Correction in jeopardy – Tactical View 2013-01-27

S&P 500 weekly chart

S&P 500 weekly chart

The headline of this weeks post deserves an explanation: Although I am still awaiting a pullback in February, the longer the markets can cling on to these levels, the less severe the pullback will be. Markets managed to regain some energy in a slow melt-up similar to early 2012.

Despite the formation of the bearish rising wedge and countless EW counts floating around that have us completing a 5th wave of various corrective counts, the massive liquidity injection from all central banks should curtail the downside severely. The chart looks eerily similar to 1980, but we are still missing a washout and we will eventually get it. In the larger context, a correction or even a recession are not that unlikely, but until then the markets seem to have little intention to follow my call for lower prices.

Unfortunately the prevailing bullishness will result in a steeper correction, as the markets managed to draw record fund inflows. Sentiment is entering contrarian bearish territory (bullish sentiment) and the news is painting a rosy picture, which is another contrarian warning sign.

S&P 500 daily chart with DeMark indicators

S&P 500 daily chart with DeMark indicators

The chart of the S&P 500 continues to straddle its rising channel on the upper resistance line. On the monthly chart you can see that the incline matches the bull markets of 2010, 2011 and 2012 well, so despite the massive surge, the bulls have yet to show signs of exhaustion. The bullish news will ensure demand at each dip.

It appears as if this market needs a catalyst for a sell-off. The debt ceiling negotiations have been put off for a while, giving us the possibility for a further rise.

On the daily chart above, you can see that the 2011 and 2012 tops were marked with a DeMark sequential sell setup that produced a 9 and a subsequent 13. The SPY ETF even gave a perfect sell and perfect countdown sell on both tops (the S&P narrowly missed the perfect countdown sell signal in 2011). This time however, the 9 and 13 flew by without any significant pullback, giving further credence to the unexpected strength of this bull.

S&P 500 hourly chart

S&P 500 hourly chart

The hourly chart looked tired but started to re-accelerate.

SPY volume analysis

SPY volume analysis

A volume analysis on the SPY ETF shows no signs of topping yet. We can clearly see the VSA indicators (green triangles) that flashed on both lows, but no matching topping candle is in sight. The bullish wave volume has already exceeded the volume of the previous bullish wave and the bullish waves are still significantly larger than the bear waves. Yes overall volume was low (often used argument from bears), but the cumulative volume (wave) shows us that the buying was simply spread out over a longer timeframe.

Option volume showed significant activity around the last low, which is mostly due to hedging. The fractal energy has managed to recover, due to the slow grind.

So far this chart gives does not indicate an immediate pullback.

Spy vs TLT still strong

Spy vs TLT still strong

SPY vs. TLT broke out and is challenging its next level of resistance already.

US regaining momentum

US regaining momentum

US vs. world is back in the channel. The complacency (low vix) in face of the pending debt is almost insane.

Financials still strong

Financials still strong

Financials still look good, dragging the S&P 500 to new bull market heights.

Material sector broke relative downtrend

Material sector broke relative downtrend

Thans to China, the Materials sector has broken its downtrend.

Semiconductors

Semiconductors

Semiconductors have turned up strongly and are performing slightly better than the broad market, but the falling channel line will be the real test of their outperformance.

Technology in the Dumpster

Technology in the Dumpster

Thanks to Apple, Technology is still looking awful.

Energy nearing breakout level

Energy nearing breakout level

Energy is nearing its breakout level.

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