Bogus? Federal Reserve Study Warns of 1987-Like Crash Caused by Leveraged ETFs

A recent Federal Reserve study warns that leveraged ETFs may contribute to a 1987-like ‘Flash Crash.’ Talk about the ‘pot calling the kettle black.’ There are some serious flaws in that assumption and if anything will sink stocks, it’s the Fed itself.

Now this is an attention grabber. A 43-page study by Federal Reserve economist Tugkan Tuzun warns that (inverse) leveraged ETFs (called LETFs in the study) could contribute to a 1987-like ‘Flash Crash.’

With all due respect, in my humble option there are some holes in this 43-page study.

Fed Study Summary

Here’s the crux of the study. This is directly from the Fed report, so bear with me:

Generating multiples of daily index returns gives rise to two important characteristics of LETFs that are similar to the portfolio insurance strategies that are thought to have contributed to the stock market crash of October 19, 1987 (Brady Report, 1988).

(1) LETFs rebalance their portfolios daily by trading in the same direction as the changes in the underlying index, buying when the index increases and selling when the index decreases.

(2) This rebalancing requirement of LETFs is predictable and may attract anticipatory trading. Portfolio insurance strategies were commonly used by asset managers in the 1980s and their use reportedly declined after the stock market crash of 1987. Rather than buying and selling stocks as the market moves, portfolio insurers generally traded index futures. The Brady Report suggests that portfolio insurance related selling accounted for a significant fraction of the selling volume on October 19, 1987. The report also notes that “aggressive-oriented institutions” sold in anticipation of the portfolio insurance trades. This selling, in turn, stimulated further reactive selling by portfolio insurers. Price-insensitive and predictable trading of portfolio insurers contributed to the price decline of 29% in S&P 500 (SNP: ^GSPC) futures through a selling cascade.”

Fed Study Flaws

To be honest, I did not have time to read the whole study, but would like to point out the following:

1) As per page 4 of the Fed report, some of the reasoning is based on ‘anectodal evidence.’ That’s no joke. It reads: “Anectodal evidence suggests that LETFs commonly use swaps and futures contracts to rebalance their portfolios. Swap counterparties of LETFs are likely to hedge their positions in equity spots or futures markets.” If LETFs use index futures … how credible is a study based on anectodal evidence?

2) According to the study, the total assets of the LETF market amounts to $20 billion. This sounds like a big number, but it’s a drop in the bucket. Apple alone has a market cap of $420 billion.

Three of the most heavily traded LETFS, UltraShort S&P 500 ProShares (NYSEArca: SDS), Ultra S&P 500 ProShares (NYSEArca: SSO), and UltraProShort S&P 500 ProShares (NYSEArca: SPXU) have a combined $5 billion in assets. The SPDR S&P 500 ETF (NYSEArca: SPY) owns $154 billion worth of S&P 500 shares.

3) The report omits the hedging feature of LETFs. Leveraged ETFs have been used to hedge a portfolio (i.e. a 3x short ETF can be used to hedge long positions). As such, they act like puts and allow investors the freedom to hold on to their hedged long positions, even in a falling market.

In 2009, Jim Cramer went on a crusade against short ETFs (or inverse ETFs) for the same reason. He claimed that leveraged short ETFs drive down the prices of financial stocks.

I don’t know how that can be since (anectodal) evidence suggests short ETFs don’t short the underlying stocks. Even if, in March 2009, short financial ETFs accounted for a total of only $1.17 billion while leveraged long ETFs made up $2.65 billion. If anything, leveraged ETFs should have buoyed financial stocks.

Stock Market Risk

The biggest risk to the stock market is the Federal Reserve’s QE policy, not leveraged ETFs.

Investor Risk

Are leveraged ETFs and leveraged short ETFs risky? You bet they are and investors should absolutely be aware of those risks.

The article “Must Know Basics About (Short) Leveraged ETFs” highlights the risks every investor needs to know before buying short or leveraged ETFs.

New Indicator by Stanford University Measures Media Sentiment

Astute investors have commented on the contrarian correlation between the media’s take on the stock market and the stock market’s performance. Now there is an actual index that keeps a pulse on the media’s sentiment.

Stanford University constructed a new index that gauges media sentiment.

I’m a ‘headline junkie’ and couldn’t wait to chart the raw data of the university’s Equity Uncertainty Index. Here’s a thumbnail rundown on the index:

Equity market related uncertainty is measured through an analysis of new articles containing terms related to equity market uncertainty. Terms are subdivided into three ‘theme buckets.’

