Is Another Disappointment Ahead for the Bears?

In Monday’s post about the potential for a correction in the Nasdaq 100 index, I mentioned how some (not all) of the top components of that index don’t look well. In today’s post I wanted to show a few charts to illustrate what I was referring to.

The largest percentage holding in that index is Apple. As you can see, price has broken the 10 month uptrend line, formed a large complex topping pattern and just recently fallen below the important horizontal support. A push higher to regain that level would go a long way towards invalidating the breakdown. Barring that, a continuation of this breakdown targets the area where the 200 day moving average resides.

The 3rd largest component, Amazon looks almost as bad. Like Apple, price has broken below the 10 month uptrend support line and has formed a bigger (and more familiar) topping pattern. Some will immediately recognize the head and shoulders pattern which has not yet validated but is oh so close to doing so.  I have added 3 areas of potential support (T1, T2, T3) below where a pullback would likely find support (buyers) depending upon the strength of the decline.

Finally, the 4th largest component is Alphabet, Google’s parent company. With a similar look to Apple and Amazon but not quite as ominous as price still sits above its 10 month uptrend support line. Just barely though. GOOG, like the first two charts has formed a large topping pattern. If price were to gap lower below the horizontal support line, it will have formed an island top pointing to a decline of 90-100 points below the neckline, or about 20% below its double top high.

I know I keep repeating myself (its not because I am getting old but rather at some point it will matter) but this market has been unbelievably irrepressible and resilient making these warnings unnecessary. Normally investors would be sitting up and taking notice with concern when we see charts like those above, especially when they represent the supposed market leaders. Either way, it should be interesting over the next few weeks to see where the market goes in the short term, if anywhere. Will the bears once again be disappointed or will we see the first decent market correction we have seen in year?  

The First Time in Months

With virtually all major US stock indexes at or approaching all-time highs it may seem blasphemous for me to bring up the possibility of a correction. Especially if I am talking about investors beloved Nasdaq 100 index, the past 2-year sector best performer. But I will risk the hate mail, scud missile threats and worse yet, derogatory White House Tweets to outline what I see may be developing anyway because hey, it’s only a possibility.

As you can see in the daily chart of QQQ, the Nasdaq 100 index, price has formed, the first time in many months, a topping pattern. In this case a rising wedge. Because all corrections (or, gawd forbid, reversals. Remember them?) require a topping pattern, when they do appear (or in development) they should not be ignored. What is likely obvious, the pattern has not confirmed (only 4 touches whereas a minimum 5 is required or broken below support) and could easily be negated if price were to hold above the lower support channel. If on the unlikely chance it does confirm by breaking lower, the pattern’s price target is at T1) below, while just below that is the rising 200 day moving average and immediately below that is an open, unfilled gap, T2.  Any of these are areas of logical support and a place where any pullback (I think I was 12 when the last one occurred), if it were to happen, would find support. It’s also noteworthy to mention the negative RSI momentum divergence in the upper pane.

I know some of you are yawning out of boredom since this “potential” correction is a whopping 5-8% and the sneers of “bring it on big boy” are bubbling from within. But because of its importance to the US stock market, a pullback in this Nasdaq 100 index would likely be the catalyst the overall market uses to do the same. With seasonality still in the bears favor and the charts of some of the top 5 Nasdaq 100 stocks looking rather ill, now is as good a time as any. But not to worry, we are in an uptrend and each and every pullback is being bought. Heck if 2 nuclear blasts and ICBM’s cant rile the market I don’t know what can. Bottom line is any pullback is a buying opportunity as we are setting up for what I expect to be a healthy year-end rally.   

The Dollar Down Under 2

To my surprise, the US Dollar (USD) failed to hold its longer term uptrend and broke down through a 2 ½ year consolidation last month. Its swift decline set up a rally in other currencies, including the Aussie Dollar (AUD) as you can see in the chart below.

Since the breakout, the AUD has rallied to just under prior resistance. If the USD continues to remain weak and the AUD can break out above current resistance, the upside target (which I have labeled as T1 on the chart) is near the 2014 highs, a compelling 12-15% upside from where it closed yesterday.

Australian sovereign bonds tend to pay a healthy premium to their US counterparts so those looking for yield could investigate them for a fit into their portfolio. Along with the higher yield, investors, by way of exchange rate risk, would be able to receive not only the out-sized yield but the potential of the capital gain if the upside target on the above chart were met. Of course, that same exchange rate risk can be a headwind if the USD were to reverse its lower trajectory and push other currencies, including the AID lower so it is critical you have a well scripted management plan if you elect to venture ahead.

The final months of 2017 should be very interesting for those playing in the currency markets as the USD (and by default its relationship to all other currencies) will be dictated by not only our Federal Reserve policy changes and whatever the current administration can enact. While no one assumes the current administration will be able to accomplish anything, I am very wary of accepting this position as I have learned that when the majority are on one side of an opinion, it is best to be on the other, especially when it comes to investing since the majority are almost always wrong.

August 2017 Charts on the Move Video

For those who were lulled to sleep with August's market action, seasonality says it time to sit up and pay attention since September is historically the weakest month of the year for stock returns. Weak or not, we are in the midst of a powerful bull market so plan accordingly.

August's video link is below.

https://www.youtube.com/watch?v=0PfC6I2wVE4&t=6s

Nothing Good Rhymes with August

For regular readers of this blog the name Tom McClellan requires no introduction as I am a big fan of his technical work and repost it regularly. With the dog days of summer upon us and the market a jumbled mess awaiting an impetus, I thought I would use Tom’s most recent work to add a little spice. Today’s post is a look at the seasonality patterns in play and their historical impact.

Everyone knows about annual seasonality, and has heard of “Sell in May and go away”.  That slogan persists even though actual seasonal strength typically peaks in August, but nothing good rhymes with August.  There is also a strong tendency of the market to show regular patterns on a 10-year basis, now known as the Decennial Pattern.  And years ending in the number 7 have an ugly surprise for the bulls. 

In year 7s, the stock market typically peaks in August and bottoms in early November.  And thus far the DJIA seems to be following the pattern very closely.  The real decline comes after a peak due Oct. 3.

The worry in following this pattern is that it might be overly influenced by the huge decline that the DJIA experienced in 1987.  So in the chart above, I show two versions of the Decennial Pattern, the lower one leaving out the data from the entire decade of the 1980s.  This allows us to see that it was not just the effects of the 1987 crash that are pulling down the Pattern in year 7s.  It is a persistent effect. 

The strong correlation that we are seeing this year between the DJIA and the Decennial Pattern is pretty impressive, and it is worth noting that the DJIA had not been seeing such a strong correlation earlier in this decade.  Here is a longer term comparison:

The market strength which is a normal feature of years ending in 5 did not appear this time.  I would argue that having the Fed doing $85 billion a month of QE earlier in the decade pulled forward the normal year 5 strength.  Then shutting off that free money pushed the market into withdrawal symptoms, like a heroin addict trying to quit cold turkey.  Now that we are farther along into the post-intervention era, the market is more free to follow its normal tendencies and we are seeing better correlation to the Decennial Pattern. 

If the stock market keeps following the Decennial Pattern with the strong correlation we are seeing now, then we can expect prices to bump along gradually lower, and then accelerate downward once October gets here. 

The following chart was added by me (Chuck) to provide a look at the DJIA performance for each and every year ending in “7”. The months of August through November have been outlined by the red dashed box. Note, only 1927 was the only year in which November ended higher than August. Will 2017 be the second?