Dow Theory Signal Imminent?

Are we about to see a Dow Theory Sell Signal?  Bloomberg explains, “The Dow Theory was one of the first attempts to decode stock market price signals and make them useful to traders and investors.

The idea is straightforward: Stock price trends should show logical and fundamental consistency across industries. Volume confirms price. And, most important, equity prices move in long-term patterns. More than 100 years after the theory was developed by Charles H. Dow, traders still adhere to its basic tenets.”

A break of the Long-term support in the indices may indicate a change in the Primary Trend in the Dow Jones Industrial Averages.  The Dow Transports have already indicated a break in the Long-term trend, giving us a Dow Theory non-confirmation.  Finally, trading volume is increasing on the declines while decreasing on the upticks.  The markets may be in a final distribution phase, where shares are being “distributed” to weaker hands that are not aware of the important changes in outlook.

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VIX pulled back from a test of its Cycle Top resistance to make a 69% retracement of the rally from the March low. While the VIX appears to be mild mannered lately, it may be subject to sudden mood changes.

(ZeroHedge) Goldman SachsBank of America, Morgan Stanley: while Wall Street banks and their research teams tend to disagree on most aspects of market analysis and forecasting, one common theme they currently all agree on is that the VIX, currently trading around 20 vols, will slide over the near-term as it gradually mean-reverts with recent record low levels achieved in 2017, as a result of the historic 2017 collapse in cross-asset correlation.

Or rather “almost all” because one bank vocally disagrees.

SPX repelled at Short-term resistance and the two year trendline.

SPX was repelled for the third week in a row at the 2-year trendline near 2675.00 and weekly Short-term resistance at 2681.88. It appears to have made a key reversal on the daily charts on Friday.  The failed backtest of the trendline suggests the trend has changed.  A break beneath Long-term support at 2596.92 confirms the new outlook.

(CNBC) U.S. stocks fell on Friday as several banking companies weighed down the major indexes on the final day of an otherwise strong week for equities.

The Dow Jones industrial average fell 122.91 points to close at 24,360.14, with J.P. Morgan Chase as the worst-performing stock in the index. The S&P 500 closed 0.3 percent lower at 2,656.30 as financials dropped 1.6 percent. The Nasdaq composite declined 0.5 percent to 7,106.65. The indexes opened sharply higher on the back of strong earnings from some of the big banks.

NDX also repelled at the trendline.

The NDX challenged its Long-term support last week only to bounce back to the Diagonal trendline at 6750.00 where it made a daily key reversal on Friday.  Breaking through the Long-term support makes it possible to decline to the Cycle Bottom at 3839.01 in a matter of months.

(Reuters) – Wall Street is hoping that first-quarter earnings growth and corporate forecasts are strong enough to bring the FAANG group of stocks back into favor and take the spotlight off worries that caused the recent sell-off in the high-flying group.

With valuations below recent peaks, the group – comprised of Facebook, Amazon.com, Apple Inc (AAPL.O), Netflix (NFLX.O) and Google parent Alphabet Inc (GOOGL.O) – could get some relief if the companies beat, or at least meet, Wall Street estimates.

Shares in the group, which led the S&P 500 to record highs in January, often trade together. They were pummeled late in the quarter on worries about a data privacy scandal at Facebook (FB.O) and U.S. President Donald Trump’s public criticism of Amazon.com (AMZN.O). On top of this, fears of a trade war with China escalated during the quarter.

High Yield Bond Index bounces above the trendline.

The High Yield Bond Index found its legs at Long-term support at 183.95 to rally above its trendline. The trendline may not hold.  A broken Diagonal trendline infers a complete retracement to its origin. This may happen in a very short period of time.

(InvestmentNews) Investors have been fleeing high-yield bond funds and ETFs. But why they are doing so is a puzzle.

High-yield bond funds and ETFs have watched a net $19.2 billion walk out the door in the first three months of the year, and $29.7 billion has exited over the past 12 months, according to Morningstar Inc.

“It’s kind of a mystery: We were just as surprised by the scope of the outflows when we totaled them up,” said Tom Lauricella, editor of Morningstar Direct. In contrast, intermediate-term bond funds welcomed $36.2 billion in 2018 and $153 billion over the past 12 months.

UST loses Short-term support.

The 10-year Treasury Note Index lost its perch above Short-term support at 120.49 this week. A loss of that support may dampen the bullish case for UST.   Should it regain that support, there is a probability of the continuation of the rally for up to 3 more weeks. However, a breakdown may have dramatic consequences.

(CNBC) Short-term interest rates rose to their highest levels since the financial crisis, as investors bet on more Federal Reserve hikes with inflation showing signs of life.

The yield on the two-year Treasury note hit a high of 2.373 percent, its highest level since Sept. 9, 2008, when the two-year yielded as high as 2.375 percent. Yields retreated off session highs later in the day amid a drop in equity markets.

Minutes from the Federal Open Market Committee’s March meeting released this week showed central bankers largely hopeful about the direction of the economy and unanimous in expectations of higher inflation.

