S&P 500 Abuses Popular Pattern to Fool Investors

It is rare that a particular stock market support level becomes as obvious as 2,040 for the S&P 500.

Since March 18, the S&P touched 2,040 +/- 13 times, and bounced every time.

As of 2,040 wasn’t already obvious enough, it also became the neckline of a head-and shoulders topping pattern that got a fair amount of attention.

You know something is suspiciously obvious when you read about it everywhere. As the small selection of headlines below shows, S&P 2,040 become a popular ‘make it or break it level.’

  • Investorplace: “S&P 500 Teetering on the Edge of a Breakdown” – The index closed just a fraction of a point from a serious technical violation. The importance of this line (2,040) can’t be overstated. – May 18
  • MarketWatch: “S&P 500 Nails the 2,040 Support ahead of the Fed” – May 18
  • Barron’s: “You shall not Pass: Stocks Gain as S&P 500 Holds 2,040” – May 18
  • TheStreet.com – “S&P Below 2,040 – Looks Like there’s more Selling to Come” – May 19
  • CNBC: “There’s been a lot of talk about the 2,040 level in the S&P 500, that is our key support.” – May 20

If It’s Too Obvious …

If it’s too obvious, it’s obviously wrong, at least this was the Profit Radar Report’s take. Below are brief excerpts from the May 15 and May 18 Profit Radar Report:

Barron’s rates the iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

May 15: “Support around 2,040 has become pretty obvious, perhaps too obvious. There is two ways the market may deal with a too obvious setup: 1) By-pass support via a gap down open 2) Seesaw across support and take out stop loss orders before embarking upon the real move. The market may deliver some fakeout moves (or gaps) near the 2,040 zone, but once the fakeout moves/gaps are out of the way, we may get a setup.”

May 18: “Based on the importance of 2,040, we wouldn’t be surprise to see more ‘market shenanigans’ around 2,040.”

Technical analysis supported the notion of a seesaw across 2,040.

On one hand, there was a bearish divergence between the S&P 500 and two different breadth gauges shown below.

On the other hand, there was the potential for a bullish RSI divergence on the hourly chart.

The Profit Radar Report anticipated a break below 2,040 (due to the bearish divergence), but did not recommend to chase the down side, due to the propensity for a seesaw and the bounce-back potential suggested by the bullish RSI divergence.

Sometimes it’s just best to stand aside while the market tries to fool the crowded trade(s). Now, that the market has punished bulls with a stop-loss near 2,040 and bears who went short on a break below 2,040, it may be ready for its next move.

Resistance (and an open chart gap) is just around 2,065, and we know for sure where the next support is, or do we?

Continued S&P 500 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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Lumber Prices May Burn Real Estate Bears

The effect of lumber prices on real estate is undeniable. As such, lumber prices can be used as a forward-looking indicator for the housing sector. Right now, lumber is carving out a potential inverse head-and shoulders bounce that may burn real estate bears.

What do lumber prices have to do with real estate?

A whole lot more than most investors think.

In fact, the correlation between lumber and real estate is one of the least known, but most accurate forward-looking real estate indicators.

I know this sounds a bit obscure, but you can’t argue with the charts. The long-term correlation chart between lumber and the PHLX Housing Sector Index is available here. Is the Housing and Real Estate Recovery here to Stay?

The key point to keep in mind is that lumber prices lead real estate prices by about 14 months.

With that in mind, let’s look at the lumber chart.

  • Lumber formed a potential head-and shoulders bottom with the (green) neckline around 340.
  • Lumber pushed above the HS neckline and the red trend line resistance.
  • Measured HS target is around 395
  • As long as trade remains above 340, the HS target remains active

Such a rally (assuming it materializes) should be felt in the housing market about 14 months later.

Of course a relapse below 340 would hint at a failed HS breakout and further weakness, which should translate into softer home prices … 14 months later.

Some of you may still wonder if lumber prices are really a ‘legit’ indicator.

Almost exactly a year ago (August 27), we published a lumber chart with a 14-month outlook via this article: How to Turn the Lagging S&P/Case-Shiller Home Index into a Leading Indicator

With the benefit of hindsight, we can now check if lumbers message a year ago proved correct.

