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.

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Transports are Fueling Dow Theory Woes

The Dow Jones Industrial Average (DJIA) is at all-time highs, while the Dow Jones Transportation Average (DJT) just lost 6.6% and briefly dipped below its 200-day SMA.

The July 16 Profit Radar Report featured the follow DJT chart and commentary:

The Dow Jones Transportation Average (DJT) just recently confirmed the new DJIA highs. According to Dow Theory, its good news when industrials (DJIA) and transports (DJT) fire on all cylinders (because goods produced by factories are moving off the shelves instead of accumulating as inventory).

However, the chart for DJT is looking dangerous. Fibonacci resistance (going back to 2002) is at 9,951, the center line of trend channel resistance is at 9,850, the rally since the May low is looking like a (eventually) bearish rising wedge, there is a glaring bearish RSI divergence, and it is possible to count a complete 5-wave move according to Elliott Wave Theory.

DJT 10,000 is about 2.5% away, and the odds of DJT running into serious trouble between now and 10,000 are highly elevated.

It is quite possible (even likely) that the DJT will start to head lower in the coming weeks/month while the DJIA will set a new high later on in 2017, setting up a bearish divergence between the DJIA and DJT.”

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

Below is an updated version of the same chart.

The DJT is now at trend channel support (and the 200-day SMA). In addition, the decline appears to have unfolded in 5 waves. This means:

1) A bounce is next

2) The bounce will be followed by further losses

Fast-forwarding to late 2017 or early 2018, any new DJIA all-time highs are unlikely to be confirmed by DJT, setting up a bearish Dow Theory divergence.

The iShares Transportation Average ETF (IYT) is the only ETF linked to the DJT. There is no short DJT ETF. IYT put options are one of few ways to bet on a falling DJT (once this bounce is complete).

Continued stock market analysis along with up-and down side targets and trading 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, and 24.52% in 2015.

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Will the Dow’s Record Streak End with a Bang?

On Monday, February 27, the Dow Jones Industrial Average (DJIA) recorded its 12th consecutive up day. This is the second longest such streak since 1930 (the longest run was 13 days in January 1987).

The S&P 500 hasn’t dropped more than 1% a day for 104 trading days.

The record gains haven’t gone unnoticed. Many sentiment indicators are in uber-bullish (bearish for stocks territory).

The investment advisors and newsletter-writing colleagues polled by Investors Intelligence are more bullish (63.10%) now than at any other time since 1987. This tumultuous span includes the 2000 tech bubble and the 2007 leverage bubble tops.

The Relative Strength Index (RSI-14) finished February above 70 on the daily, weekly and monthly chart.

However, trading volume has been suspiciously low. Despite solid gains, less than 40% of NYSE volume has been flowing into advancing stocks.

History’s Most Important Lesson

Record optimism and strong gains on low volume … anyone with a bearish disposition could (ab)use those facts to paint a pretty bearish picture.

However, history cautions against that.

Several times throughout the post-2009 bull market – and most recently on December 14, 2016 – the Profit Radar Report pointed out that historically stocks rarely ever top on peak momentum.

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

The February all-time highs occurred on peak momentum.

The green vertical lines (chart below) mark previous peak momentum (based on RSI-35) highs. None of them market major tops.

The blue lines mark strong rallies to new all-time highs on low volume (less than 40% of NYSE volume flowing into advancing stocks).

Most of those instances were followed by corrective pullbacks, but nothing worse.

Expect the Abnormal

Sometimes stocks simply push the envelope and plow higher than anyone thought possible (the S&P 500 already surpassed the 2017 year-end targets analysts set in December).

The August 28, 2016 Profit Radar Report outlined why to expect such ‘abnormal’ gains.

1) Bullish breadth thrust off the February and June 2016 lows

2) Bullish Elliot Wave Theory patterns

Although the risk of a temporary pullback is increasing, the body of evidence points towards further gains in the months to come.

The historic Dow Jones winning streak is unlikely to be followed by a “thud”.  Any correction should be viewed as a buying opportunity.

Visual forward projections (published back in August, but still valid today) and up side targets are available here: S&P 500 Update – Expect the Abnormal. In fact, the up side targets given in August have been reached. Now what? Here is the latest update: S&P 500 Reaches Up Side Target – Now What?

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.

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Did the Dow Jones Just Invalidate the Ominous Rounding Top Formation?

There’s been a lot of talk about a super bearish long-term formation called a rounding top.

The bearish rounding top interpreation has been circulating for months, but particularly gathered steam near the January/February lows, when even more market pundits jumped on the already crowded bear market wagon.

Below is just one of many rounding top articles. This one was featured in Barron’s on March 2, 2016. It points out two bearish patterns:

  1. Rounding top
  2. Low trading volume

* * * * * * * * * *

* * * * * * * * * *

Rounding Top – R.I.P.?

