Under The Hood

It’s been a few weeks since my last momo update and that means it’s time to kick the tires, wiggle the shocks, and to take a good peek under this market’s hood.

However always make sure you use an experienced technician with access to the proper type of tools. And read the manual before you ask her any embarrassing questions.

Despite Friday’s little red candle party it seems that market makers remain rather positive about the prospects of the current uptrend. At least judging by the VXV:VIX ratio, which stubbornly was locked in position last Friday. Recall that this is a medium to long term chart as the VXV is looking three months out – thus it mostly reflects what’s going to be happening over the next few weeks or months, not the next few days.

Another long term momo chart that’s pointing up is the NYA50 vs. NYA200 ratio. In case you’re a noob – we are comparing the number of NYSE stocks above their 50-day SMA vs. the ones above their 200-day SMA. In essence we are measuring the quality of the current advance – and again on a medium to long term basis. I consider this a long term chart as 200-day SMA and even 50-day SMA changes obviously take their merry time.

The short to medium term picture however is looking less rosy – please step into my air conditioned lair:
[amprotect=nonmember] More charts and cynical commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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JNK vs. TLT – a high yield bond ETF vs. one that is tied to 20-year treasury bonds. Junk vs. quality. And it seems credit traders are a lot less enthusiastic about the short term here. We do sometimes see a little divergence that suddenly unravels and turns into nothing. But if this thing keeps dropping next week then I would be extremely cautious about the short term picture on the equities side here.

Another chart well worth keeping an eye on is the NYSE advancing vs. declining volume and yet again I see a developing divergence I have an increasingly hard time ignoring. Obviously it sometimes plots some quick spikes but the current pattern is increasingly pointing down, not up. Of course this one has in the past triggered way ahead of corrections, so we can’t rely on it out of context.

And potentially offering up a bit more on the context side is its hot cousin – the NYSE advancing vs. declining issues ratio. I call that a solid divergence and one that either gets cleared out soon or it has the potentially to drag equities into an ugly August.

Bottom Line: We just made a U-turn at the first volume hole on our road map. The next two trading sessions will either resolve the red flags I am seeing on the momentum side or a price will have to be paid (or should I say stingy bidders will have to be paid). Long term we seem to be okay – thus far at least. Personally I would prefer to see divergences on both the long and short term side paired with a relentless short squeeze. The odds for this to happen during the low vol summer months are usually rather slim.

The equities side would be of more interest to me had we touched that P&F target of 1390 on the SPX. Until either that happens or we see a meaningful correction to the downside I don’t intend to throw much of my capital at playing equities. Instead I plan to stick with solid setups on the commodities and FX side.

Cheers,