S&P 500 Abuses Popular Pattern to Fool Investors

It is rare that a particular stock market support level becomes as obvious as 2,040 for the S&P 500.

Since March 18, the S&P touched 2,040 +/- 13 times, and bounced every time.

As of 2,040 wasn’t already obvious enough, it also became the neckline of a head-and shoulders topping pattern that got a fair amount of attention.

You know something is suspiciously obvious when you read about it everywhere. As the small selection of headlines below shows, S&P 2,040 become a popular ‘make it or break it level.’

  • Investorplace: “S&P 500 Teetering on the Edge of a Breakdown” – The index closed just a fraction of a point from a serious technical violation. The importance of this line (2,040) can’t be overstated. – May 18
  • MarketWatch: “S&P 500 Nails the 2,040 Support ahead of the Fed” – May 18
  • Barron’s: “You shall not Pass: Stocks Gain as S&P 500 Holds 2,040” – May 18
  • TheStreet.com – “S&P Below 2,040 – Looks Like there’s more Selling to Come” – May 19
  • CNBC: “There’s been a lot of talk about the 2,040 level in the S&P 500, that is our key support.” – May 20

If It’s Too Obvious …

If it’s too obvious, it’s obviously wrong, at least this was the Profit Radar Report’s take. Below are brief excerpts from the May 15 and May 18 Profit Radar Report:

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

May 15: “Support around 2,040 has become pretty obvious, perhaps too obvious. There is two ways the market may deal with a too obvious setup: 1) By-pass support via a gap down open 2) Seesaw across support and take out stop loss orders before embarking upon the real move. The market may deliver some fakeout moves (or gaps) near the 2,040 zone, but once the fakeout moves/gaps are out of the way, we may get a setup.”

May 18: “Based on the importance of 2,040, we wouldn’t be surprise to see more ‘market shenanigans’ around 2,040.”

Technical analysis supported the notion of a seesaw across 2,040.

On one hand, there was a bearish divergence between the S&P 500 and two different breadth gauges shown below.

On the other hand, there was the potential for a bullish RSI divergence on the hourly chart.

The Profit Radar Report anticipated a break below 2,040 (due to the bearish divergence), but did not recommend to chase the down side, due to the propensity for a seesaw and the bounce-back potential suggested by the bullish RSI divergence.

Sometimes it’s just best to stand aside while the market tries to fool the crowded trade(s). Now, that the market has punished bulls with a stop-loss near 2,040 and bears who went short on a break below 2,040, it may be ready for its next move.

Resistance (and an open chart gap) is just around 2,065, and we know for sure where the next support is, or do we?

Continued S&P 500 analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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 Breaks Below Support

The May 11 Profit Radar Report featured the VIX:VXV ratio (click here for chart and more details) and concluded that: “Today’s S&P 500 reversal after closing the open chart gap neutralizes and reversed the bullish edge discussed Sunday. Potential near-term target: Below 2,040.”

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

As the chart below shows, 2,040+/- is important not only because it’s been tested ten times since April. It is also:

  • A long-term Fibonacci projection level
  • Short-term Fibonacci retracement level
  • Double trend channel support
  • Neckline of a potential head-and shoulders pattern

Yesterday’s Profit Radar Report pointed out internal deterioration and stated:

Price is masking internal weakness. Even though the S&P didn’t close at a new low, the % of S&P 500 stocks above their 50-day SMA dropped to the lowest level since February 19, and the NY Comp a/d line dipped to a 10-day low. According to Elliott Wave Theory, a notable drop (wave 3 down) could be on the horizon. Various other indicators contradict each other, but show a general bias towards lower prices (perhaps indicating a choppy stair-step decline). With or without prior bounce, the odds favor a drop below 2,040.”

The S&P 500 is now below key support. Regardless of the exact shape and scope of the decline, this puts the bears in the drivers seat until further notice (= break above resistance, or bullish divergence against support).

There is a real chance the S&P will continue to follow the projection featured in the April 13 Profit Radar Report, also published here.

One word of caution: The importance of the 2,040 level has become quite obvious. Mr. Market takes pleasure in fooling the obvious trade. We’ll be watching various breadth and sentiment indicators (and support around 2,020) even more closely for tell-tale signs of a ‘fool the crowd curveball.’

Continued S&P 500 analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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

How High Can Oil Go?

Crude oil prices almost doubled since the February low. How much higher can oil rally?

The February 21 Profit Radar Report stated that: “Seasonality is strongly bullish until late April. For anyone interested in trading oil, this is a tempting setup to go long.”

