Swing High & Bearish Divergence

Stocks formed a daily swing high on Thursday.

Thursday was day 14 for the daily equity cycle. A swing high on day 14 sets up a potential left translated daily cycle formation. That aligns with our longer term view that stocks are in their timing band for an intermediate cycle decline which we discussed here and here. Stocks are in their 4th daily cycle & which is another reason to expectant intermediate cycle decline. There is a bearish divergence developing on the TSI, which is something that we see a cycle tops. A close below the 10 day MA would signal the daily cycle decline.

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Stocks – Warning Signals Indicate To Proceed With Caution

Stocks closed below the 10 day MA on Friday. Friday was day 30, placing stocks in their timing band for a daily cycle low. And for reasons that we discussed here on Tuesday, I do not think that day 30 was the daily cycle low.

And stocks delivered more signals on Thursday of a pending daily cycle decline.

One of the signals delivered on Thursday was the bearish TSI divergence. Despite stocks closing at all-time highs there is a bearish divergence developing on the True Strength Indicator.

Another signal on Thursday was the alarmingly large SOS number. As we discussed on Tuesday, stocks printed a huge 777 million Selling on Strength on Tuesday. While the S.O.S. is not a precision tool, we have now received a second larger Selling on Strength signal on Thursday. Stocks printed a huge 1093 million Selling on Strength number on Thursday. This is the type of number usually associated with an intermediate cycle decline. So stocks have now delivered repeated SOS signals while in the timing band for a cycle decline. This increases the odds of a cycle decline.

I also believe something more sinister than a daily cycle decline is unfolding, which I plan to discuss in the Weekend Report.

Analyzing the Evidence for a Daily Cycle Low

I received a number of emails asking if Friday was a daily cycle low.
Let’s look at the evidence.

Generally speaking stocks need to be in their timing band for a DCL and also close below the 10 day MA for a DCL to print.

The daily equity cycle peaked on day 22 and has drifted lower, printing its lowest point on Friday. That was day 30 which places stocks in the early part of its timing band for a daily cycle low. Stocks also closed below the 10 day MA on Friday as well.

So, some of the evidence is beginning to point to Friday hosting the DCL.

However, some other indicators are signaling that the daily cycle low has yet to form. The first of which is the 10 day MA. While stocks did close below the 10 day MA, we also usually see the 10 day MA turn lower prior to a DCL. Which has not yet occurred.

There are usually 2 bearish crossovers that also form prior to printing the DCL: a bearish 30 line crossover on RSI 05 along with a TSI bearish zero line crossover.

In the example above, stocks were in a stretched daily cycle where price did close below the 10 day MA twice before printing the daily cycle low on day 60. But both times that stocks closed below the 10 day MA, RSI did not close below the 30 line, the TSI did not deliver a bearish zero line crossover and the 10 day MA did not turn lower — so consequently stocks did not print a DCL in either case.

And since those same criteria have not been satisfied here, this additional evidence is indicating that the DCL has yet to form.

One last signal indicating that the daily cycle low has yet to form was delivered by the Selling on Strength number that printed on Tuesday.

Stocks printed a 777 million Selling on Strength on Tuesday. This is a large number that usually foreshadows the printing of a daily cycle low. I have to say that it would be very rare to see this type of number on day 1 of a new daily cycle.

So after shifting through the evidence, the odds are that the daily cycle low has yet to form.

Equity Sell Signal

Stocks have been in a daily uptrend that has been characterized by peaks above the upper daily cycle band and lows above the lower daily cycle band. While stocks remain in their daily uptrend, they delivered some sell signals on Thursday.

After dipping into a half cycle low last week stocks broke out to a new high on Tuesday and Wednesday. However stocks formed a swing high on Thursday and printed a failed breakout which signals that stocks have begun their daily cycle decline. The divergent TSI along with the bearish TSI crossover are other signals that stocks are beginning their daily cycle decline. A break below the daily cycle trend line will confirm that stocks have begun their daily cycle decline.

Meanwhile the Miners continue to develop bullishly.

After the huge day on Wednesday it is not unexpected to see the Miners give back a little on Thursday. However, the Miners continue to develop bullishly as buyers stepped in once the Miners tagged the 10 day MA. That helps to further confirm that day 26 hosted the DCL. And this has implications on the longer term intermediate cycle which I discussed in Wednesday’s Mid-Week Update.

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Bullish Expectations


We have been discussing the status of the daily equity cycle in regards to whether day 45 hosted a daily cycle low. Last week we listed what needed to occur for us to change the labeling.

Last Thursday we outlined that the daily cycle is extended past day 45 if the following occurred:
* If RSI broke below the dashed blue line
* Stocks close below the upper daily cycle band
* Deliver a bearish TSI Zero Line Crossover

Since two of the three has now happened that has now shifted my thinking that this is an extended daily cycle with Tuesday being day 59.

RSI has now made a lower low and the TSI has delivered a bearish zero line crossover. Both signal that stocks are now declining into their daily cycle low. With a peak on day 54 this is an extremely right translated daily cycle. We should see stocks break below 2566.33 in order to complete its daily cycle decline. Stocks are currently very late in their timing band for a daily cycle low and have already corrected for 5 days. So a swing low and a break above the declining trend line will confirm a new daily cycle.

The big picture is that stocks are in a daily and weekly uptrend. They will remain in their uptrend unless the close below the lower cycle band. Therefore a swing low above the lower cycle band will be a buy signal.

