Welcome To The Underground- August 22nd, 2020

The US markets closed higher on the week with the $SPX breaking out and closing at new all-time highs a smidgeon under 3400. Breadth indicators weakened considerably in the face of the new highs on the index as Apple soared to a $2 Trillion market cap.

My bullish optimism is now being tempered with the changes I am seeing in behind the glamour of the lofty index. The Schnell Strength Index is still in the 90’s but it weakened 3% intraday on Friday, an Options Expiration day with a new high for the market. 3% is no big deal, but the last 4 days of this week saw more decliners than
advancers on both exchanges as the market pushed higher. This week, we saw a drop below the trend line for the advance/decline line measured on many different markets. The Nasdaq Composite, the NYSE Composite, the Canadian market, the mid caps, small caps and the S&P 1500.

On my other breadth indicators, my early signal market scan for weakness triggered again this week. It also triggered in late June, but the broad picture was still bullish. There were almost a 1000 stocks down more than 5% this week, while the indexes closed higher. A normal level is 200. So digging into the underground statistics of this market, I saw considerable weakness as the $SPX closed slightly above the prior high. The weakness is amplified by the fact that it was an options expiration Friday with very low volume. The failure of banks, brokers, energy and industrials to continue to rally this week was concerning. One of the big factors I expect to see happen soon is the US Dollar start to rally for 4-6 weeks. Not a predicition of that time period but a countertrend rally (USD moving higher) setup is sitting on the dollar chart discussed below.

Summary: The US market keeps working its way higher. The Canadian market is still stalled up against resistance. Is this the sunset for the current market rally? It has all the setups suggesting that we are about to roll over. For the week ahead, we’ll need to see spirited buying to fix the conditions that showed up. It’s not over until it starts to break down, but my opinion would be keep stops tight to protect profits. If we close higher again next week, no harm done.

Let’s jump into the charts.