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.

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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.

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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.

Short-term S&P 500 Update

2018 has been a year of extremes. The year started with stocks becoming extremely over-bought, and ended with stocks getting extremely over-sold.

In fact, 2018 hosted the worst December performance since 1931.

The December 23 Profit Radar Report stated that:

We are likely in an environment where pessimism can become even more extreme, but those extremes can cause violent 1 – 5 day spikes. In terms of seasonality, a Santa Clause Rally (last 5 days of 2018, and first 2 days of 2019), occurs 73.5% of the time (since 1970). The odds of a multi-day rally – within a longer down trend – are elevated.”

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.

Over the next two days, the S&P 500 dropped to 2,347 (the lowest level since May 2017), and thereafter jolted 5% higher, in a single day.

How does this rally (up to 174 points in 3 days) fit into the larger picture?

The DJIA already reached its ideal down side target (21,700, which is where wave 3 or c equals 1.618 x wave 1 or a).

The S&P 500 has not yet reached its ideal down side target (2,269, which is where wave 3 or c equals 1.618 x wave 1 or a). However, the S&P bounced from 2,349, where wave 3 or c equals 1.382 x wave 1 or a).

In other words, we are dealing with a measure of conflict:

  • The DJIA already reached it’s down side target, the S&P 500 did not.
  • Sentiment at the December 26 low was extremely compressed, which allows for a larger bounce.

How do we resolve the conflict?

The December 30 Profit Radar Report published the chart below, which illustrates the ideal outcome, along with the following commentary:

The S&P 500 has not reached the 161.8% Fibonacci projection level (2,269), which as a common down side target for waves 3. Unless the S&P closes above Friday’s high (2,520), we assume that we’ll see new lows.”

The above path is still in harmony with the outlook published in the October 28, 2018 Profit Radar Report, which projected (yellow lines, chart below) a rally from 2,600 to 2,850 (in October/November) followed by a drop to about 2,400 thereafter.

Obviously there has been much flux and volatility, and trading this market comes with a fair amount of risk.

But, where there’s risk, there is usually opportunity, and if the S&P follows our path, hits our down side target while over-sold and with bullish divergences, we will want to buy.

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.

Free Access to the Profit Radar Report

For the first time ever, anyone can get FREE ACCESS to the Profit Radar Report. The last 6 complete Profit Radar Report updates covering the S&P 500, Dow Jones, Nasdaq, XLU, US dollar, EUR/USD, gold, silver, and 30-year Treasuries, TLT are available here. Enjoy!

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.

April 4, 2018 (6:00pm PST)

Yesterday’s PRR stated that: “We will set our stop-loss at breakeven. If SPY gaps below 258.87 in the morning, we will keep our stop-loss at 256.”

Since SPY gapped lower and opened at 256.75, we set our stop-loss at 256. After another 200-day SMA seesaw, SPY closed at 263.56. We will now raise our stop-loss back to breakeven (258.87).

Monday’s PRR mentioned that the NY Composite a/d line is still above its February and March lows. The chart below provides more details. From March 23 – April 2, the S&P 500 drifted lower, while the NYC a/d line inched higher. This bullish divergence suggests that selling pressure is abating.

This fact, in addition to the S&P 500, DJIA and Nasdaq-100 hitting our down side targets and/or support (March 28 PRR) contributed to the SPY buy signal.

However, bullish outlooks are rare. In fact, some Elliott Wave Theory analysts are vehemently bearish, which is reminiscent of early March, when the March 7 PRR published the chart below and stated:

This is one of those times where it’s dangerous to rely solely on Elliott Wave Theory (EWT). Some EWT analysts currently advocate a 1 – 2 constellation to the up side (green labels), others a 1 – 2 to the down side (red labels). “1 – 2” meaning waves 1 and 2 are complete (or nearly so), with a powerful wave 3 (up or down) to follow, essentially EWT analysts expect either a melt-up or melt-down. We know at least one group will be wrong.

The path that would make most sense (in terms of fulfilling more indicators/patterns than the other paths) is continued range racing, an eventual re-test of the February panic low (blue box), and subsequent rally to 3,000 +/- (blue labels, or scenario #2 shown in the February 28 PRR).”

Our indicators supported the blue path weeks ago, and continue to do so (with or without another drop to 2,530 – 2,460).

However, we wanted to let subscribers know that we always monitor various developments, and if our indictors change (i.e. an increase in selling pressure or emergence of bearish divergences) we will have to adjust accordingly.

