Saturday Bullish Percents
Disclaimer: All charts and comments are intended for education and discussion purposes only. No investment recommendations are being offered. Please do your own research and take responsibility for all investment decisions that you make. Questions and comments related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Breadth | THU - Commodities & Currencies | FRI - Market Sentiment | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |
This was a brutal week in the equity markets. But, we all knew equities had moved up too high too fast in the wake of lower Fed Funds and a favorable jobs report. So the indexes were ready for a severe correction and they really handed it to us. All week the new highs /new lows were warning of serious underlying weakness. On Wednesday T-Bill rates plunged and that was another very important early warning. And all week gold and oil were hitting new highs as if they were intentionally trying to push equities off the edge of a cliff. In other words, there were plenty of signals, it is just hard to pay attention to these signals when you don't want to see them. In my case, I was discussing these warning signals in this blog, but not paying enough attention to them in my own trading accounts.
The ECRI economic cycle index ticked lower this week from a low level. It indicates weak growth 4-6 months ahead, but not a recession. The ECRI future inflation gauge continues to predict low levels of inflation. I highly recommend a subscription to ECRI.
More bad news, the bullish percents are solidly confirming the moves lower in the indexes. One value of point-and-figure bullish percent charting is that it takes a 6% move to change the trend. This filters out the short-term noise to reveal the larger direction of prices. It doesn't always work, but is generally a good timing method. Unfortunately, the shift in these bullish percents says the trend has reversed. I don't think you see this many bullish percent indexes shift to downtrends if you are just experiencing a short-term pullback, but I don't say that with a lot of certainty. This is definitely a tough market to call right now with so much emotion and volatility in the market as the mortgage and credit issues pull equities lower, while the Fed and emerging markets try to push it higher.
Above is a chart I'll be watching in the next few weeks. Connie Brown, one of my favorite technicians, uses the weekly RSI to help her identify trends. She says that if the weekly RSI breaks below the 40-level bull support, and then into the oversold range, the chances are good that (1) the uptrend is broken (2) the next rally will fail at resistance (3) and prices will retest the lows. However, as prices retest, if the RSI maintains above oversold as prices hit new lower lows, it produces a bullish divergence. This is often an excellent buying opportuity with a relatively safe stop out point.
So based on this chart, we'll probably see lower lows for the XLF, and it will likely weigh heavily on the broader market. If the RSI holds above oversold, we will have one clue that the uptrend in prices for the financials will resume ,and this will be a big plus for the broader market.
