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)?

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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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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.

S&P 500 – Are New Highs Sustainable?

The June 2 Profit Radar Report featured the chart below and stated that: “S&P 500 Futures are down some 15 points in Sunday night’s session and already reached their first target. Aggressive investors afraid of missing out on a bounce (which could turn into something more) may put some money to work.”

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.

Well, the bounce turning into a full fledged rally and it did so quickly. In the process the S&P 500 delivered some impressive price and breadth patterns along the way. For example:

Bullish Developments

  • Yesterday’s (Tuesday, June 4) rally was supported by exceptional breadth, with 81.48% of NYSE stocks advancing. In addition to Tuesday’s strength, Monday saw more stocks advancing (65.03%) despite a 6-point loss. This is generally a positive for stocks.” – June 5, Profit Radar Report
  • Sunday’s PRR showed the spike in new 52-week highs (116 for the S&P 500). Defensive sectors (like staples, utilities, and health care) saw about twice as many new highs as non defensive sectors. Some may interpret this as a bearish ‘risk off’ rally, but historically that’s not been the case.” – June 12, Profit Radar Report
  • Retail investors polled by the American Association of Individual Investors (AAII) are unusually bearish (below 30% bulls for 5 consecutive weeks). When this crowd has been this bearish during a bull market, the S&P 500 was higher 3 months later every time.” – June 16, Profit Radar Report
  • By one measure, hedge funds have the smallest exposure to equities since 2013. This is highly unusual considering that the S&P 500 is only 2% from its all-time high. Since 2009, when hedge funds were this bearish, the S&P 500 was higher 3 months later 90% of the time.” – June 16, Profit Radar Report
  • My favorite liquidity indicator reached new all-time highs this week. Since the beginning of this bull market in 2009, the NYC a/d line reached new all-time highs before the S&P 500 eight other times. On average, it took the S&P 45 days to reach a new high or all-time high (the 2007 all-time high was not exceeded until April 10, 2013). 1 year later, the S&P 500 was higher every time. 2, 3, 6 months later, the S&P was higher 7 out of 8 times.” – June 16, Profit Radar Report

Bearish Factors

The Elliott Wave Theory pattern is still not distinctly bullish. I published four different scenarios in the June 2 Profit Radar Report. The most bearish one was eliminated on June 5. Two of the three remaining ones projected new all-time highs, and the third allowed for new all-time highs.

Shown below is one of the 3 possible scenarios (published in the June 2 Profit Radar Report). The second one has a trajectory similar to this one, and the third one is much more bullish.

Short-term Factors

As the first chart shows, RSI-2 is over-bought and RSI-35 is lagging, so technical indicators allow for some short-term risk. The May all-time high should provide some resistance, but a rally towards and into 3,000 is possible.

I’ll be watching the next inflection zone to see if the bullish developments outlined above will overpower the lack of a clearly bullish Elliott Wave Theory pattern.

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.

S&P 500 Update – Big Fake or Little Fake?

As mentioned in the last S&P 500 update we were looking for stocks to continue lower into the next target/inflection zone, which was around 2,740 (May 29 Profit Radar Report: “We expect 2,740 – 2,720 to be reached. From there, a larger bounce may develop.”).

Sunday’s (June 2) Profit Radar Report featured the chart below and stated that: “S&P 500 Futures are down some 15 points in Sunday night’s session and already reached their first target. Aggressive investors afraid of missing out on a bounce (which could turn into something more) may put some money to work.”

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 bounce happened, and it happened quickly and honestly stronger than I expected.

Big Fake or Little Fake?

Now the question is: Will stocks relapse or continue to new all-time highs?

The chart below shows that the S&P 500 fell as low as 2,728.81 on Monday. This drop closed the open chart gap at 2,744.13 and tagged Fibonacci target at 2,739.45, where wave c = wave a (a common target for waves c). The open chart gap at 2,851.11 is the next up side target (I wrote about the power of chart gaps here last week).

In terms of breadth, this week’s market action was bullish. Despite Monday’s 6-point drop, 65.03% of NYSE stocks advanced (strength ‘under the hood’), and on Tuesday, 81.48% of NYSE stocks advanced.

The horizontal blue line helps us determine other times when more than 80% of stocks advanced. In general it’s been a positive (green lines), but there’ve been false signals as well (May 16, red line and October 16, 2018, not shown).

So Tuesday’s strong up day is positive, but not an infallible buy signal.

I still prefer for this rally to relapse. The question is how high it will rally and relapse (big fake, or little fake). The June 2 Profit Radar Report outlined the 4 most likely paths going forward. One was already eliminated by this week’s action. That leaves three. Continued updates, projections, and 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.

 

S&P 500 – The Ideal Path

The S&P 500 has been following the yellow projection published in the May 13 Profit Radar Report. The original projection along with updated price is shown below, the original May 13 Profit Radar Report update is available here.

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.

KISS

Moving forward, here is a very simple approach: Lase week, the S&P 500 broke below long-term black trend channel support. This support is now resistance (around 2,830). Additional resistance is provided by last week’s low (2,801).

While below 2,801 – 2,830 we are looking for more weakness.

A move above resistance could unlock a rally to about 2,900, which would likely be an excellent opportunity to go short.

Longer-term Projection

The projection below was published in the April 28 Profit Radar Report. It shows two different paths:

  1. Black labels: Wave B of 4 ended at May 1 high. Wave C of 4 is now underway. Ultimate Wave C target is around the December 2018 low. Once complete, wave 5 will carry the S&P to new highs.
  1. Outlined in purple is an expanding triangle formation (this formation looks better in the DJIA, but is projected using the S&P 500), where the May decline is wave E. Completion of wave E will be followed by new highs. It’s important to note that wave E does not have to drop as low as illustrated.