Currently we want to have some ‘skin in the game’ if stocks continue higher, but will continue to manage risk.

The DJIA may have finished the 5-waves lower shown in the March 28 PRR. The chart below shows some short-term resistance levels: Red line: 24,300. Trend channel: 24,700.

XLU continues to gnaw on resistance around 51. The pattern of this rally is not exactly bullish, but nevertheless continues to make higher highs and higher lows. RSI-35 is positive, on balance volume not (yet?). The near overbought RSI-2 condition has been digested. We will still close XLU if it moves above 51. XLU could be tracing out a messy triangle with support around 50 or 49 and resistance at 50.80 – 51. Our entry was on February 12 at 48.40.

Summary: Some bullish divergences are building, which is positive. The S&P closed today at minor resistance around 2,644. A move above 2,644, followed by 2,695 – 2,700 would increase the odds that a bottom is in.

The US Dollar Index has not moved for the past 4 days. The March 27 low at 88.942 remains key. As long as trade remains above, the US dollar can continue to move higher. The EUR/USD remains still above 1.2240. A move below 1.2240 may well usher in a protracted decline.

Gold bounced from the 61.8% Fibonacci support level, but that bounce has been feeble. On balance volume remains weak.

Silver is trading uninspired between support and resistance.

April 3, 2018 (10:00pm PST)

Our SPY buy order was triggered today at the open (258.87), which was above 258.10 but below 259. SPY closed 260.77, about 0.7% above our entry. The question is whether we want to limit risk and set the stop-loss at breakeven, or give SPY a longer leash.

The March 24 PRR stated: “The 200-day SMA is too popular for its own good, that’s why we rarely talk about it (aside from February 5, because it coincided with important Fibonacci support at 2,536). On February 9, the S&P 500 briefly tested the 200-day SMA, and bounced 269 points. Now the S&P is back at the 200-day SMA. It would almost be too simple if the S&P again bounces 200+ points after hitting the 200-day SMA (as it did in early February). With or without small bounce, a 200-day SMA seesaw seems more likely.”

The S&P 500 (and SPY) closed below the 200-day SMA yesterday and back above today. This seesaw stopped out a large number of 200-day SMA focused investors. We wanted to see a minimum of one seesaw, but more are possible.

Today’s rally gives us the luxury to ‘play with house money.’ Although risk of another seesaw across the 200-day SMA (which is only 0.10 points below our breakeven point) exists, our first consideration is usually safety. We will set the stop-loss for SPY at breakeven. If SPY gaps below 258.87 (S&P 500 futures are down 7 points in after hours trading), we will set the stop-loss at 256.

Investors more afraid of missing out on potential up side than being concerned with down side risk, may keep SPY without stop-loss.

April 2, 2018 (7:30pm PST)

Tonight’s PRR includes an update to the open SPY recommendation.

For the past 7 weeks we’ve frequently referred to our preferred, or ideal path for the S&P 500 going forward. The February 11 PRR suggested a path similar to 2011, and the February 19 PRR reiterated that: “We would like to see a retest of the panic low (W-shaped recovery) like in October 2011 or September 2015.”

The W-shaped recovery (wave 4 correction according to Elliott Wave Theory) was identical to scenario #2 outlined in the February 28 PRR or the blue path featured in the March 7 PRR.

On March 19, the wave 4 scenario (similar to 2011, or scenario #2 or blue path), which required a test of the initial February panic low at 2,533 became our primary focus (March 19, PRR: “The blue wave 4 projection (March 7 PRR) and scenario #2 (February 28 PRR) is now the preferred path.).”

The chart below compares the 2011 correction (and subsequent rally) with the 2018 correction. Today the S&P dropped below 2,590 – 2,575 (March 28 PRR: “We would still like to see a drop below 2,590 – 2,575.”) and came within 21 points of the February panic low.

The S&P dropped below the 200-day SMA (for the first time since June 27, 2016), but closed 0.88 points above the February 9 closing low. Although RSI-35 is stronger than price, it would take a new S&P closing low to call this a bullish divergence. However, the RSI margin is so slim that an immediate S&P drop lower could erase any bullish divergence.

Below is an updated look at short-term sentiment extremes. All VIX-and option-based sentiment gauges had an uptick in bearishness, but not extreme. The green bars highlight the last two W-shaped corrections. Panic readings only occurred on the initial low (left W wing). The same is true this time.

80% of NYSE stocks closed the day lower, but the NY Composite a/d line is still above its February and March lows.

