Market Correction

Yesterday was a heavy liquidation day across the board as volumes picked up and ATR's expanded -- an indication of short term directional change. Yesterday I pointed out the importance of price acceptance/rejection above 2011 highs in the major indices. To follow on that thought process, we can view the futures this morning and have a look at the structural precipice of the Dow (YM #F) - sitting at a precarious  level of monthly structural support as per the brown horizontal channel line at 12678. Yesterday, the Dow futures broke down and closed the day below the 2011 May and July highs, which as stated implies rejection of new 52 week highs and a need for continued price development, given the extent and duration of this rally. Today, we can see the market is attempting to challenge this important level again as per action in line with the black line reflecting 2011 highs. More importantly, if Dow mini's close below the monthly structural support at 12678 on a weekly basis, this market correction will be much deeper.

We looked at the $TRAN (Cash Transports) yesterday and discussed the non-confirmation new 52 week high in the index. We can see the ominous action in the Transports below as they come back into monthly support at 5000. If this market breaks 5000, the corrective action will be much deeper.

We can also bring in some perspective from the macro-weekly overlay line chart below looking at the Dow (Blue Line) and Transports (Black line) correlation since 2006/7. From above we looked at TRAN non-confirming the new highs but below TRAN are trading near all time highs (Black Line) vs DOW (Blue Line) which is clearly lagging. The recent erosion in TRAN looks to be closing the weekly DOW/TRAN spread and explains the recent directional weakness in the TRAN index relative to DOW on the day chart. This chart would imply DOW outperformance going forward as a result of its lagging behavior. We could also trade the Dow from the long side on any short term long momentum signal, hedged against the TRAN until this weekly spread comes back in line.

Lastly, we can take a look at what will be a key piece in determining the timing of any potential reversal in this market: AAPL. Yesterday's action in AAPL did not demonstrate significant weakness. We can see from the 'Red Arrow' below and 'SE - 628.56' that a short term momentum sell signal was generated. Looking closer, we can see that AAPL continues to trade decisively above its 3 day pivot regression (defined by the pink visual overlay structure), implying that the short term bias has remains up. We would need to see a significant liquidation event to imply the end of this trend. Structurally, AAPL trades within its weekly channel as per the blue horizontal overlay lines. This channel signifies that the intermediate trend is up. For longer term investors any daily closing violation below the lower weekly boundary at 600 would imply reducing long position or taking profits as a much deeper correction would develop. We would have to remain agile at these levels, as per yesterdays 'tell' based on our 'SE' (Short Entry) at the 3 day time frame level or short bias would suggest that trend is showing 'cracks'. In that line of thought, any 2-day closing violation below the regression would signify potential further downside corrective action. We will have to monitor this market as it could be a potential leading indicator into the depth of corrective action.

US Index Tour

Where are we in Macro-Context with respect to what has been a relentless push since Jan?

If we look at the Dow Industrial e-mini future below we can see that the index has been in corrective mode since April 2 - the first trading day of April. The first trading day of the month is always significant from a directional pivot standpoint and usually etches a monthly extreme; it seems that the April high on the mini at 13229 is proving to be an inflection point thus far. The structural view of the DJIA mini future is currently developing in a supportive area: we can see the confluence of several key supportive time frame boundary lows -- the 'blue' channel low (reference 12813) marks a supportive multi-week low for the index, which has acted to contain the price to date. Just below the 'blue' channel, we can find the 'brown' channel enveloping price which defines the important macro-monthly pivot low (12678 level). Lastly, we can visualize the 'black' horizontal line running across the screen linking the April/May and July 2011 'closing' highs (12768) and now supporting the current distribution of April 2012. We can see how larger time frames (Weekly and Monthly) contain this market from the day chart perspective, along with the 2011 highs. Most importantly, we have to watch for any weekly closing violation < 12678 (monthly pivot channel low -- brown channel low), which would imply further downside corrective action. This would imply a 'price-rejection' above the 2011 highs, suggesting the market is not 'ready' and sustainable above these levels quite yet and would need more time to develop below these highs. Typically, markets will move into new 52 week high territory as part of the nature of a self-reinforcing momentum bias that finds fewer and fewer interested buyers before establishing a balanced or accepted zone of price action. The macro conditions all remain supportive, however, but we need to keep an eye on 2011 highs.

