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.

 

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

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

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

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

  1. Rounding top
  2. Low trading volume

* * * * * * * * * *

* * * * * * * * * *

Rounding Top – R.I.P.?

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

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

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

What’s the status of the rounding top pattern?

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

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

Low Volume Doesn’t Matter

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

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

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

More Important than the Rounding Top

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

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

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

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

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

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Dow Jones Component Reshuffle is Bearish for Stocks

The Dow Jones Industrial Average is about to undergo the most significant changes in a decade. The featured chart shows that S&P Dow Jones Indexes usually gets the timing of its changes wrong. Furthermore, the ‘New Dow’ will be subject to the whims of the most vulnerable sector of the US economy.

Good-bye Hewlett-Packard, Bank of America, and Alcoa. Hello Nike, Goldman Sachs, and Visa.

The Dow Jones Industrial Average is undergoing its most dramatic facelift in a decade and will morph into a much more financial sector focused average. The changes will go into effect September 20, 2013.

I see the following risks short and long-term:

Short-term Reshuffling Risks

In recent years reshuffling components was followed by temporary corrections. The weekly DJIA chart below chronicles changes and the effect on the Dow since February 2008 (there was no change from November 2005 – February 2008).

The short-term performance immediately following the shuffle was generally negative, although the losses were limited. Long-term was in line with random.

Long-term Reshuffling Risks

S&P Dow Jones Indexes, a subsidy of McGraw-Hill (which is also the parent company of Standard & Poor’s and J.D. Power and Associates), dropped one financial name (BofA) from the mighty Dow and added two (Goldman Sachs and Visa).

But the exposure to financials is more significant than even the two for one swith suggests. Why?

The Dow Jones (NYSEArca: DIA) is a price-weighted gauge, that’s why it’s called an average not an index. Price-weighted simply means that the stock with the biggest price tag carries the most weight. Currently that’s IBM. At $190 a share IBM accounts for 9.43% of the DJIA and is the unquestioned VIP (Chevron, the ‘runner up,’ trades at $123).

Soon to be deleted Bank of America trades at $14.50 and accounts for 0.74% of the index (keep in mind that the index has only 30 components). That means that BAC would have to move 13 times as much as IBM to match IBM’s effect on the average.

Currently financials are the fifth biggest sector of the DJIA and account for only 11.39%. Here’s where it gets interesting:

Visa trades at $186 and Goldman Sachs at $165. The top three holdings of the Dow Jones will be IBM, Visa and Goldman Sachs. Based on a quick thumbnail assessment, financials will soon be the biggest sub-sector of the Dow with an allocation around 25%.

We shouldn’t forget that the Financial Select Sector SPDR ETF (NYSEArca: XLF) and SPDR S&P Bank ETF (NYSEArca: KBE) lost 85% from 2007 to 2009, significantly underperforming the S&P 500 (NYSEArca: SPY), which was down ‘only’ 57%.

So the heavy financial weighting of the Dow can be a negative.

In fact, former Treasury Secretary Hank Paulson mentioned in a guest contribution for a German finance and economy newspaper that he fears yet another financial ‘firestorm’ (firestorm is the term he used).

According to Paulson the financial sector is quite vulnerable. This article explains in detail the problem Paulson warns of: Hank Paulson Warns of Another Financial Crisis.

Simon Maierhofer is the publisher of the Profit Radar Report.

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What The Dow’s Big Red Reversal Candle Means

On Monday the Dow spiked within 120 points of a new all-time high before falling hard. In fact, Monday’s red candle engulfs all of the 21 previous candles. However, the bearish candle is in conflict with bullish short-term indicators.

The Dow Jones Industrial Average (DJIA) reversed trends with an exclamation mark on Monday. After spiking to a new recovery high, the DJIA (corresponding ETF: Dow Diamonds – DIA) fell to a 21-day low.

A chart simply and elegantly displays a ‘bad day’ like this with a big red candle. This one red candle engulfs the 21 previous candles (shaded gray box).

This red candle high is also called a reversal candle. Candles like it tend to mark trend reversals. In this case from up to down. This doesn’t mean the Dow can’t and won’t eventually move higher (short-term bullish developments discussed below), but it cautions of lower lows ahead.

Two other facts enhance the message of this red candle. The high occurred right against a parallel channel anchored by the June/November 2012 lows and September 2012 high.

Perhaps even more importantly, the Dow stalled and reversed just before its all-time high water mark at 14,198.10. The Dow’s all-time high is huge resistance.

The February 18 Profit Radar Report referred to the all-time high resistance: “Next week has a bearish seasonal bias. With its all-time high just ahead, the Dow has a well-defined resistance level for a short trade. Aggressive investors may short the Dow close to its 2007 high with a stop-loss at 14,200.”

At the Profit Radar Report we call this kind of a trade a low-risk trade. Why? Because we were only 200 points or 1.5% away from the stop-loss level.

One Swallow Doesn’t Make a Summer

But one swallow doesn’t make a summer one one red candle doesn’t make a bear market. After two 90% down days (February 20, 25) stocks were likely to rally. That’s why Monday’s (February 25) Profit Radar Report recommended to cover short positions at S&P 1,491.

In addition the VIX triggered a sell signal (buy signal for stocks) yesterday. Although I think that stocks will slide to a lower low, it will take a break below support or a spike to resistance to place a possible short bet. Important short-term support/resistance levels are outlined in the Profit Radar Report.