Our two-prong SPY buy recommendation required: 1) a drop below 256.25 and 2) a subsequent rally above 258.10. The chart below shows the 256.25 and 258.10 level. SPY did not meet both qualifications. The SPY buy order was not triggered. See summary section below for update SPY buy levels.

Unlike the S&P 500, SPY closed below its February low and displays a bullish RSI-35 divergence.

The same is true for the DJIA (new closing low, bullish divergence).

As anticipated, double support around QQQ 154.50 acted as magnet. QQQ fell as low as 153.88, but closed at 155.51. Even though QQQ remained above its February low, RSI-35 and on balance volume are at or below February level. Not bullish.

Summary: The S&P 500 has met the minimum criteria to consider this correction complete. There is, however, a difference between minimum and ideal. The ideal target is 2,530 – 2,460 (see chart below published in the March 24 PRR). S&P 500 futures are up 10 points in after hour trading. At current price, the S&P 500 would open above its 200-day SMA. SPY would gap higher an open above 258.10. It would take at least a 130-point rally to get an initial confirmation that the bottom is in. Since there is a chance the S&P won’t drop into our ideal down side target, investors may need to ‘pick their poison.’

1) Be early and risk further losses

2) Be late and risk missing out on gains.

In short, the minimum target has been met, but we would prefer to see the S&P drop into and reverse in the ideal target zone (2,530 – 2,460).

We will buy SPY at the open or during the day (as long as it is above 258.10 but below 259). Our initial allocation is a conservative 5%. Our stop-loss will be at 256.

April 1, 2018 (5:30pm PST)

For the first time since February 2016, the S&P 500 suffered two consecutive montly red candles. Since the beginning of the 2009 bull market, the S&P recorded more than 2 consecutive red candles on 6 occasions (3 x 2 month, 1 x 3 month, 1 x 5 month, current – purple boxes). After the 3 x 2 red candles (Aug/Sep 2015, Apr/May 2012, May/Jun 2010) the S&P briefly broke below the prior low twice (Jun 2012, Jul 2010) and came within 25 points of the prior low once (Oct 2015). In February 2016 (the 1 x 3 month period), the third red candle exceeded the prior low by only 2 points.

The S&P 500 doesn’t have to rhyme with prior consecutive monthly declines, but if it does, it would be in harmony with our ideal path of one more new low followed by rising prices.

As mentioned on Wednesday, “sentiment is bearish enough to spark a bounce.” The bounce happened on Thursday, and may continue on Monday (first trading day of April has a solid bullish bias, S&P 500 up 17 of last 23 years, average gain: 0.49%).

Minor short-term resistance remains around 2,640-ish and 2,690-ish.

Below is a renewed look at our set of short-term sentiment gauges. The extremes seen around the February panic low have been digested. During double-bottoms (W-shaped corrections), investors are almost always more optimistic during the second ‘W’ low. That’s why a new closing low (if it occurs) will probably not cause the same kind of panic seen in early February, and set up a bullish divergence.

Our New York Composite advance/decline liquidity indicator shows a similar pattern. The NYC a/d line has been trending higher (green line) and down side pressure seen in late March was less intense than in early February (in early February nearly 90% of stocks declined, in late March ‘only’ 80% of stocks declined – vertical red bars & green line).

Short-term, the DJIA closed above the trend channel shown on Wednesday. As the purple lines show, DJIA could carve out a triangle (purple lines, S&P shows similar formation). This kind of micro-analysis during larger waves 4 is less reliable than at other times, but it’s about the only thing somewhat worth mentioning right now.

XLU closed (barely) above red trend line resistance. RSI-35 confirmed this move, on balance volume did not. RSI-2 is near overbought. Next resistance is just above 51. The positives we saw near the February low are starting to fade a bit, and XLU will have to overcome 51 to unlock further upside. If XLU rallies to 51 on Monday/Tuesday, RSI-2 will likely be fully overbought. We will lock in gains and sell XLU if it spikes above 51.

Summary: Short-term sentiment and money flow (liquidity) suggest that fear and selling pressure are improving, setting the stage for bullish divergences. For a true bullish divergence, we would have to see a new S&P 500 closing low, which is what we’re waiting for to confirm our ideal path for a more significant bottom.

Although we are looking to buy, our indicators and cycles do not project massive up side, even once a low is in place.

The EUR/USD, US Dollar Index, gold and silver did not move much since Wednesday’s PRR.

March 28, 2018 (6:10pm PST)

The market will be closed on Friday in observance of Good Friday. The next update will be published as usual on Sunday.

