S&P 500 at ‘Make it or Break it’ Level

The S&P 500 has reached a seemingly important ‘make it or brake it’ zone. Here’s why:

For the last couple of weeks, I’ve been following two scenarios:

1) Washout decline with target of 2,500 – 2,500 (purple arrow, chart below)
2) Accelerating wave 3 lower (yellow arrow, chart below)

The two scenarios were first introduced via the December 9 Profit Radar Report, which stated that:

A brief drop below 2,618 (with next support at 2,607, 2,550 and perhaps as low as 2,500) followed by a quick recovery would preserve the bullish divergences and suggest sellers got ‘washed out’ and a year-end rally is underway. Persistent trade below 2,618 and 2,607 means we need to allow for more weakness.”

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.

Both scenario had the same outcome, mentioned in the December 12 Profit Radar Report: “We assume with a high degree of certainty that this rally will ultimately re-lapse to new lows. The question is not if but when.”

Although I amended the ideal down side target for scenario #1 to 2,478 (December 16 Profit Radar Report), the decline has gone a bit further than I initially thought.

Nevertheless, up until now, both scenarios pointed in the same direction. That’s no longer the case.

A (sustained) break below the blue trend channel and Fibonacci support (both around 2,478) will tilt the odds significantly towards scenario #2, which could see the S&P drop another 100 – 300 points.

Assessing the Odds

Based on Elliott Wave Theory, the odds are 50/50.

Statistically, the odds of a breakdown are less than 15%. How so?

The red graph below shows the average path of the past 10 bear markets (as defined by Ned Davis Research). On average, the S&P does not fall more than 16% during the average bear market (this average includes the 2000 and 2008 bear markets).

Today’s performance was unique and remarkable in many ways:

  • S&P 500 closed down 1.54%, but VIX was unchanged
    Since 1992, VIX was unchanged or lower when the S&P was down more than 1% only 32 other times. Over the next month, the S&P rose 81% of the time, on average 2.4%
  • S&P 500 turned a >1.5% gain into a >1.5% loss
    Since 1982, the S&P turned a >1.5% gain into a >1.5% loss 7 other times. 1 week, and 1 month later it was up 86% of the time.
  • S&P 500 lost > 1.5% on an FOMC day
    Since 1996, the S&P lost >1.5% on a FOMC day 5 other times. 1 week later, it was up 60% of the time, 1 month later it was up 80% of the time (datasource: SentimenTrader).

Summary

The S&P 500 just suffered the worst start to a December since 1931. Although statistical odds favor a bounce from here, Elliott Wave Theory cautions that a break below 2,478 can unleash another wave of selling.

Continued updates 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 evaluation 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 e-Newsletter to get actionable ETF trade ideas delivered for free.

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Crude Oil Could Fall Another 50%

Crude oil prices dropped 38% since October 3. The June 20, 2018 Profit Radar Report published the following analysis and projections:

The two charts below show two possible longer-term Elliott Wave Theory counts:

  • The first one implies that a major top is in.
  • The second one implies that we’ll see another high before a major top.”

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.

The November 25 Profit Radar Report stated that trade may bounce from the descending green support trend line, but warned that:

The 2008 and 2014 decline caution that failure to bounce despite being over-sold can lead to continued losses. In fact, the chart below shows that the chart pattern of 2018 looks similar (perhaps a smaller fractal) to the chart pattern of 2011 – 2015 (blue boxes).”

Oil prices did bounce from the green support line, but it failed to get above 55, which according to the December 9 Profit Radar Report was needed for a bigger snap back rally.

Price is once again nearing over-sold, and a bullish divergence exists, but betting on bounces in a bear market takes impeccable timing.

Continued updates 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 evaluation 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 e-Newsletter to get actionable ETF trade ideas delivered for free.

S&P 500: Does Low Fear Portend High Risk?

Below is a free excerpt of the December 9, Profit Radar Report, which takes a detailed look at various sentiment, liquidity, breadth and moment indicators to gauge the down side risk. Since this update is published out of context with all the other updates, an additional “Summary” section is provided at the end of the December 9 Profit Radar Report to provide bigger picture context.

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.

                                       * * * * * December 9, 2018 Profit Radar Report * * * * *

The S&P 500 closed at 2,633.08 on Friday. That’s only 1.99 points higher than the November 23 low. If the S&P would have closed at a new low, it would have been interesting to see if there are any bullish divergences.

Well, futures are down 20+ points in Sunday’s trading, so let’s just pretend the S&P closed at new lows, and look for potential divergences anyway. The blue box highlights the price action since the September high.

  • RSI-35 did not confirm the ‘new low’ (RSI-2 is near over-sold)
  • The cumulative NY Composite a/d lines did not confirm
  • The NY Composite a/d ratio did not confirm
  • The percentage of stocks below their 50-day SMA did not confirm

How about different sentiment gauges?

  • The VIX is below its October extreme
  • The VIX/VIX3M ratio is below its October extreme
  • The CBOE equity put/call ratio is at the same level
  • Contango is above its October extreme
  • The SKEW carved out a new low
  • The CBOE equity put/call ratio (5-day SMA) is below its November extreme
  • NAAIM equity exposure is about even, but above its November extreme
  • Bullish Advisors polled by II are less bearish than last week
  • Bullish Investors polled by AAII are less bearish than last week

All the above indicators show that there is little panic, certainly less panic than in October or November. This could be viewed as either 1) a bullish divergence or 2) there is enough room for the market to fall further.

