Russell 2000 stuck between breadth thrust and death cross

Hitching a portfolio to small cap stocks has been a sure ticket for a rollercoaster ride.

We won’t even talk about the last two years of high volatility without any net progress. Just over the past month, the Russell 2000 went from a bullish breadth thrust to a ‘death cross.’

Will the death cross over-power the breadth thrust or vice versa?

Breadth thrust

What was the breadth thrust? From September 9 – 11, the Russell 2000 rallied more than 1% on three consecutive days. When coming from a 6-month low, that has happened only five other times over the past decade (see blue bars).

As the blue bars show, the Russell 2000 rallied strongly almost immediately every time. Despite the signal’s solid track record, the September 11 Profit Radar Report noted the over-bought condition against resistance (red line) and warned that: “The setup is not ideal for a buy signal.”

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Death cross

Only 16 days after the breadth thrust, the Russell 2000 and corresponding iShares Russell 2000 ETF (IMW) suffered a death cross.

The red bars highlight every death cross over the past ten years. Although I’m not a fan of the fear-mongering death cross label, 1-2 months after each death cross the Russell 2000 traded lower every time. The last two death crosses (11/13/2018 and 9/2/2015) were particularly unkind.

Trouble shooting

Why did the breadth thrust fail?

Because the Russell 2000 could not make it above resistance. In fact, not only the Russell 2000 ran into resistance, the S&P 500 and Dow Jones Transportation Average did too.

I published this triple index resistance chart in the September 15, Profit Radar Report and warned that:

“The S&P 500, Russell 2000 and Dow Jones Transportation Average are at an inflection point. While the S&P 500 remains below purple trend line resistance, we allow seasonality and cycles to pull stocks back down.”

Conclusion

The two diametrically opposed Russell 2000 signals discussed above illustrate a much larger conflict. Over a month ago (September 1, Profit Radar Report) I found a lot of conflict among indicators.

Some breadth measures were strong, some weak, short-term cycles were up, but longer-term cycles down, etc.). Usually when that happens, the market stays range bound.

I personally would like to see lower prices, and the Russell 2000 death cross supports that conclusion. However, there are a number of sentiment readings that may limit down side in terms of size of length.

Continued updates, projections, buy/sell 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 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.

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S&P 500 Update – Trading Range Breaks

Sunday’s (September 29) Profit Radar Report concluded that: “If 2,938 breaks, the S&P 500 may quickly drop to 2,890 and potentially 2,820.” On Tuesday the S&P closed at 2,938 and yesterday/today fell as low as 2,855.

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.

This was one of the easier short-term setups, but how does this breakdown fit into the bigger picture?

Bigger Picture

The September 15 Profit Radar Report featured the chart below, which showed that S&P 500, Russell 2000 and Dow Jones Transportation Average were at key resistance.

One major financial news website declined to publish the chart and story because “it doesn’t say much.” I politely disagreed, because the message – although not sensational – was profoundly simple and important:

Don’t buy stocks while three major indexes are below resistance and still have to prove themselves. Or, as the September 15 Profit Radar Report put it:

While below 3,045, we allow seasonality and cycles to pull stocks back down. A move below 2,945 is needed for lower targets though.”

Down-turn Confirmed?

Does the drop below 2,945 confirm a new down-turn?

We are getting close, but as mentioned in yesterday’s Profit Radar Report, we need another up/down sequence. How come?

The dashed blue lines below highlight recent directional moves. None of them (rallies and declines) unfolded in a discernable 5-wave pattern. According to Elliott Wave Theory, 5 wave moves identify the prevailing trend. The lack of 5-wave moves explains why the market has been range-bound rather then trending.

On a smaller scale, the decline from the September 19 high appears like only 3 waves, thus far. Another up/down sequence (waves 4 and 5) would make for a small 5-wave decline and increase the odds of a trend reversal (a projection of the ideal next move was published in yesterday’s Profit Radar Report).

Until that happens, we note that the S&P 500 is near support, getting over-sold and ready for a bounce (the up portion of the up/down sequence?).

There is another simple reason why I want to see a clear 5-wave move lower before getting more bearish: The August selloff triggered a number of sentiment extremes usually seen near a bottom, and the subsequent rally triggered a number or breadth and momentum signals usually indicative of further gains.

Continued updates, projections, buy/sell 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 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.

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Crowd Psychology: Bears Needed to Get Burned

The Profit Radar Report monitors dozens of indicators to compile a broad-based and educated forecast. All those indicators fall into one of the following four categories:

  • Supply & Demand (Liquidity)
  • Technical Analysis
  • Investor Sentiment (Crowd Psychology)
  • Seasonalities, Cycles & Patterns

The September 2 Profit Radar Report included a detailed analysis of investor sentiment (called the Sentiment Picture). Based on sentiment, the September 4 Profit Radar Report stated that: “A fakeout breakout would burn a lot of premature bears, and may be just what is needed to clear the air for another leg lower.”

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.

