S&P 500: Short-and Long-term Risk vs Reward Analysis

it happened again: The S&P 500 erased a month worth of gains in just 3 days. Being aware of the up side potential compared to down side risk is always a good idea, but especially now.

Let’s objectively assess bullish and bearish factors to determine up side potential vs down side risk for the short-and long-term.

Up Side Potential – Short-term

The October 20 Profit Radar Report published the S&P 500 futures chart below and stated that: “A close above 3,002 (blue triangle) could eventually lead as high as 3,187.75 (3,167.74 for S&P 500).

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The S&P 500 came within 12 points of this target and then dropped 84 points in 3 days (as projected, see last chart of this article). Based on the above projection, near-term up side potential is limited.

Up Side Potential – Longer-term

On November 25, the VIX closed below 12 for the first time in 3 months. Over the past 20 years, this has happened 8 other times. 1 year later the S&P 500 traded higher every time (the blue lines below highlight the instances since 2013).

On November 25, the Russell 2000 reached a new 52-week highefor the fist time in a year. Over the past 20 years, this happened 5 other times. 1 year later, R2K traded higher 4 of 5 times.

For the first time since August 2018, the monthly MACD histogram for the NY Composite crossed above 0. The blue lines below highlight times when the MACD histogram exceeded 0 for the first time in a year. This signal was rare (only 6 times since 1980) and always followed by gains 1 year later (on average 16%).

Short-term Down Side Risk – Short-term

The November 24 PRR mentioned that VIX hedgers held a record amount of VIX positions and warned: “The last two times this happened, the VIX spiked and S&P 500 took a nasty spill.”

From November 27 – December 3, the VIX soared as much as 50%. This may have satisfied the need for a VIX spike already, but more could still be to come.

Longer-term Down Side Risk

The November 20 PRR noted that: “Unlike stocks, junk bonds have been trending lower. The chart below plots the S&P 500 against the SPDR High Yield Bond ETF (JNK). The blue boxes highlight other periods where JNK trended lower while the S&P trended higher. It usually and eventually led to stock market pullbacks of various degrees.”

It is difficult to put a time-frame on this ‘setup’ as the bearish divergence could be followed by weakness sooner or later.

Conclusion

When compiling my forecasts I look for ‘signal clusters.’ Those are times when indicators and studies coherently suggest a specific performance over a certain time frame.

Right now, a cluster of bullish studies suggests that stocks will be higher about 1 year from today.

Another cluster of indicators projects lower prices over the next 3 month. This cluster, however, is in conflict with the strong momentum market we’ve seen since early October.

In short, the weight of evidence suggests that pullbacks over the next 3 month are an opportunity to buy.

The yellow projection below, published in the December 1 Profit Radar Report, outlined a path in harmony with a number of indicators.

As you can see, the projection correctly captured the decline from 3,150 to below 3,100. Another rally to the high is quite possible and – if all goes according ‘to plan’ – should be followed by another pullback, potentially a much deeper, but also temporary one.

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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Short-term S&P 500 Forecast

We’ve been tracking the triangle formation that kept the S&P 500 range bound for several weeks.

The last free S&P 500 forecast (April 15: S&P 500 Trapped in Range – Why and How Long?) summarized the situation as follows:

If the S&P is not strongly rejected by the upper triangle boundary, it will probably continue ‘triangling’ around and eventually break higher. Even if stocks break higher though, they may soon come back … perhaps to test the lower end of the range.”

Here is an updated look at the triangle, seasonality and supply & demand:

The S&P tried to break above the triangle, but ultimately failed, and is now just below prior triangle support.

As per the April 22 Profit Radar Report, this failed breakout was almost expected:

Based on technical analysis, a break above S&P 2,112 and Nasdaq 4,465  – 4,485 would be bullish. The bearish S&P divergences suggest tight risk management to protect against a fakeout breakout. If the breakout is successful, up side appears limited. Aggressive investors may trade a break above resistance (such as QQQ above 109.10) or go short while resistance holds.”

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The RSI graph, included in the chart above, illustrates the bearish RSI divergence.

The percentage of stocks above their 50-day SMA also failed to confirm the latest S&P high and strongly suggested internal deterioration (view chart here).

MACD (shown above) triggered another sell signal on Tuesday.

Seasonality is turning bearish (my S&P 500 seasonality chart is shown on page 2 of this Forbes article).

Yesterday, the equity put/call ratio and VIX:VXV ratio spiked to levels that caused bounces in the past (chart below published in yesterday’s Profit Radar Report).

However, demand for stocks has been falling as supply picked up. Tuesday’s drop on heavy volume right after an attempt at new highs is a negative (high volume declines after a period of selling can be exhaustion moves, but high volume declines after new highs tend to be more of a ‘kick off’ move).

The S&P 500 is still in the chopping ranging, so pegging a reliable resistance level is tough, but I would watch S&P 2,090 and the red resistance line on the RSI graph. A move above RSI resistance would make another S&P all-time high possible.

In summary, selling the bounces seems to be the best approach right now. The question is, how big will the next bounce be?

