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S&P 500 INDEX and VIX

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S&P 500 INDEX weekly scale price chart

S&P 500 INDEX weekly scale price chart

S&P 500 index is resting on the 2 year-long support/resistance level. Breakout to all time highs in July 2016 was followed by a weak rally in July-August period. Since mid-August the index has been in a sideways consolidation. The pull-back reached the previously broken resistance at 2,120 levels. Price action in the September-October period can be identified as a descending triangle with the horizontal boundary (support) standing at 2,120 levels. Over the past two months the S&P 500 index tested the strong support for 3 times. Breakdown below 2,120 levels will signal further correction for the U.S. Equities.

CBOE Volatility index is consolidating between 13 and 17 levels. Breakdown below 2,120 on the S&P 500 index could also result in a breakout on the VIX. The level to watch on the CBOE VIX is 17.35. If S&P 500 index manages to hold above 2,120 levels, last two months sideways consolidation will be labelled as a pull back and we will expect new highs in the coming months. In that case 17-18 area should become a medium term high for the CBOE VIX.

S&P 500 INDEX daily scale price chart

S&P 500 INDEX daily scale price chart

CBOE VOLATILITY INDEX daily scale price chart

CBOE VOLATILITY INDEX daily scale price chart

S&P 500 INDEX and MSCI ACWI

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Over the past two weeks, global equity markets rebounded from strong support levels. Last two week’s recovery came after the S&P 500’s pull back to its long-term support level at 2,125 levels. Long-term charts of S&P 500 index and a broader representation of global equity market performance, the MSCI ALL COUNTRIES WORLD INDEX, possibly completed a re-test of the broken resistance/support levels. Once a resistance is cleared it becomes support and vice versa.

S&P 500 index, a benchmark for large cap US equities broke out of a year-long sideways consolidation in mid-July. After reaching 2,193 levels in mid-August, the index pulled back to test the broken resistance at 2,125 levels. Both the year-long upward trend line and the horizontal support held well and the index rebounded without any technical damage to the long-term trend. Unless the markets reverse once again to challenge the support at 2,125 levels, we will claim the latest price action was a pullback and is likely to be followed by a resumption of the long-term uptrend.

Monthly scale price chart of S&P 500 index

Monthly scale price chart of S&P 500 index

Weekly scale price chart of S&P 500 index

Weekly scale price chart of S&P 500 index

MSCI ALL COUNTRIES WORLD INDEX captures large and mid cap representation across 23 Developed Markets and 23 Emerging Markets countries. With 2,481 constituents, the index covers approximately 85% of the global investable equity opportunity set. Please note that iShares has an MSCI ACWI ETF that seeks to track the MSCI ALL COUNTRIES WORLD INDEX.

In mid-July MSCI ACWI, similar to S&P 500 index, completed a significant chart pattern. A year-long H&S continuation chart pattern was completed with a breakout above 410 levels. Since then the index possibly completed a pull back to the neckline of the H&S chart pattern. Last week’s sharp reversal increased the likelihood of a continuation towards 443 levels. Unless the index reverses to challenge the support at 405 levels, we will identify the latest price action as a pullback that is likely to be followed by a resumption of the long-term uptrend.

Monthly scale price chart of MSCI ACWI

Monthly scale price chart of MSCI ACWI

Weekly scale price chart of MSCI ACWI

Weekly scale price chart of MSCI ACWI

If global equity indices mentioned above resume their uptrends, we are likely to see fresh new highs on several individual securities. Financial media usually pays attention to 52 week highs as a measure of security’s strength. There is even a better way to look at this; all-time highs. It is usually difficult for investors to buy stocks that are reaching their all-time highs. But usually the most promising part of an uptrend starts when a stock moves into uncharted territory in other words all-time highs. Below are some of the stocks on my watch-list that are likely to breakout to all-time highs and some that are likely to record 52 week highs. These stocks formed clear bullish chart patterns with identifiable horizontal boundaries. Breakouts will not only complete the chart patterns but also will push the stocks to all time highs and 52 week highs.

U.S. & CANADA

aaon-inc

booz-allen-hmltn

brookfield-am

costar-group

euronet-wordlwide

geospace-techn

gug-frontier-mkts

icf-intl

suntrust-bks

EUROPE

aak

moncler

JAPAN & HONG KONG

coolpad-group

meiji-holdings

sankyu

sunac

SMALL CAPS vs. LARGE CAPS

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Small caps show relative weakness vs. the large caps when investors move out of riskier/high-beta names and into relatively safe large caps. Opposite can be said during small cap strength vs. large caps.

There are two ways to capture this relationship to understand if there is a possibility of small cap outperformance in the following weeks.

1) Russell 2000 vs DJIA is now testing a 6 year-long trend line support. Until it is broken down, these type of trend lines are expected to resume the current trend. In this case the trend is upwards and the ratio is likely to rebound from the long-term support, resulting in an outperformance for the small caps.

RUSSELL VS DOW JONES INDUSTRIAL

Data Source: Thomson Reuters, Charts created in MetaStock

2) Russell 2000 vs. S&P 500 index is now testing the lower boundary of the horizontal trading range. A rebound from the lower boundary will likely result in an outperforming period for Russell 2000 index versus the S&P 500 index.

RUSSELL VS S&P 500

Data Source: Thomson Reuters, Charts created in MetaStock

UK FTSE 100 and STOXX 600

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A chart that breaks out to all time high levels has the least resistance. It is called the uncharted territory. Prices are expected to resume their trend after a decisive breakout to all-time high levels. This is what happened with some of the indices over the past few years. I attached below some of the strong breakouts to all-time high levels that have taken place. S&P 500 Index, Germany DAX Index and India BSE SENSEX index are some of them.

