S&P 500 Update: Bullish Triangle vs Bearish Divergences

The S&P 500 is in the midst of a tug of war between a bullish triangle break out and bearish divergences. Who will win, bulls or bears?

Bullish Triangle

The weekly S&P 500 chart below illustrates the bullish triangle potential. Triangle resistance (now support) is around 2,800. The measured target is calculated by projecting the maximum depth to the up side (dashed green arrows).

Thus far the S&P has held above 2,800, which is the first step towards confirming the triangle. Yet, there is risk of a fake out break out. How so?

Bearish Divergences 

The S&P 500 closed at the highest level since January 29, but underlying breadth has been weaker than price leads us to believe.

The red bar shows that my favorite liquidity indicators (dubbed ‘secret sauce’, more details available here) failed to confirm the new recovery highs.

Admittedly, the bearish divergences could be erased by one strong day, but while alive, risk is elevated.

Bearish Divergences in Context with Technical Analysis

The July 15 Profit Radar Report stated that: “The S&P 500 is at the bottom end of the 2,800 – 2,850 zone, which is filled with resistance levels and open chart gaps. Resistance is at 2,808 (January 16 high), 2,830 (combination of two long-term Fibonacci projection levels), 2,839 (January 31 high), and 2,873 (January 26 high). Chart gaps (which act as magnets) are at 2,812.70 and 2,851.48.”

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The gap at 2,812.70 was closed on July 17. On July 25 the S&P overcome resistance at 2,830 and almost closed the open gap at 2,851.48.

Short-term Outlook

Further gains are possible while above 2,830 (and 2,800), but bearish divergences (while they exist) suggest the risk is elevated.

Long-term Outlook

The longer-term S&P 500 outlook is discussed here

Continued updates are available via the Profit Radar Report.

BONUS CHART

The chart below shows the bearish divergences leading up to the Nasdaq-100 QQQ top. The left portion shows the projection featured in the July 15 Profit Radar Report, the right portion includes updated price (as of yesterday’s close, before Facebook hit the fan). Bottom line, risk is elevated while trade is below resistance (red line @ 181.80 is Fibonacci projection resistance going back to 2002 low)

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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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As mentioned in part I of “How to Outsmart a Choppy, Range-bound Market” (published on March 27), we anticipated a rollercoaster-like stock market.

Our strategy was to look for low-risk opportunities in certain industry sectors.

The April 24 Profit Radar Report stated the following:

“The S&P 500 has reached a point where a bounce is likely. It’s possible that the bounce may morph into the next bigger rally. We would prefer to see even lower prices (the lower, the better the risk/reward), but we’re not certain if our wish will become reality.

We’ve been here before (February 8, April 2). Both times the S&P rallied … and eventually pulled back again. In February we bought XLU as a lower-risk bet on equities. Now XLP sports an interesting setup.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Low-Risk Sector Trades

The Utility Select Sector SPDR ETF (XLU) and Consumer Staples Select Sector SPDR ETF (XLP) were over-sold and over-hated at the time. In addition they were trading against support with bullish divergences. And, paying some of the best dividends in the business didn’t hurt.

We bought XLU on February 12, and sold XLU on April 6 for a 6.16% gain.

We bought XLP on April 25, and sold XLP on May 1 at breakeven.

We again bought XLP on May 31, and sold XLP on July 10 for a 5.50% gain (yes, sometimes it may take two attempts to get it right).

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At no time did XLU or XLP fall below our purchase price, and both trades offered a 11.66% (including dividends) absolutely no risk, no stress return.

The Profit Radar Report continuously looks for low-risk trade opportunities, which includes stocks, gold, silver, oil, currencies. Continued updates and recommendations are 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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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

Crude Oil Update

As crude oil has been nearing the top of its trend channel, we’ve been looking for low-risk opportunities to short oil.

The proximity to trend channel resistance is not the only reason for our bearish disposition however.

Investors have become increasingly more bullish on oil, and trade seems to be nearing the end of a wave 4 rally (according to Elliott Wave Theory).

Waves 4 are choppy and unpredictable. In fact, this wave 4 has gone on further than we expected.

In an attempt to provide some clarity, the Profit Radar Report published the chart below on June 24.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Based on this interpretation of the wave structure, oil needed one more rally above 75 before a massive decline.

The July 1 Profit Radar Report stated that:

“This is another window of opportunity for oil to turn lower, however, another strong close would likely erase the short-term RSI-35 and on balance volume divergence. A quick spike to 75 followed by an intraday reversal would be a picture perfect beginning of a reversal with significant down side potential (see June 20 PRR).

Not all signals are alligned for a good sell signal, but it’s worth taking a stab.

We will short crude oil if it moves above 75 on Monday or Tuesday or short the United States Oil Fund (USO) if it moves above 15.20 on Monday or Tuesday.”

On Tuesday, July 3, crude oil briefly spiked above 75 (USO above 15.20) before reversing lower.

As seen on the weekly chart, there’s another strong resistance cluster just below 80. We can’t yet rule out a move to this level.

For now we got an excellent low-risk entry point to go short, and as long as trade remains below Fibonacci resistance at 72.55, we are looking for lower prices (next support: 69.50). Continued updates for oil, gold, silver, US dollar and stocks are 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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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