Will Stocks Jump the Gun Again and Mute the Possible Upside?

Sometimes, I draw lines on charts, and they get a lot of negative feedback. People take issue with how I drew the line or what sort of line it is. On Twitter, they call it a Chart Crime. I laugh because there are no right or wrong lines. This is an art, not a science.

I am also a firm believer that all lines tend to get broken over time. Generally speaking, I am not a fan of long-term lines either. But this weekend I posted this chart of the yield on the 30-year bond on social media, and folks took issue with it. I have been tracking the yield on the 30 year in a spreadsheet for more than three decades and sometime about twenty years ago I drew in this blue line.

At the time, I was simply connecting what I viewed as three peaks, and the line was pretty flat (I prefer flat lines over steep ones). The line sat there on my chart for the last two decades, never having come close to it again. Then, in the fall of 2023, it got right to the line and backed off almost immediately. I admit I was surprised when a twenty-year-old line mattered.

But here we are approaching this line again. My rule of thumb on lines is that I always use a thick pencil since Edwards and Magee, in their book Technical Analysis of Stock Trends, said we should use a 3% rule (for the line to mean anything, we should break it by 3%). Rather than do the math I just use a thick line and if I can see the break on the chart from across the room (I have bad eyes!) then it’s a good break.

This is a long way of saying that if the yield on the 30-yr cracks above 5% I wouldn’t be surprised and it will surely make great headlines, but for it to matter I would need to see it cross this line from the other side of the room. Especially when the DSI Is at 10.

As for the stock market, so far it is mapping out as I would prefer it to. Can it continue on its downward path for another week? That might be too much to ask but a chop-fest with some negative breadth and a final whoosh at the end of the week would be a good set up.

On Friday the major indexes all made lower lows. Thus far we have not seen an expansion in stocks making new lows (beyond the mid December reading). A week ago I was confident we would not see new lows rise over the December readings but I admit I am not nearly as confident now.

What I am confident in is that we are heading toward an oversold condition. You can see the Oscillator is back under the zero line. Under the chart I show you the table I continue to work with, filling in the numbers we are dropping. Can you see how filling in red breadth numbers now will be a good set up next week? It need not be red every day but leaning that way would be a positive.

Then there is the Nasdaq Momentum Indicator. What I do here is plug in lower closes for Nasdaq over the course of the next week or so to see when the indicator stops going down. Here I have walked Nasdaq down nearly one thousand points and the indicator stops going down (the definition of oversold) January 21st. As a reminder, the exact date is not the important part, the important part is that is where we are heading and thus we get ready and do not fear a whoosh, especially one at the end of the week.

I don’t think sentiment is as bearish as I would like it to be but we did see the AAII bears come in higher than the bulls last week. The Investors Intelligence bulls still number 52% but when they are released this coming midweek, we should see them in the 40s, which would be a far cry from the 63% we saw nearly two months ago.

The put/call ratio is still not panicky but the ten-day moving average of the equity put/call ratio is finally attempting a lift. Some more downside this week should at least see this get back near the November level.

Will the market accommodate us or will it do as it has done for months now, jump the gun, therefore, muting the upside? I prefer the former over the latter.