Under the Hood: S&P 500 Deteriorating

We observed on April 21, that the stock market was actually stronger than the S&P 500 (NYSEArca: SPY) chart led to believe (Article: Under the Hood is more Strength than the S&P 500 Chart Shows).

Subsequently, the S&P 500 moved to a new all-time high on April 27 (2,126.92).

However, this condition of underlying strength quickly morphed into underlying weakness.

The April 26 Profit Radar Report observed this: “Interesting, 1-2 weeks ago, the percentage of NYSE stocks above their 50-day SMA was actually higher than the S&P 500 chart would suggest. Now, the percentage of NYSE (and S&P 500) stocks above their 50-day SMA is visibly lagging the new all-time highs. RSI is also lagging.”

The chart below shows that bearish divergences between the S&P 500 and the percentage of NYSE stocks above their 50-day SMA tend to lead to weakness (only 2 out of 8 corrections since 2014 were not preceded by this divergence).

Although the Nasdaq-100, QQQ and AAPL (Nasdaq: AAPL) staged a bullish breakout (as reported here: Nasdaq QQQ ETF Break out of Bull Flag and here: Fascinating AAPL Formation Telegraphed Bullish Breakout), the Profit Radar Report did not issue an official buy signal for the following reason:

“Based on breadth and seasonality, this rally is not built on a solid foundation. Also, the Nasdaq-100 has gapped up 1% to at least a once-year high 50 other times besides Friday. Over the next three sessions, it added to its gains only 38% of the time, averaging a return of 0.6%. Its maximum gain during the next three days averaged +1.3%, the maximum loss -3.2%.”

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The above-mentioned articles warned that: “The trend is up, but lagging breadth and the open chart gap suggest an eventual pullback is likely,” and “In terms of Elliott Wave Theory, any new AAPL high could complete a 5-wave move and result in a larger-scale reversal.”

AAPL spiked to a new all-time high on Tuesday (April 28) and has fallen 10 points since.

This week’s down side reversal of the S&P 500, Nasdaq and AAPL after a bullish breakout (according to technical analysis) emphasize why it is helpful to monitor multiple indicators.

That’s why the Profit Radar Report looks at supply & demand, technical analysis, investor sentiment, seasonality and price patterns for a comprehensive outlook.

How a combination of the above indicators is used to spot high probability trades is shown here (with an actual recent example): How to Spot High Probability Setups

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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History Says: Rising Interest Rates Rarely Sink Stocks

The news-reporting powers to be have determined that rising interest rates are the bull market’s worst enemy.

In fact, the looming threat of rising rates is as unwelcome as the dreaded QE taper used to be. But wait, QE ended many months ago, and stocks are still near their all-time high (see here for detailed analysis of QE effect on stocks).

Could rising interest rates be a moot point (just like the end of QE was)? As we will see in a moment, rising rates are not as scary as many believe.

But first off, how does the Federal Reserve raise interest rates and which interest rate is the one being ‘manipulated’?

What’s the ‘Interest Rate’?

When the Federal Reserve (or the media) talks about raising (or lowering) interest rates, it is talking about the federal funds rate.

The federal funds rate is the central interest rate in the U.S. financial system. It is the interest rate at which depository institutions trade balances held at the Federal Reserve with each other overnight.

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How Does the Fed ‘Manipulate’ the Interest Rate?

The Federal Reserve sets the target rate. The target rate is currently 0 – 0.25%. The Fed ‘manipulates’ this rate via government bond purchases (i.e. the Federal Reserve reduces liquidity and raises the federal funds rate by selling government bonds).

The actual rate is determined by trading between banks. The weighted average of bank transactions is considered the effective federal funds rate (currently 0.11%).

What Really Matters: How Do Interest Rates Affect Stocks

But what really matters is how the federal funds rate affects stocks.

Here’s what the data says:

The chart below plots the S&P 500 (NYSEArca: SPY) against the federal funds rate going back to 1954.

Periods of rising interest rates are highlighted in green.

More often than not, the S&P 500 moved higher (or didn’t decline significantly) when interest rates rose. The few exceptions are marked with a red box.

