Next chart shows my custom Market Breadth Index (MBI) and the raw input for it (RAWMBI). I have described this very useful tool in the past here. The important takeaways from this chart are as follows:

1. Stocks are currently in a bear market. A bear market is characterized by a series of lower lows, lower highs and failed rallies.
2. At this time $SPX is about 11% off the all-time highs, but it could easily correct by an additional 15-35%. This is based on the Fibonacci retracements from the 2009 lows to the recent all-time highs.
3. The bottoming patterns during the previous bear markets showed up in the RAWMBI readings as “oversold”. Right now RAWMBI is not even close to being oversold.

All of the above are pointing to more downside pressure for stocks in the foreseeable future.
    

   NYSE Composite index ($NYA) closed below the August 2015 lows and hit a multi-year low on Friday. The current chart of $NYA may be sporting an inverted Cup and Handle pattern. If this pattern plays out we could easily correct by around 10% more from today’s prices.
CHART OF $NYA

​Many of the high-beta, economically sensitive areas of the market have been under pressure for a considerable period of time now and hit a fresh set of multi-year or 52-week lows. This includes IWM (small caps), XHB (homebuilders) and XBI (Biotech). This shows poor appetite for risk among the market participates. 

​Selling was not limited to the US markets, but was evident worldwide during the first two weeks of 2016. Both the developed and the emerging markets were hit hard and many country funds hit multi-year and 52-week lows. VGK (Europe stocks), EEM (emerging markets), EWZ (Brazil) are some of the more prominent examples.
       A clear winner on the downside this week was RSX – the ETF tracking the stock market of mother Russia. Just on Friday it collapsed over 7% and hit a fresh set of 52-week lows.  

Bonds benefit during the time of financial stress, as money rotates into the perceived safety of the return of the capital. Return on capital takes a backseat to simply getting your money back from an investment. TLT broke out above the October/December highs and hit a new closing high for the move.
CHART OF TLT
       Even the short-term bonds are pushing higher. If you think about this for a moment, it is very counterintuitive. If the Fed is raising interest rates, shouldn’t bonds be worth less? The Market is sending a completely different message: we don’t care about rates; we just want to receive our principal back!
CHART OF BSV

The dollar index ($USD) traded more or less sideways this week. $USD is bullish and is within a spitting distance of 52-week highs. With most of the world’s Central Banks easing (printing money), and the Fed tightening (raising interest rates and not printing money right now) its no wonder the dollar looks attractive.
CHART OF $USD

If you go to a store and buy an item on sale – you got yourself a bargain. A store discounts items for various reasons such as: new inventory arrived, the store bought too much, item’s expiration date is approaching, etc. But if you approach the stock market with the same attitude, you will likely go broke very soon! Market discounts stocks in accordance to a myriad of factors. One thing for certain is that it’s never wrong. If a stock goes on sale there is probably a reason for it. The beauty of technical analysis is that we don’t really need to know the “why” it is happening, we can simply take that it “is” happening and act accordingly.
       Gold is one such example: it hit multi-year lows just a few weeks back and since rebounded and then traded more or less sideways. It doesn’t change the fact that gold is currently very bearish. Maybe if $USD weakens somewhat gold could push higher to around $1140-$1160. Or maybe it just collapses from here. Either way: I am not looking to pick a bottom, but rather to wait for an overbought condition to manifest so I can short again.
GOLD CHART

When you trade GDX it helps to keep in mind what is GDX composed of: small/medium cap, low priced stocks tied to a commodity. Small caps are more volatile then large caps. Low priced stocks are more volatile then the higher priced once. Commodity related stocks are generally more volatile then other types of stocks. Standard Deviation (a measure of fund's volatility) for GDX is around 34. That for SPY is around 11 and that for AGG is 2.74. What this means is GDX is violently volatile. It is best to allocate only a small percentage of your trading account to this security. Having said this…
       GDX is back to the $13 magic level where it held support on numerous occasions in the past. It certainly looks vulnerable now and a break below $13 could easily shave off another 15-20% off its current price. An alternative scenario is another rebound attempt to, a now prominent resistance around $15, or possibly higher. In either case, I am only looking to short and not trying to pick a bottom.
CHART OF GDX

       Oil hit the high $20s this week. It’s possible that we get a corrective action and a bounce to the $35 area. Oil is very much in a bear market so attempting to pick bottoms is fraught with dangers, but… Today we will look at some of the oil related funds and their behavior during the past few weeks which may be indicating that oil could put in at least an intermediate bottom or a “trade-able bottom” in the near term.
CHART OF $WTI

​Energy fund (XLE) also hit a multi year low this week, but it may be approaching an inverse cup and handle pattern limits (see chart) and a sizable bounce could materialize. Looking under the hood of XLE, we see that it is extremely oversold. The Bullish Percent index for XLE hit 2.5% a few days back – a very oversold level. In the past levels these oversold lead to a sizable rally. Exxon Mobil (XOM) also diverged from the general market this week and did not drop with the rest of stocks.
         The Oil & Gas Equipment Services fund (XES) may also be approaching a limit of the measured move from the inverse cup and handle breakdown (see chart). Keep in mind that these measured moves are just rough estimates, but they could act as guideposts to lock in profits. If traders start covering their shorts in XES, a bear-market rally could easily materialize.

