Trend Check with Tushar Chande

Markets Fall Out of Parabolic Patterns After Well-timed Warning

Tushar Chande | 

After my well-timed warning last weekend, the markets fell out of their parabolic patterns on Monday, responding to the external trigger of rising rates.  For example, the New York Composite was the first to fall out of the pattern and fell decisively all week (see Chart 1).  The external trigger was the rise in rates (see Chart 2).   I had discussed the risk of  rising bond yields in a earlier post on January, 11.   The stock market conveniently reversed after reaching the upside Dow target range that I identified two weeks ago (see Chart 3 below).  

 

Chart 1: The NYSE Composite fell out of the parabolic pattern on Monday and did not look back.  The rise in interest rates was the initial external trigger (see below).

 

Chart 2: The rise in 10-year yields past 2.62% was the external event that caused the initial sell-off, but the Dow 30 had reached my upside target from a couple of weeks ago (see below).

 

Chart 3: The Dow reversed just after it entered my upside target range, that I discussed a couple of weeks ago (see Chart 9 of that post).

 

VIX Index Reaches Resistance

With draw-down targets in the media ranging from -5% to -15%, the $VIX index has just reached nearby resistance, having broken a down-trend line.  However, as you can see in Chart 4, it is not near some of the levels seen in earlier breakdowns, so we probably have some ways to go.

 

Chart 4: The $VIX index broke the down-trend line and approached its 2017 highs.  However, it is below the 2016 peaks, so the risk of further down-side action remains.

 

HYG Has Not Bottomed Yet

The iShares iBoxx High Yield Corporate Bond ETF has not yet reached levels seen in recent sell-offs, which also suggests that more downside action  remains.

 

Chart 5: The HYG ETF remains well above its lows from previous sell-offs, which suggests that further downside action remains.

 

Amazon Continues to Amaze

I first wrote about Amazon when it was just at the end of its consolidation around 980 (see Chart 4 of that post), and then followed up when it broke out near 1100.  Amazon has held up well even during this heavy sell-off, so it is definitely a stock to watch for the rest of 2018.

 

Chart 6: I wrote about Amazon in late October (around 980) and again after it rallied to 1100.  The stock has had a good run, but its relative performance this weeks marks it as a stock to watch for the rest of this year.

 

Looking Back and Looking Ahead

The intermediate and long term trend is still up, so we must keep this week's declines in perspective.  Soon, the market should arrive at another low-risk entry point for those who like buying pullbacks.

My posts and analysis have luckily been close to the mark, and I hope you have enjoyed the ride.  Perhaps this will convince you to subscribe to the blog for future post alerts (using the quick link below) that may also luckily turn out well.

 

Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions.
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