THIS SIGNAL CAN FORESHADOW A SIGNIFICANT PRICE MOVE

CHARTS SPEAK FOR THEMSELVES

The S&P 500 peaked 101 days ago on January 26, 2018.  Williams %R, which helps us track momentum, is shown at the bottom of each weekly chart below.  The red arrow shows S&P 500 momentum reached "oversold" territory in March.  During the subsequent drops (blue arrows), the bears were unable to push momentum back into oversold territory, which tells us to be open to better than expected outcomes in the weeks and months ahead.

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THE NASDAQ LOOKS EVEN BETTER

Bullish momentum was so strong before the January 2018 peak that even after correcting/consolidating for 101 days, the NASDAQ has remained above oversold territory, which is a sign of strength.

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2011 CORRECTION:  NASDAQ

Compare and contrast the 2018 chart (above) to the 2011 chart (below).  Notice how momentum was much weaker in 2011.

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TECH STOCKS IN 2018

Like the NASDAQ, momentum in the technology sector (XLK) has remained incredibly strong since markets peaked in January.

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TECH STOCKS IN 2007

Compare and contrast the 2018 chart (above) to the 2007 chart (below).  Notice how momentum in the technology sector was much weaker in late 2007/early 2008.

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S&P 500'S LONG-TERM OUTLOOK

In November 2016 bullish setups on the chart of the S&P 500 turned out to be helpful.  This week's video revisits that analysis to see if the long-term bullish conclusions have been negated during the recent stock market correction. 

 

MOMENTUM FAILURE IN 1998

When the bears had control of the short-term trends in 1998, they were unable to push bearish momentum back into oversold territory in late September/early October; this is known as a momentum failure (see blue arrow below).  The momentum failure said "be open to better than expected outcomes in the weeks and months ahead".

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According to StockCharts.com:

"The failure to move back into overbought or oversold territory signals a change in momentum that can foreshadow a significant price move."

WHAT HAPPENED AFTER THE MOMENTUM FAILURE?

After the bears failed to push momentum back into oversold territory in 1998 (blue arrow bottom of image), the NASDAQ found its footing and tacked on 240%.  The box in the upper left hand corned of the image shows a similar situation on the present day weekly chart of the S&P 500, telling us to keep an open mind about better than expected outcomes in the weeks and months ahead. 

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Recent Breakout Says A Lot About Markets And Economy

PICTURES ARE WORTH A THOUSAND WORDS

When investors are confident about future economic outcomes, they tend to prefer growth-oriented XLY (consumer discretionary) over defensive-oriented XLP (consumer staples).  The 2002-2009 chart below shows the XLY:XLP ratio consolidated for several years before breaking down in October 2007.

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THIS PICTURE LOOKS QUITE A BIT DIFFERENT

In the present day scenario, the XLY:XLP also consolidated for a number of years.  The ratio was unable to exceed the orange lines between 2000 and late 2017.  Instead of breaking down in a bearish manner (see October 2007 above), the ratio broke out in a bullish manner in late 2017 by exceeding the levels that had acted as resistance for roughly 17 years.

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The charts above tell us quite a bit about the market's tolerance for risk in late 2007 relative to the market's tolerance for risk in 2018.  Even in the face of recent broader market weakness/consolidation, the ratio is up 6.55% for the month as of April 27. 

DOES BROADER ASSET CLASS BEHAVIOR PAINT A MORE CONCERNING PICTURE?

Is the XLY:XLP ratio the only ratio that paints a "be open to better than expected long-term outcomes" picture? To help answer that question, this week's video covers over 20 ETFs, allowing us to understand the market's message via broad asset class behavior.

MONDAY'S ECONOMIC DATA

Chicago PMI came in at 57.6. Any reading over 50 indicates improving economic conditions. From The Wall Street Journal:

"WASHINGTON—Americans’ spending bounced back in March, while their incomes continued to grow, a sign consumers could drive better economic growth this year."