Proceed With Caution

Stocks printed a new daily daily cycle high on Tuesday. However, there are some bearish divergences that are developing that we will take a look at.

The bearish divergences that are developing on the momentum oscillators are often associated with a cycle decline.

There is also a bearish divergence that has been developing on the Advance-Decline line which which often heralds a daily cycle decline.

What this means is that we need to re-look at the decline into the day 45 low. While the day 45 low was in the timing band for a DCL, it did not satisfy other criteria that we look for in a daily cycle low such as:
* Causing the 10 day MA to turn lower
* A bearish TSI Zero Line Crossover
* A fib tracement of at least 38%

That leaves us with a couple of scenario’s to consider:
1) Day 45 did not host the DCL
Under this scenario, that places stocks very deep into their timing band for a daily cycle low. Therefore any daily cycle decline at this point would likely to be brief.

2) The second scenario is if, in fact, day 45 was the DCL. That would make Tuesday day 9 of a new daily cycle. In either scenario, a close below the upper daily cycle band would signal that the daily cycle is in decline. But under the second scenario with stocks being at only day 9, that leaves 4 – 6 weeks before stocks would be in their timing band for a daily cycle low.

In either scenario, selling on a close below the upper daily cycle band would limit the downside risk. Long positions can be re-entered if the decline did not close below the lower daily cycle band and stocks closed back above the 10 day MA.

But if stocks close below the lower daily cycle band, then this is not the time to throw caution to the wind …

 

Extremely Right Translated

Stocks broke out to new highs on Monday. We previously discussed the possibility that Thursday hosted a one day daily cycle decline. But with the Monday’s bearish engulfing candle and a divergent TSI, that makes it likely that stocks are beginning their daily cycle decline.

Monday was day 43 for the daily equity cycle. Since stocks last printed a yearly cycle low the daily cycles have averaged 42 days. Which means that stocks are in their timing band for their daily cycle low. Typically a daily cycle decline can last 7 to 15 days. However, a new high on day 43 makes this an extremely right translated daily cycle formation.

Let’s take a look at what happened the last time stocks formed an extremely right translated daily cycle back in May.

Back in May the daily equity cycle peaked on day 35, forming an extremely right translated daily cycle. Stocks only declined 2 days before it was back to the races. I am not saying that stocks will only decline for 2 days. But we need to be open to the possibility.

Stocks continue to close above the upper daily cycle band, indicating that they are in a daily uptrend. As long as a swing low forms above the lower daily cycle band, then stocks will remain in their daily uptrend.

Beware Bonds

Bonds finally appear to have confirmed a new daily cycle.

Bonds printed their lowest point last Friday. That was day 12, which is usually too early for a daily cycle low. However bonds have now:
* Broke above the declining trend line
* Delivered a bullish zero line crossover on the TSI
* Closed above the lower daily cycle band
* Closed above the 10 day MA
* Managed to turn the 10 day MA higher.

All of which convinces me that day 12 hosted the DCL.

The bigger picture is that bonds are in their timing band for a yearly cycle low and are in an interemdiate cycle decline.

Bonds have formed a monthly swing high in October. A monthly swing high is required for the yearly cycle decline. Bonds will need to deliver some bearish follow through to confirm that the yearly cycle is in decline.

Bonds are already in a daily downtrend. If the yearly cycle decline has begun then I suspect that we will see bonds backtest the 50 day MA and then rollover into another left translated daily failed cycle in order to complete the yearly cycle decline.

Bullish Uptrend

image

The daily equity cycle has been forming a mini triangle consolidation since peaking last Thursday which was day 19.

spx

Stocks are currently on day 24 for their daily cycle. That is 6 days shy of the normal timing band for a daily cycle low. Closing below the 10 day MA along with the bearish TSI divergence suggest that stocks are setting up for completing their daily cycle decline.

spx_2

So if stock break bearishly to complete their daily cycle decline the bigger picture is that stocks are in a daily uptrend. This uptrend is characterized by peaks above the upper daily cycle band and lows forming above the lower daily cycle band. So even is stocks decline into a daily cycle low, they will remain in their daily uptrend until they close below the lower daily cycle band.

The 7/01/17 Weekend Report Preview

The Dollar
$$$

The dollar breaking lower on Tuesday signaled that it is still declining into its yearly cycle low. The decline into the yearly cycle low is obscuring our daily cycle counts. What is clear is that the dollar is in a daily downtrend. The dollar will continue in its daily downtrend until it closes above the upper daily cycle band.

Under the premise that a cycle cannot failed, then break to a new high without beginning a new daily cycle leads me to believe that day 39 hosted the DCL instead of June 5th. That would mean make Friday day 27, placing the dollar in its timing band for a daily cycle low. With the TSI at a level that has marked other DCL’s, once a swing low forms it will likely signal a new daily cycle.

Stocks
stocks

After peaking on day 21, stocks formed a swing high and broke convincingly below the daily cycle trend line on Tuesday to confirm the daily cycle decline.

Stocks printed their lowest point on Thursday, tagging the 50 day MA. Thursday was day 29, placing stocks 1 day shy of its timing band for a daily cycle low. A swing low and a break of the declining trend line will confirm that day 29 hosted the daily cycle low. Stocks remain in a daily uptrend. Stocks will continue in their uptrend until it closes below the lower daily cycle band.

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