Charting – Equities Showing Cracks in the Armor

After a slightly bullish and shortened holiday week the equity markets are now once again positioned for a move lower. I say slightly bullish because despite 3.5% gains in the S&P, the move higher this week came on very light volume and considering the holiday upside bias, was really to be expected. That said I’m seeing multiple technical indicators that are signaling short term weakness in the equity markets and I’d like to share them here.

Let’s get right into it.

Note the higher sell volume over the last 10 sessions vs notably light buy volume

To the naked eye the move higher this week looks very promising but awareness of key technical levels tell us that this market is still very much under pressure until it can reclaim $313.30. The main takeaway from the SPY daily is that the failure to close back above the yellow March trendline and the rejection of gap window at $315.50 means that we are still in a short term downtrend. Note that the volume decreased significantly this week and is much lower than the recent sell side volume that we saw in the last 2 weeks. This tells us that institutional participation is not present on this move up. IE – the rally this week was more or less a typical holiday float on light volume.

Moving on to the 1hr time frame I’d like to point out the perfect chart symmetry here. Thursday we gapped higher on the jobs number then tagged gap fill at $315.50 before a quick fade, then consolidation, then another fade into the close. Notice how the yellow trendline which dates back to March converges with the master level of $313.30 as well as the upper blue trendline which goes back to the pivot high on the 16th. The fact that they couldn’t get this market close at the highs of the day after a blowout jobs number with holiday trading volume tells us that investors are nervous about holding into the weekend.

As we know, TX, FL, CA, AR, and other states have rolled back reopening and I predict that more rollbacks will happen over the weekend after people are out and about celebrating the holiday.

Let’s take a lot at some other indicators that are sending of red flags –

Note the inside bar pattern forming on WFC.

The old saying goes – “The market won’t sustain a rally without financials”.

To me, over the last 3 months WFC has been a key indicator to the overall strength of the market. The reason being is that Wells Fargo is one of the 4 largest money center banks in the US and if one of those banks is trading at near decade lows, it is not a good sign for the health of equities. When WFC threatened to make a fresh 9 year low back in May (which it eventually would shown above by the yellow and white support levels) I took it as a leading indicator that the S&P was going to face headwinds in the coming days.

Sure enough the market did dip lower shortly thereafter before making a low on 5/14. Since then, WFC has vastly under performed as has the XLF which is pictured below. Note that both of them are forming an inside bar on the daily charts.

That said, WFC and pretty much all banks have lagged the market and despite twice hitting key support at at $25.10 this week (and breaking through $25 at one point), the biggest bounce it could muster was a brief gap up to $26 on the jobs number before being immediately faded right back to support then sheepishly trading sideways for the rest of the session.

So next I’d like to rifle through a few more charts that I think are signaling underlying weaknesses.

IWM – iShares Russell 200 ETF

Despite a nice showing earlier in the week, the IWM diverged from the S&P and finished the week looking very soft. Again, this may coincide with the notion that the market is concerned about what Governors have and will continue to do about the numbers of Covid spikes. Simply put when the Russell out performs, it’s risk on, when it underperforms, it’s risk off.

BA – Boeing Airlines

BA had a news driven powerhouse move Monday that ultimately turned out to be a flash in the pan. It seems that after the positive news about the 737 comeback, traders realized that none of that matters if no one can fly on said planes. Yes, sometimes the market is reactionary like that and it just shows how jumpy and short term news driven this environment is. That said, the market (Esp the $INDU) isn’t likely to sustain any rally without the participation of BA. This is not unlike the case I’ve just made about financials and the Russell. Starting to see a pattern?

BA still managed to finish positive on the week but price action over the last 3 days has been very bearish. All 3 days it made a run at the key level of $188.66 in the first 10-30 minutes of trading but immediately rejected and formed insider bar patterns for the rest of the respective sessions.

That’s why confirmation on the daily chart is so important. BA was able to close above key resistance on Monday ($188.66), but it never confirmed the breakout. To add a little bit of education here, confirmation above resistance is a close on the daily chart above said resistance level, and then a secondary close above the high of the “breakout” candle”.

For example –

Notice how 3 days after confirmation is made GLD pierces back through what used to be resistance and now it serves as support

Also, if you look back to the 1st chart I posted (SPY daily) you’ll notice that we closed below the yellow trendline, paused for a day, and then confirmed below it a day later. That is why that trendline became resistance this week and why I’m still short term bearish.

Moving on. I want to quickly go over some of the large caps that overwhelmingly make up the majority of the SPY and QQQ weighting.

AMZN – Amazon

AMZN has made a massive rising wedge on the daily time frame. What may look like a breakout of a channel is actually just a typical exhaustion gap before rising wedge plays out.

Case and point –

Note how the SPY “breaks out” then forms an island reversal.

Via Twitter I have been saying since Thursday that AMZN was about to put in a blowoff top. I believe we will see someone downside action next week, possibly as early as Monday.

Speaking of rising wedges –

AAPL – Apple Computer

Now this is a beautiful chart pattern

Notice the breakdown of the rising wedge on Wednesday. Then on Thursday morning we had the gap higher off of the jobs number that brought AAPL right into a perfect neck-tie between both converging trendlines which then became resistance. Awesome symmetry and beautiful to look at.

Also note that the breakdown of the wedge was kicked off by the news that Apple would be closing more stores to combat covid. The charts almost always precede the news and this here is a perfect example.

TSLA -Tesla

This chart is a bit more of a stretch to call a rising wedge but I find the trendlines intriguing nonetheless. If nothing else this simply shows how unbelievably frothy this stock has become. I mean, when your CEO is bragging on Twitter and bashing short sellers as your stock is trading at all and all time high whilst being up 42% in the last 2 weeks and nearly 400% in 4 months, it generally lets you know that a top is very near. The valuation here really a microcosm of the Nasdaq right now. In any case I really liked it as a swing short Thursday with the absurd gap up to $1200 and hanging man candlestick pattern.

MSFT – Microsoft

MSFT isn’t as extended as TSLA or AMZN and there isn’t a rising wedge or any sort of bearish reversal pattern (which is to be expected as it’s not as sexy of a buy as either of them). However, I want to simply point out that it did kiss the upper trendline of the channel that it has been trading in and should respect that with a pullback in the near term.

And now last, but not least. In fact, this is what I believe ties everything together.

I have been waiting for the VIX to hit gap fill at 27.67 for the last couple of days and not only did it do that, but in the same day it tagged the 200 MA and then formed a hammer candle on a closing basis. This is super bearish for equities in the near term and it seems to coincide with some of the topping, inside bar, and/or reversals patterns that I’ve mentioned here. As we know, the VIX is like a powder keg and that gap fill level plus the 200 MA will act like lit fuses which is why I am notably bearish for the opening of the equity markets Monday morning.

Overall I am seeing multiple factors that tie this together and am positioned as such.

Full position disclosure –

Short – AMZN, TSLA, SPOT, SAVE, USO.

Long – GLD

About Aaron Basile
Day Trading and Swing Trading Ideas, Certified Personal Trainer, Power Bodybuilding, Avid Sports Fan (NBA, NFL)

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