S&P 500 Update – The Surprising Implication of Strong Januaries

The S&P 500 just traded in the ‘sweet spot zone’ for over 350 days. What is the sweet spot zone?

It’s above the 200-day SMA, but not more than 10% above the 200-day SMA. While in the sweet spot zone, the S&P has steadily moved higher without overheating. This is extremely rare.

In fact, there are only two other periods similar to this (1965, 1994). Both times the S&P ended the streak by falling below the 200-day SMA. On January 5, for the first time ever, the S&P broke higher (see chart below). What does it mean when the S&P goes from ‘not too hot’ to ‘hot’?

From Not Too Hot to Hot

The research below was originally published in the January 7 Profit Radar Report. At the time (January 7), the S&P 500 recorded 4 consecutive up days and closed at 2,743. The S&P added two more up days, bringing the total to 6 consecutive daily gains to start the year. What’s the implication of such a strong start?

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January 7, 2018 Profit Radar Report

Since 1960, the S&P 500 has opened the year with 4 consecutive up days 8 other times (see table).

The thumbnail charts below show performance from December 1 before the first-4-day-of-January spurt to December 31 thereafter). By the end of the year, the S&P was higher every single time (1987 – 1988 was the smallest gain with only 0.2%).

50% of the time (the last 4 times), the S&P fell below the January 1 open at some point during the year.

Based on history, a strong start to January is bullish for the remainder of the year. The risk of a correction throughout the year is 50%.

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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.

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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Equity Put/Call Ratio Near Multi-Year High

On Friday, the equity put/call ratio rose to the second highest reading in years. This means that option traders are loading up on put protection, an indication of unusual fear (consider that the S&P 500 is within two percent of its all-time high).

Sunday’s Profit Radar Report update featured the chart below and stated the following:

The S&P 500 is in the middle of its trading range, just above the 200-day SMA. The equity put/call ratio (5-day SMA) is near one of the highest readings in years (0.78). This has lead to gains, or at minimum limited down side in the past. 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.

Will the S&P 500 Rally to New All-time Highs?

How quickly things change. Just a week or two ago, stocks tumbled and fear soared.

The first wave of re-emerged ‘Grexit’ fears (June 28) knocked the S&P 500 down 45 points in one big swoop, and another 15 points via a 7-day grind (see chart).

Thanks to hopes for an ‘aGreekment’ stocks soared higher this week.

Of course, it’s easy to explain the past with hindsight and a few news events. The problem with this approach is that it only works in hindsight, since no one can foretell the news.

A more comprehensive approach generally offers more future insight.

Will the S&P 500 Rally to New All-time Highs?

A look at the past will help determine what’s next.

Commenting on the big June 28 decline, the June 29 Profit Radar Report stated the following:

Nothing is eaten as hot as it’s cooked. It’s probably best to give it some time to let the initial kneejerk reaction shake out, and re-evaluate once things settle. Support at S&P 2,072 may be broken, but a news-event driven break is probably not as meaningful as an ‘organic’ break.”

Following the initial June 29 mini-meltdown, the S&P 500 (NYSEArca: SPY) bounced around until it got hit again on July 8, when it closed below the 200-day SMA for the first time since October 20, 2014.

On that day (July 8), the Profit Radar Report wrote that: “We don’t put too much weight on today’s close below the 200-day SMA. More important is support at 2,040. Today’s decline may have exhausted selling, at least temporarily. The odds for a bounce are good. The open gaps at 2,081 and 2,101 could be targets”.

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Here is where understanding how a price bottom came to be (although it’s rear-view analysis) can be valuable.

The June 29 and July 8 mini-meltdowns were 90% down days, which means that 90% or more of volume was to the down side, and 9 out of 10 stocks closed lower. Multiple 90% down days can be a reflection of exhausted selling pressure.

Based on the two 90% down days, the June 8 closing low may stand for a while.

The up side target (open chart gap at 2,101 – dashed pink line on chart) was captured yesterday.

Unfortunately, that puts the S&P 500 in a sticky spot. Short-term overbought, but with the potential of having established a more robust low.

Stocks are reaching overbought territory, so resistance at 2,115 – 2,125 is worth watching for a pullback or relapse.

