RSI Chart: Risk levels for investors are increasing

Imagine this …

John is hiking up a 5 mile mountain.   After each mile hiked, he notices that he is tiring and that he needs more time to rest.  

He just finished his third mile, and he is starting the next mile with less energy … but he still has energy left.   The reality is that with each additional mile hiked, his energy is lessening. 

Questions …

1. Will John be able to reach the top and climb all 5 miles?
2. Will his dropping energy lead to fatigue and a retreat before the top?
3. Are the odds increasing or decreasing for him to make it to the top?

Why all these questions and why do they relate to the market now?

It is because the analogy fits today’s chart shown below.   The picture of the progress on the trip “up the mountain” is depicted by the SPY’s upward price movement on the chart.

The C-RSI (Relative Strength) depicts the decreasing amount of strength as each new mile is climbed.   The amount of strength is still positive … but it is continuing to decrease, so the odds are getting worse for each new mile (each new high) being attempted.

What message is this sending?   That each new high is becoming more difficult, and that corresponding risk levels for investors are increasing.  

What would it take for an energy (strength) rejuvenation for the upside to occur?  The C-RSI would need to break above its black resistance line at label 1 on the chart.   

(For an in-depth explanation of the C-RSI, please click on this link:  “The C-RSI explained“

posted by Marty Chenard www.Stocktiming.com

Out of Balance Alert …

Who’s going to tell you? … It won’t be the main stream media, or myopic Wall Street analysts who don’t look at the Global picture.

What am I talking about this morning?  …  A problem that appears to be brewing on the Transportation Index, the Dow Jones Industrials, and the Japanese TX100 index.

So, today’s update will be longer than usual as we explore how the U.S. stock market and Japan’s TX100 correlate. 

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Let’s start today, by looking at the U.S. side, and specifically at the Dow Jones Transportation Index. 

Note today’s Transportation index chart below.  Two important things are obvious.
1.  The Relative Strength has been moving down with lower tops, and it is negatively divergent with the Transportation Index.  (The RSI is still positive, so one does not know for sure if the RSI will move down and make a lower low, or break up past the resistance line.)
2.  The Transportation Index just made a “triple top”.   That is significant because that represent 3 attempts where it could not get past a 3 month resistance level. 

Everyone understands the relationship between the Transportation Index, goods that are shipped, and retail sales.   If the Transportation Index were to fail to the downside, it would suggest that the economy was weakening because of a decrease in products being shipped.  A break to the upside would suggest the economy was getting stronger because of an increase in products being shipped. 

So, the upcoming breakout will be important, and it may be that Institutional Investors are waiting to see the consumer’s Christmas buying behavior before they decide on how to play the Transports.

*** In any event, this triple top is a CRITICAL testing level that will affect the other indexes.  Now, see the next chart …

Now, let’s move abroad and take a look at Japan’s TX100 Index.   A few people are saying that Japan may be rolling into a slow crash.

From our view point, Japan’s market just broke below a Head & Shoulders pattern.  The downside implication of this is for it to fall to just above the 500 level which would be above its March low.  So, Japan’s stock market is in trouble and falling now.   See the next chart …

This next chart shows the correlation between our Dow Jones Transportation Index, the Dow Jones Industrial Index, and Japan’s TX100.

I inserted labels 1 to 4 in order to make the comparison easier.   Here are the past correlations:
1.  At label 1, the Transports, the Dow, and the TX100 made simultaneous peaks.
2.  At label 2, it was a little different.  The Dow reached its peak first, and it was a few weeks later that the Transportation index and the TX100 finally reached their peaks.
3.  At label 3, all three indexes reached a market bottom simultaneously.
4.  At label 4, all three index reached a pull-back bottom simultaneously.

Those two years of correlation came to an end in August. 

Now, about three months later, we have the following:
1.  The Dow is still trending up.
2.  The Transports have stalled with a “triple top”.
3.  And, the TX100 is having a correction.

There is now no correlation between any of them.   They are out of sync.  

They are out of balance with one another, and balance will be re-established.  This means that we will see some very unusual market activity in the coming days or weeks when balance is re-established. 

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posted by Marty Chenard www.stocktiming.com                 ________________________________________________

Liquidity Chart: Keep an Eye on Money Flows …

Keep an Eye on Money Flows …

Some time ago, I heard a story about one of Warren Buffett’s early mentor’s.   As the story goes, he was told early in his career, that the stock market was about money.   When money was moving into the stock market, it went up.   When money was moving out of the stock market, it went down.

Sounds too simplistic, doesn’t it?  

