S&P 500 Analysis

A couple weeks ago, I declared 2,040 as target and ‘make it or break it’ zone (Why 2,040? Is explained here).

I realize this is a strong statement, and although the S&P 500 easily reached the 2,040 target, it appears like the ‘make it or break it’ zone was a non-event. Nevertheless, 2,040 actually did what it was supposed to do. How so?

First, 2,040 acted as price target. The target was reached.

The October 4 Profit Radar Report (PRR) proposed that: “If the S&P doesn’t turn around at 1,953, the odds increase for a push to 2,040.”

What does ‘make it or break it’ mean anyway?

The October 7 PRR explained that: “The rally from the September 29 low has been stronger than it should have been, and a sustained move above 2,040 would likely mean that the correction is over. A break above 2,040 could also validate a W-bottom formation, and significantly reduce the odds of another low in 2015.”

Second, 2,040 didn’t require a reaction, but market action around 2,040 would indicate whether the S&P 500 will break the August low (1,867) or not.

The S&P moved above 2,040, thereby diminishing the odds of another low dramatically. The S&P 500 made it. This doesn’t mean there won’t be a pullback.

In addition to price, we’ve also been focusing on market breadth. Price is important, but it’s not the only thing that matters.

To illustrate, an electric car can only deliver the full horsepower (or kilowatts) if the battery is charged. An empty, or near empty battery, won’t get the driver far, regardless of how many horses are under the hood.

We wanted to see how things look under the hood as the S&P approached (and surpassed 2,040). Is there enough horsepower and battery life left to move stocks higher?

At times, market breadth was quite weak (especially on Friday, October 23). However, there were no bearish divergences suggesting a pullback.

The October 18 PRR stated that: “A decisive move above 2,040 would unlock the next up side target around 2,080.”

It would be a stretch to call the move decisive, but 2,080 was reached nevertheless.

The hourly chart shows that the S&P 500 reached and eventually (after appropriate testing of resistance) exceeded all up side targets (blue ovals). There was a bearish divergence at yesterday’s high.

There is also trend channel resistance (going back to 2009) at 2,093 (increasing about 0.75 points per day).

It will now take a new RSI high and a move above 2,093 (adjusted for time) to unlock further up side targets. There is risk of a shallow pullback as long as the RSI divergence persists and trade remains below resistance.

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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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VIX Seasonality Approaching Key Inflection Point

Based on seasonality, there are two particularly important dates for VIX traders:

  • Early July
  • Early and late October

July marks the best VIX buying opportunity of the year.

October marks the best VIX selling opportunity of the year.

Our VIX seasonality chart is based on 25 years worth of daily closing price history.

The chart below compares VIX seasonality with actual 2014 VIX performance.

The major seasonal VIX turning points were spot on in 2014 (the Profit Radar Report pointed out both of them).

The second chart compares the 2015 year-to-date VIX with VIX seasonality.

The seasonal 2015 VIX low arrived a bit early (June 23 instead of July 2).

However, the June 18 Profit Radar Report observed that: “The VIX closed at 10.57 today, the lowest reading since February 26, 2007. Today’s close was 0.04 point below the lower Bollinger Band at 10.61, suggesting that the VIX is oversold. A close back above the lower Bollinger Band is generally considered a buy signal.”

The summer VIX spike occurred during the time of year where the VIX is expected to rise.

The actual VIX high, however, occurred before the October seasonal high. Based on seasonality, there should have been another VIX spike in October. There are still a few days left for the VIX to turn lower, but the August panic VIX high certainly won’t be exceeded in 2015.

Seasonality is pointing towards lower VIX readings until mid December.

However, I would be remiss not to mention that big outlier moves, like in August/September, may alter the ideal VIX path.

That’s why the Profit Radar Report augments seasonal research with technical and sentiment analysis.

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.

Black Swan Indicator at 25-year High

The CBOE SKEW index, commonly referred to as the ‘black swan’ indicator, just spiked to the highest level in the indicators 25-year history.

Is this as scary as it sounds?

What is the SKEW?

The SKEW is calculated by the Chicago Board Options Exchange (CBOE), the same exchange that publishes the VIX.

Like the VIX, the SKEW is calculated from prices of S&P 500 out-of-the-money options. The SKEW Index basically attempts to quantify the odds of a black swan event (or S&P 500 tail risk).

CBOE identifies a black swan event as a two or more standard deviation move below the mean.

According to the CBOE, the black swan risk is negligible at a reading of 100. At 115, the risk is 6%, and at a level of 135, the risk of a black swan event is 12%. On Thursday the SKEW was at 151.22.

What is a Two Standard Deviation (Black Swan) Event?

Perhaps the easiest way to understand a two standard deviation event is with the help of Bollinger Bands.

The common default setting of the upper and lower Bollinger Band is two standard deviations above or below the 20-day SMA. The current spread between the S&P 500 20-day SMA and the Bollinger Bands is around 85 points (4%).