S&P 500 INDEX

BSE SENSEX INDEX

GERMANY DAX INDEX

More and more equity indices are now breaking out to all-time high levels or at least preparing for strong breakouts. UK FTSE 100 index is one of them. Index closed the week above strong resistance level at 6,950. Few more weeks of strength will confirm the decade-long breakout.

UK FTSE 100 INDEX

Europe continues to gain strength thanks to ECB. Euro Stoxx 600 index is preparing to clear multi-year resistance at 400 levels. I’m not sure if any of these latest breakouts could end up being bull trap. The best available information (latest price information) suggests strength and increase in upside momentum in global equity indices.

EURO STOXX 600 INDEX

MSCI ALL COUNTRIES WORLD INDEX is now challenging multi-year resistance. Decisive monthly scale close above 430 will confirm the breakout.

MSCI ALL COUNTRIES WORLD INDEX

CBOE VIX (VOLATILITY INDEX)

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During the sharp correction in October 2014, S&P 500 index reached 1,800 levels and CBOE VIX jumped to 31 levels. VIX is often called the “fear index”. Higher levels of VIX can coincide with market corrections. Over the past 2 months CBOE VIX has been consolidating in a tight range. Consolidation can be a symmetrical triangle. Breakout from this consolidation will result in high volatility for U.S. equities. Breakout above 22.80 levels can send the VIX to 35-40 area. Breakdown below 15.52 levels will be positive for equities. I have posted the S&P 500 index futures on an inverted scale to see the price movements in sync with the VIX. Symmetrical triangle chart pattern (if it is a valid one) should resolve in the next few days/week.

CBOE VIX

S&P 500 INDEX

S&P 500 INDEX (MAR 2015) FUTURES PRICE

CBOE VIX (VOLATILITY INDEX)

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Volatility can move higher in the following months if we see a decisive weekly close above 22 levels. In the last two years CBOE VIX consolidated in a range between 11 and 22. Six year-long downward trend line and the upper boundary of the horizontal consolidation range meet at 22 levels. A decisive break above 22 levels can result in a sharp upward move towards 40-45 area. Such price action will be bearish for global equity markets. It is important to keep a close eye on this chart development in the next few months.

CBOE VIX

Chart is plotted on a weekly scale and closing prices are taken into consideration.

S&P 500, STOXX 50, NIKKEI and FTSE 100

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S&P 500 index cleared its historical high level at 1,580 levels. U.S. equities have clearly outperformed the rest of the global equity markets. So far so good… But without Japan, Europe and UK how far can the positive trend in equities reach? Long-term charts show that Stoxx 50, Nikkei 225 and FTSE 100 indices have reached strong long-term resistance levels. Only after a breakout above these long-term resistances will global equities have more fuel to resume their long-term uptrend. Failure to breakout from these consolidations in the following months can be negative for equity markets.

S&P 500 INDEX

EURO STOXX 50

NIKKEI 225 INDEX

UK FTSE 100 INDEX

S&P 500 and STOXX 50

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In financial markets trying to pick tops and bottoms has always been costly. Predicting the beginning of a larger scale correction or a uptrend is not only difficult but also a low probability bet. High probability set-ups are the ones when you have confirmation. Trade-off is that confirmations don’t come at the very early stages of a trend. As a result, to have a high probability trade you should be willing to miss part of the move.

S&P 500 INDEX

S&P 500 Index and Europe’s STOXX 50 had a rough week. Both indices experienced sharp pull-backs. Does this change the trend? Can it be the beginning of a larger-scale correction? We don’t know the answers to these questions… What we know is that indices are currently above their long-term averages. In the past, 200-day moving average has always been a good indicator. Breakdown of the moving average supported by a breakdown on a trend line support resulted in larger-scale corrections. In this case 1,700 levels will be important for S&P 500 index and 2,800 levels will be decisive for STOXX 50.

STOXX 50 INDEX

S&P 500 index is above historical highs which is at 1,580 levels. I’d define the strong support range for the S&P 500 as 1,580-1,700. Since the beginning of 2012, STOXX 50 index is in a uptrend. Strong support area for the STOXX 50 will be 2,700-2,800.

It is too early to call for a larger-scale correction. We need confirmation. We need to see decisive breakdowns.

VOLATILITY INDEX

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Followers of Tech Charts will remember this chart on the CBOE VIX. I have been bringing this important chart to your attention for almost 3 months. Repetitive positive divergences and similar technical outlook in the past two CBOE VIX reversals made this chart even more essential. VIX found support at 15 levels in 2008, 2010, 2011 and 2012. Each one of those tests were followed by a sharp spike in volatility. In the past two reversals MACD generated positive divergences that were early warning signals of correction in equity markets. When we compare the low in the first quarter of 2012 and the low in the second half of the year, we can’t miss the non-confirmation on the momentum indicator and the volatility index. So the question is: Are we at the beginning of an increased volatility period?

CBOE VIX

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Earlier during the month I wrote about CBOE VIX. Volatility is a good measure of market sentiment. Historical chart studies show 3 important levels for CBOE VIX. 50 level has been an extreme pessimism in the equity markets and 9 & 15 levels; extreme optimism. Over the past 5 years VIX couldn’t break below 15 levels. As a result, equity market peaks occurred every time VIX reached 15 levels. In the past few weeks, CBOE VIX made an attempt to break below 15 levels. This was critical as it would have pushed the volatility index and the sentiment to a new extreme. However, the attempt failed to break down the important support level. We are now back into the trading range between 15 and 50. Given that MACD is generating a positive divergence (a warning signal for a possible reversal), we are likely to see higher prices on the VIX, that could result in a weak equity market. We continue to watch 15 levels as an important support and unless index closes below 15 levels on a weekly basis, we expect higher VIX levels in the coming months.