Continued S&P 500 analysis is 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 and 17.59% in 2014.

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Is the Russell 2000 Forming a Bearish Wedge?

The Russell 2000 sports an interesting chart.

Here is what Wednesday’s (April 15) Profit Radar Report observed:

The Russell 2000 rallied to a new all-time high today. The chart shows a wedge, which is generally considered a bearish formation. RSI did not confirm today’s high and MACD is barely positive (blue bubble). The 2-day RSI is short-term overbought at 96. The Russell 2000 also touched the upper Bollinger Band today.

History suggests a pullback, sooner or later. Aggressive investors may short the S&P 500 (NYSEArca: SPY) or Russell 2000 (NYSEArca: IWM) against today’s high.”

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Well, the Russell 2000 pullback happened sooner rather than later.

However, the Russell 2000 is still within the rising wedge formation (and above wedge support). There are two ways to draw wedge support (solid and dashed green line).

Notice also the open chart gap created by today’s massive gap down. Such chart gaps have a tendency to be closed – sooner or later.

In summary, while today’s drop comes at the right time to start the initial validation process of the bearish rising wedge, the Russell 2000 still needs a break below support (on increased volume) to unlock the potential for much lower targets.

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.

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MACD Triggered ‘Gnarly’ S&P 500 Signal

Living in San Diego, I get to pick up some surfer slang, such as: “Hey dude, this wave was gnarly.”

Coming from Germany, I had never heard the term ‘gnarly’ before. A look at the urban dictionary shows synonyms such as crazy, wicked nasty or rad.

Turns out, in San Diego beach cities, many things are ‘gnarly,’ not just the waves (this could include an accident, girl or even a breakfast burrito).

On January 22, when the S&P 500 closed at 2,064, MACD triggered a ‘gnarly’ buy signal (see green line in chart below). Why gnarly?

Via the Profit Radar Report, I noted the MACD buy signal and warned:

According to proprietary internal supply & demand measures, this recent rally leg has been weak. However, the S&P closed above the 20 and 50-day SMAs for two consecutive days and trend following technicals like MACD have turned positive.

The purpose of the current up move is to lure investors back into stocks and elicit a level of optimism before the hammer drops again.

A reversal lower would certainly baffle many market technicians. My research still favors the odds of a reversal.”

In hindsight, it becomes obvious that the MACD buy signal was indeed wickedly gnarly. The S&P 500 dropped like a rock right after the buy signal. This illustrates the pitfall of basing buy/sell decisions solely on popular gauges, such as the 20 and 50-day SMA or MACD.

Yesterday’s decline triggered a MACD sell signal, but support around 1,988 has held thus far. Depending on today’s close, the S&P 500 (NYSEArca: SPY) may even paint a green reversal candle.

Today’s close could be important for the short-term, but – with or without bounce – I anticipate another leg down as outlined in the January 19 Profit Radar Report:

More follow through strength is likely with resistance at 2,040 – 2,075. The odds for another leg starting at 2,040 – 2,070 are above average. Potential down side target is 1,960 – 1,900. Going short around 2,050 is most attractive from a risk/reward perspective. We do expect new highs eventually, but another leg down first looks to be in the cards.”

Perhaps we get another bounce to 2,075, followed by a drop to 1,960 – 1,900 and new recovery highs thereafter.

Continued updates will be available to subscribers of 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 and 17.59%.

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

4 Iconic U.S. Stocks that Lost 49% While You Were Sleeping

Overnight, four iconic U.S. companies lost 49%. One of them, a reputable blue chip Dow component, wiped out four years worth of gains while investors were sleeping. What does this performance mean and can it be detected/avoided?

The biggest danger is one you are not aware of or can’t predict. For individual stock investors that’s gap down opens. Such overnight losses leave big chart gaps that often by-pass stop-loss orders.

October has been a particularly treacherous month as four iconic U.S. companies lost a combined 49% while shareholders were sleeping. Talk about a financial overnight coronary event.

In the night(s) from October 17 (Friday) to October 20, IBM (NYSE: IBM) lost 8.35% and wiped out four years of gains.

In the night from October 20 to 21, Coca Cola (NYSE: KO) lost 5.75%.

In the night from October 23 to 24, Amazon (Nasdaq: AMZN) lost 9.10%.

In the night from October 15 to 16, Netflix (Nasdaq: NFLX) lost 25.83%.

Is there a common trigger for all those coronary events?

Is it possible to detect and prevent owning stocks before an overnight collapse? 

The chart below shows IBM, KO, AMZN and NFLX side by side.

Trading volume spiked every time on the day of the coronary, but there was no consistent pattern the day before (which was the last day to get out in time).

A look at commonly used technical indicators – such as moving averages, MACD, RSI, percentR – also shows no consistent pattern.

Netflix and Amazon were unable to overcome their 20-day SMAs the days prior to the gap down, but Coca Cola ‘slept’ above the 20-day SMA the night before it fell out of bed.

Amazon triggered an MACD buy signal the day before it tumbled.