Below is a reprint of the entire Sentiment Picture:

August Sentiment Picture (Published September 2, 2019)

The July Sentiment Picture (published August 3) concluded that: “Short-term sentiment gauges are nearing a point where a bounce becomes likely. We’ve seen many bounces turn into spirited rallies (and this may happen again), but longer-term bullishness allows for additional losses after any bounce.”

The S&P 500 found a low the next day, but bounces (thus far) lacked escape velocity and remained within a trading range.

The following longer-term sentiment polls went from bullish to bearish (bearish considering how close the S&P 500 is to its recent all-time high):

  • National Association of Active Investment Managers (NAAIM)
  • Investors Intelligence (II)
  • American Association for Individual Investors (AAII)

The dash green arrows highlight when any of the above-mentioned polls showed similar readings over the past 56 months. Most of them occurred near a significant low.

Since inception of the AAII poll, sentiment (as measured by the AAII bull/bear ratio) was as bearish when the S&P 500 was within 5% of a 52-week high 9 other time (the only such instance in the 21st century was in April 2005). The worst return was 1 month later (S&P 500 down 44% of the time), the best return was 3, 6, and 12 month later (S&P 500 up every time).

According to Lipper, investors yanked more than $40 billion from equity funds over the past weeks (that’s 0.3% of total equity assets) and 2% over the past year. This is the biggest exodus out of stocks since 2016 and nearly as pronounced as in 2002. This is not a short-term timing tool, but strongly suggest that a deeper correction would be a buying opportunity.

The sentiment-based conclusion made last month (“longer-term bullishness allows for additional losses after any bounce”) has become less likely.

A change of character would have to occur for stocks to fall further despite a number of bearish (bearish relative to how close the S&P 500 is to its all-time high) sentiment gauges.

Short-term sentiment indicators are neutral.

Continued updates, projections, buy/sell 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 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.

Can the S&P 500 Suffer Another ‘Air Pocket Decline?’

The last S&P 500 update highlighted the bearish implications of trend line resistance and the ominous VIX wedge.

I reiterated the importance of this trend line in the July 28 Profit Radar Report when stating that: “We are looking at many indicators, but the purple trend line – boring as it may seem – is probably more helpful than other gauges at this point.”

The S&P 500 fell over 200 points after tagging purple trend line resistance (see ‘before and after’ charts below).

Obviously, the purple trend line worked, but will the S&P 500 tumble another few hundred points as implied by the expanding triangle pattern (wave E shown on left)?

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.

Here are a few other facts and indicators to help gauge the odds:

New Lows

On Monday, 249 NYSE-traded stocks fell to new 52-week lows. This is the highest reading of 2019. In fact, it’s very unusual for such high 52-week low numbers to occur so soon after the S&P 500 was at an all-time high. The blue lines in the chart below show other times when 52-week lows spiked above 240 when the S&P was within 10 trading days of a 52-week high. It wasn’t a good sign for stocks.

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Technicals

The S&P 500 is back above trend line resistance (now again support, tomorrow around 2,905). As long as trade remains above this green trend line, the rally can continue higher.

Next resistance is at 2,950 – 2,985.

Island Reversals

The term island reversal is often associated with tops but can also mark bottoms. It simple donates a number of candles at a price extreme separated by two gaps.

As outlined by the blue oval, the S&P 500 just staged an island reversal to the up side.

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As indicated by the blue lines below, similar island reversals occurred in August 2,015, December 2015, February 2016 and June 2016. The short-term performance was mixed, but long-term performance was positive.

Breadth

Monday’s Profit Radar Report stated that: “Today’s drop saw 87.87% of all stocks declining. This tends to be indicative of at least short-term lows. A bounce is likely.

The developing bounce delivered an 83.45% up day (83.45% of NYSE-traded stocks advanced) Thursday. The green lines in the chart below show that this has been positive 3 of the last 5 times it happened.

Summary

Purple trend line resistance has been validated by the S&Ps 200-point drop. It’s rare for indicators to foretell are massive drop, but the evidence allows for a continuous decline.

The S&P 500 will have to stay below resistance (2,985) and fall to new lows to start validating the bearish implications of the expanding triangle pattern discussed here.

Continued updates, projections, buy/sell 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 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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Legit or Counterfeit? Stock Market ‘Moment of Truth’ is Here

Is this rally legit or counterfeit? The ‘moment of truth’ is here, and we should soon find out.

How so?

I published the below S&P 500 chart in the June 2 Profit Radar Report and have been watching the purple projection ever since. The expanding purple lines outline a megaphone or expanding triangle pattern, with the upper ascending trend line marking natural resistance.

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.

Critics claim that trend lines like this are ‘technical voodoo,’ but the market provides the points, analysts like myself simply connect the dots (like painting by numbers).

Such trend lines are like traffic lights. A car can stop at any given moment, but it’s most likely to stop (and potentially U-turn) at a traffic light.

