I Spy … An Intriguing NYSE Composite Chart

Perhaps the most fascinating chart right now is that of the NYSE Composite. It features two developments worth exploring:

  1. Island reversal
  2. Bearish wedge

The NYSE Composite includes all stocks listed on the NYSE, about 1,900. Unlike the S&P 500 (NYSEArca: SPY) or Dow Jones (NYSEArca: DIA), the NYSE Composite actually reached a new all-time high on Thursday.

The new all-time high was short-lived and followed by a massive gap down the next morning.

Island Reversal

This gap lower created an island reversal. Some analysts consider island reversals indicative of a major trend change, but the Technical Analysis book by Edwards and Magee describes it as follows:

“The island pattern is not in itself of major significance, in the sense of denoting a long-term top or bottom, but it does as a rule send prices back for a complete retracement of the minor move which preceded it.”

It’s probably up to debate where the last minor move started, but at Friday’s low the NYSE Composite already touched minor support.

In addition, as Sunday’s Profit Radar Report pointed out, there’s an open chart gap, and the post-2009 bull market has filled every chart gap.

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Open gaps are like unfinished business, and with the gap closed this morning, the NYSE Composite doesn’t ‘have to’ move any higher.

Bearish Wedge

In fact, the NYSE Composite has formed a potentially bearish wedge formation (bold trend lines). It takes a break below the green trend line to activate lower targets, but last weeks island reversal throw-over top may be an early indication of an upcoming correction.

Trade Setup

Last week’s all-time high is important for the short term, and going short against it presents a low-risk trade setup with a favorable risk/reward ratio.

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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Bullish or Bearish? Dow Jones Averages are All Over the Place

All for one and one for all may have worked for the Three Musketeers, but it’s not working for the Dow Jones Averages.

All three Dow Jones Averages are pulling in different directions.

The Dow Jones Industrial is near its all-time high. The Dow Jones Utility just came off a nine-month low and the Dow Jones Transportation Average has been stuck in neutral for four months.

Here’s a look at all three averages and an attempt to interpret the meaning of the broad Dow Jones disharmony.

Dow Jones Utility Average (DJU)

The Dow Jones Utility Average (DJU) lost as much as 14% from January 28 to March 11.

On March 11, the Profit Radar Report noted that: “Utility stocks are down 13% from their recent high, and every stock component of the Utility Select Sector SPDR ETF (NYSEArca: XLU) is trading below its 50-day SMA. RSI is at a level that sparked rallies in June 2013 and August 2014. XLU trend line resistance is just below today’s close. Unlike XLU, the Dow Jones Utility Average already close below its trend line. Nevertheless, utility stocks are compressed and should soon spring higher.”

The latest rally started on March 12, and as long as support at 585 – 574 holds, DJU may continue higher.

Dow Jones Transportation Average (DJT)

The Dow Jones Transportation Average (DJT) has been stuck in a multi-month triangle, and is threatening to close below triangle support.

A break down below the ascending green trend lines has to be graded bearish (unless it reverses). Next support is at 8,800 and 8,600.

The iShares Transportation Average ETF (NYSEArca: IYT) tracks the DJT.

Dow Jones Industrial Average (DJI)

The Dow Jones Industrial Average (DJI) just fell below long-term Fibonacci support/resistance at 18,004, which is also where the 20-day SMA is.

This allows for continued weakness.

The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) tracks the DJI.

Bearish Divergences?

The lack of confirmation among the Dow Average isn’t a bullish development, but thus far the key U.S. indexes are not displaying signs of a major market top (for more details about the indicator that’s identified the 1987, 2000 and 2007 tops go here: Is the S&P 500 Carving Out a Major Market Top?).

Until we get the same kind of deterioration seen at prior bull market highs, divergences among the Dow Average may just be a distraction.

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.

Is the S&P 500 Carving Out a Major Market Top?

This indicator is so valuable, I don’t want to keep it to myself. Unfortunately, I’m a bit in a pickle though.

I want to be fair to my subscribers. It just wouldn’t be right to share research reserved for paying subscribers for free, so I came up with this compromise:

You will see the indicator in its full power and glory, but I won’t disclose its name. It will simply be dubbed ‘secret sauce.’

As the charts below will show, ‘secret sauce’ correctly telegraphed the 1987, 2000 and 2007 market crashes.

Perhaps even more importantly, ‘secret sauce’ told investors to stay invested throughout this 6-year old bull market. Although there’ve been corrections along the way, ‘secret sauce’ has consistently pointed to new (all-time) highs.

What is Secret Sauce?

‘Secret sauce’ is basically a market breadth and liquidity indicator. Here’s how it works:

You know something’s wrong if the S&P 500 is at new highs, but ‘secret sauce’ isn’t.

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That’s what happened prior to the 1987, 2000 and 2007 crashes. ‘Secret sauce’ failed to confirm the new S&P 500 highs, which was an early indication of internal deterioration.

