The past few days saw much of the Santa Clause Rally’s gain evaporate on the S&P 500 – although we are still above the index’s December 2014 low point. Is the market in danger of a major selloff? Lets look at the technicals to see what might give us an answer to that question. First, the seasonal factors.
I reviewed Thackray’s 2015 book and noted that January has been bullish only about half of the time since 1950. Equity Clock (www.equityclock.com) has a seasonal graph of the S&P500 that suggests choppy returns in January and February—particularly in the first part of January. So, from a seasonal perspective, the recent volatility might not be so unexpected. And of course, seasonals are usually strong until April or May from this point.
Next, lets look at the internals of the market. One of my major “market health” indicators is breadth – via the cumulative Advance / Decline line. I like to draw a 200 day MA against that line to determine its larger trend. A break below the MA may spell trouble. According to the chart above, this is not the case right now. I also look for divergences. I like to see peaks and troughs on the A/D line (black line on chart) rising with peaks and troughs on the S&P 500. If you get a divergence – that again may spell trouble. So far, we’re getting corresponding strength on the A/D line vs. the S&P 500—as I’ve noted on the chart with my black trendline indicators.
Technical Analysis 101
Now, I’d like to go back to Technical Analysis basics . Take a look at the S&P500 chart below. What do you see?
- Higher highs, higher lows: uptrend in place. High significance.
- Support above the 40 week (200 day) MA: uptrend healthy. High significance.
- Accumulation/Distribution line trending up (bottom pane): Moneyflow remains positive. High significance.
- Diverging momentum oscillators: these divergences do show some potential for risk. Medium level significance.
- Increased volatility: note the large candles (big up and down weekly moves) of late. VIX (not shown) is rising on that volatility. Lower significance.
All in, the most important factors (trend and moneyflow) are bullishly trumping the caution notes by the less significant factors (momentum and volatility). Seaonality should keep the market moving over the coming months. So too should the Presidential cycle (3rd year of the term is typically bullish). The signs are there for a larger selloff later this year – but for now, markets remain “Strong like bull”.
Learn Technical Analysis
I’ll be conducting a free technical analysis workshop at the Richview Toronto Public Library: 1806 Islington Ave, Toronto, ON M9P 3N3 – January 14, 2015 @ 7:00 PM. This may be my last library seminar for the winter, so if you live in the area – Come out and join the discussion!