The Euro completes its Triangle formation.

The Euro completed the final probe of the Triangle formation and is now moving higher.  It has the capability of a parabolic rally to or above 127.00 over the next two weeks.  Triangles are often known as signals of an impending trend change after the target is met.

(EUObserver) Germany is proving less keen than the European Commission had hoped to share its wealth with poorer EU states.

That reluctance is likely to push back deadlines for proposals on eurozone reform. It could even sink the commission’s ideas on deeper monetary union, solidifying Europe’s north-south economic divide.

One commission proposal was to create a European Deposit Insurance Scheme (EDIS) to protect up to €100,000 of savers’ deposits in any eurozone bank.

European Council head Donald Tusk wanted to press ahead at an EU summit in June, but German MPs were still “far, far away” from agreeing to use German money to underwrite the scheme, Ralph Brinkhaus, the deputy head of chancellor Angela Merkel’s centre-right CDU/CSU bloc told press in Berlin on Thursday (12 April).

EuroStoxx reaches Intermediate-term resistance.

The EuroStoxx 50 Index renewed its rally to reach its Intermediate-term resistance at 34470.00 before pulling back.  The Cycles Model suggests a bearish tilt over the next four weeks.  A break of the Head & Shoulder neckline and mid-Cycle support at 3296.33 may create a panic decline.

(MarketWatch) European stocks edged higher on Friday, with the benchmark index scoring a third straight week of gains, as investors watched for developments in the Syria situation and in the trade spat between the U.S. and China.

European markets had traded with sizable gains earlier in the session, but trimmed the advances in the afternoon as U.S. stocks turned lower.

Sage Group PLC shares tanked after a sales warning, while Volkswagen AG shares rose after the German auto maker’s board replaced its chief executive.

The Yen pulls back toward support.

The Yen pulled back toward Intermediate-term support at 92.21 in a two week extension of its Master Cycle low.  Cycle extensions are most common in fourth Waves as they tend to take extra time to develop.  The Cycles Model suggests that a Master Cycle inversion (high) may take place in mid-May.

(Reuters) – The dollar neared a 1-1/2-month high against the yen on Friday, as an improvement in investor risk appetite buoyed equities and pushed U.S. yields significantly higher.

The dollar was steady at 107.385 yen after gaining more than 0.5 percent overnight. A rise above 107.490 yen would take it to its highest since late February. The greenback has gained about 0.3 percent versus the yen this week.

Equities were boosted as Wall Street gained on Thursday in anticipation of strong corporate earnings, and as geopolitical worries eased on U.S. President Donald Trump’s suggestion that a military strike on Syria may not be imminent.

Nikkei retests the two-year trendline.

The Nikkei probed the two-year trendline this week, but closed beneath it. A decline beneath Short-term support at 21451.51 renews the sell signal. The potential for a decline to the Cycle Bottom is high.

(JapanTimes) Stocks rebounded on the Tokyo Stock Exchange on Friday, supported by an overnight rally in U.S. equities.

The 225-issue Nikkei average added 118.46 points, or 0.55 percent, to end at 21,778.74. On Thursday, the key market gauge lost 26.82 points.

The Topix index of all first-section issues was up 10.84 points, or 0.63 percent, at 1,729.36, after slumping 6.78 points the previous day.

The gains came after Wall Street rose on Thursday due mainly to easing concerns about the geopolitical risks over Syria.

U.S. Dollar is due for a low.

USD is due for a low next week as it nears the end of its current Master Cycle.  It may bounce from the weekly Cycle Bottom at 88.36, staging a rally toward the Broadening Top “Point 7” target.  A panic Cycle may develop in equities and bonds, boosting the flow back into the USD as a safe haven.

(BusinessTimes)  The US dollar firmed against its peers on Friday, supported as an improvement in investor risk appetite lifted equities and pushed US yields significantly higher.

The US dollar index against a basket of six major currencies was a shade higher at 89.758. It rose 0.2 per cent the previous day, ending a four-day losing streak.

The index managed to bounce as Treasury yields spiked, with that of the 10-year surging five basis points overnight to its highest since late March.

Yields rose as Wall Street gained on Thursday in anticipation of strong corporate earnings, and as geopolitical worries eased on UTS President Donald Trump’s suggestion that a military strike on Syria may not be imminent.

Gold rallies to a marginal new high.

Gold rallied to 1369.40 on Wednesday before dropping back into its trading range.  The high appears to be a two week extension of a Master Cycle inversion.  The reversal may have begun due to the late arrival of the Cycle Pivot.  Wednesday’s move is called a breakout by some analysts but the move may be a false one.  Instead, this may be the beginning of a panic Cycle decline in precious metals.

(Kitco News) – For those keeping score at home, the gold market has seen seven failed breakout attempts since its multi-year high reached in 2016.

While the lack of follow-through buying has been demoralizing for some gold investors, many analysts continue to point out that the gold prices are still in a solid uptrend, creating higher lows along the way.

