A Tale of Two Indices – One with an Obvious Divergence

Last week here I wrote that the bottom was unlikely in and that for the time being bounces should be sold. The market did go lower, but I wouldn’t necessarily say it bottomed. Regarding bounces being sold, that worked, but buying dips would have worked just as well. It was a choppy week and on the surface the message the market is sending is currently very split. Underneath the surface it isn’t as inconsistent.

Based on the close on Friday the SPX can be interpreted both as bear flagging or putting in a flattish bottom (at least an interim one). The IWM is looking a bit weaker and the QQQ’s look as strong as can be. Thus, it’s a tale of two (actually more, but that sounded like a better title) indices. Beneath the surface however, there might be a little more evidence currently pointing to new lows in the coming weeks. With the FOMC next week the volatility is unlikely to subside. Based on the current picture (which will be outlined below) should the SPX make new lows prior to the FOMC decision it would increase chances of a bottom being put in. However, if the SPX instead rallies into and possibly after the Fed decision, it would likely fail within a day to a week after – unless what I show below is greatly improved.

Breadth: Below I actually do show a tale of two indices.

First the SPX (note that both the NYSE and DJIA have similar looking breadth stats as SPX):

SPX stocks at 20-day highs: As I wrote last week, this can stay low for some time before getting an oversold bounce. Although this measure has stayed this low for over a week (i.e. the start to this year), it does typically recover a bit within a few days to a week of getting this low. Thus, there is decent chance a pretty good bounce is near. screen-shot-2016-09-17-at-8-42-25-am

SPX stocks over their 20-day MA: It is oversold, but typically not oversold enough to be consistent of a bottom (albeit the Brexit bottom so anything is possible). If it begins to recover before moving lower, it likely means new lows are coming but definitely watch to see how much it is able to improve. screen-shot-2016-09-17-at-8-44-10-am

SPX stocks above their 50-day MA: Similar comments as above. screen-shot-2016-09-17-at-8-44-49-am

Now the QQQ’s: Price is extremely close to making new all time highs and yet……..

QQQ stocks at 20-day highs: quite a bit of divergence there. screen-shot-2016-09-17-at-8-47-21-am

QQQ stocks above their 20-day MA: there is more participation than in the SPX, but it’s still lagging quite a bit. screen-shot-2016-09-17-at-8-48-41-am

QQQ 52 week high minus lows: More divergence. Last time this breadth measure was here the QQQ’s were trading near 109.screen-shot-2016-09-17-at-8-49-15-am

We all know that AAPL played a large role in last weeks QQQ strength. In the end, more participation is needed or the QQQ’s will likely begin to play catch up with the other indices.

Divergence: This is in no way an prediction as what is to come, I am just showing what happened last time (December 2015) a similar divergence occurred between SPY, IWM and the QQQ’s. It is helpful because breadth also lagged during that time (you can see above). Hence, if the divergence between the indices continues along with the lag in breadth then it increases the chance of a further correction (but note there can be lots of whipsaw before a larger break. screen-shot-2016-09-17-at-12-03-14-pm

Finally: Check out the SPX weekly MACD below. The DJIA and NYSE have similar weekly MACD bearish crosses. This can turn around, but for now it is definitely waving red flags.screen-shot-2016-09-17-at-11-40-29-am

With all that said, the market often rallies into FOMC. If that should happen it would be a good opportunity to see if there is much more participation among individual stocks or if it is just an oversold bounce. If, on the other hand, the market moves lower prior to Wednesday and is able to get more oversold it would help increase odds that a bottom was in. Finally, whatever happens next week note that when SPX is near its 50-day MA around Fed decisions, there is typically at least a couple more weeks of volatility to follow.

Open Interest:

SPY-W: This is just the 3rd week of Wednesday expiration. The first two have both worked out well in that price remained below the high calls (there hasn’t yet been high puts for Wednesday expiration). The current best pin is 215 with the main call resistance between 217.5 and 218.5. This may shift a bit as traders position themselves for the Fed at the start of the week. Remember this expires two hours after the Fed announcement. spyw

SPY-F: For right now there isn’t much to see here. There is some put support at 210 and call resistance at 220. This will also likely change as the week progresses. spyf

In sum, there is divergence in the market that at this point favors the bears and new lows coming. However, the market is oversold enough to get a very good bounce, which could align with a move higher into the Fed rate decision on Wednesday. Should the market move lower prior to Wednesday, it may wash out breadth to form a more traditional bottom. On the other hand, if the market bounces first and rallies into and or after the Fed decision then it might provide an excellent opportunity to sell strength.

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