February 6

Market Update for Tue 6 Feb 2018

The S&P/ASX-200 lost 95+ points (1.56%). The down move is the largest since November 2016 after the release of the US election results and wiped out around AUDb33 in value. The move was expected after a plunge in US equities with the Dow Jones closing 2.5% lower. The drop might come as a surprise after the US jobs report for January shows strong payrolls (+200K versus market expectation of +180K) and an accelerated increase in average hourly earnings (+2.9% YoY). The upbeat data underscores the strong momentum in the US economy.

XJO gave back all the gains made in the previous three sessions. Priced are back near the psychologically important round number 6000 and near the demand line of the uptrend channel. The break above 6090 resistance did not hold which can be classified as an upward trend exhaustion. Prices broke below the area of support between 6035/50 and the close near the low of the day is weak. Volume was above-average. While volume denotes good reward for the effort, it is nevertheless not climatic. The Chart-of-the-Day shows the familiar 2-Hours chart of the S&P/ASX-200 (XJO). A new short-term uptrend channel can be drawn across price action of the last 2 weeks. Prices bouncing from the current level and recovering the area of support between 6035/50 quickly would allow keeping a more optimistic view of the market. A sustainable break below the 6000 level would not only end the current uptrend channel but also enter the Daily time frame into a confirmed downtrend again. Market Condition remains in Stage 1.

The NH-NL Index plunged into the abyss with Daily NH-NL indices dropping to the lowest level since the November 2016 US election selloff. The drop in prices and the NH-NL Index follows negative divergences which progressed and triggered in the last week. They do work and give strong and reliable signals for a trend reversal, although the exact timing, as well as the magnitude of the resulting move, remain unpredictable. The negative divergence in the Weekly NH-NL index is still in force. With prices nearing the weekly moving average and the Weekly NH-NL index dropping towards its zero line, this condition is about to be worked off. A quick recovery of the NH-NL Index would leave distinctive down spikes behind which give a message for a short-term bottom in the market. A look at the New Highs – New Lows raw data shows a spike of New Lows above and beyond the +200 reading we had last week. This is the highest level of New Lows since the November 2016 US election. The Brexit results in July 2016 produced a similar spike of New Lows. Both times were buying opportunities rather than the start of a bear market.

The Secondary Market Internals are negative now. The NH-NL Ratio dropped below its 50% neutral line into negative territory for the first time since the tedious trading range between May and October 2017 ended. Same here, a quick recovery and distinctive down spike would give a message for a short-term bottom. A falling NH-NL Ratio moving average is usually not portraying a conducive condition for the market. This indicator is falling since the 6150 price top was made in mid-January 2018 and continues to fall. The Volatility Index started coming back to life at the beginning of this year. Its position above the upper band denotes trouble in the market. A downtick would leave behind a spike to give a similar message for a short-term price bottom.

Volatility Indices are determined by how much volatility premium is getting priced into underlying equity market index options. Therefore, it reflects the degree of fear being felt by options traders. The US Volatility Index (VIX) rose to its highest reading since the November 2016 US election. In the process, the VIX rose above the prices of all its future contracts which is a pretty rare occurrence. Most of the time, the VIX stays below its futures contracts. Due to the expiry of the future contracts a time-risk premium has to be factored in. The closer a futures contract gets to the expiration date, the closer the price gets to the VIX. It is only during scary price declines that things can bet out of whack and the VIX is rising up above the level of its future contracts. Now, the interesting part is that instances when the VIX is above its futures contract are usually a condition of a price bottom for equity markets rather than the beginning of something ugly.

The Breadth Indicator is negative ever since the most recent price top was made and remains negative. A negative McClellan Oscillator is usually not a conducive market condition. The oscillator is unable to get above its falling tops line (red line) where it would give a signal for a short-term bottom in the market. The Summation Index continues to fall which is a message for liquidity leaving the market. The oscillator made a nice down move. A quick recovery would produce a down spike which in turn gives a message for a short-term bottom in the market.

The Bottom Line. In our weekend report, we articulated that prices near the most recent top with Market Internals at weak levels is not a condition of mutual agreement and that something has to give. And based on the overall picture we were not overly eager about the prospects for a continuation of the uptrend lately. Weak Market Internals and negative divergences in long-term market internal indicators remained a looming threat. Today’s selloff brought both, price action and Market Internals better in sync to either continue lower together or for both to produce bottoms together. The next few sessions will give more clarity about the direction of the market going forward. A selloff below the 6000 level followed by a swift recovery would denote a washout and give a strong signal for a price bottom. We don’t know if this is going to happen but we will take according action if it does. Price indicators and oscillators as well as Market Internals indicators (but not prices themselves) are brought down to an oversold condition. At best we are expecting more lateral movement going forward. Support is at 6000 and resistance remains unbroken at 6090. Prices remain within those boundaries. Market Internals are now negative. Trading Mode is downgraded to Conservative on negative Market Internals. A further downgrade to Protective is required on a Daily close below the 6000 level.

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Posted 06/02/2018 by Notes on ASX in category Daily Market Update