The April 24 Profit Radar Report added the following: “Based on EWT, more gains are likely, however bullish seasonality is starting to taper off. Sentiment is near neutral. Based on long-term EWT, a rally to 50+/- followed by a significant relapse (perhaps even below this year’s low) is a real possibility.”

The long-term chart shows why 50+ was the up side target given on April 24 (red long-term trend line + 20-month SMA).

The short-term chart provides some additional details:

  • Oil moved as high as 49.56 on Tuesday
  • Oil turned overbought on Tuesday (vertical red line)
  • Oil spiked above the shorter red trend line, but closed below it (bearish throw-over)
  • Oil was unable to overcome bold red trend line resistance

All of the above is at least near-term bearish. Although bullish seasonality will reassert itself in June, the trend is lower until double trend line resistance is broken, or bullish divergences emerge at support.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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

Volatility Ratio Shows Dangerous Complacency

At the end of last week we saw some excessive pessimism (reported here), now we are seeing signs of complacency.

The May 8 Profit Radar Report stated the following: “As long as the bullish RSI divergence and support near 2,040 hold, odds favor either a bounce or rally to new recovery highs. We will be watching the open S&P chart gap at 2,079.12. Once/if the gap is closed, we’ll have to determine if this bounce has legs (new recovery highs) or if it is just a small bounce within a deeper correction.”

The S&P 500 rallied and closed the open chart gap on Tuesday (May 10). This open gap was our minimum up side target, and the fact that the S&P turned lower immediately after reaching the target indicates persuasive selling pressure.

On the same day, the VIX:VXV ratio dropped to 0.79. Wednesday’s (May 11) Profit Radar Report explained what this means.

MW 2

 

The chart above plots the S&P 500 against the VIX:VXV ratio. The VIX measures implied volatility for the next 30 days, VXV for the next 90 days. Readings below 1 mean that option traders anticipate 90-day volatility to exceed 30-day volatility. Readings below 0.80 indicate extreme complacency towards short-term volatility. Yesterday’s reading was 0.79.

As the dashed red lines indicate, sub 0.80 readings have consistently led to a pullback, although the scope of any pullback varies. This indicator was the reason we did not want to chase yesterday’s spirited rally.

Today’s S&P 500 reversal after closing the open chart gap yesterday neutralizes (and reverses) the bullish edge discussed on Sunday.  The S&P remains in the chop-zone with 2,065 being the likely ‘line in the sand’ between short-term bullish and bearish moves.

Failure to move back above 2,065 favors further down side. Potential near-term target: below 2,040.”

Once the S&P reaches the initial down side target, we’ll evaluate our dashboard of indicators to see what’s next. Continued S&P 500 analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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

Some Investor Sentiment Indicators Show Excessive Pessimism

There hasn’t been a truly noteworthy investor sentiment extreme since the January/February lows, when the Profit Radar Report recommended buying.

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

Last week saw some unusual sentiment readings.

Sunday’s (May 8) Profit Radar Report published the chart below and pointed out the following:

Some measures of sentiment are in unusually bearish territory. Unusual considering that the S&P just traded only 1% away from its all-time high! Shown below are the % of bullish investors (polled by AAII) and the CBOE equity put/call ratio.

The put/call ratio doesn’t have a perfect track record, but as the dashed red lines show, high readings mark some sort of low more often than not.”

In addition to these ‘odd’ sentiment readings, various indexes reached support levels.

This constellation led to the summary offered by the same Profit Radar Report:

As long as the bullish RSI divergence and support near 2,040 hold, odds favor either a bounce or rally to new recovery highs. We will be watching the open S&P chart gap at 2,079.12. Once/if the gap is closed, we’ll have to determine if this bounce has legs (new recovery highs) or if it is just a small bounce within a deeper correction.”

The S&P 500 is within striking distance of the open chart gap (2,079.12), we we’ll have to evaluate if this bounce ‘has legs’ or not.

Continued S&P 500 analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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

Gold and Silver Bulls Risk Painful Whipsaw

Gold and silver have been on a tear, but there’s reason to be cautious. Here are some facts to consider before following the crowded trade:

Gold Update

Since late December 2015, when we anticipated a tradable low, gold has rallied as much as 25%. Commercial hedgers (considered the ‘smart money’) are now heavily selling into this rally.

The chart below was published as part of the April 24 Profit Radar Report update.

