In The Week Ahead: Why This Chart Is A Red Flag For The Market

John Kosar's picture

Monday, January 19, 2015 - 12:00pm

by John Kosar

Despite a strong rebound on Friday, all major U.S. indices closed lower for the week. The past two rebounds, in mid-December and in early January, were triggered by communication from the Federal Open Market Committee (FOMC) that pertained to the timing of an expected interest rate hike.  

Friday's rally was not much different, as investors collectively interpreted weak December consumer price index (CPI) data as an indication that the Federal Reserve may delay increasing rates until the second half of the year.

 

Last week's decline was led by the tech-heavy Nasdaq 100, which lost 1.7% and is now down 2.2% for the year. In the Dec. 29 Market Outlook, I said that continued weakness in technology issues could become problematic in January and February as seasonal factors began to weigh on stocks.

Technology remains a key influence this week as the broader market continues to negotiate a near-term inflection point that is likely to become the springboard for the next intermediate-term trend.

From a market sector standpoint, my own metric shows that the biggest inflow of investor assets last week went into energy. This followed a steady contraction in these assets between July and December. If this continues, it will suggest an emerging buying opportunity in this unloved and washed-out sector.

Time for Tech to Sink or Swim

In last week's Market Outlook, I covered the Nasdaq 100's recent transition from its October price advance to a sideways trend since late November, the latter of which represents near-term indecision as investors digest the recent gains and try to determine its next directional move.

Over the past week, the Nasdaq 100 went from being situated right in the middle of that indecision area to testing and bouncing off its lower boundary at 4,089 on Friday.

Nasdaq 100 Market Outlook Chart

The lower boundary represents a well-defined line in the sand. The index must build on Friday's strength and eventually rise above the upper boundary of the pattern at 4,347 to confirm that the indecision area has resolved in favor of higher prices and the resumption of the larger October advance.

On the other hand, a sustained decline below 4,347 would warn of further weakness and an upcoming test of the 200-day moving average at 3,947, which is 4.7% below Friday's close.

General Electric Not Looking Bright

While we await the Nasdaq 100's reaction to this key inflection point, one place to look for a potential leading indicator of direction is market bellwether General Electric (NYSE: GE). 

I highlighted GE a few weeks ago, saying shares had rebounded from a Dec. 17 test of their March 2009 major uptrend line. However, since then, GE has not only collapsed below that five-year trendline, but also below its $23.69 Oct. 15 low, following a failed attempt to retake its 200-day moving average on Dec. 23.

GE Market Outlook Chart

Considering this blue-chip stock's positive correlation to the S&P 500 since 2011, and its huge market cap, I am viewing the recent weakness as an indication that the January broader market pullback may not yet be completed.

Volatility Offers Another Reason for Caution

Investor apprehension since late December can be seen in the Volatility S&P 500 (VIX), or the fear gauge, which has been situated above its 50-day moving average since Dec. 30. The past two times this occurred coincided with the previous two minor declines in the S&P 500.

SPX VIX Market Outlook Chart

It would take a sustained move back below the VIX's 50-day moving average, currently situated at 16.03, to indicate that investors have collectively become complacent enough to fuel the next leg higher in the broader market. Until then, the market remains vulnerable to more near-term weakness.

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Gold Attracting Buyers

In the Dec. 15 Market Outlook, I pointed out that total assets invested in SPDR Gold Shares (NYSE: GLD) were expanding, indicating investors were slowly starting to buy gold again. And last week, I identified an emerging bullish chart pattern in GLD, saying that a move above $118.02 would target an initial test of the 200-day moving average at $120.86.

GLD Market Outlook Chart

GLD closed at $118.56 on Jan. 12, and proceeded to rise 3.9% to a high of $123.15 on Friday, before finishing the week at $122.52. Friday's strong close positions GLD above both its 200-day moving average and its March downtrend line, which clears the way for a 4.5% advance to $128.

Last week's spike in gold prices may be an early indication that recent deflationary pressures are coming to an end. Although my work suggests an emerging intermediate-term buying opportunity in the U.S. stock market between now and early next month, recent weakness in market bellwether General Electric and an elevated VIX warn that the pullback from the late December highs may not yet be completed.

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John Kosar does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.