Technical Market Report - Monday, August 19

The good news is:​ The current decline is near its end.

The Negatives

New lows remained at threatening levels on both the NYSE and Nasdaq.

Hindenburg Omens were triggered on every day except Friday last week when new highs and new lows both exceeded 2.8% of issues traded on the NYSE.

An interesting note; Hindenburg Omens were also triggered by the 10% trends (19 day EMA’s) of NYSE new highs and new lows every day for the past 2 weeks. I did a little checking and could not find another time this condition had been met. It came very close for 1 day in early March of 2000 just before a prolonged decline in prices.

The first chart covers the past 6 months showing OTC in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in brown.  Dashed vertical lines have been drawn on the 1st trading day of each month.  OTC NL has been plotted on an inverted Y-axis to decreasing new lows move the indicator upward (up is good).

For the past month OTC NL has been moving downward (new lows increasing). This indicator will turn sharply upward when this period of weakness ends. At this point, less than 160 new lows will move the indicator upward.

The next chart is similar to the one above except it shows the SPX in red and NY NL has been calculated with NYSE data.

The pattern is similar to the chart above.  Less than 147 new lows will move this indicator upward.

The next chart covers the past 6 months showing the OTC in blue and a 40% trend (4 day EMA) of Nasdaq new highs divided by new highs + new lows (OTC HL Ratio), in red.  Dashed horizontal lines have been drawn at 10% levels for the indicator; the line is solid at the 50%, neutral, level.

OTC HL Ratio fell further into negative territory.

The Positives

The market is oversold.

An abrupt price decline from a cycle high that was confirmed by breadth is usually followed by a return to new highs. The cycle highs do not end until they are unconfirmed by breadth. The cycle highs three weeks ago were confirmed by breadth.

The next chart is similar to the one above except it shows the SPX in red and NY HL Ratio, in blue, has been calculated with NYSE data.

NY HL Ratio has been bouncing around the neutral level finishing the week slightly positive at 50.6%.  

The next chart covers the past 6 months showing the SPX in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green.

NY NH held up well in spite of the price decline.

The next chart is similar to the one above except it shows the OTC in blue and OTC NH, in green, has been calculated with Nasdaq data.

 OTC NH has been weaker than NY NH, but it did confirm the index high of 3 weeks ago.

Seasonality

Next week includes the 5 trading days prior to the 4th Friday of August during the 3rd year of the Presidential Cycle. The tables below show the daily change, on a percentage basis, for that period. 

OTC data covers the period from 1963 to 2018 while SPX data runs from 1953 to 2018. There are summaries for both the 3rd year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.

Average returns for the coming week have been positive by all measures and stronger during the 3rd of the Presidential Cycle than other years.

Report for the week before the 4th Friday of August.
The number following the year is the position in the Presidential Cycle.
Daily returns from Monday through the 4th Friday.

OTC Presidential Year 3 (PY3)
 Year       Mon     Tue     Wed    Thur    Fri    Totals
 1963-3   0.26%  -0.14%  -0.06%   0.06%   0.58%   0.69%
 1967-3  -0.02%   0.10%  -0.11%  -0.34%  -0.23%  -0.61%
 1971-3   0.34%   0.31%   0.23%   0.11%   0.30%   1.30%
 1975-3  -0.70%  -1.77%  -1.47%   0.50%   0.72%  -2.71%

 1979-3   0.07%   0.03%   0.51%   0.26%   0.18%   1.05%
 1983-3  -0.11%  -1.71%  -0.95%  -0.46%   0.27%  -2.96%
 1987-3  -0.31%   0.29%   0.04%  -0.10%  -0.33%  -0.42%
 1991-3  -2.89%   0.89%   3.17%   0.06%   0.53%   1.76%
 1995-3  -1.12%   0.55%   0.28%  -0.71%  -0.09%  -1.09%

