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.

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.

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.

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

S&P 500 Update

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

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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.

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

Tell Tale Signs from the Dow Jones Averages

Sunday’s Profit Radar Report featured the following charts and analysis for the Dow Jones Averages:

Dow Jones Industrial Average (DJI):

The Dow Jones Industrial Average (DJI) appears to offer the most clues at this moment. The weekly bar chart shows double support (trend line and prior September high) right around 17,350 – 17,300. The 20-month SMA is at 17,198. This is not must hold support, but it’s a general zone worth watching for a potential bounce.”

Dow Jones Transportation Average (DJT):

The Dow Jones Transportation Average (DJT) broke above double trend line resistance (green circle) on July 29, but didn’t produce the ‘escape velocity’ needed to continue moving higher. In fact, the DJT has now returned to its original breakout trend line (blue circle). This kind of back test often serves of launch pad for the next spike. We’ve seen a few failures of a similar launch pad lately, but this is still one of the more reliable technical patterns.”

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Summary:

We don’t want to ignore some credible indicators pointing towards a correction, but 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.

 

Dow Jones Averages Did Not (Yet?) Confirm S&P 500 Highs

The S&P 500 is at new all time highs, and, as the weekly bar chart shows, there’s some room until it hits next resistance.

However, the Dow Jones Industrial Average (NYSEArca: DIA) and Dow Jones Transportation Average (NYSEArca: IYT) failed to surpass their prior highs.

But, the Dow Jones Transportation Average (DJT) managed to close above red trend line resistance (blue circle), which is short-term bullish.

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Viewed in isolation, the S&P 500 (NYSEArca: SPY) breakout is bullish, but it has not yet been confirmed by other major market participants.

The trend is your friend … until it ends. Seasonality suggests a rally pause. Here’s a brand new and detailed S&P 500 seasonality chart.

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.