Price Momentum Oscillator Points to a Pullback
Every Friday, Carl and Erin Swenlin put out a video summarizing their market views based on the DecisionPoint Trend and Momentum Models. The show is called DecisionPoint and is broadcast on StockCharts TV’s Youtube channel, here.
Below is a matrix illustrating the current trend and momentum outlook for the four US equity indices tracked by DecisionPoint, as of Friday, March 22nd. This article will focus on the short-term PMO signals.
Trend Model Signals are determined by different variations of moving-average crossovers, depending on timeframe. The PMO Signal is DecisionPoint’s proprietary momentum indicator. In my opinion, it is most comparable to the MACD or PPO but is calculated using price action over longer durations, thus reacts a bit slower yet produces less false signals. The ChartSchool section of StockCharts explains the “PMO can be used as both a measure of relative strength, momentum and overbought/oversold conditions. It can also be used to determine price reversals using bull and bear crossovers.”
“I Think a Pullback Is Totally Reasonable at This Point in Pretty Much All the Markets”
Erin expressed her short-term bearish view on Financial Sense Radio last week. She also made the following statement:
“On my daily charts the OEX and the Nasdaq 100 both got buy signals and I thought for sure this week I would see the same at least out of the S&P 500. Still, haven’t. In fact, the PMO turned down below the signal line and the Dow hasn’t even come close to getting a buy signal. The margin is so wide and it’s still continuing lower.”
Momentum has continued to weaken in the days since, with the S&P 500 ($SPX) and S&P 100 ($OEX) both whipsawing from buy-to-sell signals. Let's take a look at the daily charts below.
Dow: "Might Have Some Struggles Ahead"
Erin points out that last week "the PMO made an attempt to turn itself upward and it failed pretty miserably.” She is looking for a retest of March's low at the 25,250 level in the near future, but explains her “expectation is more to the downside and a likely break below that line.”
As for the lower highs YTD, she thinks “you could maybe make a case for a double top” but cautions that “it isn’t officially a double top until it executes." The pattern would execute on a break below the 25,250 area she is watching.
Nasdaq: Leading But Near Sell Signal
As for the Nasdaq 100 ($NDX), Erin commented "again, a topping PMO is what I’d be concerned about.” She mentioned 7,200 as the next short-term level of interest.
S&P 100: Fresh PMO Sell Signal
Erin expressed concern over "another topping PMO" in the $OEX, which actually crossed below the signal line on Monday. She explained "the wedge pattern, of course, is bearish" and that "the expectation is a breakdown." As you can see in the chart below, price is currently pushing on the lower bounds of that wedge.
S&P 500: “Whipsaw Buy-Sell Came in on the PMO”
When discussing the chart below, Erin explained: “one of the things I’m really concerned about when I look at the S&P 500 right now is this very clear negative divergence with volume.”
She is referring to the On-Balance Volume (OBV) indicator in the bottom pane, which is a cumulative measure of up-day volume minus down-day volume. The following explanation provides some context around how Erin uses the OBV indicator in her analysis:
“If you are in a nice rising trend or a rally you want volume to be supporting that and right now we’re just not seeing that and that does give us pause and a suggestion that we might finally get the breakdown below the bottom of this wedge.”
Also, note the bearish divergence in momentum as evidenced by lower highs in the PMO in March despite higher price highs. You can see these divergences very clearly in the thumbnail. Erin’s call on Friday could not have been timelier, as price punctured the lower trend line on Monday and momentum continued to falter. (all charts are as of intraday 3/25/19).
After analyzing these four charts, the weight of the evidence suggests the PMO buy signals in the Nasdaq and S&P 100 that triggered on March 15th are likely to fail, and soon see new sell signals similar to the S&P 500 last week. This is already playing out today, as the $OEX looks poised to put in a fresh PMO sell signal. With 3 of the 4 indices tracked by DecisionPoint now showing bearish momentum, there is a high probability the Nasdaq will follow in coming days. Further supporting this thesis is continued underperformance from the small-cap Russell 2000, $RUT (not tracked by DecisionPoint). The $RUT daily PMO looks even worse than the Dow's ($DJI), steadily deteriorating since the sell signal in early March. We're beginning to see fading momentum across the board, from bearish PMO crossovers to negative RSI divergences. This does not bode well for US Equities in the short-term.