S&P 500 Index: Near-Term Trendline Apex Support Levels

The following daily chart (and close-up shot) of the S&P 500 Index is criss-crossed by a number of trendlines. There are a couple of near-term price levels where these intersect at their apex (2730 and 2685). Should both of these be breached with force, we'll likely see another leg down.

My last post referencing the SPX:VIX ratio offers further details that would corroborate such a downward event...worth monitoring in the days/weeks ahead.

The monthly chart of the SPX below depicts the ATR indicator in histogram format (with an input length of one month). This length of one month illustrates which months made the most volatile moves during the past 20 years. Generally, the ATR spikes have preceded either a period of consolidation or a trend reversal. The spike in this month's ATR is the second highest, with the highest formed by the October 2008 candle. We still have one day left in February's candle, so a higher ATR is still possible (although it seems remote). In any event, this is hinting of further volatility ahead and either a period of consolidation or trend reversal.

Volatility/Index Ratio Death Cross Retests

In my 2018 Market Forecast post I had identified important major support levels with respect to the Volatility/Index ratios of the S&P 500, Nasdaq 100 and Russell 2000 Indices as follows:

• SPX:VIX Ratio -- 200
• NDX:VXN Ratio -- 350
• RUT:RVX Ratio -- 80

Since that date, these indices corrected by around 10% and their corresponding volatility ratios have produced a bearish moving average Death Cross formation on the daily timeframe, as price plunged below those major support levels.

As can be noted on the following three daily ratio charts, these support levels are represented by the blue horizontal line. The only ratio whose price is still below is the SPX:VIX ratio.

The Death Cross level is represented by the red horizontal line. The RUT:RVX ratio and the NDX:VXN ratio have come the closest to retesting this line, while the SPX:VIX ratio is still well below.

If we're to witness a resumption of an equity bull market, these ratios will need to break and hold above their Death Cross levels, and create a whole new uptrend on this daily timeframe, since the last two-year uptrend has been thoroughly decimated by this correction. No doubt that will take some time, so we'll likely see more volatile swings in the SPX, NDX and RUT in the meantime. Otherwise, failure to break above their crossovers, will likely produce another leg down on rising volatility.

US 10YR T-Note: Major Support & Resistance Levels

I last wrote about the 10YR T-Note, 10YR Rate, and the US Dollar (DX) here.

The following monthly comparison chart shows the price action of all three. The US Dollar, generally, trends in the same direction as the 10YR T-Note, but has seen much more volatile swings. The 10YR Rate has recently broken above a very long-term downtrend line and is threatening to break above 3%, a level last hit in January 2014.

There are four sets of Fibonacci retracement drawings depicted on the following monthly chart of the 10YR T-Note, as well as a very long-term uptrending channel.

Price has recently broken below the bottom of this channel and sits at/near major support at the convergence of various levels of three of these Fib retracements (two long term and one short term) around 120.00. Major resistance lies a short distance above at 121.59 to 122.70 ( two short term Fib levels and channel confluence).

We'll see if buyers step in to 10YR T-Notes and the US Dollar if the 10YR Rate spikes up to/through 3%.

Conversely, and as I mentioned in my above-referenced post, if DX fails to stabilize around 90.00, the next major support lies below around the 84.55 level. As well, the next major support level for the 10YR T-Note sits around 115.00 to 116.00 (confluence of three sets of Fib retracements levels...two long term and one short term).

China's Shanghai Index: Major Support & Resistance Levels

As noted on this compressed monthly chart of China's Shanghai Index (SSEC), price is currently in between major support (the apex of trendline convergence) at 3000 and major resistance (38.2% Fibonacci retracement) at 3368.

The next monthly chart also confirms 3000 as major support (confluence of price and lower edge of uptrending channel), with 3600 as a major price resistance level.

It's important for SSEC to hold above 3000, as a drop and hold below could see it tumble back down to 2500, or lower. At the moment, the momentum indicator is above zero on this timeframe, although it's been in decline since December 2016...a drop and hold below may produce such a price plunge.

February 16, 2018: Chinese New Year (Year of the Dog)

Fannie Mae and Freddie Mac Tread Water as Another Government Bailout is Needed

Another government bailout ($3.7 Billion) is needed to keep Fannie Mae's net worth from entering negative territory after reporting a 4Q net loss of $6.5 Billion, as described in this Bloomberg article.

Both Fannie Mae (FNMA) and Freddie Mac (FMCC) remain near their lows post-2008/09 financial crisis, as shown on the following monthly and daily charts.

The momentum indicator is below zero on both timeframes on all four charts...potentially hinting at, as yet, unrevealed underlying risks and further weakness ahead.

