as you all know, I watch the XLP/NYSE Index ratio for key inflection points .. when the ratio goes UP then “staples” (think risk off) have more relative strength and when the ratio goes DOWN then the overall market (think risk on) is stronger from a relative strength perspective
with the recent market action … one would think the ratio would have exploded higher .. well, yeah, no – it hasn’t. still stuck in the range it’s been trading since FEB 2021.
so, for those max BEARS you might want to watch this .. need an upside break out above the red line to get the party started and for the max BULLS need it to break down below the green line …
no idea which way it will go BUT I will tell you I was surprised when I took a peak at it during my nightly cruising of the charts … my “thinking” was that it would have been higher, much higer.
but we trade what we SEE not what we think … so, until the ratio closes above the red line I’m going to say this sell off is a much needed correction that will ultimately need to be bought … and if we break BELOW the green line, then, perhaps game on for another run.
today, the ratio went and smacked right into an hourly pattern SELL (yellow highlight) and a 15 minute butterfly sell (light blue) …
when the ratio goes DOWN the market goes UP. pattern hit perfectly and the rally ensued …
now, it’s time to WATCH the next day or weeks action to see if this pattern fails and the sell off continues OR the ratio continues down causing sustained rally. I don’t recommend being LONG any indices right now as we are in a TIME and PRICE window that might prove significant.
you realize I watch the XLP/NYA ratio – a lot – and one of the things that I never did till today is look at the “time” component of the first leg down from the XLP inception. today I did and that “time” component aligns nicely w/ a “May” timeframe to really be on the look out for HUGE support in the ratio (which equates to weakness in equities) just a little further below.
if you look at the most recent action certainly looks like we have one more wave lower into the HUGE SUPPORT zone and then, well, it’s judgment day in my humble opinion.
we have a very KEY level of support on the XLP/NYSE Index ratio.
as you can see below … we have the measured move (dashed red line) equal to the largest correction in the ratio since the low in 2007 and w/ that the lowest level on the RSI in 12+ years. note, a bullish divergence does not appear to be needed for the ratio to find support …sometimes there was some bullish divergence and other times it just hit the support level and reverse higher. I do think it’s necessary to to take this into account.
then, we have a significant amount of math coming into this level w/ the .786 retracement from the last swing low hit last week.
lastly, we have key trend line support a little lower … this is a “good” trend line because you can see that it was respected as resistance when we copy/pasted the lower trend line onto the higher prices to create the blue trend channel … bottom line is to expect support in the ratio.
so now to the IF and THEN statement of using PATTERNS.
IF the ratio does find support THEN the equity market should correspondingly correct/move lower. ELSE, a blow thru to the downside of the ratio will make the market continue higher and, perhaps, w/ force.
we will be in that key decision making process – next week.
the second chart is just showing the NYSE Index overlaid on top of the ratio .. as you can see when the ratio finds support, the market corrects – every time.
you can go to any financial site and check out “why” the equities sold off today … it could be any number of reasons. at the end of last week, we had a double 3 drives to a top pattern w/ timing that said “monday” is important … to me, it is as simple as that.
in addition to that, take a peak at the XLP/NYA ratio. bounced off some BIG support so the sell off is nothing that wasn’t expected.
how big will this become – if at all? no idea if it’s a one day blip or a big thump coming. just going to look for patterns ..that being said, a ton of euphoria, a lot of SELL PATTERNS and our ratio analysis showing support and Staples to outperform the broader market which usually means – risk off.
11/05/2020 – yes, some insanity is ongoing everywhere. that being said, we trust PATTERNS and tune out all the noise. In this case, we had the expected reaction to the resistance levels sighted below and, now with this rally, we have another SELL pattern coming into play. SELL THE RATIO = SELL TECH.