Regardless of the final path, here are two key takeaways:

  1. For now the down side risk is potentially significant
  2. Price and momentum studies strongly suggest that – once this correction is over – stocks will rally to new all-time highs.

Summary

While below resistance, we are looking for new lows. Once the S&P 500 reaches our next down side target (and inflection point), we’ll gauge how big of a bounce may develop.

Down side targets, bounce potential, and any curveballs will be 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 Update

Last week, the Profit Radar Report stated that: “We would be interested to buy if the S&P 500 drops below 2,810 and subsequently rallies back above 2,830. Although we don’t know how much the S&P would rally, we want to have some skin in the game.”

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.

Considering that the S&P closed at 2,891.31 last Friday, a buy limit at 2,810 seemed ridiculous, but Monday saw the S&P drop 90 points.

Here is why 2,810 was an important level to watch:

  • Long-term trend channel support (going back to 2009)

  • Short-term trend channel support

On Monday (May 13), S&P 500 Futures briefly dipped below and right away snapped back above the lower trend channel line (at 2,810, green arrow). This price pattern along with the bullish RSI-35 divergence suggested some kind of low was struck.

Based on Elliott Wave Theory, this bounce should run into trouble somewhere around 2,900.

Price and momentum studies are not nearly as bearish as Elliott Wave Theory, so stocks could also move higher than expected.

The elevated CBOE Equity Put/Call Ratio (5-day SMA currently at 0.76, see chart above) certainly allows for further up-side (readings above 0.7 are generally seen near lows).

Regardless of the longevity of this bounce, the reversal at the long-and short-term trend channels at 2,810 provided an opportunity to gain some exposure at low prices (our actual buying price ended up being 2,820.21), which is better than being tempted to chase price at higher and riskier levels.

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.

 

5 Tempting High Reward S&P 500 Sector ETF Setups

If you like team sports, you know that a team may win even though some of its players had a bad day, or vice versa.

Just as a team is made up of individual players, the S&P 500 is comprised of individual sectors. Not all sectors perform at the same level at the same time, in fact, some may boom while others bust.

Here is a look at some sector ETF setups (boom and bust, ripe and stale):

Health Care Select Sector SPDR ETF (XLV)

The April 17 Profit Radar Report noted that the following about XLV:

The health care sector represented by XLV has taken a beating, too. XLV dropped to the lowest level since January 4, and sentiment has become extremely bearish. Purely based on sentiment, when there was so much pessimism, XLV has rallied over the next month 90% of the time, with an average gain of 5%. Seasonality is positive for the next month as well.

Aside from the green bar, there’s no ‘must hold’ support level, but RSI-2 is over-sold. We are committing a small amount to buying XLV below 86.”

We bought XLV when it dipped below 86 on April 18, and sold XLV when it became over-bought and reached the 5% average gain threshold at 90.50 and May 6.

XLV is now in neutral territory, and the setup has become stale.

Real Estate Select Sector SPDR ETF (XLRE)

The April 14 Profit Radar Report featured the chart below and stated:

The Real Estate Select Sector SPDR (XLRE) looks interesting. 3 support and resistance levels meet up to form resistance at 36.80 on Wednesday. Price is wedging higher with a small bearish divergence. Based on the wedge, the down side risk is significant if price fails to hold support. For now, we will go short if XLRE moves above 36.85 and subsequently drops below 36.50.”

Unfortunately XLRE missed my sell limited by 15 cents. After a sizeable drop, XLRE bounced from support, but a break below that support (around 35) is likely to unlock the next down side target. The potential down side risk could be significant, partially because XLRE’s sector ‘cousin’ may be in trouble.

SPDR S&P 500 Homebuilders ETF (XHB)

The May 5 Profit Radar Report pointed out that: “The SPDR S&P Homebuilders ETF (XHB) is wedging higher, and close to wedge resistance and general resistance with a bearish RSI-35 divergence. In terms of seasonality, May and June are the worst months for XHB. We will short XHB if it spikes above 41.80 and subsequently moves below 41.70 (stop-loss at day’s high). Considering futures, XHB may open lower tomorrow, and we may consider to go short on a drop below 40.70.

XHB fell below lower wedge support, which unlocks significant down side potential. RSI-2 is near over-sold, and a bounce is possible. In fact, any bounce that gets close to the broken purple trend line (such a re-test of previously broken support is often a ‘kiss good-bye’) would be another low-risk set up to go short.

Utilities Select Sector SPDR ETF (XLU)

March 27 Profit Radar Report:

The utility sector (represented by XLU) rallied to new all-time highs with more than 80% of its components at a 52-week high..

In addition, XLU was rejected by trend line resistance. Additional trend channel resistance is around 59.50. Support is around 58.20 and 57.20. There was a bearish RSI-35 divergence on the daily chart.

Based on technicals and statistics, shorting XLU has high odds of being profitable. Unfortunately XLU seasonality is very bullish for March/April. 

XLU could move a bit higher, but we will leg into a short position now (and will probably add more if it moves higher). There is no good inverse utility ETF, so we will short XLU above 58.40.”

XLU is making slow down side progress, but it’s not been able to move below support around 57 – 56.75. A move below support could unlock further down side, but immediate down side may be limited due to a near over-sold RSI-2.

PHLX Semiconductor Index (SOX)

The PHLX Semiconductor Index is often the ‘MVP’ that drives the ‘team’ to more gains (or vice versa). SOX is at a convergence of support (black trend channel and green trend line). If bulls are going to make a stand, it would be here. If not, the next stop is around 1,440.

Continued sector and stock market analysis 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.