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

Shown is the price of gold along with the net exposure of commercial gold hedgers. Hedgers have racked up the largest short position since 2012.

The April 24 Profit Radar Report stated that: “Out of the three driving forces we monitor for gold (technicals, sentiment, seasonality), technicals look the most bullish. Sentiment says risk is elevated. Immediate up side potential is limited based on seasonality.”

The May 1 Profit Radar Report included the following update: “Gold moved above resistance at 1,272 and above this year’s high at 1,290. It is next to impossible to peg the termination point of strong momentum moves, such as in February and currently. 2-day RSI is overbought and sentiment remains bearish, so the next resistance zone at 1,310 – 1,320 is a candidate for a pause/reversal. More up side is possible, but when the tide turns, it is likely to turn quickly and burn latecomers.”

As the updated gold chart shows, gold reversed just below the 1,310 – 1,320 zone, but remains above support. What this means is discussed in the latest Profit Radar Report update.

Silver Update

The chart below (published via the April 20 Profit Radar Report) shows that commercial hedgers are even more bearish on silver.

The May 1 Profit Radar Report included the following update: “Commercial traders ramped up their silver short positions to the highest level in decades, 2-day RSI is overbought and seasonality is getting close to the most bearish period of the year. Next resistance is around 18.5. A move to around 18.5 along with some bearish divergences would create the potential for a nice short trade (ZSL is one ETF option).”

The updated chart below shows silver reacting to its overbought condition and rising red trend line, but reversing before reaching resistance at 18.5.

The extreme short positions of commercial hedgers and the most bearish seasonal pocket of the year should be a worry for silver bulls, but may set up a nice trade for trading opportunists.

Continued gold and silver analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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 Update – Two Cookies Now?

My worst fear when I first started analyzing markets and publishing my research was FOMO. Fear Of Missing Out … on the next big move.

This was reflected in my market forecasts, which were either full speed forward (prices will soar) or full speed reverse (market will crash).

True, this kind of mentality helped me peg the 2007 top, and the March 2009 and October 2011 bottoms, but it takes more than an ‘all or nothing’ approach to succeed at investing.

Today I rely on dozens of indicators that fall into one of four categories: 1) Supply & demand 2) Technical Analysis 3) Investor Sentiment 4) Seasonality & Cycles.

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

The result is a more balanced, comprehensive and potent signal, along with the realization that the market may be stuck in neutral for a while.

There are times when indicators conflict and essentially cancel each other out. More often than not, trading during such times is like forcing the round peg through the proverbial square hole.

On Wednesday, May 4, the S&P 500 dropped to 2,046, which was also the March 17 high. In essence, the S&P 500 hasn’t gone anywhere for the last 33 trading days.

Looking back, it now makes sense why our indicators haven’t given us a S&P 500 signal (and why the Profit Radar Report hasn’t recommended a S&P 500 trade) since March 17 (when we closed out the S&P 500 position bought at 1,828).

Not Laziness, but Patience

It’s almost been a month since the last complimentary S&P 500 update (April 11: S&P 500 Stuck in Resistance Mud). It’s not because I’ve gotten lazy, but there just hasn’t been much to update.

The concluding comment of the last April 11 S&P update was that: “Our indicators stopped providing a cohesive directional signal when the S&P first hit 2,040. In hindsight, this explains the trading range since. Unfortunately, there is still no cohesive directional signal.

This is a ‘one cookie now, or two cookies later’ market where patience tends to be rewarded. More often than not, this means it’s best to sit on the sidelines. We will consider buying at lower prices or (short) selling at higher prices.”

S&P 500 Projection

Based on what signals we had to work with, the April 13 Profit Radar Report featured the following projection along with this comment:

Support at 2,040 held and the S&P 500 moved higher today. Looks like the short-term bullish wave 4/wave 5 scenario discussed on Sunday is in play. This means, that the S&P 500 is likely to continue a bit higher, before embarking upon a deeper (but temporary) correction.

The Elliott Wave Theory labels along with its implications (yellow lines) are drawn on the daily chart. A move to 2,100 – 2,115 would make the chart look more ‘proportional.’ Unless all the bearish divergences are erased, we anticipate a promising setup to go short around 2,100 – 2,115.”

Thus far, the S&P topped and reversed at 2,111.05 on April 20. It is possible that the S&P is following the projected yellow path.

However, there is support around 2,040, and another rally to new recovery highs before a deeper correction is possible. With or without another rally, we are nearing a deeper correction … and a potential ‘two cookie reward.’

Continued S&P 500 analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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