       Natural gas price appears to have been rejected around $2.49. This is a resistance level marked by the previous peak – a logical place to fail. Natural gas is bearish, so (naturally) I am only looking for bearish setups and shorting opportunities. We could now easily retest the multi-year lows that were set in December.
CHART OF NATGAS

Trade Alerts Service is now live – please sign-up here!

That’s it for this week’s market recap,
Best Regards and have another great trading week!
 
Alexander Berger (www.MasterChartsTrading.com)

SPY has probably peaked in May of last year. We had a waterfall-like event in August 2015 as it broke major support, but quickly rebounded. My proprietary Market Breadth Index (MBI – contact us for licensing) signaled the beginning of a bear market as early as September of last year. This changed my entire posture from that of looking for buying opportunities within a bigger uptrend for stocks, to that of looking for shorting opportunities within a bigger downtrend.
       At this point a retest of August lows for S&P500 appears extremely likely. A break below the August 2015 lows would be quite bearish. The On Balance volume and the Advance-Decline Volume line for SPY has already hit a new low for the move – before the index even got to the August lows. Could volume be the leading indicator of events to come?
        Very short-term SPY is somewhat oversold and could bounce to the $200 area. But this could be an opportunity for those short sellers who missed the shorting opportunity in late December to get short.
CHART OF SPY
CHART OF $SPX

​Various other major indices are already trading at or below the August 2015 lows. Namely: the Small caps, the Homebuilders, Energy, Emerging markets and the NYSE composite itself! This shows a broad, persistent selling pressure in the USA and abroad. 

       So what’s an investor to do? Where can one find shelter from this selling in stocks? As I continue to stress – cash is always an option. An alternative to cash is of course bonds. Bonds of all sorts either held supports after the November swoons, or actually broke out to new highs to become the new market leaders. I can’t say that TLT is the ultimate place to be, but if my bearish predictions are correct, TLT could massively pop in the near future. Municipal bonds (MUB) are the clear winners at this juncture as they continue to hit all-time highs.
CHART OF TLT
CHART OF MUB

If you need any further proof of the cautious investor stance, look at the short-term bond fund - BSV. You would be hard-pressed to find a more conservative investment option then the short-term bonds. The fund held support after a bout of selling around the December rate hike, but now rebounded and is pushing towards all-time highs again. This is showing elevated levels of fear as money is rotating out of stocks.
CHART OF BSV

The Dollar is poised to challenge the 52-week highs again. In December it held support and since continued making higher highs and higher lows.
CHART OF $USD
​

       Gold got a pop this week and managed to close above the 50-day moving average for the first time since November of last year. Gold is long-term bearish and is locked in a bear market for over 3 years now. We now basically have a bearish setup. If we fail here, we could see new lows again. An alternative scenario is continuation higher to the 200-day moving average and the high volume resistance area around $1160. In either case I am not looking to go long gold, but to short on a rebound.
GOLD CHART
​

       Two weeks ago I pointed out a bullish divergence on the chart of GDX. This week the divergence played out and we had a short-term higher high in GDX. I feel like GDX still has some juice left in it and it could continue higher to around $16.  Chart for GDX is somewhat messy, but as with gold, I am not looking to pick bottoms, only to short this bearish security.
CHART OF GDX
​

I pointed out a rising wedge formation on the chart of $WTIC in the last couple of weeks. Wednesday this rising wedge broke down and oil hit another multi-year low Thursday. Is oil done dropping? The rising wedge has probably played out for now, but I still think oil has some momentum to continue down to the upper $20s before putting in some sort of a bottom. My subscribers that opened an inverse position in mid-November are now sitting on over 100% profit in short crude oil fund (SCO). Sign-up today!
       I had a question from a subscriber recently asking whether USO is a good investment vehicle? Here is my response:
       USO is OK for trading, but it is put together using futures and does not track oil spot price in the long term. See this chart of USO. Notice that it hit an all-time low today. But oil ($WTIC) itself only hit multi-year low, not an all-time low. If you hold USO for a long time (several month) the performance will vary significantly from an underlying security.
CHART OF $WTIC

       Natural gas may have broken above the recent highs and seems to continue its push towards the 200-day moving average. Again, as with other bearish securities, I am only looking to play this one on the short side. Another high-volume resistance area is very close at $2.70. I will be looking for failure signs there.
CHART OF NATGAS
​

That’s it for this week’s market recap,

Best Regards and have another great trading week!
 
Alexander Berger (www.MasterChartsTrading.com)


Trade Alerts Service is now live – please sign-up here!