SPY (daily) remains firmly in its up channel. That's the big trend to keep firmly in mind.
That said, it's 13-ema inflected downward yesterday for the first time since mid May (bottom panel). We have noted this many times in the past: after the first inflection, there's often a bounce and then a lower low, or at least a period of sideways trading (yellow shading). Often, the 50-dma either catches up to price or price declines towards the 50-dma. In other woods, the shorter term trend is weakening.
This loss of momentum is more apparent on the hourly chart. After the strong start to July, the index has traded sideways to lower. This was expected (post). Yesterday's sell off pushed the RSI to 12, which made the short-term (1-2 day) risk/reward very favorable (post). About 7 out of 10 times, price will retest the low, forming a positive divergence in the RSI. This is something to watch next week.
On weakness, 196 is the first support level. 195 is even more important: it was the mid-July low and it is where the trend line from February comes in (arrow). Further down, the 50-dma is at 193, which was also the June low.
Be aware that SPX is approaching 2000. In the past, there has been a strong reaction near each "round number" milestone; at a minimum, a decline of 3%, but usually more, occurs. The weekly Bollinger mid-band is a potential target. A reaction to 1900-1920 would be normal.
Breadth has not been strong over the past several weeks. With SPY trading near its ATH, NYMO has been negative. Yesterday's sell off pushed NYMO to -64. Normally, a low NYMO like this occurs after a few weeks of selling, and it marks a low. That's not the case here as SPY started the day near its ATH. The number of similar instances is low, but in the past, this set up has led to further selling.
Weakness in breadth is even more clearly seen in the Nasdaq. With price about 1% from its recent high, only 40% of its components are above their 50-dma. That's poor participation and indicates an unhealthy market under the surface.
Yesterday's action caused Vix to spike 30%. This was the first such spike since January, which led further to the February low. Usually (6 out 7 times in the past 5 years) SPY has continued lower in the days ahead after the first such spike in Vix.
Similarly, we've noted before that Vix spikes have recently tended to come in pairs, with the second spike being a more solid swing entry point.
Yesterday's powerful down move came a day after the Dow made a new high. Long red candles (strong selling) after a new high typically follow through lower in the days ahead.
SPY had gone more than 60 days without a greater than 1% daily move. That streak ended yesterday. In the past, the market has traded sideways to lower in the weeks that follow (chart from Stock Almanac).
SPY is in the midst of several other long streaks. The current uptrend has been so strong that it has now been 19 months since price has reacted to the lower weekly Bollinger band. This streak is now longer than the record one from 1995 (which ended in July 1996).
Long streaks, of course, make investors confident. This is easily seen in the July BAML survey of fund managers overseeing a combined $700b in assets. Their equity exposure is now the second highest in 13 years. This has been a contrarian bearish indicator in the past (yellow shading; chart from Short Side of Long).
Investor confidence has reduced hedging. The equity put-call ratio made a more than 3 year low recently. Unsurprisingly, it's now rising, which has also tended to coincide with sideways to lower equity prices.
The flip side is that fund managers have the lowest bond weighting in more than 6 months. They are 64% underweight. Nearly 90% expect 10-year rates to exceed 2.5% by year end. Meanwhile, bonds continue to outperform SPX in 2014. The 10 year rate dropped to 2.47% this week and 30 year bond futures reached their highest level since early June 2013. TLT is short-term overbought (above its upper Bollinger band, lower panel), but price appears to breaking out higher. The consensus strongly expects higher rates but rates are declining instead.
Commodities are also out of favor with investors. The CRB index formed a head and shoulders top and is now approaching the measured move target. Note the positive RSI divergence taking place. A period of consolidation at support (circles) would likely indicate that the downtrend has ended.
Better commodity prices are generally beneficial to emerging markets. These markets have been handily outperforming developed markets over the past several months, yet fund managers remain underweight. EEM appears to have broken above a long base formed after the collapse in mid-2011.
Looking ahead, mid-July seasonality continues to be weak through the first half of next week. The week after sees the typical end of month strength. So, further weakness early next week could be a nice set up into the end of the month.
Our weekly summary table follows: