We have posted discussions about this in the past, most recently on November 25th and also on October 30th, where we looked at the charts and decided that the S&P 500 was possibly in for some trouble. On November 25 the broad market index closed at 1111.18, and today it closed at 1091.94, for a loss of 1.7%. Basically, the market has gone nowhere in that time.
What has happened, however, is that the chart has given us some more signs that the market is running into trouble. Here is a 1 yr daily chart of the SPX, similar to the one we showed in our previous posts, except with some updated lines.
As you can see, we still remain unable to break above that 1120 line (yellow horizontal line), which is the long term 50% Fibonacci retracement line from the 2007 high to this years low. It is likely that we are seeing heavy resistance at this level as traders anticipate this weakness and front run it to exit positions for the year.
Additionally, this chart shows that we have broken the uptrend that was established since the March lows. Keen observers will note that this also happened in October, but the break is much more definitive this time especially when combined with that price ceiling. However, we will need to take a look at where we close on the weekly chart because that should be much more indicative of future movements.
For good measure, the same analysis applied to the E-Mini futures (/ES) yields similar results:
The /ES is attempting, and thus far failing to break through its own ceiling which has been established at 1112. As you can see, the E-Mini futures just broke below the upward trendline that has defined this rally since March.
The root cause of this is, in our opinion, fund managers selling off risky assets to lock in the substantial gains some of them have been able to accumulate during this tumultuous year. Obviously, this situation is not sustainable, as mutual fund managers often have a mandated maximum cash balance, and hedge fund managers generally do not like to have their end-of-year statements to clients say that they are in cash. But there is a lot of money available to be taken off to the sidelines, so this situation may continue through the end of the year. It will be important to watch leadership stocks over the next couple weeks such as Goldman Sachs & Co. (GS), JP Morgan Chase (JPM), Apple (AAPL), Cisco, (CSCO), Google, (GOOG), Ford (F), General Electric (GE), Caterpillar (CAT), etc. and of course gold (GLD) and the US Dollar (UUP). We’ll be making a follow up to this over the weekend.
-Lucid Markets Team
Disclosure: Long GS, CSCO, GOOG, GE, GLD, UUP, JPM and the stock market in general through various other positions.