The edge has shifted to the market bears for now. It remains a time to be on high alert but the bears still have a lot to prove before anyone should start running for the hills.
Last week I shared with you a new chart showing a Volume at Price (VAP) analysis on the S&P 500. That chart is still strongly influencing my own thinking. Here is an updated version of the chart:
Part of the reason that I say that the bears have a lot to prove is that they are fighting against very strong support between 1810 and 1880 on the S&P 500. You can see this support area clearly in the chart above.
The bulls, on the other hand, have to break above 2,130 to prove their case. The bulls have the harder case to make for now but the bears aren’t exactly looking at a layup.
Another reason I’m skeptical of a full blown bear mauling is that one of my most recent proprietary indicators is showing a positive divergence between the August 2015 correction and today.
Let me show you what I mean.
For the past half year I’ve been tracking a new proprietary indicator that shows what percent of the stocks in both the S&P 100 and NASDAQ 100 have active SSI’s. The SSI is my proprietary Stock State Indicator. Stocks with active SSI’s are behaving strongly. They have had strong up moves that are well supported by trend. Stocks with inactive SSI’s have been stopped out by our Smart Trailing Stop indicator.
Here’s how my new percent active SSI chart looks today:
What we’re seeing in the chart above is that even though the price of the largest stocks in the S&P is testing the lows set back in August 2015, there are more strong stocks in the index today than there were after the August bottom.
This is known as a positive divergence and it’s a caution sign for the hungry bears.
On the plus side for the bears, the Smart Moving Average on the S&P 500 continues to turn increasingly negative and the S&P 500 never triggered a Re-Entry Rule after having been stopped out last August.
The picture in the tech heavy NASDAQ isn’t much different. Our indicators did get whipsawed having triggered a Re-Entry Rule in December which ultimately failed and stopped out again in January. (That bothers me, by the way, and I’m actively working on how to make it less likely to happen again.)
Here’s the current chart of the NASDAQ Composite with our indicators:
Volume at Price support levels for the NASDAQ look like this:
The areas of support and resistance for the NASDAQ are not as crisp as they are for the S&P 500 but they do suggest that there could be continued thrashing about between 4,000 and 5,200.
In other news (and personal opinions), continue to stand aside from energy and China. These markets continue to show no positive action whatsoever. If I had positions in these markets, I’d be looking for a good spot to exit on a strong bounce.
Gold and silver are showing some signs of a bottom. I still think that there could be more downside from here but I’m increasingly interested in beginning to establish new positions but I certainly wouldn’t risk anything that I’m not willing to see drop another 25%.
Finally, I’d like to leave you with another example of an exceptionally strong stock in a weak market – Pepsico (NYSE: PEP).
PEP last triggered a Re-Entry Rule in 2009 and has been on a six year unrelenting bull tear ever since. It recently dipped into its Low Risk Zone before rising back out with strong support from its Smart Moving Average.
Take a look:
Its Volume at Price chart is also offering strong support at current levels:
I love strong stocks in these shaky markets. PEP is a shining example of a very strong stock that has proven its staying power again and again.
(Quick but important aside – if you’re wondering what that recent spike down to $75 was in the above chart, that was the low price on August 24, 2015. On that day PEP opened at $91.58 and even closed up at $91.83 but it had a huge intraday down spike during trading hours to as low as $76.48. That’s why you should never put your stops in the market!)
Stay safe … and strong,
Richard M. Smith, PhD