Below is the original August 27 chart. The green graph represents lumber prices set forward by 14 months. The blue graph reflects the actual performance of the PHLX Housing Sector.

Major ‘pops and drops’ in lumber prices (such as in 2013) tend to show up muted in the real estate market – which is what happened again over the past 14 months – but directionally real estate continues to follow the beat of lumber.

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.

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

NYSE Composite Chart is Sending Strong Message

Although not nearly as popular as the S&P 500 or Dow Jones, the NYSE Composite sports one of the most transparent technical pictures we’ve seen in quite a while. Here’s a closer look at the strong message of the NYSE Composite.

The NYSE Composite Index is not often discussed, but as one of the broadest U.S. indexes (1,868 components) it offers a unique big picture perspective, especially right now.

First off is a weekly log scale bar chart of the NYSE Composite since its March 2009 low along with some basic support/resistance levels and trend lines.

The second chart zooms in on the more recent price action.

There are a number of noteworthy developments:

There is a possible head-and shoulders top. The red line is the neckline. The projected target is 10,655, which was already reached last week.

The measured HS target at 10,655 also coincides with green trend line support.

Despite the measured HS target having been fulfilled, the August 3 Profit Radar Report predicted another leg down.

The NYSE Composite (NYSEArca: NYC) already exceeded last weeks low and the measured HS down side target. Today it broke below last week’s low and first green trend line support.

What does this mean for the NYSE Composite?

It doesn’t take a ‘chart Sherlock’ to perceive that the next leg down is underway.

While the trend is still down, the outlook is not as bleak as many expect. There is support at 10, 447 (200-day SMA) and 10,250.

From this support I expect a reaction that will surprise Wall Street and investors alike.

More details along with an actual projection for the S&P 500 are 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.

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

The XLF Financial ETF Chart Looks Ominously Bearish

Uncertainty is one of the annoying staples of investing, but there are times when risk and uncertainty can be reduced to an absolute minimum. The Financial Select Sector SPDR ETF (XLF) is at such a low-risk inflection point right now.

Technical analysis is not infallible, but sometimes it allows you to pinpoint key inflection areas.

The Financial Select Sector SPDR ETF (NYSEArca: XLF) is at such a key inflection point right now.

The financial ETF (XLF) chart below offers a wealth of information:

1) XLF is butting against resistance created by the May 22 high.
2) The rally from the August 28 low has almost exactly retraced a Fibonacci 61.8%.
3) The current rally high could almost be considered the right shoulder of a head-and shoulders top (although there’s no real neckline).
4) Key resistance is at 20.32 – 20.60.
5) Key support is at 19.50 and 19.30.
6) There is a bearish RSI divergence at the July 23 high.

What Does All This Mean?

As long as trade stays below 20.60, odds favor lower prices ahead for XLF, potentially a sizeable decline.

How to Trade

There are two low-risk ways to trade XLF:

1) Go short now with a stop-loss above resistance or
2) Go short once support is broken.

Those are low-risk trades, not no risk trades.

Why Low Risk

Support/resistance levels act like traffic lights. A car driving down the street is most likely to stop (and reverse) at a traffic light. It doesn’t have to, but if the light is red it has to stop.

The XLF resistance level acts like a traffic light. XLF doesn’t have to stop there (in fact, a bullish case can be made if XLF breaks above resistance), but if XLF is going to stop and reverse, it will be at this ‘light.’

Overhead XLF resistance provides a stop-loss level, which exactly defines the risk of the trade. The potential gain is significantly larger than the potential loss, putting the risk reward ratio in favor of the short trade.

Only trading low-risk setups like this one results in about 60% winning trades, but the gains of the winning trades are 3-4 times bigger than the losses of the losing trades. The Profit Radar Report specializes in spotting such trade setups. The green bubble (August 5, 2012), marks when the Profit Radar Report stated: “Financials are currently underloved. With such negative sentiment, a breakout above 14.90 could cause a quick spike in prices.”

XLF echoes the current position of the S&P 500 (NYSEArca: SPY), which trades at a similar inflection point. The Nasdaq (Nasdaq: QQQ) has rallied much further than the S&P 500, the Dow Jones on the other hand (NYSEArca: DIA) has yet to catch up to the S&P 500.