These are two more financial instruments to monitor, in addition to those I've mentioned recently here and here, for clues on equity weakness.

What's Hot & What's Not in US Markets

Depicted on the following graphs are percentages gained/lost in Major Indices and Major Sectors over a longer term (1 year), a medium term (year-to-date), and a short term (the past week).

They are presented, simply, to illustrate where they are relative to those three timeframes.

My only comments are as follows:

• Major Indices: Utilities, Small Caps and Transports continue to underperform, and I'd monitor Small Caps, in particular, as I outlined in yesterday's article, for further signs of weakness and an indicator of further equity risk-off activity.
• Major Sectors: Energy, Consumer Staples, Health Care and Utilities continue to underperform, but I'd keep an eye on Financials for any evidence of further weakening, as I recently described here.

Finally, the "volatility gauges" mentioned in this post may also offer clues on equity direction, as well as index/sector and risk on/off preference in the weeks ahead. I referred to Technology in that article, and it's, especially, worth monitoring, inasmuch as a marked weakening of that sector could have quite a negative impact on equities, as a whole.

U.S. High-Yield Corporate Bonds ETF Remains Unstable

Price on the High-Yield Corporate Bonds ETF (HYG) has weakened further since my late-January post.

It's now trading in between major resistance and support levels of 86.00 and 83.00, respectively, as shown on the following weekly comparison chart of HYG and the Russell 2000 Index (RUT). Volumes spiked to record highs on last week's decline and the momentum indicator has fallen below the zero level, hinting of further weakness ahead on this timeframe.

The HYG:RUT weekly ratio chart below shows that HYG has underperformed the RUT since March of 2009.

However, this ratio strengthened during the past two weeks and is now caught up in between the medians of longer-term and shorter-term downtrending channels, and is below major price resistance of 0.06. The momentum indicator has popped above the zero level on this timeframe.

So, if HYG drops and holds below 83.00, and if the HYG:RUT ratio drops below the shorter-term channel median (currently around 0.0555) on a momentum break and hold below zero, look for further weakness ahead, not only in HYG, but, potentially, in the RUT, as well.

Volatility in the RUT has exploded over the past few days, as shown on the following daily RUT:RVX ratio chart.

Price has fallen below its major support level of 85.00 and we'll likely see a bearish moving average Death Cross form in the next couple of days. As long as it remains below this level, we'll continue to see wild, volatile swings in the RUT, and, likely further weakness in the days/weeks ahead.

US, European & Chinese Financial ETFs Weaken

The following daily ratio charts show the performance of three Financial ETFs with their respective country/union's Major Index, namely, XLF:SPX, EUFN:STOX50, and GXC:SSEC.

Each of them has weakened compared with their counterpart index during the volatility spike that occurred in world markets over the past couple of weeks. These ratios had either reached or broken above some sort of resistance level and are now above near-term support.

If we see the RSI decline below the 50.00 level, this could be a warning signal that their indices may weaken more than is currently anticipated.

The following monthly charts of XLF, EUFN, GXC, WFC, GS & DB all show that they had reached major resistance (either price or trendline) and have pulled back. Their respective support levels are shown, along with the momentum indicator.

With the exception of GXC, momentum on all of them had, either stalled, or had been declining on their latest price ascent...hinting of impending weakness. Momentum on EUFN and WFC is close to breaking below zero, and is below zero on DB. A drop and hold below zero on this timeframe could see an acceleration in selling in these instruments, as well as major world indices, in this current high-volatility environment.

Finally, of interest is the trading range of February's candle on the following monthly (percentage) chart of the VIX.

As of last Friday's close, we're only seven trading days into February and already this month's candle range is larger than those of previous spikes (with the exception of those that began in October 2008 prior to the financial crisis), and its percentage-gained has exploded in those seven days. As well, momentum is rapidly rising on this timeframe. I think that this is signalling that the selling in the SPX has not yet finished.

So, keep an eye on the financial instruments mentioned above for clues on equity weakness.

Emerging Markets ETF: Cheap to Buy?

The following monthly chart of the Emerging Markets ETF (EEM) shows that price has dropped below major resistance around the 50.00 level, after rallying towards its all-time high of 55.82. Near-term support is at 45.00, while major support lies below at 40.00 (the apex of a converging trendline and channel), or lower at 35.00 (historical price support).

Whether or not its current price represents fair value on this longer timeframe remains to be seen. The fact that January's gap up has now been filled may be a warning that lower prices are ahead, before this ETF begins to stabilize and present more of a viable buying opportunity.

Equity "Volatility Gauges"

* See UPDATES below...

