Who Is Lying?

Authored by Sven Henrich via NorthmanTrader.com,

It was a good week to be bullish and the buying was ferocious and on the surface it appears that bulls won a major victory and bears look to have flailed again. Correction over. New highs on Nasdaq with $SPX recapturing all key moving averages including the 50MA, the 21MA, the weekly 5EMA and all is looking rosy again. Next week bullish OPEX, a sheepishly dovish Fed again the week after and then mark-ups for the month and quarter end. One can firmly smell the standard bullish seasonal script.

Or is it all a big lie? And if so, who is lying? After all, nothing is more ferocious than bear market rallies. Bear market are you nuts? Just look at $AMZN. To the moon Alice, to the moon.

Let’s have a look at the larger picture shall we?

First off, was the bullish outlook this week a surprise? No, it wasn’t if you paid attention to the signals and charts.

Larger market readings were still very oversold at the beginning of the week and I highlighted an example of this on twitter on Monday:

These readings actually were consistent with major recent lows and may well be this time too, but it’s not that simple from what I’m seeing, but I’ll get to that in a minute.

But chart structures told us to be bullish, after all we saw very specific bullish structures as I outlined in Fog Monster:

“…if you want to be bullish here you can envision a series of inverses to play something like this”:

Indeed we saw a similar script unfold throughout the week:

The Cohn resignation dip was bought quickly and $ES played a 2nd inverse right back toward end of February highs with $SPX breaking above its trend line:

All seems well.

But if you zoom out a bit $SPX just managed to get back to its longer term trend line:

And right here it gets very interesting. Tech and various components raced to new highs and in doing so repeated a pattern we saw in March 2000. New highs on $NDX but not on $DJIA. I described this coming event this week in Market Paradox.

And indeed look at the various other index components, nowhere near new highs:


And while $DJIA cracked above its 50MA, look at other indices:



These are a very large market divergences we are witness to here.

Even small caps, as strong as they were this week, did not make new highs yet and their underlying volatility index tagged their descending trend line:

$JNK barely played along:

What’s it all mean? Well, from my perch bulls still have a lot to prove here.

Lets’s dig a bit deeper into the leader of this rally, the Nasdaq:

$NDX is close to its upper trend line dating back to 2015 and new highs came on a very distinct negative divergence.

One that is very pronounced on the weekly chart:

Why is this relevant? Because it speaks to weakness of new highs underneath.

And we can see it in the internals.

Nasdaq new highs- new lows are weaker than during previous highs:

Fewer components are above their 50 and 200 day moving averages:

And even tech’s monster, $AMZN, is showing signs of divergences that have spelled trouble in the past:

Check the history:

Add that $AMZN is tagging its 2009 trend line it too has a lot to prove here and is risking a revisit to the weekly 50MA based on its weekly negative divergence history. This would constitute a massive drop on the stock and by extension the $NDX itself.

What all these charts are saying is that the rally, as strong as it appears, has major problems in internals, something I highlighted in Broken.

Here’s the updated chart:

And despite the rally the descending trend in equal weight has not improved:

Bottomline: From my perspective the rally of last week, while making perfect sense from a technical perspective, has not rung the all clear. Far from it. There are deep internal issues in markets that suggest that further gains, while certainly possible, may find themselves seriously tested by the pull of history. In this case this is a rally that bears wanted and want, to alleviate oversold conditions and bring about the negative divergences that have spelled major trouble in the past.

After all yields have not dropped here and the ultimate bear ratio chart still stands unresolved:

And $SPX is retesting its 1987 trend line:

Volatility has subsided again and the coast is clear. Or is it?

That’s a ghost print on the $VIX there seemingly tagging its trend line. Perhaps we will see a proper tag this week, after all its OPEX week, but $VIX remains above the descending trend line and we will soon find out who is lying. Further gains are therefore possible, but without new highs across the board and continued questionable internals the rally is questionable.