Based on Elliott Wave Theory, the S&P 500 could be 1) nearing the exhaustion point of this down leg, or 2) be in a strong and sustained wave 3 lower (S&P could still rally towards or into 2,700s before next down move). The summary section below discusses which scenario is more likely.

Another attention grabber was last week’s ‘death cross,’ where the 50-day SMA fell below the 200-day SMA.

The last time death cross that received a lot of attention was in May 2016, when the 50-week SMA fell below the 100-week SMA. This was supposed to be an ‘irrefutable sell signal,’ but ultimately turned out to be one of the best buying opportunities ever.

At best, SMA crossovers have a spotty track record, and we don’t base our anlysis on such lagging indicators. For those interested, the arrows in the weekly chart below mark all bearish and bullish 200/50-day SMA crosses over the past 20 years (weekly chart shown to capture longer-term history of signals).

Shown below are various support levels that may help navigate the coming weeks, and answer the question posed above: What’ next? Sustained move lower, or quick wash out decline followed by snap-back rally?

  • 2,618: Black trend channel
  • 2,607: Wave C = 61.8% wave A
  • 2,550: Wave C = 78.6% wave A
  • 2,500: Fibonacci support going back to 2011
  • 2,478: Wave C = 100% wave A
  • 2,385: Trend line support going back to 1998
  • 2,280: Trend channel support going back to 2009

The Russell 2000 IWM is in the general green support range, with trend channel support at 143.25 and 141.30. A bounce from 143.25 – 141.30 seems likely, but sustained trade below the lower trend channel would unlock lower targets.

The Nasdaq-100 QQQ has a general range of support at 161 – 157. A break below, would likely lead to a retest of the February/March lows at 154-150.

Summary: The above analysis was based on Friday’s closing price. The S&P 500 futures chart below includes Sunday’s 20+ point drop. Trade is right around black trend channel support. Anytime prices reaches support, odds of a bounce increase.

Based on the Elliott Wave Theory structure, we are trying to figure out whether we are nearing the end of this down leg (with a potential wash out decline), or if trade will accelerate lower (as a wave 3 would).

A brief drop (1-3 days) below 2,618 (with next support at 2,607, 2,550 and perhaps as low as 2,500) followed by a quick recovery would preserve the bullish divergences and suggest sellers got ‘washed out’ and a year-end rally is underway.

Persistent trade below 2,618 and 2,607 means we need to allow for more weakness.

We will take a stab at going long (only with a small amount as this correction may carve out lower lows eventually) if the S&P 500 drops below 2,607 and subsequently rallies above 2,620 (stop-loss to be set at that day’s low). The SPY buy level is thus linked to the S&P 500 (approximate corresponding SPY levels: buy on drop below 261 followed by move above 262.10 with stop-loss at day’s low).

The very first graph of today’s update (S&P 500 in 2011 – blue box) illustrates what a wash out decline may look like.

                                        * * * * * December 9, 2018 Profit Radar Report * * * * *

SUMMARY: The lack of fear, expressed by various ‘bullish divergences,’ is likely to result in a short-term bounce. Back in September, we expected a correction toward 2,400, and that seems still likely (longer-ter S&P 500 outlook available here). A drop toward 2,400 (or at least below 2,500), would probably trigger the kind of ‘panic readings’ commensurate with a more significant bottom.

Continued updates 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 evaluation 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 e-Newsletter to get actionable ETF trade ideas delivered for free.

Is the Inverted Yield Curve a Bear Market Signal

Bloomberg just called the inverted yield curve the ‘harbinger of doom.” Is this a fact or fear mongering?

What is an inverted yield curve?

In the investment world, there is generally a strong correlation between maturity and yield. Longer-term maturities pay more interest than shorter-term maturities.

For example, 10-year Treasuries pay more interest than 2-year Treasuries. Since this happens most of the time, this condition is called a normal yield curve (blue graph).

But, we live in interesting times, and the yield curve is about to invert (red graph). This means longer-term maturities actually pay less than shorter-term maturities.

Harbinger of doom?

In fact, the short end of the yield curve – 5-year compared to 3-year (5/3) – has already inverted, which means that 3-year maturities actually pay more interest than 5-year maturities.

This has happened five other times since 1970 (red arrows on chart below mark occurrences since 1976). Only in 1973 did it coincide with a market top. The other four times, it took a minimum of two years before the next big correction.

The chart below plots the S&P 500 against a more popular yield curve, which compares the 10-and 2-year yields. The spread is currently only 0.11%, and it’s threatening to fall below zero for the first time since 2007.

The red bars mark all prior times when the 10/2 yield curve inverted. Although it led to bear markets in 2000 and 2005, it was not a consistent ‘harbinger of doom’ in the 20th century.

It’s also worth mentioned that the S&P 500 was down more than 11% before the yield curve inverted.

Conclusion

The facts show that using an inverted yield curve – 10/2 or 5/3 doesn’t matter – as a bear market signal is at best inaccurate, and at worst misleading.

However, and that’s a big however, that doesn’t mean that stocks won’t slip into a bear market. There are other reasons why stocks were ‘supposed to’ tumble.

My down side targets, published on September 3 (when the S&P traded around 2,900) via the Profit Radar Report, ranged from 2,575 – 2,289. That down side target was provided before the yield curve inverted.

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.

Continued updates are provided 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 evaluation 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 e-Newsletter to get actionable ETF trade ideas delivered for free.