Then again, it is just too true to ignore.   How many investors actually bother to try and measure true money flows moving in and out of the stock market?

We have always felt that the directional flow of money was a key, and more importantly, the relative amounts of money flowing in or out.   From data we collect, we recognize that there are only 4 possible conditions worth noting relative to money flows.

-  First, money is in either a state of Expansion or Contraction in the stock market.  When they are in Expansion, they are above our horizontal line on today’s chart.   When money flows are in Contraction, they are below our horizontal line. 

The impact of money flows is very logical.  In an Expansion modality, the market goes up as more and more money chases stock prices … and that pushes them higher.   When money Contraction occurs, investors are cashing out, and it takes lower prices to find a buyer in those environments. You can see those conditions happening in the chart below.

So, that explained 2 conditions, what are the other 2 conditions? 

The other two conditions have to do with trending and patterns.   Even though money flows are in Expansion or Contraction, the inflows or outflows have short term changes of direction as part of their trend.  

For example, look at the far left of the chart.  You can see that April and May of 2008 showed a trend reversal to the upside.  When the trend reversal started, money-flow levels were still in Contraction.  However, that up trend continued, carrying the money flow levels up into Expansion territory.    Later … that upward trend line was broken to the downside in late May, and then money flows fell back into Contraction, and stayed there for months while the stock market plummeted.

So now, money flows are in Expansion again, and at a high level of money flowing into the market.   But, there is also something else going on that is worth observing and it has to do with labels 1 to 4 that we posted.

So, what is going on at labels 1 to 4?

Each label shows that when money is flowing out, that more flows out than the previous time.   That is telling us that, as this rally matures, more and more profit taking is occurring.  If this continues, it will increase the downside pressure in the market as outflows fall to lower levels.  

For now, things are okay, but risk levels are starting to slowly rise due to this activity. 

P.S.  This money outflowing pattern is coinciding with waves of Institutional selling activity that we are seeing.

This Chart on Long Term Liquidity Flows is posted everyday on our Subscriber Site at www.StockTiming.com

                 

posted by Marty Chenard www.StockTiming.com

Is there a Negative RSI Divergence problem?

What is a Negative RSI Divergence and why should you care?

A Negative RSI Divergence is a condition where the underlying stock or index is moving higher, while the Relative Strength is moving lower.

So what is happening, is that each up move in the market is being made with less strength.  Eventually, there is not enough strength to match the amount of an upward movement, and then the market or stock falls.

No one knows for sure exactly when “divergent strength” will hit is limit relative to a stock or index rising.  But what one does know for sure, is that the “amount of risks” one is taking in a trade is increasing as that happens.   Many hedge funds and money managers look for those kinds of market behaviors as a sign that they should reduce their exposure through hedging or start taking profits on part of their positions.

So, why discuss Negative RSI Divergences this morning?

Because that is what is happening on the NYA Index and our Institutional “core holdings” index.  

Take a minute and observe the chart below to see the Negative Divergence that is developing now.   Unless this pattern changes soon, the negative divergence will become too large to sustain the market’s desire to move higher.

(In our charts, we use a C-RSI which zero bases the Relative Strength so one can interpret it easily and quickly. An explanation of the C-RSI can be found at this link:  C-RSI explained.) 

posted by Marty Chenard  www.StockTiming.com

Do NOT go AGAINST this Indicator…

We think it is important enough to post everyday on our paid website … what is it?

It is a chart of how much selling Institutional Investors do everyday, and what the short term trend of that selling is.  

If you have read our updates in the past, you know that we have consistently said that an investor should NEVER go against what Institutional Investors are doing.  To do so can sometimes be investor suicide.

As a courtesy to our Free Members, we are posting our Institutional Selling chart today.  The chart below goes back to this past July and there been 8 up or down changes in the Institutional Selling Trend since then.

Take a look at the chart below and see how the NYA (New York Stock Exchange) shifts its direction in accordance to what Institutional Investors are doing relative to Selling.   Institutional Selling action is a market direction indicator that every investor should have on their side.

posted by Marty Chenard from www.StockTiming.com

An Alert on the Us Dollar…

The Dollar could fool everyone …

Just as Foreign countries are diversifying out of the Dollar … just as the Dollar’s carry trade is being overdone, the Dollar is poised to make an upside run.

Take a look at today’s chart and what do you see?

The Dollar just started to break above its 8 month resistance line.  At the same time, its Relative Strength has been trying to move above a resistance line for 7 months … until yesterday when it broke out above it.

