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Wednesday, May 6, 2015

Daily update 5/6 TLT sell off

A little more down.

SPX confirmed yesterdays close below the 50 SMA with a lower close.  Breadth was -66% indicating broad based selling.  The new highs were a pitiful 25 while new lows jumped up to 76.  The bears were quite busy selling into strength just a few minutes after the open.  The selling appeared to exhaust itself shortly after 2:30.  The dip buyers rushed in to push prices up into the close.  SPX managed to close above the 4/30 low even though it broke it during the day.  Interesting that the bounce came right after price dipped slightly below the infamous 100 SMA.  The TRIN was below 1 all day and closed at .94.  Once again this is very unlikely to be an important low.  Today's bar looks a lot like the 4/30 candle.  Those dip buyers were rewarded.  I commented that night it is pretty much a 50/50 proposition whether it gaps up or down after a day like that.  We have a very similar situation.  Will they get rewarded or hit over the head this time?

On 4/30 we had blue bars on the futures indicating we were over sold.  We don't have that this time.  Notice the -DI line is over 35 once again.  We keep getting short bursts of real selling pressure, but they stop before they break the market down.  Who is doing the selling and how big is their hammer? 

There is clearly sizable numbers of people on opposite sides of the trade.  Eventually one side will win out.  In the mean time the chop could continue.  To my eyes the rallies keep getting weaker.  Until that changes we are not going to break out on the upside.  The risk of a break down remains elevated.

I heard quite a bit of talk about interest rates today.  Bob Pisani says stock traders are confused why rates are rising when the economic data seems so poor.  There is no doubt the sell off in bonds has been pretty sharp.  I believe it to be technical.  Take a look at this monthly chart of TLT.

Look at that +DI line.  There are only two other times it spiked like this in the last 10 years.  Each was followed by a severe sell off.  The last time there was a dip then a higher high in price before the collapse.  In that dip price never broke the low of the last big up candle.  This time we have already done that.  I think that suggests we probably won't be making a higher high this time.  The other two sell offs did not end until the DI lines came together.  If that pattern repeats we should have considerably more downside to go.  I have no idea if there is any fundamental underpinning or not.  TLT got massively overbought and is now selling off.  It could simply have been profit taking that started the rout.  How this might affect stocks is an open question.  Both previous declines saw pretty good stock rallies.  However, as I have shown over the last few months the economy appears to be the weakest it has been in this entire recovery.  We have just seen a big surge in fuel prices over the last couple of months.   Now we are seeing a surge in interest rates.  Will the economy be able to stand up to those headwinds in its weakened state?  I know I can't answer that and I doubt anybody else can either.  I will keep a close eye on the economic data as it comes in.  It may be the deciding factor what happens here.


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