At the start of the New Year, finding bullish reasons to expect higher equity prices are becoming harder to find.
2015 – Year End Review
S&P 500 Index (SPX) declined 14.96 points or -.73 for the year after reaching an intraday high of 2134.71 on May 20, 2015 and then traded in a narrow range until August 20, 2015. Digest Issue 31 “Breadth Continues Deteriorating [Charts]” includes a chart detailing the Head & Shoulders Top pattern that was underway in early August.
Now for the year end update.
Left Shoulder of the large Head & Shoulders Top formed February 25 with an intraday high at 2119.59 marked “LS” above. The Head marked “H” at the top occurred May 20 at an intraday high 2134.71 followed by the Right Shoulder “RS” July 20 at an intraday high 2132.82. The pattern activation came August 20 when SPX declined below the neckline “NL” with a minimum measuring objective “MO” at 1952, met and exceeded by the August 24 decline. While now appearing to be in trading range between 2000 and 2100, it needs to close above the downward sloping trend line “DSTL” to challenge the downtrend underway.
Foremost Six Update
While some indicators were refined for better focus, others remain unchanged. Here are the charts in their perceived order of importance with minimal text commentary.
US Dollar Index (DX) up 77 or +.79 for the week and +8.48 points or + 9.39% for the year with most of the advance occurring early when it reached an intraday high of 100.39 on March 13 slightly exceeded by the December 2 intraday high of 100.51 before a dramatic reversal on December 3 to close at 97.62. It now appears to be in range between 94 and 100.51responding to global macro forces, the Euro and considerable speculation in the bank dominated FX market. As demonstrated by commodities and equities early in the year any further advance above 101 would be unwelcomed by the bulls.
Chart Courtesy of StockCharts.com
United States Oil (USO) as a proxy for WTI Crude Oil it declined .30 or – 2.65 for the week and -9.36 or -45.97% for the year.
Chart Courtesy of StockCharts.com
From an Elliott Wave perspective it appears a 3rd momentum wave occurred August 24 with an intraday low at 12.37 followed by a counter trend wave marked 4 above that ended October 9 with a intraday high of 16.20 and then the final 5th wave washout at the intraday low on December 21 at 10.52. However, since there is one other place along this downward sloping glide path beginning in June 2014 at 39.44 that could have also been a completed 5 wave sequence there could still be lower lows to come if the considerable fundamental supply and demand commentary proves correct. One important difference is this potential 5th wave bottom occurred at the seasonal low.
Since prices are determined in the ?paper? futures market, watch for signs of short covering by the Managed Money group in the weekly COT reports provided by the CFTC. Should they begin profit taking by short covering joined by additional Producer/Merchant/Processer longs as open interest declines it could signal a potential bottom even if just temporarily.
iShares Transportation Average (IYT) down 2.00 points or -1.46% for the week and -29.34 points or -17.88% for the year. The downward sloping trendline, DSTL begins at the March 20 intraday high of 165. IYT would need to close above 148 to challenge the downtrend and based upon slowing global trade a near term trend change looks unlikely.
Chart Courtesy of StockCharts.com
Market Breadth
The McClellan Oscillator Summation Index reported by McClellan Financial Publications, gained 370.78 points last week up from 551.77 to 922.55 after reaching a near term bottom of 174.51 on December 21. Beginning this week we will be following and reporting on the Ratio Adjusted Summation Index, which factors out the number of issues traded allowing for a better long-term comparison at turning points. According to Tom McClellan +500 is the level to watch for trend change confirmation. Last week the Ratio Adjusted Summation Index gained 116.90 to -20.35 and still a long way below the important +500 level. Here is the chart with a 50-day moving average in blue that might also make a good timing signal.
Chart Courtesy of StockCharts.com
Here is the S&P 500 Index with the Ratio Adjusted Summation Index below showing the failure of the latest attempt to get back above 500 in early November thereby confirming the current sell the rallies playbook.
Chart Courtesy of StockCharts.com
Next up, here is an alternative for interest rates.
iShares iBoxx $ High Yield Corporate Bonds (HYG) up .09 or +.11% for the week and down 9.02 or -10.17% for the year.
Chart Courtesy of StockCharts.com
The downward sloping trendline, DSTL begins from the May 29 intraday high at 90.97. Another potential Elliott Wave 5th sequence like the one in USO above could be possible if crude oil stabilizes around current levels reflecting the interconnectivity with some oil companies and high yield debt issues.
One more substitution, this time the Shanghai Composite Index replaces the DBX ETF Trust – Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR).
Shanghai Composite Index (SSEC) down 73.31 or -2.03% for the week and up 304.50 or +9.41 for the year.
Chart Courtesy of StockCharts.com
The upward sloping trendline begins at the August 26 intraday low of 2850.71 touching the September 29 intraday low of 3399.28 and the December 14 intraday low at 3021.16. After the August decline on news of allowing a wider currency trading band and subsequent speculation that a further currency deprecation versus the US Dollar could follow, the importance of the Shanghai composite should not be overlooked.
Summary
At the start of the New Year, finding bullish reasons to expect higher equity prices are becoming harder to find. The traditional Santa Claus rally appears to have fizzled and while a few large capitalization favorites have held up the S&P 500 Index, it only confirms narrowing breadth while masking the underlying weakness in many other stocks. However, should the US Dollar advance remain contained and crude oil prices stabilize, concerns about high yield debt defaults will be calmed while companies in the oil and gas sector will add support to the index.