FusionIQ Strategy Session

March 27th 2014

Summary Comments
Recent market activity has been rather quiet of late as what appeared to be a renewed upside breakout by several indices quickly reversed course. Subsequently markets have been range bound, with a slightly lower bias, since the failed breakouts. That said, the recent sluggish trading activity hasnt caused any major trend violations on any major indices yet. Key levels for us remain 1,740 on the S&P 500 and 4,000 on the NASDAQ Composite. Only violations of those levels would concern us that a deeper correction was about to ensue. The negatives if anyone is looking for them are clearly the divergences between the price action on several major indices relative to their underlying breadth and momentum metrics. The problem is that these divergences can continue for quite sometime before they become troublesome. To me these divergences are like a weakened leg on a stool. The stool is clearly vulnerable, however, it may be like that for quite some time before it gives way. Its a condition that clearly needs to be constantly monitored as its stability has become compromised. One other observation to note is the rotational shift away from higher beta names such as biotechs and small caps. The aforementioned market sectors have been suffering more than larger cap peers, suggesting that there is a rotation away from risk and towards larger, more stable names. In conclusion the trends remain up, though breadth has been weakening, and we suggest remaining constructive as long as key S&P 500 and NASDAQ supports are not broken.

S&P 500 Index Weekly chart with technical overlays

The S&P 500 is still above trend, however divergences between momentum and price continues to widen. We remain constructive unless 1,740 is violated.

NASDAQ Composite Index Weekly chart with technical overlays

Similar to the S&P 500, the NASDAQ is still above trend, with divergences between momentum and price continuing to widen. We remain constructive unless 4,000 is violated.

Russell 2000 Index Daily chart

The recent breakout to new highs by the Russell 2000, then the quick and sudden reversal back below that high, suggesting a false breakout. While not alarming yet it is something to watch.

NYSE/Arca Biotech index (BTK) Daily chart

As we had mentioned on the last Strategy Session call biotechs had gone parabolic and were very likely due for a correction. The recent 14% correction from the peak suggest market participants scaling back on risk.

NYSE/Arca Biotech index (BTK) Daily chart

BTK correction on 14% suggest pretty sold distribution.

SPDR Homebuilder ETF (XHB) Daily chart

The homebuilders recent breakout to new highs, followed by a quick breakdown has the look of a head fake.

SPDR Homebuilder ETF (XHB) Weekly chart

The homebuilders recent breakout to new highs, followed by a quick breakdown has the look of a head fake.

Fusion Risk On/Risk Off Index Daily chart with technical overlays

Risk On is starting to underperform risk off a sign the market may be changing its outlook towards risk.

NYSE New Highs minus New lows - Daily chart

NYSE New Highs less new lows is continuing to deteriorate. While this is not alarming it is something to certainly take note of as eventually falling new highs is a big problem.

Ebay Inc. (EBAY) Weekly chart

Back in 2012 we cited that EBAY was breaking out over a resistance area that it had failed to eclipse on numerous occasions (red lines and arrows) near $ 35. We suggested that once a stock can breakout above stubborn resistance that usually portends a big move as seen EBAY did in fact take off.

Schlumberger LTD. (SLB) Weekly chart

Currently we look to SLB shares as a modern day comp of EBAY (circa 2012) and see tthat SLB is trying to breakout above stubborn resistance near $ 95 (red lines and arrows). Given $95 has been a sticking point since 2008 we suggest any breakout above $95 would be very bullish.