1) Uncertainty or uncertain.
2) Economy or economic.
3) Equity market, equity price, stock market or stock price.

To be included by the index, an article must include at least one word of each bucket.

Searched are about 1,000 newspapers (via a NewsBank database) throughout the United States. Newspapers include large national papers like USA Today and small neighbor papers.

The number of newspapers NewsBank covers increased from 18 in 1985 to 1,800+ in 2008. To adjust for the growth, the index normalizes the results to an average value of 100.

Interestingly, according to the University, the index has a contemporaneous daily correlation with the VIX (Chicago Options: ^VIX). The data and Equity Uncertainty Index goes back to 1985.

As the chart below shows, the index is rather noisy, even when illustrating the 30-day simple moving average (SMA). Of course, it’s always tricky to cram 28 years of data into a five-inch chart.

The second chart cleans up the Equity Uncertainty Index a bit and plots it against the S&P 500. For this chart we’re looking at the 90-day median average since the year 1999.

Now we are starting to see a basic correlation between media reporting and stock market action. As with most sentiment indicators, the media’s reporting bias is deeply contrarian.

Big spikes in ‘uncertainty’ – much like the VIX ‘fear’ Index (NYSEArca: VXX) – generally mark a major market bottom.

Complacency, or the lack of uncertainty can (but don’t have to) be trouble for the S&P 500 (NYSEArca: SPY) and the broad market.

I look at headlines every day and compose my very own, non-scientific media index.

For example, below is my observation published in the March 10, 2013 issue of the Profit Radar Report:

“The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High as Markets are Undaunted by Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits a Record High With Household Income at a Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Excessive optimism was worked off by the February correction. Sentiment allows for further gains.”

Looking at the chart, we see that the media is somewhat, but not extremely complacent.

I wouldn’t use this indicator as a timing tool, but it’s a fun study and potential warning.

Other sentiment and money flow indicators on the other hand are very powerful and have correctly foreshadowed market tops and market bottoms. With stocks at all-time highs we’re scouting signs for a market top.

This article is long enough already, but you may check out what other sentiment and money flow indicators ‘say’ about the potential for a looming market top. Here is: A Detailed Look at 5 Different Sentiment Gauges

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

A Detailed Look at 5 Different Sentiment Gauges

If you want to know how much money is waiting on the sidelines to drive stocks higher, take a look at various sentiment measures. Combine those sentiment measures with actual money flow gauges and you’ll get a good idea of how much cash is left (or not) waiting to buoy the stock market.

Seasoned investors look at many indicators before making buy/sell decisions. One of them should be sentiment.

My personal ‘three pillars of market forecasting’ are technical analysis, seasonality, and sentiment.

Technical analysis includes trend lines, patterns (like triangle, head-and shoulders, etc.), Fibonacci levels, divergences and so on.

Seasonality includes seasonal patterns and cycles for broad indexes and sometimes individual stocks and sectors.

Sentiment can be subdivided into many segments. I consistently follow more than a dozen sentiment and money flow gauges and regularly chart the following five for Profit Radar Report subscribers:

CBOE Volatility Index (VIX)
CBOE Skew Index
CBOE Equity Put/Call Ratio
% of bullish advisors polled by Investors Intelligence (II)
% of bullish investors polled by the American Association for Individual Investors (AAII)

The chart below is a reprint of the July 25 Sentiment Picture (available to subscribers of the Profit Radar Report).

It plots the S&P 500  against the above-mentioned sentiment gauges.

The VIX (NYSEArca: VXX) continues to linger near a multi-year low. This has been the case for almost a year. Using the VIX to time market highs has been a fool’s errand. We realized that back in November 2012 when the Sentiment Picture ‘quarantined’ the VIX:

“When an indicator doesn’t work, we’ll put it on ‘probation’ until it proves its worth again.” Let’s just say the VIX has continued to be on probabation.

The put/call ratio is a valuable member of the sentiment family. The May 19 Sentiment Picture noted that option traders were finally jumping on the rally bandwagon and warned that: “Risk is rising. A fair portion of current gains should be quickly retraced.” The S&P 500 (NYSEArca: SPY) quickly lost 7% thereafter before rebounding.

Sentiment polls by Investors Intelligence (II) and the American Association of Individual Investors (AAII) are a ‘casualty’ of the QE liquidity market and need to be taken with a grain of salt.

Extreme bullishness reflected in the polls hasn’t had much of an impact on stocks, but bearish extremes have coincided with rallies.