Most recently, the S&P 500 rallied when rates were buoyed starting in 2004 and 1998.

The green areas clearly show that rising rates are not bearish for stocks.

However, it needs to be pointed out that when the stock market rolled over in 2000 and 2007, the Federal Reserve had a lot of room to lower rates and stimulate growth.

That is not the case today. If this economic recovery does not stick, and stocks fall, the Federal Reserve won’t have much room to lower rates. It would take several rate hikes to build up a ‘cushion,’ that would allow the Fed to lower rates if the economy relapses.

Perhaps that’s why the Federal Reserve has been so hesitant to raise rates, and thereby spook the market.

Rather than focusing on rate hikes, I will continue to monitor the indicator that correctly foreshadowed the 1987, 2000 and 2007 market tops. It also ‘told’ us consistently since 2010 that this bull market is alive and healthy. Here’s what this indicator, which I dubbed ‘secret sauce’ is telling us right now. Is the S&P 500 Carving Out a Major Market Top?

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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How to Spot High Probability Setups

High probability setups are like gold nuggets: rare and precious.

What is a high probability setup?

A high probability setup is a buy (or sell) signal with a high probability of being profitable.

What makes it high probability?

Investing (or trading) is all about putting the odds in your favor. The stronger the signal, the better the odds.

The strongest signal is when all of the following indicators point in the same direction:

• Supply and demand data (only available for stocks)
• Technical analysis
• Sentiment
• Seasonality

Here is one recent example of a high probability setup.

I shared the following via the March 25 Profit Radar Report:

“The more research I do, the more attractive owning the Aussie dollar becomes. Seasonality is turning very bullish in April, cycles are up, sentiment is extreme, the latest low came with a bullish RSI divergence, and it broke above red trend line resistance.

There is no guarantee, but this is as close to a high probability trade as we’ve seen in quite a while. We want to own the Aussie dollar. Unfortunately currencies aren’t big movers, so the up side isn’t huge.”

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One way to gain exposure to the Australian dollar is via the CurrencyShares Australian Dollar ETF (NYSEArca: FXA).

Sentiment

The first chart offers a long-term look at the Australian dollar and investor sentiment (commercial traders’ net futures position).

As the dashed green lines highlight, every time commercials’ net exposure soared, the Australian dollar started to rally.

Sentiment: Bullish

Seasonality

Seasonality projected a strong March – May rally. The Australian dollar seasonality chart is based on Australian dollar futures prices from 1988 – 2014.

The daily performance of each year is weighted equally and averaged to attain seasonality, which reflects the average performance of the Aussie dollar based on 26 years of price history.

Seasonality: Bullish

Technical Analysis

On March 23 (green dot) the Aussie dollar broke above trend line resistance. There was also a bullish RSI divergence at every low in March or April.

Technical analysis: Bullish

Benefit of High Probability Setups

The Australian dollar did not rally immediately after the March 25 buy signal. In fact, it dropped at first.

However, since seasonality and sentiment suggested higher prices, we stuck to our guns and held on.

High probability setups deserve a ‘longer leash,’ because more often than not, trade moves in the expected direction.

The Aussie dollar is up more than 3% since the buy signal, but has now reached long-term resistance and may pull back. RSI confirmed the latest high, so any pullback should be temporary.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Nasdaq QQQ ETF Breaks out of Bull Flag

The April 22 Profit Radar Report showed this chart of the Nasdaq-100 and stated:

“There are similarities between AAPL and the Nasdaq-100, which is forming a potential bull flag. A break above 4,465 – 4,485 (corresponding level for QQQ = 109.10) could drive the Nasdaq-100 to next resistance around 4,600. Aggressive investors may buy QQQ with a break above 109.10.”

The bullish breakout materialized, but how legitimate is it?

 

Below is an update chart of the Nasdaq QQQ ETF.

• The breakout occurred on elevated volume. Bullish.
• There’s on open chart gap at 109.55, which will probably get filled.
• There’s a long-term bearish RSI divergence. Potentially bearish.
• RSI may be about to close above trend line resistance. Potentially bullish.
• Next resistance at 111.50 – 112.20.
• Ideal bull flag target is around 112.50.

The trend is up, but lagging breadth and the open chart gap suggest an eventual pullback is likely.

AAPL, the MVP of the Nasdaq and most important stock in the world, shows one of the most fascinating chart formations. More detail here: Fascinating AAPL Chart Formation Telegraphed Bullish Breakout

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Fascinating AAPL Formation Telegraphed Bullish Breakout

The April 22 Profit Radar Report highlighting this fascination AAPL (Nasdaq: AAPL) formation with the following commentary:

“AAPL, the most important stock in the world, hasn’t been able to nudge the S&P, Dow Jones or Nasdaq in either direction. That’s because AAPL is stuck in its own trading range/triangle. The consolidation pattern is similar to that of Q3 2014. AAPL closed at 128.62 today. This mini-breakout increases the odds of more upside.”

 

Below is an update AAPL chart. The next meaningful resistance cluster is around 140, but the open chart gap (and various breadth divergences) allows for a ‘digestive pullback’ at any time. In terms of Elliott Wave Theory, any new high could complete a 5-wave move and result in a larger-scale reversal.

AAPL’s pop also propelled the Nasdaq-100 and PowerShares QQQ ETF (Nasdaq: QQQ) out of a formation called a bull flag. More details here: Nasdaq QQQ ETF Break out of Bull Flag

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Nasdaq and S&P 500 at All-time Highs – Surprisingly, This is Not Bullish

15 years after the tech bubble, the Nasdaq Composite finally closed at a new all-time high. On the same day, the S&P 500 (NYSEArca: SPY) briefly spiked to a new intraday high.

This is not surprising, since we just discussed that ‘Under the Hood is More Strength than the S&P 500 Chart Shows‘ (for how long remains to be seen).

 

Let’s pretend for a moment the S&P also closed at an all-time high, and look at historic precedents when both indexes clocked in at new all-time highs on the same day.

Since the infamous ‘sell in May, and go away’ period is almost upon us, let’s further narrow down our search to matching all-time highs scored in the month of April.

The chart below does just that. The dashed green lines mark matching April highs.

Things always get a bit tight when cramming 41 years of data into one chart; nevertheless, both indexes visibly struggled the months following matching April highs. The only exception was April 1995.

Short-term, the S&P 500 broke above resistance (discussed here). Based on technical analysis, this is bullish. But other indicators suggest that up side could be limited. Why? More details here.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Under the Hood is more Strength than the S&P 500 Chart Shows

If you own stocks, this is a good new / bad news scenario.

On one hand, U.S. stocks are stronger than the S&P 500 (NYSEArca: SPY) chart suggests. On the other hand, stocks are (or were) overbought, at least based on this indicator.

Here are the details:

The percentage of NYSE stocks above their 50-day SMA nearly matched their previous highs last week, while the S&P 500 stayed below its prior highs.

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The potential implications are two-fold:

1. The buying pressure behind the latest rally leg is actually stronger than the S&P 500 chart suggests.
2. The % of NYSE stocks above their 50-day SMA reached an overbought reading. Prior such instances either saw stocks struggle to move higher or correct.

Based on technical analysis, investors should watch last weeks high – 2,111.91 for the S&P 500. Trade below allows for further weakness, trade above would translate into further up side (at least temporarily).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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I Spy … An Intriguing NYSE Composite Chart

Perhaps the most fascinating chart right now is that of the NYSE Composite. It features two developments worth exploring:

1. Island reversal
2. Bearish wedge

The NYSE Composite includes all stocks listed on the NYSE, about 1,900. Unlike the S&P 500 (NYSEArca: SPY) or Dow Jones (NYSEArca: DIA), the NYSE Composite actually reached a new all-time high on Thursday.

The new all-time high was short-lived and followed by a massive gap down the next morning.

Island Reversal

This gap lower created an island reversal. Some analysts consider island reversals indicative of a major trend change, but the Technical Analysis book by Edwards and Magee describes it as follows:

“The island pattern is not in itself of major significance, in the sense of denoting a long-term top or bottom, but it does as a rule send prices back for a complete retracement of the minor move which preceded it.”

It’s probably up to debate where the last minor move started, but at Friday’s low the NYSE Composite already touched minor support.

In addition, as Sunday’s Profit Radar Report pointed out, there’s an open chart gap, and the post-2009 bull market has filled every chart gap.

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Open gaps are like unfinished business, and with the gap closed this morning, the NYSE Composite doesn’t ‘have to’ move any higher.

Bearish Wedge

In fact, the NYSE Composite has formed a potentially bearish wedge formation (bold trend lines). It takes a break below the green trend line to activate lower targets, but last weeks island reversal throw-over top may be an early indication of an upcoming correction.

Trade Setup

Last week’s all-time high is important for the short term, and going short against it presents a low-risk trade setup with a favorable risk/reward ratio.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Is the Russell 2000 Forming a Bearish Wedge?

The Russell 2000 sports an interesting chart.

Here is what Wednesday’s (April 15) Profit Radar Report observed:

“The Russell 2000 rallied to a new all-time high today. The chart shows a wedge, which is generally considered a bearish formation. RSI did not confirm today’s high and MACD is barely positive (blue bubble). The 2-day RSI is short-term overbought at 96. The Russell 2000 also touched the upper Bollinger Band today.

History suggests a pullback, sooner or later. Aggressive investors may short the S&P 500 (NYSEArca: SPY) or Russell 2000 (NYSEArca: IWM) against today’s high.”

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Well, the Russell 2000 pullback happened sooner rather than later.

However, the Russell 2000 is still within the rising wedge formation (and above wedge support). There are two ways to draw wedge support (solid and dashed green line).

Notice also the open chart gap created by today’s massive gap down. Such chart gaps have a tendency to be closed – sooner or later.

In summary, while today’s drop comes at the right time to start the initial validation process of the bearish rising wedge, the Russell 2000 still needs a break below support (on increased volume) to unlock the potential for much lower targets.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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S&P 500 Trapped in Range – Why and How Long?

• S&P 500 in 2012: up 13.4%
• S&P 500 in 2013: up 29.6%
• S&P 500 in 2014: up 11.3%

S&P 500 YTD in 2015: up 1.6%

If there were such a thing as an investment time machine, we would skip the last five months or simply fast-forward over November, December, January, February, March and what we’ve seen thus far of April.

We could have taken a dirtnap in the spirit of: ‘the bear was hibernating, the bull too, and so could have been me and you.’

I guess after six years of gains (five of them double-digit), it’s kind of normal to see a period of stagnation. In fact, it probably should have been expected.

The voice of the bears has been nagging for years and bulls are ever-present. It’s about time bulls and bears share the limelight with whichever animal represents the boring middle (how about the sloth?).

According to chewed-out Wall Street wisdom, the market almost never goes up in a straight line … and that’s exactly what we’re getting right now.

The Profit Radar Report has been mentioning for months that the forces of supply and demand are basically in balance. There hasn’t been enough buying power to propel stocks higher, and not enough selling pressure to keep them down.

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For example, the March 29 Profit Radar Report observed that: “S&P 500 today is exactly where it was November 18, and there’s no indication that the up and down zig-zagging is coming to an end. In fact, there’s a real possibility the S&P is forming some sort of triangle.”

Triangle’s are notorious for keeping stocks range bound for weeks, even months. The April 8 Profit Radar Report featured this S&P 500 visual for a possible triangle (triangle boundary lines in purple).

The S&P has reached the upper boundary of the projected triangle, which is the ‘do or die’ level outlined in my prior S&P 500 forecast.

If the S&P is not strongly rejected by the upper triangle boundary, it will probably continue ‘triangling’ around and eventually break higher. Even if stocks break higher though, they may soon come back … perhaps to test the lower end of the range.

Seasonality is pointing higher, but there are two caveats with seasonality right now.

S&P 500 Seasonality – This is Not an Ordinary Year

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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