In the last 18 months, the stock market, commodity markets, and fixed-income markets have all been on wild rides. We wrote 2021 forecast pieces in January (read them here and here), but with commodities plays on the rise and oil prices on the rise while other sectors of the market cool, a fresh look at things for the rest of the year seems like a good idea. Let’s begin by looking at some monthly candlestick charts. Analysis of Candlesticks Dow Jones Industrials (DJI) is a stock market index We can observe from this monthly Japanese candlestick chart of the Dow Jones Industrial Average (DJIA) below that prices have risen dramatically over the last decade, with a strong increase since March 2020. Using our methods with a little leeway, we can anticipate an 8 to 10 record high gain since the epidemic low in 2020. In the lower panel, notice how the 12-month price momentum study is slowing down. S&P 500 Index We can notice another large gain over the last 10 years in this monthly Japanese candlestick chart of the S&P 500 Index (SPX). The index formed a lateral consolidation pattern around 2,000 to 2,200 in 2015-2016, and we have more than doubled since then. As the SPX hit 4,400, I wouldn’t be surprised to see some big profit-taking. The pace has slowed in this area as well. Nasdaq Prices have doubled from their consolidation pattern in 2018 and 2019 at the 7,000 level, as shown in this monthly Japanese candlestick chart of the Nasdaq below. From a low of roughly 5,000 in 2015-2016, prices have nearly tripled. Yes, the rate of change in the momentum study is slowing. Russell 2000 Prices have more than doubled since their March 2020 bottom in this monthly candlestick chart of the Russell 2000 index (RUT). This has the potential to steal your breath away. We want to be more cautious as we head into the third quarter, given the streak of white candles and waning enthusiasm. All of these charts (above) exhibit the 8 to 10 record high pattern, indicating that a top reversal pattern is possible. Analysis of Advance-Decline Let’s have a look at the Advance-Decline line now. Dow Jones Industrials (DJI) is a stock market index The Advance-Decline line on this daily candlestick chart of the DJIA, shown below, has been drifting sideways since early May. Although the DJIA is a narrow average with only 30 stocks, this difference in price behavior indicates a bearish divergence. S&P 500 Index Prices and the Advance-Decline line are both pointing up in this chart of the S&P 500 and its Advance-Decline line, indicating that a bearish divergence has not yet begun. Below is a chart of the Nasdaq, which shows a large bearish divergence. The Nasdaq has been setting new highs, but since February, the Advance-Decline line has been going sideways to lower. The Nasdaq 100 index is a stock market index that measures how well Prices and the indicator are both rising in this chart of the Nasdaq 100 and its Advance-Decline line. There is no bearish divergence in this chart. Sectors The marketplace can be divided into 11 categories, but I’m just going to go through a portion of them today. We can observe that prices have doubled since the epidemic low in this weekly candlestick chart of the ( XLE), the S&P Energy sector ETF, below. The weekly On-Balance-Activity has been stuck for the past four months due to high trading volume. For a bearish divergence, the 12-week price momentum study has been weakening. EOG Resources ( EOG) and ConocoPhillips ( COP) are two oil stocks that could see further gains in the third quarter. The graphs are shown below. Financials Prices have began a topping phase in this daily bar chart of the ( XLF) Financial sector ETF, as shown below. Prices have fallen below the 50-day moving average line, which is currently cresting. Since early June, the On-Balance-Volume line has weakened, and the Moving Average Convergence Divergence (MACD) oscillator has fallen below zero, signaling an unambiguous sell signal. Technology We can observe that prices have more than doubled from their epidemic low in this weekly Japanese candlestick chart of the ( XLK), the Technology sector ETF, below. Since March 2020, trade volume has decreased, and the weekly On-Balance-Volume line has been trapped in a sideways trend for the past year. Lower highs were made in the previous year, according to the 12-week price momentum analysis in the bottom panel. This is a bearish divergence of considerable magnitude. Industrials We can notice a worsening picture in this daily bar chart of the ( XLI), the Industrial sector ETF, below. Prices have fallen below the 50-day moving average line, which is currently cresting. The On-Balance-Volume line has weakened in recent months, and the MACD oscillator has dropped below zero, signaling a sell signal. Bonds We can detect a potential upside price objective in the $165 range on this daily Point and Figure chart of the ( TLT), the iShares 20+ year Treasury Bond ETF, below. Dollar of the United States of America Prices have stopped short of a test of the late March/early April highs in this daily Japanese candlestick chart of the US Dollar Index (DXY). DXY could be on the verge of retesting its May lows. Make a note on your calendars. A technical service that I’ve used since the mid-1990s ( www.pfr.com) predicts a large-scale “trend change” on or around Aug. 2, and it’s worth keeping an eye on. This might signal the beginning of a 10% pullback in the major averages. Late October is expected to see the next trend change, which might signal the start of a year-end surge. As we get closer to August 2, we’ll be paying greater attention to the advance-decline data and price movement. Sentiment Without mentioning mood, no discussion of the stock market would be complete. There are numerous “signs” that the stock market has gone off the rails. I’m seeing a lot of bullish market letters and discussion from fellow technical analysts. I frequently receive letters from Real Money members inquiring about this or that investment, and I have two observations: 1. The names they’re looking for appear to be more speculative. I can’t recall the last time I received an email regarding a mundane utility stock. 2. The failure to recognize risk is the second thing that has struck me about the emails. Everyone wants to know what the next highest price objective is, but no one ever asks where a stop up should be moved. Sentiment isn’t a precise measure, and a lot of it is based on anecdotal evidence that’s difficult to quantify. The projected IPO of Robinhood could be a watershed moment. Bottom-Line Planning The stock market has provided us with some great returns over the last year or so, but there are some warning signs emerging, and traders should begin to lean in the opposite direction. Consider adding to commodities investments, as they may be the third-quarter outperformers. Consider pursuing a career as a scale-up profit taker. To lock in more gains, keep raising your stop protection. Pay special attention to where prices are closing in the range. When prices close around the day’s high, highs are usually made. Is the On-Balance-Volume line getting weaker as volume rises on days when the market or your favorite stock falls? Pay closer attention to the news and look for stock and market declines in response to positive news; this indicates that the news has been discounted. Diversification will not save the day; there will be moments when everything goes wrong./n
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