The April 26 Sentiment Picture for example picked up on the extremely bearish AAII poll numbers and the large number of II folks looking for a correction and wrote:

“36% of advisors and newsletter writers polled by Investor’s Intelligence (II) are looking for a correction. Incidentally, that’s exactly what we are expecting. However, the market rarely fulfills the expectation of the masses.” In other words: expect higher prices.

It took years of trial and error to become familiar with the various sentiment gauges and learn how to interpret the different readings. I have found that there’s a difference between sentiment polls and money flow indicators. The equity put/call ratio, for example, is an indicator that shows if investers are really ‘putting their money where their mouth (sentiment polls) is.’

When the put/call ratio finally reached extreme territory in May (and investors started to put their money where their mouth is), the stock market turned sour, at least temporarily. A updated chart and analysis of the equity put/call ratio is available here: “Is a Market Top Near? ‘Smart’ Option Traders Send a Curious Message.

Continuous sentiment analysis is available via the Profit Radar Report.

Contrarian Signal? Investment Advisors are Dangerously Bullish

Investors blindly following the crowd often end up getting slaughtered like a herd of sheep. That’s the very premise of contrarian signals. So what is the crowd doing now? A look at investment advisor sentiment provides a glimpse.

Investors Intelligence (II) just released the latest results of its sentiment poll. Every week II polls investment advisors and newsletter writing colleagues.

This ‘smart money bunch’ works surprisingly well as an indicator, contrarian indicator that is.

When the II crowd is excessively bullish, it’s generally time to hover around the exit. Conversely it’s usually a good time to leg into stocks when there are plenty of II bears.

Without further ado, here are this week’s results. The chart below plots the S&P 500 against the percentage of bullish advisors polled by II.

In a nutshell, 51.6% of advisors are currently bullish. This is below this year’s May 21 high of 55.2% (which foreshadowed a shallow correction).

The red lines highlight the effects prior readings above 54% had on the S&P 500 (NYSEArca: SPY). There were some great signals, but there were also some spectacular misses.

QE liquidity has certainly skewed the contrarian accuracy of this particular indicator.

The Commitment of Traders (COT) report for the S&P 500, Dow Jones Industrial, and Russell 2000 is fairly neutral.

However, commercial traders (considered the ‘smart money’) are rather bearish on the Nasdaq-100 (Nasdaq: ^IXIC) while large speculaters (the ‘not so smart money’) are predominantly bullish. COT sentiment for the Nasdaq suggests that gains may be limited.

In this QE bull market, I always take a look at a dozens of sentiment and actual money flow indicators.

What’s the message of other sentiment indicators?

I have found that sentiment surveys (such as II) combined with option traders sentiment (such as put/call ratio), and a few other off the wall (but accurate) sentiment gauges, provide a good pulse on the market.


Is a Market Top Near? ‘Smart’ Option Traders Send a Curious Message

Option trader sentiment extremes have racked up a fairly impressive track record as a contrarian indicator in the Fed’s QE bull market. No one else is talking about a major market top, so now might be an appropriate time to ‘check in’ with option traders and see what they have to say.

The QE bull market is 53 months old. The S&P 500 trades 156% higher today than at its March 2009 low, the Nasdaq-100 and Russell 2000 are up 209%.

No one else in the mainstream media is calling for a top, which is all the more reason to open this particular can of worms: Is a market top near?

One specific segment of traders has offered valuable clues about approaching market tops in the past: Option traders.

Equity Put/Call Ratio

The Equity Put/Call Ratio and SKEW Index capture the actions of the kind of option traders considered ‘dumb money’ (please don’t shoot the messenger, I didn’t come up with the term).

The Equity Put/Call Ratio shows the put volume relative to call volume. A ratio above 1 occurs when put volume exceeds call volume. The ratio is below 1 when call volume exceeds put volume.

Puts are bought to protect portfolios against declines; calls are bought as a bet on higher prices.

Since this is a contrarian indicator, high readings (0.9 or above) are usually seen near market bottoms when fear of a decline runs high. Readings around or below 0.5 reflect a dangerous extent of complacency and occur near market highs.

Last week the Put/Call Ratio fell as low as 0.55%. What does that mean?

The chart below plots the S&P 500 (NYSEArca: SPY) against the equity Put/Call Ratio (bottom of chart) and the SKEW Index (more about the SKEW in a moment).

The vertical red lines highlight readings at market tops.