The week started with a massive rally (Monday) and was followed by an even bigger drop (Tuesday). Normally pops and drops like Monday/Tuesday would validate a special PRR, but considering the larger context (March 19 PRR: “Waves 4 cause a lot of whipsaw and require patience. There may well be times where it will feel like we missed an opportunity … just before stocks reverse and offer a second [or even third] chance.”) it’s sometimes best not to over-analyze certain moves.

The S&P 500 is stomping around atop the blue support cluster at 2,590 – 2,570. We would still like to see a drop below 2,590 – 2,575 (ideally to around 2,530 or 2,460), but short-term sentiment is bearish enough to spark a bounce.

Pinpointing resistance levels in a wave 4 environment tends to be a fools errand, but 2,645-ish and 2,690-ish may be worth watching. A move above 2,645-ish could lead to 2,690-ish, but such a bounce would not eliminate the potential for a drop below 2,590.

The hourly DJIA chart below outlines a short-term trend channel and potential short-term Elliott Wave Theory count. If that’s correct, DJIA should drop below 23,360, find support (ideally at 23,000 – 22,800) and rally.

Double Nasdaq-100 QQQ support around 154.50 could act as magnet and reversal target. At this point, there is no bullish divergence as RSI-35 is toying with new lows (even though QQQ remains above its February low) and on balance volume is already at new lows.

Summary: This is a difficult environment to trade, which is why we trade only if the S&P follows our ideal path (drop below 2,590 at minimum, followed by a rally). The current constellation of various indicators suggests that carving out a low may be a process that could take a few more days, even weeks. For now we will keep our SPY buy recommendation open.

We will take another close look at investor sentiment and money flow in Sunday’s PRR.

As anticipated, the US Dollar Index tested trend channel support at 88.90 (blue oval). From there it rallied strongly. Yesterday’s low (blue oval) could be important and can be used as a stop-loss level for long positions (like UUP). We may soon be adding to our existing UUP position.

Short-term, the EUR/USD allows for a triangle (purple lines), with a potential bullish breakout. This doesn’t have to happen, but it could. If it does, it would likely lead to a test of the long-term trend channel at 1.2620 (black line) and a great opportunity to short the euro (long dollar). A break below 1.2240 would very likely mean that a EUR/USD top (and dollar bottom) is in and signal a longer-term trend reversal.

Long-term, the EUR/USD shows a bearish RSI divergence, is close to long-term trend channel resistance, with cycles soon turning lower, and sentiment supporting falling euro prices.

Gold validated our suspicion and fell hard, retracing almost exactly 61.8% of the March 20 – 27 rally. If gold started a rally with a target north of 1,382 (wave 3 up next?), it should stay above Fibonacci support at 1,328 or 1,318. For aggressive traders, this is a low-risk opportunity to go long with a stop-loss just below support.

Of course, a strong gold rally is unlikely if the US Dollar Index is also about to rally.

Silver is once again back at support around 16.2.

This is a follow up to the 30-year Treasuries analysis published on March 14 PRR.

TLT closed above the bold (previously red, now) green trend line. According to Elliott Wave Theory, TLT can still relapse to a new low. However, a move above 122.42 as good as eliminates this bearish option. Cycles are pointing higher. In short, the trend is higher as long as TLT stays above ascending trend line support (120.40) and once TLT clears 122.42.

Below is an updated look at the 30-year Treasury Yield trend channel shown on March 14. Since then there’ve been two more trend channel touch points. A sustain yield break below 3% (based on trend channel) and 2.98% (based on Elliott Wave Theory) will point to lower yields/higher prices.

Continued updates and analysis is 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.

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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S&P 500 Update

2017 was one of the most unique years ever, not just for the stock market, also in terms of world events and natural catastrophes.

An almost unprecedented phenomenon was that of strong stock market momentum.

The November 19, 2017 Profit Radar Report pointed out that:

The S&P 500 was higher 8 of the first 9 months of 2017. This has only happened 8 other times (1936, 1950, 1954, 1958, 1964, 1995, 1996, 2006). 2, 3, 6, and 12 month later the S&P was higher every time but one (0.7% loss 2 month later in 1964). Such strong momentum readings (and they are seen across all time frames) are extremely rare. As mentioned back in December 2016 and March 2017, stocks rarely ever top at peek momentum. We have to go back to 1995/96 to find similarly strong and persistent up side 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.

