Can the S&P 500 Suffer Another ‘Air Pocket Decline?’

The last S&P 500 update highlighted the bearish implications of trend line resistance and the ominous VIX wedge.

I reiterated the importance of this trend line in the July 28 Profit Radar Report when stating that: “We are looking at many indicators, but the purple trend line – boring as it may seem – is probably more helpful than other gauges at this point.”

The S&P 500 fell over 200 points after tagging purple trend line resistance (see ‘before and after’ charts below).

Obviously, the purple trend line worked, but will the S&P 500 tumble another few hundred points as implied by the expanding triangle pattern (wave E shown on left)?

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Here are a few other facts and indicators to help gauge the odds:

New Lows

On Monday, 249 NYSE-traded stocks fell to new 52-week lows. This is the highest reading of 2019. In fact, it’s very unusual for such high 52-week low numbers to occur so soon after the S&P 500 was at an all-time high. The blue lines in the chart below show other times when 52-week lows spiked above 240 when the S&P was within 10 trading days of a 52-week high. It wasn’t a good sign for stocks.

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Technicals

The S&P 500 is back above trend line resistance (now again support, tomorrow around 2,905). As long as trade remains above this green trend line, the rally can continue higher.

Next resistance is at 2,950 – 2,985.

Island Reversals

The term island reversal is often associated with tops but can also mark bottoms. It simple donates a number of candles at a price extreme separated by two gaps.

As outlined by the blue oval, the S&P 500 just staged an island reversal to the up side.

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As indicated by the blue lines below, similar island reversals occurred in August 2,015, December 2015, February 2016 and June 2016. The short-term performance was mixed, but long-term performance was positive.

Breadth

Monday’s Profit Radar Report stated that: “Today’s drop saw 87.87% of all stocks declining. This tends to be indicative of at least short-term lows. A bounce is likely.

The developing bounce delivered an 83.45% up day (83.45% of NYSE-traded stocks advanced) Thursday. The green lines in the chart below show that this has been positive 3 of the last 5 times it happened.

Summary

Purple trend line resistance has been validated by the S&Ps 200-point drop. It’s rare for indicators to foretell are massive drop, but the evidence allows for a continuous decline.

The S&P 500 will have to stay below resistance (2,985) and fall to new lows to start validating the bearish implications of the expanding triangle pattern discussed here.

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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I Spy … An Intriguing NYSE Composite Chart

Perhaps the most fascinating chart right now is that of the NYSE Composite. It features two developments worth exploring:

  1. Island reversal
  2. Bearish wedge

The NYSE Composite includes all stocks listed on the NYSE, about 1,900. Unlike the S&P 500 (NYSEArca: SPY) or Dow Jones (NYSEArca: DIA), the NYSE Composite actually reached a new all-time high on Thursday.

The new all-time high was short-lived and followed by a massive gap down the next morning.

Island Reversal

This gap lower created an island reversal. Some analysts consider island reversals indicative of a major trend change, but the Technical Analysis book by Edwards and Magee describes it as follows:

“The island pattern is not in itself of major significance, in the sense of denoting a long-term top or bottom, but it does as a rule send prices back for a complete retracement of the minor move which preceded it.”

It’s probably up to debate where the last minor move started, but at Friday’s low the NYSE Composite already touched minor support.

In addition, as Sunday’s Profit Radar Report pointed out, there’s an open chart gap, and the post-2009 bull market has filled every chart gap.

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Open gaps are like unfinished business, and with the gap closed this morning, the NYSE Composite doesn’t ‘have to’ move any higher.

Bearish Wedge

In fact, the NYSE Composite has formed a potentially bearish wedge formation (bold trend lines). It takes a break below the green trend line to activate lower targets, but last weeks island reversal throw-over top may be an early indication of an upcoming correction.

Trade Setup

Last week’s all-time high is important for the short term, and going short against it presents a low-risk trade setup with a favorable risk/reward ratio.

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.

 

Nasdaq-100 ‘Stuck on an Island’

The Nasdaq-100 bars painted a bearish reversal pattern in early December. We’ve just seen the effects of this reversal pattern, but as long as trade remains about this support, there’s no reason to worry.

On December 3, the Profit Radar Report took a closer look at the Nasdaq-100 and stated:

The Nasdaq-100 bars are painting a picture (almost looking like an island reversal) that’s similar to prior reversal patterns (see blue circles). This is a potential red flag, but unless support at 4,285 and 4,210 is broken, it’s premature to worry.”

The reversal pattern delivered again, like it did a couple of times earlier this year.

Thus far, the Nasdaq-100 found support at 4,216, so there’s no reason to worry.

Support at 4,209 is backed up by 4,180. Only a move below 4,180 may draw trade towards the open chart gaps.

The biggest open chart gap for the QQQ ETF (Nasdaq: QQQ) is at 100.26. We may not get there, but if we were, it likely would be a good buying opportunity. Overall, I expect new highs later this year or early next.

Recent Profit Radar Report analysis for the S&P 500 is available here: S&P 500 Suffers from Lack of Participation

Recent Profit Radar Report analysis for the Dow Jones is available here: Dow Jones Repelled by 12-year ‘Insider’ Resistance

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 to get actionable ETF trade ideas delivered for free.