When viewed in the context, the current Equity Put/Call Ratio is approaching a level that’s caused trouble for stocks in the past.
This note, which I sent to subscribers on April 16, 2010 explains exactly why: “The put/call ratio can have far reaching consequences. Protective put-buying provides a safety net for investors. If prices fall, the value of put options increases balancing any losses accrued by the portfolio. Put-protected positions do not have to be sold to curb losses. At current levels however, it seems that only a minority of equity positions are equipped with a put safety net. Once prices do fall and investors do get afraid of incurring losses, the only option is to sell. Selling results in more selling. This negative feedback loop usually results in rapidly falling prices.
This note preceded the 2010 ‘Flash Crash’ by only 13 days.
The current reading doesn’t foreshadow a Flash Crash, but a degree of caution is warranted.
SKEW Index
Like the VIX, the SKEW is calculated by the CBOE. The SKEW is far less popular than the VIX, but has delivered much better signals than the VIX lately.
The SKEW Index in essence estimates the probability of a large decline. Readings of 135 suggest a 12% chance of a decline. Readings of 115 suggest a 6% chance of a large decline (large decline is defined as a two standard deviation move).
In other words, low extremes are bullish for stocks; high extremes are bearish for stocks.
As the chart shows, the SKEW is currently in ‘bullish for stocks’ territory.
This contradicts the more or less bearish message of the Equity Put/Call Ratio.
What do we make of this?
Past experience has taught me not to bet against the SKEW. It’s prudent to allow for higher prices, perhaps after a shallow correction.
To get the best possible read on the stock market, I look at sentiment (such as options data and other sentiment/money flow gauges, seasonality and technical signals.
Right now the technical picture for the Nasdaq-100 (Nasdaq: QQQ) is fairly crisp and clear. The Nasdaq-100 is moving towards serious resistance in a well-defined trend line channel. This resistance increases the odds of a sizeable top dramatically.
Simon Maierhofer is the publisher of the Profit Radar Report.
Follow Simon on Twitter @ iSPYETF


Nasdaq-100 is Approaching Massive Resistance

The Nasdaq-100 has been a stock market trailblazer ever since the 2009 low. Despite its 210% gain, the Nasdaq is lagging well behind many other major indexes. This makes it an ideal target for technical analysis and long-term resistance studies.

Right now the Nasdaq-100 (QQQ) is better suited for technical analysis than almost any other broad market index.

That’s a bold statement, but there’s a good reason. Unlike the S&P 500, Dow Jones and many other indexes, the Nasdaq-100 is well below its all-time high.

Any index, stock or ETF at or near an all-time high has little up side resistance. Theoretically, the sky is the limit. Not so for the Nasdaq-100.

The chart below shows just two trend lines that have capped all of the Nasdaq’s recent advances and offered the same great trade setups (more below).

Right now the Nasdaq is butting up against red trend line resistance. The up side is obviously limited as long as prices stay below the red trend line.

Going short against the red trend line would be a low-risk trade setup simply because the risk is limited and well defined. However, I’m not inclined to short this market (yet).
Even if the Nasdaq-100 (Nasdaq: QQQ) moves above the red trend line, it is very close to massive resistance going back to its all-time high in 2000. The resistance is massive, because it’s made up of two separate Fibonacci levels converging in close proximity of each other (more below).
Support is provided by the green trend line. As long as prices remain above the green trend line, the trend is up.
The Profit Radar Report has been taking advantage of those two trend lines for months. When the Nasdaq double backed the red trend line on May 28, the Profit Radar Report recommended to go short.
A re-test of previously broken resistance is a bearish opportunity 8 out of 10 times.
The open chart gap left on June 20 was a clear signal that the index will come back up to fill this gap. Chart gaps act like magnets for price.
There’s an open chart gap just above 3,000. It too will be closed.
From Small to Big Picture
The red and green trend lines are ‘small fish’ compared to the truly massive resistance not far above current trade.
How the Nasdaq reacts at this key inflection point may well set the stage for the next year of trading. We’ll have to see what happens, but I believe the odds of a major top occurring against this massive resistance are greater than 50%.
The Profit Radar Report has revealed the key resistance level and how to trade the coming weeks.

Will Apple’s Breakout Stick?

Apple has staged six unsuccessful breakout attempts in the last eight months. Each time AAPL rallied more than 10% just to roll back over. Now Apple is teasing investors with higher prices again. Will this rally stick?

Since its September 2012 all-time high at 705, AAPL has rallied more than 10% seven times … and failed every time.

