The Weekly Trader

This is what the technical indicators are telling us this week: 

One-month trend = Flat to Bullish. As expected, (due to overbought signals from RSI), SPX drifted lower last week, closing at 3633 on Friday. Now: Futures are substantially higher on Sunday night, but as always, wait until the morning for confirmation. 

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 60.22 (Daily) = Neutral to slightly overbought. RSI warned us last week that the market was getting “too big for its britches” (i.e. overbought), and sure enough, RSI dropped from near 70 to 60. Now you know that RSI often gives reliable warning signals as it creeps closer to 70 (visa versa on 30).

MACD = Neutral. MACD is above its zero line but crossed below its 9-day Signal LineMACD reversed direction with the market and signaled there could be trouble, and there was.

Daily Intraday Volatility (VIX): 23.31 = VIX is still telling me that investors have little or no fear. 

Comment: Last week, the market got too overbought, as reflected in the RSI readings (near 70). Sure enough, the market was unable to move higher, which was not a surprise, and then fell almost all week. Volume and momentum were absent.

On Sunday night (as I’m writing this), the positive vaccine news and a Fed meeting are leading to a positive futures market. RSI has moved to neutral (a little overbought at 60) but VIX is signaling extreme complacency. With the holidays approaching, and investors dreaming of a Christmas rally, caution is still advised.

It always makes me cautious when “everyone” is on the same side. It’s true that the market often rallies during Fed meetings, and perhaps the optimism over the vaccine will take the market into the stratosphere. That is quite possible.

On the other hand, I have seen this scenario before. In 1999, the market was going to the moon (thanks to bullishness over dot.com), and with the Fed’s help over the Y2k fears, the market went even higher in January 2000. The market seemed unstoppable. By March, however, the party ended as the market began a long descent into the abyss. It was not a pretty picture as many investors and traders lost everything.

I’m not saying this will end the same way. What I do know is that all bull markets, and bubbles, end. No one can say when, or what the catalyst will be, but one day this bull market ends. Right now, the biggest worry for me is the low VIX and that so few traders and investors think anything is wrong. Every decade or so the market teaches these people painful lessons.

I’m not saying to sell everything and move to cash, but it wouldn’t be a bad idea to evaluate how much risk you are taking with stocks, and to reduce risk if necessary. It’s a decision only you can make.

Meanwhile, with the vaccine on its way, the Fed meeting, and a recent pullback, the market appears ready to rock and roll. Let’s see how high it can go, and most importantly, if any rallies fail. As I’ve said in the past, watch the rallies for clues. A failed rally would be a warning signal.

This is what the technical indicators are telling us this week: 

One-month trend = Bullish. SPX drifted higher during the week. Volume and momentum was on the light side all week. Futures are flat to lower on Sunday night, but once again, wait until the morning for confirmation. 

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 67.96 (Daily) = Overbought. As SPX creeps higher, so does RSI. It’s near the 70 RSI overbought level, so be on guard. I would not be surprised to see a severe reversal based on RSI alone, but no one can predict when.

MACD = Bullish. MACD is above its zero line and above its 9-day Signal Line. MACD is signally that the uptrend will continue. Look for any signs of a reversal.  

Daily Intraday Volatility (VIX): 20.79 = How low can we go? VIX tells me that bullish investors have little or no fear.

Comment: The overbought market has become more overbought. Throw the fundamentals out the window because no one seems to cares. Just like in 1999, and 2008, all that matters is that the market is going higher.

Wise traders, however, know that extreme overbought markets can reverse on a dime, and at anytime. I can’t predict when that will happen, but I am certain it will happen. There is a point when there just aren’t enough buyers to keep lifting the market higher.

Trying to time a reversal is difficult for most traders. That is why it’s a good idea to trade less often and with smaller positions as the market gets more overbought. If the RSI of SPX rises above 70, that is a flashing warning signal.

Most investors are waiting for a Christmas rally, fueled by the positive vaccine news. And yet, the jobs number was disappointing, and there are other signs of economic problems.

Bottom line: It’s unknown which direction the market will go this week, but the overbought signals should not be ignored. Markets can reverse without warning before investors have a chance to react. Watch the rallies closely for clues of a struggle to move higher.

Here is the latest from Lance Roberts (realinvestmentadvice.com), who notes that investors are ignoring the rising risks: https://bit.ly/3osdAvI

Sven Henrich (Northman Trader) observes how momentum is weakening while the market moves ever higher: https://bit.ly/39K4Vkh

This is what the technical indicators are telling us this week: 

One-month trend = Neutral. SPX moved higher early in the week and then flat-lined before and after Thanksgiving. Volume was thin all week. Perhaps participants will return to the market this week. Futures are slightly lower on Sunday night, but wait until the morning for confirmation.

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 63.72 (Daily) = Overbought. As SPX creeps higher, so does RSI. It’s not extreme yet but it’s getting closer. RSI has given some remarkably accurate readings in the last few months, so pay attention if it spikes during the week.

MACD = Bullish. MACD is above its zero line and above its 9-day Signal Line. MACD will give an early signal of a faltering market. It hasn’t given that signal…..yet.  

Daily Intraday Volatility (VIX): 20.84 = Very Low. How low can we go? VIX tells me that bullish investors have little or no fear, and are high on hopium.