Rule of thumb

Since trend lines give the market a chance to prove itself, it’s generally best not to buy below trend line resistance (because the market has to prove itself by moving above) or to sell above resistance (because the market just proved it can move above and may continue higher).

What are the odds of a reversal?

The updated S&P 500 chart below includes the same expanding triangle (or megaphone) lines along with some other support/resistance levels and indicators.

The S&P 500 is within striking distance of trend line resistance. RSI-2 is almost over-bought, and RSI-35 is lagging.

In other words, the S&P is approaching the ‘traffic light’ with the gas tank approaching ‘E.’

The Dow Jones Industrial Average already tagged its megaphone line. If it moves above, and as long as it stays above, it’s prudent to allow for higher prices, although a number of indicators suggest an eventual relapse.

Seasonality

The beginning of July is usually bullish (with the first trading day of July having been up 84% of the time), but this bullish seasonality is now fading away. In fact, the second half of July and August tend to be tough for stocks.

Bearish VIX wedge

The VIX is carving out yet another wedge. The wedge is not necessarily an immediate sell signal for stocks, but a close above 14.50 is bullish for the VIX and likely bearish for stocks.

Summary 

The S&P 500 and Dow Jones Industrials Average are at a resistance zone that double as inflection zone (the S&P 500 resistance level is 0.5% higher than the corresponding DJIA level, so we should allow for at least a 0.5% margin).

A sustained break above resistance will likely unlock further gains, but failure to move or stay above resistance may be the beginning of another nasty 10-15% correction

Based on the weight of evidence, I believe the risk of a pullback near current levels is elevated.

Continued updates, projections, buy/sell 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 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.

5 ‘Keep it Simple’ Stock Charts and 1 Bearish Constellation

The rally from the June 3 low has created many bullish price and breadth patterns and studies (5 of them are discussed here). The market has followed through on them thus far.

However, the short-term Elliott Wave structure does not look bullish, and the long-term projection published in the June 2 Profit Radar Report (shown here) points to a serious speed bump.

In short, there is a measure of conflict between indicators. When that happens, I like to go back to the basics and keep it simple.

Resistance

The DJIA shows probably the most important resistance range to watch: around 27,300.

Support

The S&P 500 shows some important support levels to watch: around 2,910 and 2,875.

Short-term Trend Channel

The June 23 Profit Radar Report used this chart to simplify the short-term: “A break below channel support would unlock a pullback. The wave labels show the most bearish EWT-based option. It’s not ideal, but it seems more likely than other options.”

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.

Trend channel support failed the next day and unlocked the biggest pullback of June. It is possible to count the decline from June 21 as 5 waves, which cautions that the trend may have changed from up to down.

Leader Fatigue

The rally from the June low has been led by defensive sectors like consumer staples. Contrary to popular belief, such (defensive-led) rallies are statistically not doomed to fail.

However, the Consumer Staples Select Sector SPDR ETF (XLP) carved out a pattern with a lot of bearish potential. I recommended to go short at 59.07 on June 13. The stop-loss is now set at breakeven, which allows us to ‘play with house money.’

Overlap

Small cap stocks represented by the Russell 2000 ETF (IWM) are lagging. In fact, IWM fell below the June 5 high. If one wanted to count the June rally as 5 waves, June 5 would be wave 1, but yesterday price dropped below the June 5 high. This creates a bearish (wave 4 / wave 1) overlap (blue arrow) that’s not allowed and voids a short-term bullish Elliott Wave count.

Bearish Constellation

Not only small caps are lagging. The transportation and banking sector are too (see chart below).

Only two other times (July 1990 and July 1998) has there been such a big divergence between the S&P 500 and small caps, transportation, and banking. This is a small sample size, but it led to a rocky and negative performance over the next quarter.

Conclusion

Even during times where there is conflict among indicators, going back to the basics provides some general guidance.

It will take a sustained move above resistance to unlock higher targets, and a break below support to unlock lower targets.

Another big but temporary drop would certainly clear up the structure and provide a lot more certainty, but we’ll let the above levels indicate whether it will happen.

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.

Gold Update

Gold has been on fire! Up almost 10% over the past month.

I would be more thrilled about gold’s run if it hit my down side target first.

The March 3 Profit Radar Report featured this longer term projection for gold (yellow lines, chart below).

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 March 13 Profit Radar Report provided this shorter term roadmap and target levels for a buyable low. The blue down side target boxes where around 1,260 and 1,240.

We had a buy limit for gold futures at 1,265 and for the SPDR Gold Shares ETF (GLD) at 119. Unfortunately gold stopped just shy of 1,265 (and GLD before 119) before staging a strong rally.

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What’s Next?

The yellow projection shown in the March 3 Profit Radar Report assumed a triangle breakout followed by a relapse.

However, there is an alternate, more bullish path. Regardless, we wanted to buy gold because both scenarios pointed higher.

Now the question is whether to chase price or not? Short-term, gold is over-bought. But as long as trade remains above 1,350, trade can continue to grind higher (which would improve the odds of the more bullish path).

Continued updates and projections 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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