The Profit Radar Report never even mentioned the rounding top pattern in its analysis, for two reasons:

  1. Everyone was talking about it. The market likes to surprise investors not fulfill their expectations.
  2. According to many ‘pros’, a rounding top sent stocks into a tailspin in 2000 and 2007. It would have been highly unlikely for the market to deliver the same pattern three times in a row.

Contrary to this bearish doom-and-gloom pattern, the February 11 Profit Radar Report recommended to buy and issued an up side target of 2,040 (S&P 500).

What’s the status of the rounding top pattern?

The chart below shows that the Dow Jones Industrials Average (DJIA) moved above the rounding top resistance.

On March 19, Chip Anderson with Stockcharts.com declared the rounding top pattern R.I.P.

Low Volume Doesn’t Matter

The Barron’s article mentioned the bearish implications of low trading volume.

Technical analysis 101 teaches that low volume rallies are doomed to fail, but the fact is that every single rally leg since the 2009 market low has been on low volume.

My analysis published here on MarketWatch shows that low trading volume is basically meaningless. In fact, as the article shows, volume patterns actually helped us predict some of the mini-meltups that ultimately carried the S&P 500 above 2,040.

More Important than the Rounding Top

More pertinent than the rounding top resistance is the red trend line resistance that connects all recent DJIA spikes.

Furthermore, prior to yesterday’s small loss, the DJIA logged seven consecutive daily gains. This rally pushed every single DJIA component above its 10, 20 and 50-day SMA.

Historically, this is a sign of long-term strength, but tends to result in short-term weakness (to digest the overbought condition). In summary, there’s reason to expect a pullback, but such weakness may be more temporary than many anticipate.

Continuous stock market updates will be available via the Profit Radar Report.

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, 17.59% in 2014, and 24.52% in 2015.

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Tell Tale Signs from the Dow Jones Averages

Sunday’s Profit Radar Report featured the following charts and analysis for the Dow Jones Averages:

Dow Jones Industrial Average (DJI):

The Dow Jones Industrial Average (DJI) appears to offer the most clues at this moment. The weekly bar chart shows double support (trend line and prior September high) right around 17,350 – 17,300. The 20-month SMA is at 17,198. This is not must hold support, but it’s a general zone worth watching for a potential bounce.”

Dow Jones Transportation Average (DJT):

The Dow Jones Transportation Average (DJT) broke above double trend line resistance (green circle) on July 29, but didn’t produce the ‘escape velocity’ needed to continue moving higher. In fact, the DJT has now returned to its original breakout trend line (blue circle). This kind of back test often serves of launch pad for the next spike. We’ve seen a few failures of a similar launch pad lately, but this is still one of the more reliable technical patterns.”

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Summary:

We don’t want to ignore some credible indicators pointing towards a correction, but based on sentiment (in particular the equity put/call ratio), it is hard to believe that stocks will drop hard. A bounce is more likely.”

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.

 

This is the First Time the Dow Jones has Done This in 105 Years

Assuming this hasn’t put you asleep, you know that the Dow Jones (NYSEArca: DIA) has been taking a giant dirt nap.

In fact, by one measure, it’s the longest dirt nap since 1910, and soon to be the longest ever.

The Dow Jones has not recorded a 1-month high or low (based on closing prices) for 42 days.

According to Lyons Fund Management, the longest such stretch dates back to 1910 and lasted 45 days.

In itself, this is remarkable, but the next stat makes it even more remarkable.

For the past 26 trading days, the Dow has been stuck in a 2% trading range (based on closing prices). This is one of the tightest ranges of the last 25 years, and the tightest range without a new 1-month high or low ever.

 

If you read the Profit Radar Report, this range comes as no big surprise. Back on March 29, the Profit Radar Report observed that: “S&P 500 today is exactly where it was November 18, and there’s no indication that the up and down zig-zagging is coming to an end.

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.

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Is the Dow Jones Transportation Average Forming a Bull Flag?

The Dow Jones Transportation Average (DJT) has been on fire, since late 2012.

A V-shaped correction, and a prolonged period of sideways trading interrupted the parabolic up trend and there’s been no net gain since September 2014.

Trading action since the November 28 all-time high has been contained by a parallel channel, that looks like a flag.

In fact, the DJT may have formed a bullish flag formation.

A bull flag is described as a consolidation period that interrupts a sharp, almost vertical rally. The consolidation range is defined by a parallel channel with a slant to the down side, and tends to separate two halves of a steep rally.

A break above the upper boundary (around 9,150) would be the first step of a bullish breakout, with a measured up side target around 10,000.

Buying against support (around 8,500) is a low-risk buying opportunity to get in on the ground floor. It’s low-risk because the nearby support level provides a clear point of ruin (stop-loss).

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A break below 8,450 would void the bull flag and allow for much lower prices.

I doubt there’s enough buying power to lift the DJT to 10,000, but trade around 8,500 (or breakout above 9,150) offers some low-risk setups.

The iShares Transportation Average ETF (NYSEArca: IYT) is the most widely traded transportation sector ETF.

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.