Three Reasons To Stay Patient

The market internals had continued to deteriorate since the A/D line formed a negative divergence in May. This made a market decline inevitable and the global fears lit the fuse over the weekend. Of course Greece has been a concern for many years as the past Greece debt triggered market declines have created some excellent buying opportunities.

The decline in May 2012 ended in early June as the market internals completed classic bottoming formations (Rally Potential That Bears Don’t Expect). Since there are no signs of a recession this market decline should also create a good buying opportunity, but how can you tell when to start buying?

I think that in addition to the market internals it will be important to keep an eye on the overseas markets. In particular I am watching the German Dax which has next good support in the 10,800 area. This is 2% below current levels . If this level is broken there is more important support in the 10,300-10,400 area.

One should also keep an eye on the sentiment as the 10% increase in AAII bullish sentiment last week I thought last week was a worrisome sign. Another market indicator I am watching is the number of stocks above their 50 day MAs as I will be looking for it to reach critically oversold levels like it did last October.

Let’s look at the three key technical signs that will help you identify the next good buying opportunity.

SPY630

The daily chart of the NYSE Composite shows the plunge through support, line a, going back to the December 2014 lows.

  • The close was well below the daily starc- band with next chart support at 10,650, line b.
  • The weekly starc- band is at 10,587 with July’s pivot support at 10,532.
  • The NYSE A/D line formed a negative divergence, line c, in May that was confirmed by the break below the early May lows.
  • This downtrend needs to be broken to confirm that the correction is over and I am also watching the short term resistance ( point 1).
  • The lower lows in the A/D line (see arrow) are also consistent with a further decline.
  • The ARMs Index closed at 2.14 which is just moderately oversold. It is well below the peaks in January (3.61) and March (2.64)
  • The 20 day EMA is now at 11,000.

The Spyder Trust (SPY) also closed well below its daily starc- band as it reached next support in $205.50 area.

  • The weekly starc- band is at $203.27 with the March low at $202.50, line d.
  • There is additional support in the $200.00 area with the July pivot support currently at $200.54
  • A drop to this level would mean a decline of 2.4% from current levels.
  • The S&P 500 A/D line dropped below the June lows on Monday.
  • It shows a well established downtrend, line f, which I will be watching closely.
  • The next long term support for the A/D line is at the December-January lows, line g.
  • The McClellan oscillator (not shown) closed at -280 which is an oversold reading.
  • The OBV has been in a well established downtrend for most of the year, line h.
  • The volume Monday was the heaviest since March 18th.
  • The declining 20 day EMA is at $209.67 and any rebounds over the near term are likely to fail below this level.

What to Do? Be patience if you are looking to get in the market or want to add to your long term stock portfolio. In my opinion the long term trend for the stock market is still positive as there are no signs on the horizon that the economy is close to a recession. In fact it appears to be getting stronger.

The Pending Home Sales were strong Monday with S&P Case-Shiller HPI, Chicago PMI and Consumer Confidence are all being released on Tuesday.

Three reasons to be patient

  1. Wait for clear signs from the A/D lines that the correction is over
  2. AAII bullish% now at 35.6% needs to drop to the low 20% area
  3. The percentage of S&P 500 stocks above their 50 day MA needs to turn up from the 20-25% level