The Outlook Hasn't Changed Much

Posted At 9:00 AM EST

Good morning...We begin the day with some selling pressure in the pre-market futures, with the major indexes looking to open near yesterday's lows.  That will prove to be an important pivot for most short-term traders today.

The last time we looked at our timing charts was on June 18th (we will likely be adding these to the regular updates on the site).  At the time, the short-term guides suggested a rebound, while the intermediate-term ones were much more questionable.

Subsequently, the market was able to stage a two-day rally, which was pretty weak but within the window of a 1-5 day recovery that we usually see.  Those modest gains were given back quickly with the big down day on the 22nd, helping to reinforce the bigger-picture trouble that the longer-term charts were suggesting.

Let's check them now.

We're once again seeing a confluence of oversold signals among the short-term indicators, even more so than we had in mid-June.  All the indicators don't always have to enter an extreme on the same day - within a day or two is usually good enough.

We saw the Indicator Score and Down Pressure reach extremes on Tuesday or Wednesday, and the % of S&P Stocks Above Their 10-Day Moving Average and the Rydex Beta Chase Index joined them after yesterday's close.  The lone holdout is the Equity-only Put/Call Ratio, which moved to a kinda-sorta extreme on Wednesday but didn't quite exceed its trading band that we watch.

With the extremes we saw in the STEM.MR Model and Short-term Indicator Score earlier this week, I was watching for the potential of a false breakdown below 875ish, and a quick 1-3 day snapback back above that area.  We've seen that over the past couple of days, but there has not been a lot of conviction behind it, which is troubling.  With the indicators where they are now, there still seems to be a decent chance of more of a rebound, but I wouldn't want to be too aggressive with it if we lose this week's low around 870.

Now for the intermediate-term (I've included a second chart as well).

With 8 total indicators, there's quite a bit to digest, but the bottom line is pretty clear - all of these guides are either neutral or just leaving "excessive optimism" territory, and only two of them are even near oversold.

One of the indicators nearing oversold is the % of S&P 500 Stocks Above Their 50-day Moving Average, telling us that quite a few stocks have gotten kicked back pretty hard.  So breadth has been bad, but other than the Rydex Bull/Bear Ratio, the other sentiment-related charts are not reflecting a whole lot of concern about it.

Part of the reason is that the decline has been somewhat swift, with much of it coming in the past week.  With these longer-term indicators, it's going to take some time for that to get reflected in the data.

Pretty much everything we've looked at over the past couple of weeks suggested trouble ahead, from the potential Head & Shoulders formation to the position of a few lesser-known speculative indicators to the VIX masking underlying downside bets.

The only real exception to that is what we looked at yesterday, with the S&P sinking to a multi-month low while total 52-week lows on the NYSE have remained very muted.  That had some fairly bullish precedents, but only in the shorter-term of one to two weeks; it didn't suggest much at all in the intermediate-term.

So I suppose not much has changed - we could/should see some kind of rally in the shorter-term, or at least if we see a down day or two we could quickly make back the losses.  But the longer-term outlook looks pretty cloudy.

Bottom line - Intermediate-term Outlook: Neutral (since April 9, SPX 843)

Beginning in early March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration.  Some of those studies were even more positive, and suggested not just a rally, but possibly a new bull market.

During mid-April, the market held up extremely well in spite of some overbought types of indications.  This is very rare during an ongoing bear market, and is important to keep in mind especially given many of the "this time is different" kinds of studies we reiterated in early May.

While there were - and continue to be - many reasons to consider this rally something different than we'd seen previously in the bear market, I was looking for the S&P to run into trouble if it traded into 940-950, which happened early in June.  I wasn't expecting any kind of waterfall decline to new lows, just more of a pullback than we'd seen.

With the most recent surge in the spread between the Dumb Money and Smart Money Confidence, and the tendency for initial breakouts from volatility coils to be "false", I was looking for the first breakout above 950 to be beaten back.  Now that that's happened and we're nearing the opposite end of the May - June range, we need to see how the market responds to short-term oversold conditions, especially now that we've seen a "failed" rally above the 200-day average.

Not only that, but this week the S&P 500 triggered the Head & Shoulders pattern that we discussed on Monday.  When this pattern has been activated in individual stocks, much more often than not the stock went down to hit the target area.  For the S&P, that target would be around 840-850 or so depending on how you draw the trendlines.  I don't want to get too hung up on the idea that that level has to be hit, but the success of this pattern on individual stocks has been intriguing.

Adding to the questionable nature of the uptrend, the market was not able to rally well off of short-term oversold conditions hit Monday afternoon.  We did bounce a bit off those oversold conditions and technical support, but rolled right back over again.  Now we're kind of in the same place as Monday - oversold and near support.  If we fail to see a meaningful bounce here, and instead continue to slice through 875-880, then that will be another consistent indication that the larger trend has changed and 850ish should be a minimum downside target.

Bottom line - Short-term Outlook:  Neutral (since June 30, SPX 919)

With the extremes in two of our shortest-term composites earlier this week (the STEM.MR Model and Short-term Indicator Score), it would have been quite unusual to not see some kind of rebound from the selling pressure.  We did see a recovery from Wednesday afternoon into yesterday, but it hasn't been all that impressive.

The choppy upside into yesterday afternoon was enough to push all of our intraday indicators out of oversold territory, so that removes a layer of immediate support.  On a slightly longer time frame, we do have the recent confluence of oversold indications we looked at in the timing chart above, so another dip down from here should set up yet another bounce attempt into early next week.

I'm not thrilled with the long-side setup, especially if we happen to lose this week's low around 870 on the S&P.  With the longer-term concerns we've been discussing, and the short, weak rally attempts of short-term oversold conditions, the action isn't exactly inspiring.

So for me it's kind of a toss-up for the coming days - I don't want to try to press any short-side bets given the timing chart, but I can't find an immediate reason to want to have long-side risk (especially if we hit lower intraday lows after the first hour, below yesterday's lows).

All the best,