An Apple a day may keep the Doctor away, but an AAPL a day certainly hasn’t kept the bear away.

In fact, AAPL (Nasdaq: AAPL) is trading 35% below its all-time high (it was down as much as 45%). Yes, somebody really upset the apple cart (ok, that’s the last apple/AAPL pun).

Bottom line questions: Does this bounce have sticking power?

The Apple chart below compares this rally with the prior six failed rallies (gray circles). Three differences are easily noticeable:

  1. Most prior rallies were unable to overcome resistance (red circle). Current trade is above two trend lines.
  2. Once the high was in place, the market rolled over quickly. Current trade is lingering above support.
  3. RSI is higher (although marginally) than at any other rally attempt (grey circle).

Prolonged price coiling, or consolidation, above trend line support at 447 (and 457) increases the odds of higher prices. Like a coiled up snake, AAPL may actually jump higher.

A drop below 447, 434 and 418, on the other hand, would point to new lows.

A look at Apple seasonality (ebbs and flows created by seasonal forces) provides additional clues about Apple’s next move.

Apple seasonality is worth investigating, because it doesn’t only affect AAPL. AAPL is a major component of the Nasdaq Index (Nasdaq: ^IXIC), Nasdaq ETF (Nasdaq: QQQ), Technology Select Sector SPDR ETF (NYSEArca: XLK), and S&P 500 (SNP: ^GSPC), so the ripple effects of AAPL seasonality can draw wide circles.

“Sell in May and go away” is a well-known (and accurate in 2008, 2010, 2011, 2012) seasonal piece of wisdom usually applied to the S&P 500.

As per the Apple seasonality chart, the moniker for AAPL should be “Sell in September and go away” and perhaps buy in August?

AAPL seasonality chartsuggested the steepest decline of the year starting on September 16. In fact, the September 16, 2012 issue of the Profit Radar Report recommended to: “short AAPL (or buy puts, or sell calls) above 700,”

Right on queue with seasonality, AAPL’s all-time high occurred on September 21.

This AAPL seasonality chart shows Apple at the cusp of the next seasonal signal.

Apple (AAPL) Seasonality Chart

Most investors are aware of the seasonal ebb and flows that influence the stock market, but iSPYETF is the first to make a seasonal chart for Apple readily available. 14-years of rich price history are packed into this one chart (which by the way predicted the AAPL September all-time high).


AAPL has had a wild ride. In a matter of months the stock lost 45% after a 15-year Apple specific bull market.

Apple shares recorded their all-time top tick on Friday, September 21, 2012 at 705.07.

Friday, September 21 may seem like an arbitrary day for an all-time high, especially since September/October usually marks the onset of a seasonally strong period of the year.
However, September 21 makes a lot of sense if you are familiar with AAPL seasonality. Why?
The seasonal chart for AAPL reveals that – on average – AAPL suffers its biggest losses of the year starting on September 16.
AAPL seasonality is based on price action since 1998, when Steve Jobs U-turned Apple from near bankruptcy to profitability.
AAPL seasonality was one of the reasons the Profit Radar Report turned bearish on Apple and issued this, at the time, shocking recommendation:
Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660.” The move above 700 occurred first and turned this into one of the sweetest short trades in history.
It’s always handy to be aware of AAPL seasonality. Despite its historic meltdown, Apple remains the ‘alpha male’ among stocks.
Depending on its share price, it accounts for more than 10% (at one time over 20%) of the Nasdaq-100 (Nasdaq: ^IXIC) and Technology Select Sector SPDR ETF (NYSEArca: XLK). It continues to be the top holding of the S&P 500 Index (SNP: ^GSPC) and SPDR S&P 500 ETF (NYSEArca: SPY).
How about seasonality for the broader stock market?
The Profit Radar Report has charted seasonal forces for the S&P 500 going all the way back to 1950 and condensed them into one telling chart.
This chart alerted us of the April 2010 and May 2011 highs, which were followed by 10 – 20% declines and the October 2011 and June 2012 lows, which were followed by a relentless rally (up 58% so far).
The Profit Radar Report not only charts basic seasonality, it also looks at (and illustrates) post election year seasonality and post-election year seasonality when a democratic president is at the helm.
To gain instant access to various seasonality charts, sign up for the Profit Radar Report.


ETF Trade SPY: Russell 2000 Nearing Danger Zone

The Russell 2000 is one of the top performing indexes this year. It outperformed most broad market and sector indexes, but is nearing resistance that’s kept a lid on every advance. Here’s how to tell if the R2k is ready to top out.

