Stock market performance is currently under scrutiny and poised to open slightly lower Thursday after European banks and other equity markets react to Wednesday’s Federal Reserve interest rate decision.
The S&P 500 printed a bearish engulfing candle, closing down (-0.75%). If this double top were to confirm over the next few days, the gains since the December low would amount to nearly 26%. (2346.58 > 2954.13 = 25.89%)
The trend is still intact, so we will need anohter method to monitor broad measures of stock market performance. More stocks, more data points.
S&P 1500 Composite
The S&P 1500 composite can help us in this respect. If we add a calculation, where we compare the number of advancing and declining stocks, then perform a percentage comparison, we can measure changes in character. Stockcharts helps us do this graphically. A change in color is what we are looking for. This will be our alert mechanism.
Note the green line in the upper panel. This line is charging higher, with no changes like the two occasions in March. Therefore, we are still in a bullish trend. Confirmation can be seen in the histogram in the middle panel. A shorter histogram bar or one that closes below zero will be needed to change our short term bias. A change like October would be obvious, well in advance of a major decline.
Note the 20d is just below price action in both charts. The trend is still intact, so we want to look at another method of observing changes in character that also eliminate the “noise.”
Renko Chart – Stock Market Performace While Eliminating the Noise
Renko charts will help us reduce the noise created by day to day “opinions” and “financial media” spin. These charts are based on bricks with a fixed value that filters out smaller price movements. This is because there is one data point per time period (day/week/etc.).
Renko charts ignore the time aspect and only focus on price changes. In this case, we set price change to the Average True Range (ATR).
SPY – Daily Renko Performance
Renko prints white and red bricks. In order for us to assume a change in trend, we need to see a red brick.
We note the Average True Range or daily change for the SPY is currently (2.11) and starting to turn higher. We would need to see a major change that exceeds this amount to print a red brick. Since we have no red bricks, we
We will monitor these “signals” over the next few days. For now, markets are oscillating between red and green this morning. Stay tuned.
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