As mentioned in my 2018 Market Forecast, I think that volatility will remain elevated for much of 2018 (although to what extent will, no doubt, vary) in this evolving environment where Central Bankers are tightening monetary stimulus measures they deployed after the 2008/09 financial crisis.

As I posted in early February, near-term major support on the SPX lies somewhere in between 2525 and 2485. The upper edge of that zone was almost hit on Friday as it reached 2532, before snapping back to close the day higher.

The following daily comparison chart shows that 10-YR rates have held near their recent highs during the recent correction of the SPX. Whether rates continue to hold or push higher on any recovery in equities, and whether that may materially impact the extent of such a recovery, remains to be seen. As long as 10-YRT remains above, firstly, 2.67% and, ultimately, 2.5%, then equities will remain vulnerable to more wild swings and weakness.

The following monthly chartgrid of 2-5-10-30-Year Bonds shows that all four of them are either at or below the -1 or -2 deviation levels of their respective long-term linear regression channels. Whether any of these begin to stabilize any time soon around these major support levels remains to be seen. The 10-YR has almost reached its 50% Fibonacci retracement level (from its lows of the 2008/09 financial crisis), so this may act as a stabilizing factor in the near-term.

As long as the SPX:VIX ratio remains, firstly, below 150, and, then, below 200, volatility will remain elevated as shown on the monthly SPX:VIX ratio chart below. Historically, price on the SPX consists of wild, aimless/trendless and very volatile swings when this ratio remains below 150.

Now that the SPX has nearly tagged its near-term support, equities may stabilize somewhat, but could be dragged down further if the FAANGs continue to decline, as shown on the following 6-month daily thumbnail charts. Keep an eye on FNGU and FNGD as a potential gauge of strength/weakness of the FAANGs +5.

The MSCI World Index has dropped to its external Fibonacci retracement level of 1.618%, as shown on the monthly chart below. It has also fallen back into a long-term uptrending channel, after briefly popping above. A drop and hold below that level (2032.74) could send all world markets into a tailspin.

The monthly chart of the US Dollar Index shows that price is attempting to stabilize around the 90.00 level, as it closed just above on Friday. It's currently in between major support (84.55) and resistance (93.06) levels, as set by the 23.6% and 38.2% levels of a very long-term Fibonacci retracement.

It began to break out of its recent consolidation last Wednesday, as shown on the following daily chart. The momentum indicator has popped back above the zero level and is forming a new swing high. Look for price to hold above 90.00 and for momentum to hold above zero as an indication that it may move to retest 93.06. What impact such a move may have on equities remains to be seen.

Finally, we may very well see US equity markets spike to new highs in a "slingshot" manner, as portfolio managers look to post a monthly gain for February by month-end...but, I'm not laying any odds on that happening. You can see from the monthly chartgrid below of the Dow 30, S&P 500, Nasdaq Composite, and Russell 2000 Indices that there will be a lot of ground to make up between now and then.

So, I'd keep an eye on the "volatility gauges" mentioned above for clues on equity direction, as part of your trading plan in the short term. Precisely what impact they may have on equities is difficult to pinpoint in this period of extreme volatility...but, they may be useful tools to add to your collection, nonetheless.

N.B. Take a look at Investing.com's new "Round Table" bi-weekly feature at this link.

* UPDATE February 12...

If the three gaps don't fill on this 60-day 60-minute SPX:VIX ratio chart, especially the first one at the 200 level, and if Momentum accelerates dropping back below zero, then look out below for the SPX...just my 2 cents' worth...

**************

P.S. No doubt inflation-watchers will be looking closely at CPI numbers when they're released this Wednesday (8:30 am ET), which may add to the fireworks.

* UPDATE February 14 (CPI data)...

Brief Government Shutdown Ends as 2-Year Budget Deal Reached

In the early hours of Friday, Congress passed a 2-year budget that boosts spending by $300 Billion and suspends the debt ceiling for a year, which President Trump has signed. So, after a short government shutdown at midnight on Thursday, the government has re-opened for business.

As of 12:55 pm ET, this news hasn't had a positive impact on equities, as Major Indices are down again, so far, today, as shown on the 2-month daily charts below.

And, the heat map below shows overnight percentage losses in other world markets, as well as current losses in North and South America.

Source: CNBC.com

* UPDATE @ 2:20 pm ET...

The SPX nearly tagged its near-term major support level of 2500 today (as I described here). However, the following daily comparison chart shows that 10-YR rates have held near their recent highs, during the recent correction of the SPX.

Whether rates continue to hold or push higher on any recovery in equities, and whether they will materially impact the extent of such recovery, remains to be seen. I should be able to provide further commentary about that by Monday.