Diametrically Opposed

Strong momentum was in direct contrast to some of the oddest breadth readings ever, also mentioned by the November 19, 2017 PRR:

Despite stocks hovering near all-time highs, there have almost been as many stocks with bearish extremes (new 52-week lows or oversold RSI) as bullish extremes (52-week highs or overbought RSI). This happened on multiple days. For example:

Last week more than 8% of stocks had a RSI reading above 70 (overbought). At the same time more than 8% of stocks had a RSI reading below 30 (oversold).

The week before last week saw a lot of buying and selling climaxes at the same time.

At some point last week, 4% of stocks registered new 52-week lows while 30% of S&P 500 stocks fell below their 200-day SMA. That’s dispite stocks being near their all-time high.

This kind of split market is rare (when it occurs near all-time highs) and historically unhealthy (it triggered a cluster of Hindenburg signals). Similar (bad) breadth readings existed 11 other times since 1998. 1, 2 and 3 month later the S&P 500 was down 76% of the time.”

Reconciling Conflicting Indicators

There was no easy way to reconcile the conflict among indicators, but the November 19 PRR concluded that: “Therefore it seems more likely that momentum (supported by seasonality) will trump breadth and push prices higher in coming weeks.”

At times like these, it’s often best to use simple trend lines as arbitrator. The November 28, 2017 Profit Radar Report pointed out a Dow Jones Industrial Average (DJIA) breakout (see chart) and stated:

The DJIA closed for the first time above the (now) green trend line going back to April 2016 (blue circle). As long as trade remains above the trend line, we’ll allow for further gains.”

On December 15, the S&P 500 closed above its respective trend line, and the Profit Radar Report stated: “The S&P 500 closed above the red trend line for the first time (similar to the DJIA on November 28). While above this trend line, gains may continue (even accelerate).”

An up side target in the low to mid 2,700s was given (and already exceeded).

Outlook

Stocks are now at a position similar to December 13, 2016, and March 2017, when the PRR pointed out that: “Stocks rarely ever top at peak momentum.”

Of course, stocks are now also overbought and have become over-loved. This means there is a fair amount of short-term risk. However, it will take some down side ‘escape velocity’ to break the up side momentum and spook investors.

If and once this happens, we anticipate a 5-10% pullback.

Continuous 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 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.

 

Are Stocks Quietly Deteriorating or Revving up for More Gains?

Every major market index has been marching to the beat of their own drum.

The Nasdaq-100 just slid to the lowest level since May 18, while the Dow Jones Industrial Average (DJIA) set a new all-time (intraday) high just on Monday. The S&P 500 is about a percent below its all-time high.

Some reason that there’s no longer enough liquidity to buoy the whole market.

This begs the question, if all this range bound churning is a sign of internal deterioration (and the ‘inevitable’ drop) or if stocks are just taking a breather and revving up for the next spurt higher?

KISS – Bottom Line

The May 29, 2017 Profit Radar Report already observed this: “There are times when indicators line up and we discuss (high) probabilities, and there are times when indicators conflict, and we are forced to discuss possibilities. Unfortunately the later is the case right now.

Each of the major indexes is tracing out a different EWT pattern, breadth measures, seasonality and investor sentiment do not offer a clear message. Therefore we are reduced to dealing with possibilities.

The weight of evidence suggests that in the not so distant future stocks will run into some trouble. The up side target for the S&P 500 is 2,450 – 2,530. The S&P 500, Russell 2000, DJIA and Nasdaq-100 are all overbought, but above short-term support. As long as this support holds, more gains are likely.”

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.

Not Exciting, but Effective

Ever since we’ve been watching support (which has been at 2,420 for the S&P 500) as stocks have gone nowhere. It should be noted that the 2,420 support level is becoming too obvious and therefore less important. The June 25 Profit Radar Report stated that: “A move below 2,420 (especially 2,400) would increase the odds that a multi-week/month top is in.”

Watching support (and resistance) is not the most exciting approach to market forecasting, but there are times where it’s best to realize there are no clear signals (such as in May), and simply wait for the market to offer the next actionable clue.

This approach protects against overtrading or the anxiety associated with a non-performing (or worse, losing) trade. In short, it provides a measure of peace of mind, a rare commodity in this market.

Summary

Mid-and long-term, our comprehensive S&P 500 forecast remains on track.

Short-term, we are waiting if the S&P pushes deeper into the 2,450 – 2,530 target zone, or if the June 19 high at 2,454 was the beginning of a more protracted (but temporary correction).

Whichever direction the market breaks, it will eventually be reversed. Ideally, we are looking to sell the rips (above 2,454 if we get it) and buy the eventual dip (although this dip may last longer than many expect).

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 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.

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.

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