NOTE – WE HAVE A LOT OF THRUST AND BREAKAWAY GAPS COMING INTO THIS LEVEL. this begs “caution” so, w/ the euphoric tech rise, it’s not a stretch to expect this level to get tagged and, frankly, get blow over and fail. but, that being said, it is a SELL XLK/XLP ratio so .. .watch closely.
last week, blogged about parabolic arcs and showed how we could use geometry to POTENTIALLY (the only operative word in investing) to look for inflection points. if your new to the blog, you’ll find a chart that has been replicated a couple times over past couple weeks /months for an area or zone of resistance. in fact, here’s a print to screen where JC (www.allstarcharts.com) and I were talking about this level … we discussed it ramifications to manage risk. this level was known 4-6 weeks ago and was discussed about it being respected. the past couple days market action can tell you why this was a smart move …
if this zone held, then technology would lose some steam (so to speak) and rotation into less volatile names (staples) would occur. at my last count we had 6 different projection techniques and math coming into this area.
when it broke above it – on a daily basis – I was somewhat surprised but it’s all probability, right? so, I blogged to wait for an open and a close above our targeted area/zone. we DID NOT get an open and a close above our area so the resistance was still on .. that is what I mean waiting for a signal reversal.
signal reversal candle (bullish) = the ‘high’ of the ‘low’ candle is taken out on close
signal reversal candle (bearish) – the ‘low’ of the ‘high’ candles is taken out on close.
when we come up w/ levels, waiting for an open/close above or below a certain level is the smartest way to play it. this is what was recommended … we have a LONG time before the month ends (for the monthly candle) but we can monitor via weekly and daily …
no need to rehash old news .. the zone has been hit. you read the blog – to find out where it COULD (there’s that probability connotation again) go …
using the basics, for now, I have used measured move corrections (blue and orange arrows) and rudimentary retracement techniques to come up w/ an initial set of targets.
folks, this might not even be the top to do all this work … it COULD GET ALL REVERSED TOMORROW.
keep the erasers and pencils ready, this is going to get interesting …
we had a sell off on the ratio a couple weeks ago BUT there was not follow thru and we still have the lingering level just a little higher which is the real test … again, until we have a strong weekly close above this level I’m in the conservative/flat camp as far at the NASDAQ and Technology goes …
watch this ratio as a key to provide support and resistance for technology names …
yes, technology and specifically the NASDAQ have been ROLLING. that being said, do see some resistance ahead and especially at the level indicated by the XLK / XLP ratio analysis. (technology/ staples) the level shown below has 6 mathematical derived levels all really really close to each other.
“should” provide resistance to this amazing run … that being said, appears like NOTHING can stop this run and this time it’s different and just buy buy buy as it’s all good …
OBTW, glad the REPO and sovereign debt crisis magically just went away …
one last, anyone else find it interesting that, w/ the NASDAQ soaring to new highs the ratio of the XLK/XLP is “barely” at the 50% level. if we had broad participation across the board wouldn’t this (the ratio) be making new highs?
can’t believe it’s been since mid-april since I posted about the market. at the time, I spied a triangle forming which proved to be wrong and it broke down and the market has continued it’s advance. humbling for sure .. when I was working up the triangle thesis I came up w/ the level that’s shown below but, honestly, I shrugged it off. “it’s not going to go all the way down there, I thought .. ” but I do remember saying, “if it could get down there, then what a perfect spot to short the market.”
folks, we are there … don’t hold me to it BUT I have around 12 reasons that this is HUGE support for the XLP/NYA ratio. don’t need to go back over the importance of this ratio … for a summary when ratio goes up risk is off and when ratio goes down risk is on. UP = bad equities. DOWN = good equities. so support should mean bad equities.
put/call ratio at an extreme, sentiment at an extreme and MONSTER support on the XLP/NYA ratio. probability says support holds and equities top and start back down … all for now. let me know if you have any questions.
disclaimer: this is ALL probability but we now have a very well defined street sign. the market COULD blow right thru the level below and it’s a rocket ship takeoff higher … that is also a probability.
so, play it safe … if it bounces strongly in / around this area then short BUT if it closes on, say a weekly basis, below the defined target area w/ conviction then be long. but for NOW, would wait and see which way she goes. hope this helps.