Regardless of the short-term outlook for XLF, the financial sector is still plagued by serious issues.

Out of all people, it’s Hank Paulson – former Treasury Secretary (during the 2008 financial crisis) – who is addressing the vulnerability of the financial sector and actually warns of another financial ‘firestorm.’

More details here: Hank Paulson Warns of Another Financial Crisis

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter or sign up for the Free Newsletter.

 

S&P 500 Hits Head-and Shoulders Target

There are times when short-term charts offer little to no guidance, and there are times when a chart just oozes with valuable clues about the market’s whereabouts. The later is true right now. Head-and shoulders, Fibonacci, trend lines, etc., this chart has it all.

Sometimes a picture is truly worth more than a thousand words.

The hourly S&P 500 (SNP: ^GSPC) chart below is jam-packed with interesting clues.

1) There is a head-and shoulders topping pattern with a neckline at 1,681. Several trend lines converging at the same area reinforce the importance of the neckline.

The setup was so plain that the August 14 Profit Radar Report recommended to go short with a move below 1,681.

2) The target of a head-and shoulders breakdown is determined as follows: Calculate the difference between the head (1,709) and the neckline (1,681) and project it to the down side (1,652). The head-and shoulders target is 1,652, which the August 15 Profit Radar Report outlined as initial down side target.

3) As the chart shows, 1652 is also the 38.2% Fibonacci retracement of the points gained from June 24 to August 2. 1,652 is thus an important support/resistance level.

4) There are two open chart gaps (dashed pink lines).

What happens if the S&P 500 (NYSEArca: SPY) falls and stays below 1,652? It will probably continue south until the next support level.

It’s interesting to note that the VIX (Chicago Options: ^VIX) created a similar head-and shoulders formation with an up side target around 15. This up side target was reached as well.

The Nasdaq-100 (Nasdaq: QQQ) – buoyed by Apple – could care less about head-and shoulders patterns as it may be worried about its open chart gaps.

Conclusion

The S&P 500 (NYSEArca: IVV) is clinging to the 1,652 level. If it fails to hang on, it will drop to the next support level. On the flip side, there are open chart gaps at much higher prices.

Sunday’s special Profit Radar Report takes a detailed look at seasonality (both the S&P 500 and VIX), sentiment (8 different sentiment/money flow gauges), technical analysis, and Elliott Wave Theory and visually projects the two most likely paths stocks will take over the coming weeks.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow him on Twitter @ iSPYETF.

Weekly ETF SPY: XLV – Head-and Shoulders Above Other Sectors

The Health Care Select Sector SPDR ETF (XLV) sports the second best year-to-date performance. Recent price action has exposed a key short-term support level that can be used as a trigger level for investors looking to short the health care sector.

The Health Care Select Sector SPDR’s (XLV) performance ranks head-and shoulders above the rest. XLV is up 19.19% year-to-date, outperformed only by utilities (XLU is up 19.66%).

Other double-digit year-to-date performers include the Consumer Staples Select Sector SPDR (XLP – 17.89%), Consumer Discretionary Select Sector SPDR (XLY – 15.46%), Financial Select Sector SPDR (XLF – 14,48%) and Energy Select Sector SPDR (XLE – 10.08%).

Technology (XLK), industrials (XLI) and materials (XLB) are stuck in single digit performance territory.

Looking at the performance (and possible cracks) of leading sectors often provides clues for the overall stock market. Prior ETF SPY’s identified key support for other leading sector ETFs like the iShares Russell 2000 ETF (IWM) and SPDR Retail ETF (XRT).

Key support for IWM and XRT has proven crucial to the short-term performance of IWM and XRT. Bot sectors/ETFs bounced exactly from support.

Not all technical analysis proves correct with that much clinical precision, but XLV is at a point where key support has become visible.

The chart below shows that XLV may be carving out a short-term head-and shoulders pattern with a neckline around 46.70. This week this potential neckline coincides with trend line support.

A break below 46.70 would unlock a measured target of 45.15 +/-, which also coincides with trend line support.

As long as support holds, the up trend remains intact and we’re just talking about ‘unhatched eggs.’ Investors fishing for a price top may use broken support as a trigger level for short positions.

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