We see similar activity developing in the S&P e-mini future below: levels to watch are again defined by the 2011 highs as per the black horizontal line that is currently supportive to price. As well, we need to watch for any downside momentum weekly closing activity below the current monthly pivot channel low at 1335 level. A weekly closing below this level would violate the structural macro-trend since January and would imply again that the S&P's are not ready to be accepted above the 2011 highs and need more time to develop.

Small caps have been under-performing as per the IWM (Russel 2000 ETF). The 2012 trend has not taken this market above 2011 highs. The Russel 2000 is still in a major-monthly macro down trend, despite the support in the major indices. This is an important divergence from the Dow and S&P - which reflect general perception and capital inflow from foreign investors. This inconsistency in breadth or concentration of capital to Dow, S&P 500 and NDX 100 speaks about the general perception of this move since January as a move to private sector quality balance sheets defined by cash flow and income through dividend as a proxy for  real-economy support and less so for the more 'speculative' real-economy growth theme defined by small caps, along with the inflationary theme as per the materials which we'll look at shortly. The 83.22 level in the IWM reflects monthly and weekly pivot resistance. We can see that the IWM attempted to move outside this level in late March, but was rejected and continues to move sideways, coming into monthly and weekly support (79.47, 78.52 levels). Any breakdown below the weekly channel low at 78.52 would imply continued weakness. 

The Transports have not confirmed the DJIA break above the 2011 highs. The Transports have struggled to move higher since early March and continue to consolidate within the monthly and weekly channel overlays as a range-bound trade. This market should find support at the 5000 level in line with monthly pivot lows (brown channel). 

Lastly, well look at the XLB -- the basic materials sector ETF proxy. We find strong correlation to the Transports above; lower macro-monthly structural highs below 2011 highs -- no attempt to push directionally above monthly and weekly pivot channel highs (38, 37.63 -- blue and brown channel boundaries). Capital inflows have been defined by our proxy of foreign buyers -- the Industrials -- with a supportive 'real-economy' perception as per the S&P 500 -- and our proxy for 'domestic' capital flows -- the Nasdaq. Again, the long term broad based inflationary theme as per the risk-on support for materials and mining, small caps and transports is muted by comparison to capital concentration in Major US Market Indices, which suggest early shift of capital and perception to quality private sector balance sheets for preservation against market shocks and government balance sheets.

Sector Screen Update

From yesterday, we have key breadth inflows across the board: Financials, Healthcare and Biotech, Technology, Materials, Mining and the Energy space.

Within Financials, Commercial and Regional banks received stronger flows than the Broker Dealers (IAI) which remain in short term bearish mode. Momentum buying was also apparent in the Oil Equipment and Service sectors versus the 'Integrated' names. We are looking at sector rotational quality, referenced by 'IntraS' vs 'CloseS' columns - referring to the signal type within the specific product (IntraS is an intraday momentum signal, 'CloseS' reflects an end of day change in direction). Whereby, the momentum trigger implies stronger product demand.  As well, the short term signal, as described, must be evaluated within the context of the intermediate and longer term product/market trend. When all trading time periods are fully synchronized directionally, we can use the trade signal type as our timing mechanism. So, the types of signals we find within sector spaces relays micro perspective and/or mood relating to the sector. And collectively, we can develop a broad macro-based insight into the overall state of the US stock market by analyzing signal quality specific to each sector.

Similar momentum signals we generated within the Ag (MOO), Mining and Materials (XME, XHB), and Energy Equipment and Service issuers (OIH, XES) space.

By far, the leading market sector is in Healthcare and Biotech space (XBI, FBT, XLV, etc). These products have been in bullish mode for the longest duration as per the numerical value found in the column associated with the signal type (4.00, etc), and driven by momentum signals initiating short term trend in line with longer term trends.