Let's look at technical, breadth and momentum indicators on daily and weekly charts of SPY, DIA, IYT, QQQ, MDY (S&P mid-cap ETF), and SLY (S&P small-cap ETF). I looked specifically at the new highs-new lows percentage, relative strength index, percentage price oscillator, volatility indexes (if available), long-term cyclical trend lines, and rising wedges.
Before I get into the technicals, here are potential catalysts that could fuel volatility going forward. The Fed is expected to end QE in October, which could fuel some volatility in Q4, and some Fed presidents even think that the Fed will raise rates in early 2015. In addition, the war in east Ukraine and the trade war between the U.S., EU and Russia could hurt global economic growth.
"The United States hit Russia's largest bank, a major arms maker and arctic, deepwater and shale exploration by its biggest oil companies with new sanctions on Friday to punish Moscow for its intervention in Ukraine.So I think there are many potential catalysts that could fuel more market volatility after the recent correction.
The sanctions, coordinated with similar European Union steps, were triggered by what the West sees as Moscow's recent effort to destabilize eastern Ukraine by backing pro-Russian separatists with troops, heavy arms and cross-border shelling." (Reuters)
"Russia threatened to escalate a growing trade dispute between the Kremlin and the EU, saying it could cap western car and clothing imports." (FT)
SPY (SPDR S&P 500 ETF)
SPY is converging with its relative strength index (RSI) and diverging with its percentage price oscillator (PPO) and SPX's new highs-new lows percentage, which shows that SPY is losing positive momentum and breadth. It is also testing resistance in its 5.5 year rising cyclical wedge, which, if broken, would break the foundation of the current bull market.
I think there's a high probability that SPY will test its major uptrend line, break it, and start correcting in the near to intermediate term, which could continue to form the ultimate top of this bull market. With all of these risks, I think the 1.5 year chart of the VIX shows how complacent investors and traders (and bots) are with the current trend. Hedging the S&P 500 Index is cheap right now, or continues to be cheap, on a relative basis. It's interesting that SPY's recent divergence with the S&P 500's new highs-new lows percentage didn't fuel a sell-off and was basically a head fake. So sometimes these indicators can act as contrarian indicators or be noise on charts. Just keep that in mind. Below is the daily chart.
SPY's weekly chart looks similar, but I don't see a bearish divergence between SPY and its PPO on a near-term basis, which would provide more confirmation (see 2011's PPO right before the correction, but SPY traded sideways for months). But that indicator looks like the only outlier right now.
DIA (SPDR Dow Jones Industrial Average ETF)
There is divergence galore on DIA's daily chart. See the chart for more detailed information. I think DIA is setting up for a major move to the downside, which would break through its cyclical wedge, long-term uptrend line and shake the foundation of this bull market. It recently pierced through its uptrend from the March 2009 low.
I see the same divergences on DIA's weekly chart. I think DIA could test its 200 week moving average once it officially breaks down. VXD, the DJIA's volatility index, is showing how much complacency is in the market.
IYT (iShares Dow Jones Transportation Average ETF)
IYT has been testing overhead resistance in its rising cyclical wedge for over two months now with declining momentum and breadth (it is negatively converging/diverging with TRAN's new highs-new lows percentage, its PPO and RSI on the daily chart). But, like the other ETFs, there was a head fake in the beginning of the year when it was diverging with all of those indicators. The new highs-new lows percentage even went negative a few times, which was actually a contrarian indicator that fueled new highs in the index. IYT's indicators were also very noisy before previous corrections occurred, so I'm going to focus on the other ETFs in this post. But I think the action on the trend line warrants caution here.
I see a bunch of mixed signals on IYT's weekly chart. I added trend lines to IYT's RSI and PPO to try to judge where we're at in this bull market. Again, I'd rather look at the other charts right now.
QQQ (PowerShares Nasdaq 100 Index ETF)
QQQ is trading like IYT right now. It's been testing resistance in its rising rising wedge for about two months now with declining momentum and breadth. QQQ's relative strength index made a new cycle high in the beginning of july, but since then it's been converging with the NDX's new highs-new lows percentage, which could have negative implications for QQQ. Also check out the "correction risk comparable" on the the new highs-new lows percentage chart. To me it's signaling that there's a high probability of a correction in the next few months, which could be similar to 2011's correction. Also, unlike the other ETFs, when QQQ's indicators were bearish at the beginning of the year, they actually predicted QQQ's minor pullback. So I think QQQ's indicators are a bit more trustworthy at the moment.
QQQ's weekly chart has similar divergences. What I want to point out on this chart is the volume spike that occurred during the early 2014 correction. It looks similar to the volume spike that occurred in early 2011 before it broke down a few months later on heavy volume. Also, NDX's new highs-new lows percentage is at an inflection point. I think it will break down when new lows spike during the next correction. The Nasdaq 100's volatility index (VXN) is still cheap (via its option prices) on a relative basis to hedge downside risk in the index.
MDY (SPDR S&P MidCap 400 ETF)
Now it's time for the fun ETFs. MDY, which is the ETF that tracks the S&P MidCap 400 Index, recently pierced through its 5.5 year uptrend line and tested its 200 day moving average before bouncing. It is currently at the vertex point of its rising wedge and could break down at any moment. The S&P MidCap 400's new highs-new lows percentage has been trending down since 2013 (including the recent head fake), and there are currently bearish relationships between MDY and its RSI and PPO, at least in the short-term. Here is MDY's daily chart.
I think MDY's (or $MID's) new highs-new lows percentage is going to break through zero soon when the index plummets through its uptrend. The technical setup looks perfect on MDY's weekly chart.
SLY (SPDR S&P 600 Small Cap ETF)
Now for the main event: SLY's daily chart. SLY, the S&P's small cap ETF, broke through its rising cyclical wedge! This is telling me that small caps have given up on this bull market. Its new highs-new lows percentage, PPO and RSI are also plummeting. The S&P 600's new highs-new lows percentage is currently at 0.83, and its RSI is below 50 (47.64), which is not a healthy condition. But, when looking at RVX, the Russell 2000's volatility index, there is no volatility in sight. I see extreme complacency here and would position for higher volatility.
In my previous two posts, I looked at industry/sector indexes that had bearish divergences and showed you how geometric shapes predicted cycle turns and even price targets during previous cycles. Also check out the Dvolatility Research Market Indicators.