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Market May Need Several Weeks to Recharge

10/26/2017 4:14 pm EST


Marvin Appel

President, Signalert Asset Management LLC

Stocks are consolidating recent gains, which is not unexpected after such a strong rally.  There are intermediate-term technical signs in charts that the market may require up to several weeks to recharge, asserts Marvin Appel, MD, PhD, of Signalert Asset Management.

Even though I believe that foreign stocks will outperform the S&P 500 Index (SPX) over the next several years, in the past two weeks they have lagged.  Both iShares MSCI EAFE ETF (EFA) and iShares MSCI Emerging Markets Index ETF (EEM) have formed negative divergences with their MACDs.  (That is, the EEM chart below shows that EEM made a series of high price highs from August-October while MACD reached a succession of three lower peaks.)

The S&P 500 SPDR (SPY) is better from the MACD perspective, having formed no negative divergences.  The recent MACD sell signal from an overbought level is not worrisome. 

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However, there is a subtle negative divergence in the Bollinger bands in the SPY chart. SPY slightly penetrated the upper Bollinger band in its October 5 price peak, but then failed to touch the upper band again at its Oct. 20 high  (green circles in the SPY chart).

chart 1

Our models remain on a Hold, which means that stocks are expected to continue to advance even though risk is not currently at the lowest possible level.  With the advent of the seasonally favorable period that begins in  November, the stock market will be in a low-risk situation even if gains may come more slowly in the weeks ahead. 

When our U.S. equity model goes from Hold to Buy, which I expect to occur by the time of the next issue, our clients will be fully invested in their equity allocations while we await the next leg higher.

Recently, I noted that both the Dow Transports and Industrials had hit new highs, which was a fresh bullish confirmation.  But the Transports have softened since then.  I believe that it is too soon to anticipate a Dow Theory sell signal, but watch for some warning signs.

chart 2

Note that on Oct. 5, SPY peeked above its upper Bollinger band, but at the time of its higher high on Oct. 20 did not manage even to touch the upper band at all.  This indicates slowing momentum (green circles). MACD generated a sell on Oct. 25.  This is unconfirmed by any MACD divergences or trendline breaks and is therefore not worrisome in the setting of a “hold” market climate.

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