Like a ceiling fan that keeps going after it’s switched off, the market tends to keep going for a little while after liquidity and breadth peaks. ‘Secret sauce’ is a good reflection of when liquidity peaks and momentum slows before stocks roll over.

The first chart plots the 1987 and 2000 top against the S&P 500 (NYSEArca: SPY). The vertical red lines show the ‘incubation period’ between peak liquidity/breadth and peak price.

The second chart highlights the 2007 bearish divergence, which essentially marked the beginning of the end for stocks. It also captures the bullish green confirmations that kept pointing to continual new highs following the 2009 low.

I stumbled upon ‘secret sauce’ in 2013, and first introduced it to subscribers in the December 1, 2013 Profit Radar Report. Ever since then we’ve known to expect higher prices.

Obviously ‘secret sauce’ isn’t a short-term timing tool, but knowing whether a correction will morph into a full-fledged bear market or not has been incredibly helpful.

Especially since the media and self-proclaimed market pros have been calling for a market crash for years.

  • December 30, 2013: Why the market could see a 17% drop in 2014 – CNBC
  • May 15, 2014: Stocks are telling you a bear market is coming – MarketWatch

Imagine knowing when to simply ignore headlines as baseless fear-mongering. Is the recent pullback the beginning of the end?

All the details about ‘secret sauce’ are 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 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.

Bulls and Bears Fight Epic Battle in ‘Black Hole’

It’s been an ugly December for the global economy, and many believe it will get worse. However, not all is terrible. There are some positives. Patience may be rewarded as stocks gyrate at a near-term inflection point.

As far as Wall Street is concerned, this may well be the most exciting week of the year.

Wide S&P 500 swings have stretched the 5-day trading range (ATR) to the second highest of the year. All this is happening against a backdrop of imploding oil prices, a Russian ruble crash and cratering junk bonds.

And, by the way, volatility (NYSEArca: VXX) is up too.

Short-term Market Conflict

The market is trading heavy and seems to want to continue lower. However, bullish seasonality may hold back the correction like a leash holds back a wondering dog.

This week is triple witching Friday. Since the CME introduced S&P 500 futures in 1997, the futures finished triple witching week higher 96.8% of the time.

Longer-term Market Conflict

In early December, the Dow Jones (NYSEAra: DIA) reached a significant inflection point.  The December 7 Profit Radar Report warned that: “The Dow Jones nearly tagged resistance at 18,004, increasing the chances of a temporary pullback.”

The chart below, initially featured in the December 7 Profit Radar Report, offers a visual of two long term resistance levels:

  1. Trend line resistance going back to May 2011
  2. Fibonacci projection resistance going back to 2002

Despite the cantankerous drop from the December 5 highs, the stock market did not display the classic signs of a major market top prior to the reversal.

What is a ‘classic sign of a major market top’? It’s a bearish non-confirmation by an indicator I call ‘secret sauce.’

There is a minor 6-day bearish divergence between the S&P 500 (NYSEArca: SPY) and secret sauce, but prior market tops were preceded by months, not days of divergences  (more details here).

These conflicts caution that the market is in somewhat of a ‘black hole.’ More down side is possible, but the final top doesn’t appear to be in yet. The Russell 2000 (NYSEArca: IWM) may be the canary in the mine, as it find support exactly where it should have. As a simple rule of thumb, only a drop below yesterday’s low will unlock significantly lower price targets.

There’s a fair amount of uncertainty, and all that on FOMC day.

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.

Follow Simon on Twitter @ iSPYETF to get actionable ETF trade ideas delivered for free.

Simon Says: This May Be The Only Bearish Looking Broad Market Index Chart

Aside from the autumn colors, everything is green on Wall Street. Stocks are up almost everywhere you look. There is only one broad market index that could reasonably be interpreted as being bearish.

The Dow Jones, S&P 500 and Nasdaq are at new (all-time) highs, and it takes a permabear or nit-picky glass half empty kind of a person to find anything alarming in those charts.

Perhaps the most bearish looking chart is that of the NYSE Composite Index (NYA). The NYA measures the performance of all common stocks listed on the New York Stock Exchange (NYSE). There are currently 1867. The iShares NYC Composite ETF (NYSEArca: NYC) replicates the performance of the NYA.

Unlike the Dow Jones and S&P 500, the NYA also includes small cap stocks, which explains why the NYA is lagging.

In fact, the NYA chart gives hope to all those who missed the latest rally. Why?

The NYA is bumping up against a serious resistance cluster made up of:

  1. 78.6% Fibonacci resistance
  2. Trend line resistance
  3. Prior support shelf

In addition, (bearish) Elliott Wave aficionados may be quick to point out that the NYA’s decline from the September high to the October low could be counted as five waves.  Such a 5-wave move would suggest at least one more leg lower.