There is no high probability setup right now, but my best guess is that new highs will be coming, perhaps after a smaller pullback.

Support and an open chart gap are around 2,080, which may be a low-risk spot to buy (with tight stop-loss). Failure to hold 2,080 and more importantly 2,040 could unlock much lower targets.

Continued analysis, based on sentiment, seasonality, technical analysis, supply & demand (and a little bit of news) is 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.

Bearish Bets Should Wait Until S&P 500 Hits This Level

The Greek odyssey, the Chinese market meltdown (Shanghai Composite down more than 30% in one month), NYSE trading suspension, etc.

There are plenty of reasons to worry. In case that wasn’t enough, S&P 500 seasonality is turning bearish, and VIX seasonality already turned bullish (more details here: Strongest VIX Signal of the Year)

Seems like it’s time to hide under a rock, or if you are more of a risk-taker, short stocks.

Sometimes, when it’s too obvious, it’s obviously wrong.

In this case, it may not be wrong to short stocks, but the timing doesn’t look quite right yet.

Here are three lower-risk opportunities to short the S&P 500, if you are so inclined.

  1. Around 2,081. There’s an open chart (first dashed pink line). Open chart gaps tend to get filled sooner or later.
  2. Around 2,101. There’s another open chart gap (second dashed pink line).
  3. After a breakdown below 2,040.

Why 2,040?

2,040 is just below the 200-day SMA, but it’s not a key level because of the 200-day SMA, rather despite the 200-day SMA.

The 200-day SMA is so popular; it tends to give many false signals (S&P seesawed across it already once this week).

The July 5 Profit Radar Report stated that: “The S&P 500 will likely open below its 200-day SMA, but above support at 2,040. The chart below shows why the area surrounding 2,040 seems important.

2,040 is a combination of long-term Fibonacci level trend channel.

Keep in mind that the market is still in a greater chopping zone, but any breakdown has to go through 2,040.

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.

 

This Line is More Important for Gold Than the 200-day SMA

Back in December you couldn’t get investors to touch gold even with a 10-foot pole. From low to high, gold has rallied 13% since and analysts are starting to up their full-year targets. This could be a costly mistake.

About 50 days ago analysts gave gold a snowball’s chance in hades to move higher.

The December 2013 headlines below show that investors were as bearish about gold as they were bullish about the S&P 500 (NYSEArca: SPY).

Bloomberg: Gold’s drop to lowest since 2010 seen extending next year by Goldman Sachs
Forbes: Gold may be on verge of a waterfall-style decline
Wall Street Journal: Gold is testing last ditch support before it falls further into the abyss
Bloomberg: Gold trades below 1,200 as growth outlook curbs haven demand
Wall Street Journal: Gold’s glimmer gone, mutual funds feel the pinch

Those bearish headlines and other sentiment gauges contributed to this contrarian assessment by the December 29 Profit Radar Report: “Gold sentiment is very bearish (bullish for gold) and prices may bounce here.”

Up until February 11, gold’s rally attempts were feeble, with gains of less than 4% since the December 31 closing low at 1,204.

Gold broke free of its short-term technical shackles on February 12, when the Profit Radar Report noted: “Gold has broken above red trend line resistance (dashed red line), but has been held back so far by silver’s inability to move above 20.64. Odds favor higher gold prices as long as 1,254 holds.”

Silver confirmed gold’s move on February 14 (when it surpassed its prior highat 20.64), which helped gold jump above its 200-day SMA.

However, as the weekly long-term gold chart shows, there’s significant trend line resistance right around 1,335, which has kept a lid on gold’s rally.

The short-term daily gold chart illustrates additional short-term support/resistance levels. It also shows that RSI confirmed the recent rally high, which suggests new highs in the future.

However, any new highs could be short-lived. A thorough analysis of gold money flows – in particular Gold ETFs like the SPDR Gold Shares (NYSEArca: GLD) and iShares Gold Trust (NYSEArca: IAU) – strongly suggests that new lows for gold and silver are still ahead.

The article below reveals the reliable pattern that tends to accompany major gold bottoms. The Missing Tell-Tale Sign of a Lasting Gold Market Low

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.