 Avg     -0.87%   0.01%   0.61%  -0.19%   0.11%  -0.33%

 1999-3   2.69%   1.21%   1.93%  -1.10%  -0.57%   4.16%
 2003-3   2.20%   1.24%  -0.03%   0.97%  -0.69%   3.69%
 2007-3   0.14%   0.51%   1.25%  -0.43%   1.38%   2.84%
 2011-3   0.15%   4.29%   0.88%  -1.95%   2.49%   5.87%
 2015-3  -3.82%  -0.44%   4.24%   2.45%   0.32%   2.76%

 Avg      0.27%   1.36%   1.65%  -0.01%   0.59%   3.86%

OTC summary for PY3 1963 - 2015 
 Avg     -0.22%   0.38%   0.71%  -0.05%   0.35%   1.17%
 Win%       50%     71%     64%     50%     64%     64%

OTC summary for all years 1963 - 2018
 Avg     -0.15%   0.06%   0.37%  -0.10%   0.22%   0.38%
 Win%       41%     57%     65%     50%     64%     61%


SPX PY3
 Year       Mon     Tue     Wed    Thur    Fri    Totals
 1955-3  -0.10%   1.36%   0.14%   0.45%   0.44%   2.29%

 1959-3  -0.36%   0.20%   0.14%   0.96%  -0.25%   0.70%
 1963-3  -0.07%  -0.08%  -0.13%   0.35%   0.31%   0.38%
 1967-3  -0.56%  -0.54%  -0.14%  -0.56%  -0.42%  -2.21%
 1971-3   1.03%   1.07%   0.01%  -0.17%   0.24%   2.17%
 1975-3  -0.19%  -1.45%  -2.04%  -0.18%   1.46%  -2.40%

 Avg     -0.03%  -0.16%  -0.43%   0.08%   0.27%  -0.27%

 1979-3   0.49%   0.07%   0.07%  -0.33%  -0.03%   0.28%
 1983-3   0.22%  -0.96%  -0.93%  -0.25%   0.81%  -1.12%
 1987-3  -0.77%   1.03%  -0.65%  -0.95%  -1.31%  -2.65%
 1991-3  -2.36%   0.79%   2.94%   0.19%   0.73%   2.28%
 1995-3  -0.20%   0.25%  -0.43%   0.06%   0.47%   0.16%

 Avg     -0.52%   0.24%   0.20%  -0.26%   0.13%  -0.21%

 1999-3   1.77%   0.24%   1.34%  -1.43%  -1.01%   0.91%
 2003-3   0.92%   0.26%  -0.20%   0.30%  -1.02%   0.25%
 2007-3  -0.03%   0.11%   1.17%  -0.11%   1.15%   2.30%
 2011-3   0.03%   3.43%   1.31%  -1.56%   1.51%   4.72%
 2015-3  -3.94%  -1.35%   3.90%   2.43%   0.06%   1.10%

 Avg     -0.25%   0.54%   1.50%  -0.07%   0.14%   1.86%

SPX summary for PY3 1955 - 2015 
 Avg     -0.26%   0.28%   0.41%  -0.05%   0.20%   0.57%
 Win%       38%     69%     56%     44%     63%     75%

SPX summary for all years 1953 - 2018
 Avg     -0.18%   0.05%   0.23%  -0.14%   0.04%   0.00%
 Win%       42%     58%     58%     45%     52%     61%

Money supply (M2) and Interest Rates

The following charts were supplied by Gordon Harms.

M2 growth has been near its trend line.

Interest rates at their close last Friday and their changes from last month.

2yr yield 1.488% down from 1.625%
5yr yield 1.422% down from 1.873%
10yr yield 1.560% down from 2.124%
30yr yield 2.036% down from 2.649%
The 2yr and 5yr yields are inverted again.

The next chart is a close up showing just the past year from the chart above.

Conclusion

New lows declined dramatically on Friday, but it is too early to tell if Thursday was the bottom. If new lows continue to decline from Friday’s levels there should be a good move upward.

Seasonality is strong for the coming week.

I expect the major averages to be higher on Friday, August 23 than they were on Friday, August 16.

Last weeks positive forecast was a miss.