Granted, the RSI is still not very strong, but if it starts to trend up and can make it above 50, then the Dollar could catch fire on the upside.  Right now, our Accelerator is a strong positive indicating that the RSI should move up higher from here.

If we get a significant up day on the Dollar soon, it could be a game changer because too many investors and countries are on the wrong side, which could initiate a short covering rally.

 

posted by Marty Chenard from www.StockTiming.com

The market’s trend DEPENDS on Liquidity Inflows and Outflows.

Our Long Term Liquidity Indicator is a measurement of Liquidity Injections flowing into the market.

- Liquidity Expansion means that money inflows are at an expansionary rate which drives the market up.  Decelerating Expansion is when the rate of inflows are decreasing while still net positive.

- Liquidity Contraction means that money inflows are being withdrawn from the markets at a level which is “net negative”, and when this happens, the contraction results in a correction or pull back.

Question #1:  So, when did Liquidity change from a state of Contraction to a state of Expansion?  When you look at today’s chart posted below, you will see that Liquidity went to Expansion in April of this year … the market has been trending up since then.

Question #2:  When did Liquidity move into Contraction?   In June of 2008, the Liquidity moved into Contraction and stayed there until April of this year. The market had a severe correction during that time. 

Our liquidity chart is posted every day on our paid subscriber site: www.StockTiming.com

posted by Marty Chenard of www.StockTiming.com

Major Resistance at the Gap…

Update on the SPY’s one year gap …

It was just a little over 1 year ago, October 3rd. of 2008, when the SPY gapped down sharply.  That gapped remained open until October 15th when it was finally closed.  

That gap was also a major resistance level to reckon with.   So, what has happened since October 15th?

The SPY has NOT been able to move past the 109.68 level.

As time moves on, the odds for moving past that level have been diminishing. 

Why?  Because our C-RSI (market strength) has not only been negatively divergent, it has also been dropping lower.  (Last Monday, we commented that “Negative divergences are warning signs” and that has NOT changed.)

C-RSI - SPY Chart

posted by Marty Chenard from www.stocktiming.com

Banks are NOT Lending …

Some investors liked what Bernanke had to say this morning.   On the surface, it sounded pretty good, but was it really?

Look … banks are supposed to lend money.  If lending is not happening, then it is like a tourniquet around the neck of the economy.   You can only shut off or slow down one’s blood supply for so long, before they end up passing out.

So, why am I mentioning this today?

It is because banks are NOT lending.   Excess reserves at banks were 2.4 billion dollars a year ago, and they were 1.4 billion dollars the year before that.  

So, how much were the reserves at the end of September?  A whopping 823.0 billion dollars. 

Obviously, banks are afraid to make loans and are being risk averse.   If Bernanke wants to get lending going, then maybe he should think about giving banks an ultimatum.  

Banks are supposed to lend … if they don’t lend, then maybe they are not really banks and maybe they should lose their bank status.

In a study by a banking analyst, the report’s expectation was that available credit lines to borrowers could shrink by 50% to 70% next year.  I must say I have not seen the report, but if there is any shred of truth to it, it would be an unacceptable shame for banks to be sitting on 823 billion in excess reserves while shrinking the availability of lending funds.

Our message to Mr. Bernanke is to “require banks to be lending institutions” or threaten to revoke their charters.   823 billion dollars in stagnation could have a very negative affect on an economy trying to turn around.   Just think about what would happen if those dollars were actually lent out to entrepreneurs, businesses,and consumers.

* This morning, Ben Bernanke was trying to stimulate Congress into enacting legislation that would overhaul the Country’s Financial Regulatory System.  Specifically, legislation bent on preventing a repeat of the recent financial crisis.

Could it be, that an already frightened banking system that allowed excess reserves to balloon to 823 billion will only get “more frightened” if they are hit with an increase in regulations?   No … I am not advocating that they have no changes or increases in regulations, what I am advocating is that attention and energy should be diverted to do what is necessary to breakup the bottleneck of excess reserves that are frozen in place.

I know that we have a few subscribers from the Federal Reserve, so I am extending a personal invitation for them to comment on today’s remarks.  Tell our investors that you do recognize that there is a bank lending problem, and that you are thinking about possible solutions … please.   You can email us directly at info@stocktiming.com, and please put “banking” in the subject line so that we can spot the email quickly.   If you do send us commentary, we will post it on our website for our readers.

To our readers: Also, if you would like to share your comments on today’s commentary, please feel free to email us at the same address: info@stocktiming.com

posted by Marty Chenard www.StockTiming.com