Russell 2000 and S&P MidCap 400 Butting Up Against Resistance

The Russell 2000 and MicCap 400 Indexes helped us identify weakness for stocks in early November. Now they’ve come back to touch major support/resistance levels and may be once again the “canary in the gold mine.”

About a month ago we looked at the Russell 2000 (small cap stocks) and S&P MidCap 400 (mid cap stocks) indexes to determine whether there’s more down side for the broader market.

Our focus was in particular on the trend line that connected the October 2011 low with all subsequent lows. It was a well-defined support level that created a pretty technical picture.

On November 7/8 the Russell 2000 (corresponding ETF: iShares Russell 2000 ETF – IWM) and S&P MidCap 400 Index (corresponding ETF: SPDR S&P MidCap 400 ETF – MDY) dropped below their respective trend lines.

This foreshadowed lower prices ahead and triggered a sell signal. However, the quick sell off left open chart gaps (particularly for the Nasdaq-100), that’s why the Profit Radar Report didn’t wholeheartedly embrace the post-election sell off and sold S&P 500 short positions at 1,348.

Fast-forward a couple of weeks and we see the MidCap 400 Index back above trend line resistance (previously support) and the Russell 2000 Index butting up against trend line resistance.

The first chart below provides a closer look at the Russell 2000 (support is colored green, resistance red). Right beyond the red trend line resistance is another resistance cluster made up of a descending trend line and previous highs/lows.

So there’s a strong resistance range ahead for the Russell 2000 (the same is true for the S&P 500) and it may take a couple of attempts to push beyond. The beginning of December tends to have a brief seasonal lull, which (combined with resistance) may drive the Russell 2000 (and stocks in general) a bit lower.

But small caps in particular sport a strong bullish seasonal bias starting in mid-December.

Mid caps have performed a bit better as they have already pushed above trend line resistance, now support. Nevertheless, resistance made up of prior failed highs is straight ahead.

The technical picture for mid caps looks more bullish than that of small caps, but even mid caps have room to retest the green support line before making another run higher.

Both indexes and their corresponding ETFs trade above their up sloping 200-day SMAs.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

It’s Do or Die Time for Small and Mid Cap ETFs

Small and mid cap stock indexes are trading at key inflection points. How the indexes and ETFs react to support at current prices will likely set the bias (bullish or bearish) for the coming weeks.

“Do or die” scenarios don’t come around too often, but when they do they deserve our attention and often provide either a low risk or a high probability trading opportunity.

What elevates the current constellation for mid and small cap ETFs from willy nilly to do or die?

There are a number of reasons. The two charts below were originally published in the October 24 Profit Radar Report. The “in a nutshell” conclusion published that day was that: “The stock market is stretched like a rubber band and should bounce back. If it doesn’t, it will ‘snap’”.

Chart 1: S&P MidCap 400 Index

Corresponding ETF: SPDR S&P MidCap 400 ETF (MDY)

The trend line originating at the October 4, 2011 low has provided guidance and support for the S&P MidCap 400 Index. A close below this trend line would be concerning. Additional support is provided by the 200-day SMA at 964.

Chart 2: Russell 2000 Index

Corresponding ETF: iShares Russell 2000 Index ETF (IWM)

The interaction between the Russell 2000 and its October 4, 2011 trend line hasn’t been as pronounced, but the decline has thus far stalled at trend line support. A close below this trend line would also be concerning. Additional support is provided by the 200-day SMA at 807.

Conclusion

Unbroken longer-term trend lines like the ones mentioned above provide invaluable technical insight, often worth more than insider information.

As long as indexes remain above their respective trend lines – the S&P 500, Dow Jones, Russell 2000, MidCap 400 and many sector ETFs remain above at this time – the benefit of the doubt should be given to rising prices.

In addition to trend line support, the October 25 Profit Radar Report pointed out a buy signal for stocks (given by the VIX) and a bullish price/RSI divergence.

Yesterday’s strong rally is running into technical resistance triggered a bearish percentR low risk entry. It remains yet to be seen how long this bounce will last, but trend line support is now our stop-loss level for long positions. The beauty of using a rising trend line as stop-loss for long positions is that it virtually guarantees a winning trade.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.