How Accurate is the SKEW?

The chart below captures the SKEW’s track record since the beginning of 2007.

Here are a few things worth noting:

  1. The SKEW has been moving higher since 2008, and it has taken ever-higher extremes to trigger a market reaction. It stands to reason that any stock market pullback (or black swan event) will not be commensurate to the 25-year SKEW extreme.
  2. The S&P 500 almost always reacts to SKEW extremes. Either it 1) pulls back almost instantly or 2) eventually gives back several days/weeks worth of gains.

Context is Key

The SKEW extreme appeared just as the S&P 500 is approaching an important inflection zone. The September 13 Profit Radar Report stated:

There is an open chart gap at 2,035.73. I am almost certain this gap will be filled (either during a wave 4 bounce or the subsequent rally). Depending on when we get there, 2,040 is an obvious candidate for a setup. It may be too obvious and subject to some sort of whipsaw, but 2,040 is the resistance level to watch.”

Best on the SKEW, there’s elevated risk of an upcoming pullback, especially around S&P 2,040.

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.

 

Gold Overcomes 3-year Old Price Barrier

After a number of failed attempts, gold surpassed red trend line resistance going back to October 2011.

The weekly bar chart below highlights this fledgling technical breakout.

It also shows that gold bounced from just above triple support (green trend line, green bar, black trend channel) on July 24, 2015. This is right about where we anticipated to see a solid buying opportunity.

The July 26 Profit Radar Report observed that: “The daily bar chart shows a bullish reversal candle at Friday’s low. Although trade didn’t quite dip to the 1,070 level we set as buy trigger, Friday’s intraday reversal satisfies the basic requirements for a tradeable low. Odds favor higher prices with a target above 1,300.”

Although gold missed our buy limit at 1,070 (by less than 6 points), we ended up buying gold futures (or GLD) at 1,100 (GLD: 105.50) on July 27.

Gold’s move above trend line resistance is another step towards our up side target. Next big resistance will be around 1,230 (I suppose we’ll get there before 2015 is over).

Seasonality allows for weakness in October. Sentiment is not nearly as bearish (bullish for gold) as it was in July, but it allows for further gains.

With trade above the 3-year trend line, it now turns from resistance to support. Further gains are likely as long as gold remains above support.

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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.

S&P 500 – New Highs or New Lows?

On September 29, the S&P 500 fell as low as 1,872. The following headlines popped up on the same day:

  • “We are in a bear market: Carter Worth” – CNBC
  • “Credit Suisse: There’s a growing treat of a major top in the S&P 500” – Bloomberg
  • “Despite rally, stocks won’t end higher in 2015: Blitzer” – CNBC
  • “Carl Icahn says would ‘keep cash’ given market risks” – CNBC

The S&P 500 soared 150 points since the September 29 low.

Based on our dashboard of indicators, we’ve been waiting for a buying opportunity.

The September 30 Profit Radar Report reconfirmed this outlook, and expressed our biggest concern:

The market has been tracking our projections very well, too well. I get suspicious when this happens. Since we are waiting for an eventual buying opportunity, our biggest concern is the market moving higher without us ‘on board.’ Key short-term resistance is 1,953.”

The October 4 Profit Radar Report pointed out: “If the S&P doesn’t turn around at 1,953, the odds increase for a push to 2,040+/-.”

2,040+/- is our bull/bear line in the sand. Trade above 2,040 could lead to new highs, while trade below 2,040 preserves the ideal scenario of new lows.

Why 2,040+/-?

2,040 was support for a 6-month trading range. This support is now resistance.

2,040 is the bottom of an important long-term trend line

There’s an open chart gap at 2,035. The September 13 Profit Radar Report wrote that: “There is an open chart gap at 2,035.73. I am almost certain this gap will be filled (either during a wave 4 bounce or the subsequent rally). Depending on when we get there, 2,040 is an obvious candidate for a setup. It may be too obvious and subject to some sort of whipsaw, but 2,040 is the resistance level to watch.”

Sustained trade above 2,030 could validate a W-bottom formation

As mentioned on September 13, 2,040 is a pretty obvious resistance level on the S&P chart, and therefore may be subject to whipsaw market action (if it’s too obvious, it’s obviously …?).

Because of the above-mentioned reason, the whole 2,040 region will be important, not just 2,040.

Furthermore, not just the price shown on the chart will matter, but also the market’s underlying condition. Is there hidden strength, or not? Is buying pressure overpowering selling, or is the advance anemic and susceptible to a relapse?

In other words, breath, strength and liquidity matter, and may give us clues that plain chart analysis won’t provide.

The Profit Radar Report monitors various breadth, strength and liquidity indicators to get a detailed look at what’s going on ‘under the hood.’

Buckle up. It’s gonna be a rocky ride.

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.