Price Action Lab Blog

Premium Market Analysis

Premium Content Sample Report

Stock Market Technicals For Week of July 29, 2019

The weekly premium report includes price action analysis of major market indexes. If you are not a subscriber click here for more information.

Summary

  • U.S. equity indexes were higher on the week led by large tech stocks.
  • High beta large caps rebounded while action in low volatility large caps was muted.
  • Bond yields rose due to profit taking in the bond market.

Recap (July 22, 2019 – July 26, 2019)

Index Week YTD
S&P 500 +1.7% +20.7%
DJIA +0.1% +16.6%
NASDAQ +2.3% +25.5%
Russell 2000 +2.0% +17.1%
10-Year Note +3 bps -0.61%

U.S. stock indexes rose on expectation of low rates and due to better-than-expected earnings. The S&P 500 has stayed above 2954, which was the previous all-time high, for a fourth week in a row.

The index has made higher highs and higher lows in the past four weeks. Since SPY inception, there have been 70 occurrences of this weekly pattern at 52-week highs. A backtest for entry at the close of the fourth week and exit at the close of the next week reveals a random pattern with 50% win rate and slightly negative Sharpe.

Therefore, this particular 4-week pattern of higher high and higher lows is random as far as forecasting the next week return.

In the 31 weeks since the bottom of December 2018, the average weekly gain is about 0.78%, as shown in the chart below.

The sharp rise in the average weekly gain in the last 31 weeks reflects an overbought condition similar to those realized before the 2011 and 2012 corrections. We will mention again the small sample but a sustainable move of this kind has low probability. This indicator is signaling a short-term correction.

The High Beta S&P 500 ETF (SPHB) rose 1.7 % on the week while the Low Volatility S&P 500 ETF (SPLV) advanced 0.6%. Tech stocks took the lead after good earnings results and caused a return to higher risk securities.

Despite the return to higher risk large caps, SPHB has been trading sideways in the last four weeks with alternating weekly return signs. From recent price action one could get the impression that higher risk stocks are on a strong uptrend but this is not the case apart from selected names. If fact, consolidation has already started in high beta large caps and we expect this to spread to the broader market.

The Russell 2000 rose 2% on the week. Unless we see a break above 1600, there is nothing here to suggest a recovery. This index is still 9.3% below its all-time highs.

Resistance for Russell 2000 is around 1600. Support is around 1500.

Yield curve update

The 10 Year – 3 month Treasury spread is now about -4 basis points. The graph above shows how the yield curve (orange line) has changed from a week ago (green line.) Yields rose slightly across all maturities on the week. This yield curve still does not forecast a recession but if inversion continues this may change.

Conclusion

Despite lower rates and better-than-expected earnings, we still expect consolidation for the rest of the summer if not a small correction.

If you have any questions, you can email us at: premium@priceactionlab.com


Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No updates to charts will be provided if market condition changes occur that affect the levels on the charts and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting program: Amibroker

Copyright notice: Any unauthorized copy, reproduction, distribution, publication, display, modification, or transmission of any part of this report is strictly prohibited without prior written permission.

Theme by Anders Norén