“Are we there yet?” If you are a parent you’ve no doubt heard this question.

Kids can be impatient and don’t read maps or GPSs, so the question makes sense.

Investors often ask themselves a similar question. Instead of “are we there yet?” they ask, “how much up side potential is there?” or is the stock ‘there’ (at its peak) yet.

The closest thing to a GPS for stocks are trend lines. Trend lines outline the path for stocks, indexes or ETFs.

The chart below shows a parallel channel for the Russell 2000 Index (Chicago Options: ^RUT).

At first glance it looks like the Russell is ‘getting there’ or approaching a possible top.

Like a tenacious woodpecker, the Russell 2000 keeps chipping away at parallel channel resistance without out actually penetrating.

This hasn’t hurt performance. Since the channel is ascending, the Russell 2000 can continue higher without ever breaking above the channel. But we see that almost every touch of the upper channel line (red circles) caused a temporary pullback.

The rally from the November 2012 and June 2013 low has been very steep and with all things that are too good to be true, the Russell will eventually give back some (or most?) of its gains.

RSI (gray circle) is already showing signs of fatigue. Although this is a small warning signal, RSI can lag for months and RSI-based sellers may miss a big portion of a rally.

The chart for the iShares Russell 2000 ETF (NYSEArca: IWM) and Vanguard Small Cap ETF (NYSEArca: VB), although not as crisp and clean, look very similar to the R2K index.

Since the Russell 2000 has outperformed the S&P 500 (SNP: ^GSPC) to the up side, it will probably outperform the S&P 500 to the down side. Now don’t go out and short the R2K or S&P right now, but you may mentally prepare for a possible shift from an up to down trend.

How To Spot a Top

Stretched rallies have a tendency to flame out with a trend channel over throw, where prices stage one last hurrah and spike above the channel. A close back below the channel often concludes the rally and kicks off a prolonged decline.

Any decline has to be confirmed by a drop below resistance, which didn’t happen in April and June (green circles).

The ETF Trade SPY is a free weekly feature that identifies ETFs near major inflection points created by support or resistance levels.

Prices near support/resistance levels tend to be great setups for low-risk trades. Why low-risk? Support/resistance is used as stop-loss and is an effective risk management tool.

If you only enter trades where your potential gain is bigger than your potential loss, you win.

To receive future issues of the free ETF SPY follow iSPYETF on Twitter @ iSPYETF.

ETF SPY History

XLK: July 24, 2013, ETF SPY predicted higher prices for XLK. Click here for XLK support and target levels.

Dow Theory: July 19, 2013 ETF SPY predicted higher prices for Dow Jones Industrial and Dow Jones Transportation Averages.

XLF: July 12, 2013 ETF SPY predicted higher prices for XLF along with a price target.

S&P 500 Pop Above 1,700 Explained

Guess what! The S&P 500 now trades above 1,700.

Should I dare ask, why did the S&P 500 (NYSEArca: SPY) pop above 1,700? As every Grandma and kindergarten kid will tell you, it’s because of what Bernanke said on Wednesday post FOMC address.

This may well be, there’s no denying that the Fed has fueled the stock market, but there’s another – possibly even better – explanation for the pop.

The S&P 500 chart below was initially published in the Wednesday edition of the Profit Radar Report and reveals something not commonly addressed by the mainstream media.

No, it’s not the fact that stocks didn’t pop the trading day after Bernanke’s speech. The chart shows that price action was contained by two red trend lines that acted as resistance.

Why and how do trend lines work?

This may be a corny illustration, but resistance levels contain stocks like a fence contains a lion. If the fence is broken the lion dashes out. Like a freed lion, the S&P 500 (NYSEArca: IVV) dashed higher as soon as ‘the fence’ (double trend line) was broken.

This hourly chart evidences that short-term trend lines work quite well. Just because resistance was broken doesn’t mean a rally will continue indefinitely.

Quite often the S&P (NYSEArca: VOO) will come back down to test support (prior resistance) before moving higher or it will run into a new resistance level.

What’s the Next Target or Resistance?

To discover higher resistance levels, we need to zoom out and look at a daily or weekly chart.

The Profit Radar Report, a premier resource for S&P 500 technical analysis, has already identified the next strong resistance and target level for this rally.

It’s too early to tell for sure, but the upcoming resistance should be important as stocks run the risk of declining significantly once resistance is reached.

You may check out the Profit Radar Report or take a look at this free do-it-yourself paper on S&P 500 technical analysis.