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The overall strength of the “October blast” rally suggests that NYA will eventually surpass this resistance cluster. But if NYA is going to pull back and fill some of the open chart gaps, right about now (or at 10,850 – 10,900) seems like an appropriate time to do so.

The Dow Jones is also about to run into the same resistance level that caused the September correction.

Solid resistance levels, like the ones shown above, increase the risk of a pullback, but obviously don’t guarantee said pullback. Higher targets are unlocked if the NYA and Dow Jones sustain trade above resistance.

A detailed forecast for the remainder of the year – based on an analysis of seasonality, sentiment, technical indicators and historical patterns – is available in the November 2 Profit Radar Report.

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.

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

4 Iconic U.S. Stocks that Lost 49% While You Were Sleeping

Overnight, four iconic U.S. companies lost 49%. One of them, a reputable blue chip Dow component, wiped out four years worth of gains while investors were sleeping. What does this performance mean and can it be detected/avoided?

The biggest danger is one you are not aware of or can’t predict. For individual stock investors that’s gap down opens. Such overnight losses leave big chart gaps that often by-pass stop-loss orders.

October has been a particularly treacherous month as four iconic U.S. companies lost a combined 49% while shareholders were sleeping. Talk about a financial overnight coronary event.

In the night(s) from October 17 (Friday) to October 20, IBM (NYSE: IBM) lost 8.35% and wiped out four years of gains.

In the night from October 20 to 21, Coca Cola (NYSE: KO) lost 5.75%.

In the night from October 23 to 24, Amazon (Nasdaq: AMZN) lost 9.10%.

In the night from October 15 to 16, Netflix (Nasdaq: NFLX) lost 25.83%.

Is there a common trigger for all those coronary events?

Is it possible to detect and prevent owning stocks before an overnight collapse? 

The chart below shows IBM, KO, AMZN and NFLX side by side.

Trading volume spiked every time on the day of the coronary, but there was no consistent pattern the day before (which was the last day to get out in time).

A look at commonly used technical indicators – such as moving averages, MACD, RSI, percentR – also shows no consistent pattern.

Netflix and Amazon were unable to overcome their 20-day SMAs the days prior to the gap down, but Coca Cola ‘slept’ above the 20-day SMA the night before it fell out of bed.

Amazon triggered an MACD buy signal the day before it tumbled.

The only way to avoid individual meltdowns is to invest in baskets of stocks via ETFs or other index-based vehicles. The link below discusses which type of ETFs are best in this stage of a bull market.

The One Common Denominator

There is, however, one common denominator, indicated by the little telephone icon. All companies reported their earnings just before the big gap down (either after the close or before the bell).

Do Gap Downs Foreshadow a Major Market Top?

Excessive amounts of selling pressure are a reflection of investor psychology.

Gap ups on the way up are a vote of confidence; gap downs show that investors’ confidence is eroding.

Erosion of confidence is one of the tell tale signs of an aging bull market. This doesn’t mean the bull market is over, but it shows that investors are becoming more selective.

The number of outperforming stocks shrinks as more and more individual stocks fall into their very own bear market. In fact, currently 31% of all NYSE stocks are trading 20% or more below their highs.

In other words, a third of all stocks are already in their own individual bear market.

A historic analysis of major market tops puts this deterioration into perspective and shows how close (or far off) we are from a major market top. It also shows which sector is the best to invest in right now.

Here is a detailed look at the 3 stages of a dying bull market.

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.

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

Selling Climaxes Spike to 4-year High

Last week saw the highest amount of selling climaxes since October 2011. Happy bulls and frustrated bears remember that October 2011 marked a major low. What does last week’s record number of selling climaxes mean?

Selling climaxes are considered a sign of accumulation as ‘strong hands’ happily buy the stocks offered for sale by ‘weak hands.’

A selling climax happens when a stock/index or ETF drops to a 12-month low, but bounces back and closes the week with a gain.

There were 605 selling climaxes last week; the Russell 2000 was one of them (more details here: Will Bullish Russell 2000 Signals Last?).

As the chart above shows, the last time there were more than 500 selling climaxes was the week ending October 7, 2011, when over 1,350 stocks saw a bullish reversal from a 52-week low.

Many happy bulls and frustrated bears will likely remember that the S&P 500 hit a major bottom on October 4, 2011.

I remember the October 4, 2011 low at 1,074 like it was yesterday, probably because it was one of my best calls. My October 2, 2011 note to subscribers said the following:

The ideal market bottom would see the S&P 500 dip below 1,088 intraday followed by a strong recovery and a close above 1,088, but technically any new low below 1,102 could mark the end of this bear market leg.”

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The problem with weekly climax data is the time delay. By the time Investors Intelligence reported last week’s climaxes, the S&P 500 was already 70 points above its low.

A closer look at the Russell 2000 chart shows that, although the spike in buying climaxes is net bullish, stocks are not out of the woods yet.

Here’s a look at the Russell 2000: Bullish Russell 2000 Signals – Will They Last?

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.

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