Comment: SPX touched all time highs last week before falling back and then moving sideways. As the virus explodes higher (although half the country thinks the dangers are overblown), as the economy gets shredded, as more people lose jobs and benefits, we are pinning our hopes on the vaccines. If the vaccines work as advertised, that could be a big time game changer. Let’s hope it’s as good as advertised.

Meanwhile, with the market near all time highs, fear has evaporated, and optimism is in the air. The bulls got their wish when Dow 30,000 was hit, before falling back. Investors might get their wish a second time. This is really something: an all-time high of Dow 30,000 during the second worst pandemic in world history. (Powell better not raise interest rates or there will be dire consequences.)

Meanwhile, the thin volume and wait and see actions by the pros have me concerned. There isn’t mass selling, but there isn’t mass buying either. It feels like a game of chicken, one that I’m not not willing to play. A Christmas rally is always possible, especially if the vaccine is successful.

Some pros are recommending gold (see below), which is not a bad idea in these uncertain times. We’re in uncharted territory, one that I can’t compare to any other period in U.S history, except 1918.

Bottom line: Be careful out there as anything is possible. Investors are shockingly bullish (according to the VIX), and hope is on the way with the vaccine. Unfortunately, I just can’t shake the feeling that an unexpected nasty surprise is waiting for the bulls. Since I don’t trade on feelings, I’m sitting this one out for now.

Here is the latest from Lance Roberts (realinvestmentadvice.com), who wisely warns that risks are increasing: https://bit.ly/36kc4p9

Here is a piece from Sven Henrich (Northman Trader), who says it’s time to buy gold: https://bit.ly/39rg7Cc

This is what the technical indicators are telling us this week: 

One-month trend = Neutral. SPX started off bullish early the first day but ended the week at the lows. Even the announcement of a vaccine couldn’t prop up the market for longer than a day. SPX closed at 3557 at Friday’s close, lower than a week ago. Futures are slightly higher on Sunday night. 

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 57.08 (Daily) = Slightly overbought. RSI fell from extremely overbought to slightly overbought.

MACD = Bullish. MACD is above its zero line and above its 9-day Signal Line. MACD will give an early signal of a faltering market. 

Daily Intraday Volatility (VIX): 23.70 = Low. What me, worry? 

Comment: Last week, the indicators warned that the indexes were overbought, and sure enough, it was a rough week for the bulls. The rallies failed, and yet, there is little fear. 

Once again, pay attention to the rallies for clues. If the rallies fail again this week, it will not be pleasant for the bulls. With the pandemic spreading and the economy faltering, I’m amazed the market is still near its all time highs. The Fed is keeping interest rates low, and the algos are working overtime to keep the market stabilized. 

I would not be surprised to see a major pullback or plunge in the next few months. I don’t trade off of predictions, but I do prepare for any scenario. Trend trading has been difficult for quite a while. Scalpers and day traders have probably found more opportunities, but it’s not easy. Indexers are just holding and hoping for the best. 

At the moment, it’s impossible to predict market direction. My gut tells me the market is vulnerable (but I don’t trade off of my gut, my feelings, or predictions). Since the market is unpredictable at this time, I am personally on the sidelines, waiting for better setups. Perhaps others have found better opportunities, and if so, you should be commended. This is not an easy trading environment. 

Bottom line: Unpredictable market, unpredictable trading setups, and unpredictable world.

Here is the latest from Lance Roberts, who wisely took profits last week: https://bit.ly/35ZqqeJ

This is what the technical indicators are telling us this week: 

One-month trend = Bullish. SPX started off strong last week, but then plunged the next day, taking quite a few stocks with it. SPX drifted the rest of the week but is still near all-time highs. However, I see a triple top. The futures are higher on Sunday night, but that could change in the morning. SPX was at 3585 on Friday’s close.

Mid-term (50- and 100-day MA) = Bullish. The S&P 500 is well above its 50- and 100-day MA. 

RSI: (S&P 500) @ 63.57 (Daily) = Overbought. RSI is creeping higher, but not at extreme levels (yet).

MACD = Bullish. MACD is above its zero line and also above its 9-day Signal Line

Daily Intraday Volatility (VIX): 23.10 = Low. VIX is well below its 200-day moving average, reflecting a lack of fear (unless you are shorting indexes). 

Comment: The market broke higher last week before pulling back from overbought levels. A triple top has developed, but it does not mean the market will plunge anytime soon. Possible, but impossible to predict.

The market is still in an uptrend while the virus rages out of control, and the economy suffers. No one can say when reality returns to the market (it’s been a long time), but as I’ve repeatedly said, trade cautiously.

This week, watch the rallies closely. If the rallies have “legs,” and continue to move higher, that is bullish. However, if the rallies reverse direction or fail to make new highs, that would be bearish. In particular, see if the indexes can break through resistance.

Anyone holding indexes long should be pleased. Those who own individual stocks have had a rougher ride in the last few weeks. It’s an unpredictable environment, especially if you own individual stocks.

Bottom line: Let’s see if the indexes can break through resistance and make new highs. If not, it could be dangerous for the bulls.

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For daily results of multiple indicators, read Yardeni Research: https://goo.gl/eT3fzA

For insightful analysis of the stock market, read Lance Roberts:www.realinvestmentadvice.com

For insightful analysis of economic conditions, read Wolf Richter: https://wolfstreet.comEdit