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Stock Market Technicals For Week of January 20, 2020

This premium report for week of January 20, 2020, includes price action analysis of major market indexes, large caps, sector ETFs and our forecast. If you are not a subscriber click here for more information.

Report contents

  1. Weekly summary and recap
  2. S&P 500 weekly analysis
  3. Major index overbought/oversold conditions in daily and weekly timeframes
  4. S&P 100 top overbought stocks in daily and weekly timeframes
  5. Low volatility versus high beta large caps analysis
  6. Sector performance
  7. Chart of the week

1. Weekly summary

  • Stocks gained amid a broad based rally.
  • Tech sector momentum increased.
  • Small caps gained most on the week.
  • Bond prices ended the week nearly flat.

Recap (January 13 2019 – January 17, 2020)

Index Week YTD
S&P 500 +2.0% +3.1%
DJIA +1.8% +2.8%
NASDAQ +2.3% +4.6%
Russell 2000 +2.5% +1.9%
10-Year Note +1 bps -0.08%


2. S&P 500 weekly analysis

The S&P 500 index rose 2% on the week to new all-time highs.

The index is not overbought in the weekly timeframe while strong support is around 3100 in case of a short-term correction.

About 84% of the stocks in the index now trade above the 200-day moving average, as shown below.

A high percentage of stocks trading above their 200-day moving average are an indication of strong bull market, as marked on above chart. Only two of the extreme conditions above 84% were followed by a correction in 2011 and 2012. Note that the 2007 top occurred several months after the peak in the percentage of stocks above their 200-day moving average. Therefore, this indicator often signals continuation, although the sample is small to be able to assign statistical significance to any observations.

3. Major index overbought/oversold conditions in daily and weekly timeframes

Daily timeframe

NASDAQ is overbought 10 days in a row, S&P 500 is overbought 3 days in a row and Russell 2000 and DJIA two days in a row.

NASDAQ daily chart with overbought condition periods.

The sample is small but shows that in most cases even more extended overbought conditions signaled continuation. In several other occasions they signaled short-term corrections while the major top in 2000 followed after about two months. Therefore, extended overbought conditions are only useful for risk management purposes but not as signal of price direction.

Weekly timeframe

According to PAL OB/OS weekly overbought/oversold indicator, NASDAQ is overbought four weeks in a row and DJIA has just turned overbought. Both S&P 500 and Russell 2000 are still not overbought and may provide support to uptrend continuation for a while.

4. S&P 100 top overbought stocks in daily and weekly timeframes

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Daily timeframe

Below is a table of overbought S&P 100 stocks sorted by highest 14-day RSI value.

LLY is overbought 30 days in a row. This is the longest period this stock has remained overbought since 1989.

A short-term correction in this stock would be justifiable at this point.

ADBE and AAPL are also overbought for an extended period of time and these stocks should normally take a breather soon.

Weekly timeframe

Below is a table of overbought S&P 100 stocks sorted by highest PAL OB/OS value.

According to PAL OB/OS indicator, most overbought stock in weekly timeframe is DHR for 8 weeks. MS and GS follow for 7 weeks. AAPL, BLK, GOOG, GOOGL, MCD and MDT are overbought 6 weeks in a row.

5. Low volatility versus high beta large caps analysis

The Low Volatility S&P 500 ETF (SPLV) rose 2.6% on the week while the High Beta S&P 500 ETF (SPHB) gained 1.9%.

The stock rally was broad but low volatility stocks rose more than high beta and this may be indication of market participants becoming slowly more risk averse at these price levels.

6. Sector performance

Technology (XLK), Health Care (XLV) and Industrial (XLI) sectors are at new all-time highs and the most overbought in daily timeframe. Energy (XLE) has largest drawdown from all-time highs (June 23, 2014) at -26.4%.  Overbought conditions in top four above may persist for few more days before a short-term correction starts.

7. Chart of the week

S&P 500 Transportation index chart is shown below:

The index is now just 0.6% below the all-time high on September 21, 2018, and could break to new highs. The related IYT ETF daily chart indicates similar price action and potential.

Conclusion

There are opportunities in the market, as always, despite extreme levels. While many analysts perceive overbought conditions as sell signals, in most cases these are continuation signals.

We also expect a short-term correction in the next few weeks after markets reach extreme overbought conditions. The magnitude of the correction cannot be known but we believe it will be between 4% and 10%.

Notes:

-Overbought conditions occur in daily timeframe when RSI(14) indicator is greater than 70 and oversold when the indicator is less than 30. Length of overbought/oversold conditions in days is also shown. 
-Overbought conditions occur in weekly timeframe when PAL OB/OS indicator is greater than 90 and oversold when the indicator is less than 10. Length of overbought/oversold conditions in weeks is also shown.
-Normally, overbought/oversold conditions indicate rising momentum in the relevant direction but they are also used as reversal indicators. 

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

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