“The market is struggling, but it looks like it wants to grind higher,” said Darin Newsome, senior technical analyst at DNT.

He added that geopolitical instability will continue to support gold as a safe-haven asset.

Crude raises its double top.

Crude was finally able to challenge the January 26 high and marginally exceeded it.  The new high was completed on Friday, so there may be some residual strength into early next week.  A break beneath the Cycle Top and trendline at 64.55 may indicate a change in trend.

(24/7WallStreet) In its monthly Oil Market Report for April released Friday morning, the International Energy Agency (IEA) said that global crude supplies fell by 120,000 barrels per day in March to 97.8 million barrels per day. The modest decline was due to higher U.S. production that offset a further cut to OPEC production.

The IEA expects 2018 supply growth from non-OPEC countries to rise by 1.8 million barrels a day, more than double the 700,000 barrel-a-day growth in 2017. As both the U.S. Energy Information Administration (EIA) and OPEC have already projected, the IEA also expects U.S. production to surpass 10 million barrels a day this year.

Shanghai Index challenges Short-term resistance.

The Shanghai Index bounced to challenge Short-term resistance at 3213.69 before easing back to the mid-Cycle support at 3152.29.  The bounce appears to be over and indications are that there may be a deeper test of the lows in the next week or so.

(ZeroHedge) or the 3rd day in a row, the Hong Kong Monetary Authority (HKMA) intervened in the FX markets and for the 3rd day in a row, failed to lift the Hong Kong Dollar off the lower limit of its peg band.

As Yicai Global reports, HKMA’s weak-side convertibility undertaking of HKD7.85 against the dollar was triggered twice during London trading hours last night and New York trading hours this morning, HKMA Vice President Howard Lee disclosed during a meeting with the media today.

The HKMA conducted two foreign exchange transactions, buying the Hong Kong dollar and selling the greenback to the market. The total value of the transaction was HKD3.2 billion (USD407 million), reducing the balance of the banking system to HKD176.5 billion.

But for now, it’s not working…

The Banking Index fails the retest of the Diagonal trendline.

— BKX launched a retest of the Ending Diagonal trendline Friday morning, but was immediately repelled.  The result was a key reversal day for the BKX. Cycles Model suggests that the Banking Index may have a month-long decline ahead of it.  It is on a confirmed sell signal.

(CNBC)  As major banks report quarterly earnings Friday morning, one technician sees a different test for the financials sector.

“We’re actually neutral the financials right now,” Craig Johnson, chief market technician at Piper Jaffray, told CNBC’s “Trading Nation” on Thursday. “We’ve been really watching that 2 to 10 spread. We need to see that widen out then it would be a really healthy sign.”

The 10-year/2-year U.S. Treasury spread has been narrowing since the wave of sell-offs in equities at the beginning of February. The spread hit a year-to-date high of 78 basis points on Feb. 9 but has since narrowed to 48 basis points.

(ZeroHedge) When we reported Wells Fargo’s Q4 earnings back in January, we drew readers’ attention to one specific line of business, the one we dubbed the bank’s “bread and butter“, namely mortgage lending, and which as we then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, specifically in Q4 Wells’ mortgage applications plunged by $10bn from the prior quarter, or 16% Y/Y, to just $63bn, while the mortgage origination pipeline dropped to just $23 billion”, and just shy of the post-crisis lows recorded in late 2013.

Fast forward one quarter when what was already a grim situation for Warren Buffett’s favorite bank, has gotten as bad as it has been since the financial crisis for America’s largest mortgage lender, because buried deep in its presentation accompanying otherwise unremarkable Q1 results (modest EPS and revenue beats), Wells just reported that its ‘bread and butter’ is virtually gone, and in Q1 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline failed to

(ZeroHedge) While JPM was quick to highlight all the favorable data in its oddly shrinking earnings presentation supplement,  one thing that continued to be conspicuously missing was the bank’s slide on “Mortgage Banking And Card Services” which year after year, quarter after quarter was traditionally part of the bank’s earnings presentation – it was certainly featured prominently one year ago… 

… only to be inexplicably and unceremoniously dropped starting in the Q2 2017 quarter.

While it is possible that JPM simply forgot to include it, for the 4th quarter in a row now, it is far more likely that Jamie Dimon simply did not want to bring attention to a troubling trend: the concerning increase in net credit card charge-offs which has been closely tracking the rise in interest rates.

(ZeroHedge) (Chapter 11 Bankruptcies are at the) Highest level since April 2011. It’s not just the Brick & Mortar Meltdown anymore.

New Chapter 11 bankruptcies in the US spiked 63% year-over-year in March to 770 filings, the highest number of filings for any month since April 2011 (when there had been 789 filings as companies were still trying to emerge from the Great Recession).

Have a great weekend!

 Anthony M. Cherniawski                                                                                                                          

The Practical Investor, LLC                                                                                                                            

2205 Hopkins Avenue                                                                                                                                    Lansing, MI 48912

www.mrpracticalinvestor.com

Office: (517) 331-5200

 

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