As long as the US Stock rally continues defying conventional wisdom of the majority - for instance a bull market in stocks cannot coexist with a bear market in bonds (WRONG!), bearish calls (1,2) that lack support from even the most basic long-term cycles, the flow of time, will continue.
US stocks, following growing concerns about the health of the global economy and a contagion spreading from China or other emerging economies, continue their decline from the November high. The unwinding of Sentiment, a process that turned greed into fear, produced major buying opportunity (MBO) in August 2015; the lows of price and sentiment will be retested if support fails. The retest process not only supports continuation of cause, a trend containing stocks since 2014, but also raises the possibility of false breakdown if the majority panics. A false breakdown, emotional or capitulation selling that places a confused majority on the wrong side of the trade (bearish) ahead of a larger upside move, also favors extending the 2009 US stock rally beyond 2017.
Investors, largely driven by emotions rather than discipline, tend to focus on volatility rather than the message of the market. This tendency prevents them from recognizing better opportunities in quieter markets.
Summary
The BULL (Price) and BEAR (Leverage) trends under Q1 accumulation after a seasonal high position the Nasdaq as consolidation against the bull opportunity since the second week of May. The focusing and unfocusing of the impulse reflects not only indecisiveness for technology stocks but also the broader market. This sideways chop, a technical process transitioning sentiment from optimism (greed) to pessimism (fear), is accumulating the energy necessary to fuel an upside breakout large cap technology stocks (see leverage).
Price
Interactive Chart: PowerShares QQQ Trust Series 1 (NASDAQ:QQQ), NDX
The long-term trend oscillator (LTCO) defines an up impulse from 110.36 to 106.47 since the fifth week of March (chart 1). The bull control the trend until reversed by a bearish crossover. Compression, the final phase in the CEC cycle, generally anticipates this change.
A close above 113.59 jumps the creek and transitions the trend from cause to mark up, while a close below 93 breaks the ice and transitions it to mark down.
Chart 1
Leverage
The long-term leverage oscillator (LTLO) defines a bear phase since the second week of May (chart 2). The bear phase, a conflicting message from the leadership of leverage and price, defines consolidation against the up impulse and tightens risk management for the bulls (see price).
A diffusion index (DI) of 88% defines a high energy bullish setup and Q1 accumulation (chart 3). A capitulation index (CAP) of 68% supports this message (chart 4). DI and CAP's trends, broader flows of leverage and sentiment from accumulation to distribution and fear to complacency supporting the bulls (red arrows), should not only continue to extreme concentrations but also restrain downside expectations until reversed (see price). A decline under these trends, a sign of weakness (SOW), would be bearish for large cap technology and US stocks longer term.
Chart 2
Chart 3
Chart 4
Time/Cycle
The 5-year seasonal cycle (orange series) defines weakness until the third week of June (chart 5). This path of least resistance restrains upside expectations (see price).
Chart 5
Intermarket Analysis
Nasdaq 100 to S&P 500 Ratio
The long-term trend oscillation (LTCO) defines a down impulse since the first week of March (chart 6). Large cap stocks (SPY (NYSE:SPY)) outperform large cap technology stocks (QQQ) until reversed by a bullish crossover. Compression, the final phase of the CEC cycle, generally anticipates this change.
The down impulse reflects a growing preference for liquidity (large cap stocks) over illiquidity (technology) by global capital (flows). This preference, driven by growing social, political, and economic strain within Europe and emerging markets, must be recognized by Insight readers!
Chart 6