The only way to avoid individual meltdowns is to invest in baskets of stocks via ETFs or other index-based vehicles. The link below discusses which type of ETFs are best in this stage of a bull market.

The One Common Denominator

There is, however, one common denominator, indicated by the little telephone icon. All companies reported their earnings just before the big gap down (either after the close or before the bell).

Do Gap Downs Foreshadow a Major Market Top?

Excessive amounts of selling pressure are a reflection of investor psychology.

Gap ups on the way up are a vote of confidence; gap downs show that investors’ confidence is eroding.

Erosion of confidence is one of the tell tale signs of an aging bull market. This doesn’t mean the bull market is over, but it shows that investors are becoming more selective.

The number of outperforming stocks shrinks as more and more individual stocks fall into their very own bear market. In fact, currently 31% of all NYSE stocks are trading 20% or more below their highs.

In other words, a third of all stocks are already in their own individual bear market.

A historic analysis of major market tops puts this deterioration into perspective and shows how close (or far off) we are from a major market top. It also shows which sector is the best to invest in right now.

Here is a detailed look at the 3 stages of a dying bull market.

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.

How S&P 500 ‘Puppet Master’ Covertly Pulls Strings

Many believe the market is rigged as high frequency trading (HFT) and the Federal Reserve have become major driving forces. However, there is another age old ‘force’ that often pulls the strings in plain sight, yet undetected by many.

A puppet master is a person, group or force that covertly controls a matter. Wielding this kind of covert power is also known as pulling the strings behind the scenes.

We know that the Federal Reserve is openly pulling strings, but that’s not what this article about.

It’s about a different kind of ‘force’ that drives the S&P 500. It doesn’t drive the S&P 500 every single day, but often enough to be considered a valid force.

To recognize, oust, and ultimately profit from this force, please join me in a little experiment.

Experiment: Stage 1 (do not peek)

Below is a chart of the S&P 500. Please take a moment to look at the chart and see if you can observe certain patterns (do not peek ahead to the second chart).

Experiment: Stage 2

Below is the same chart with three very simple annotations.

  1. A blue trend channel going back to the March 2009 low.
  2. A black trend channel going back to the October 2011 low.
  3. Fibonacci projection (red line) going back to the March 2009 low.

Please keep in mind that I didn’t create those lines. The market did. I only connected the dots.

Experiment: Stage 3

The third chart shows the same two channels and Fibonacci resistance, but shows daily bars to allow for a closer examination of the more recent price action.

Here is what we see:

  1. The S&P 500 was repelled by the black channel in January, March and April (red dots).
    On April 2 (green arrow), the S&P 500 staged a technical breakout to new all-time highs, but the Profit Radar Report pointed out resistance at 1,898 (created by a short-term channel) and 1,900 and warned that this looked like a false breakout.
  2. The S&P 500 found support around the blue channel three times in March and April (green dots).
  3. The S&P 500 (NYSEArca: SPY) essentially treaded water in an expanding range wedge created by two powerful long-term trend channels.
  4. Yesterday, the S&P 500 sliced below the blue channel. Support is like thin ice, if broken it gets investors wet. Trend lines like that make great guidelines for stop-loss levels.

Please Mock Me

Usually when I write articles about trend lines, readers post comments like this one:

“More BS from the techies. I can take any chart and draw these lines and call it a trend.”

Ironically, those kinds of comments are a good sign. A puppet master ousted as puppet master is no longer able to covertly influence others.

In order for trend lines to continue working, there need to be enough doubters, mockers, hecklers, and investors simply unaware of the power of this simple tool.

So please, go ahead and disregard trend channels and allow the rest of us to enjoy their full benefit.

Even before the channel was broken, a number of indicators suggested lower prices. The April 7 Profit Radar Report reported an MACD sell signal and bearish seasonality and concluded that:

“Today’s decline looks like an important building block for a multi-week bearish structure.”

We’ve all heard about MACD, but this particular MACD signal is especially unique and potent. The reason why it’s discussed here:

MACD Triggers the Year’s Most Infamous Sell Signal

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.

 

MACD Trigger’s the Year’s Most Infamous Sell Signal

History suggests that an April MACD sell signal should never be ignored, but this particular MACD sell signal is loaded with additional nuances and tell tale signs. Here’s a closer look at what could be the most infamous sell signal of the year.

On Monday MACD triggered a sell signal for the S&P 500. There are a number of reasons why this sell signal should be watched very carefully:

1) It occurred after the S&P 500 pushed into triple resistance.

The April 2 Profit Radar Report highlighted this resistance cluster as follows:

“Trend line resistance going back to October 2011 is at 1,900. Minor trend line resistance is at 1,898. The centerline of a short-term trend channel is at 1,898.”

2) The S&P 500 reversed at 1,897.28 and painted a bearish red reversal bar.

3) The S&P 500 found support at the 50-day SMA and a trend channel going all the way back to the 2009 bear market low.

4) Perhaps most importantly, seasonality is turning quite bearish in April.

A bounce is likely since the S&P 500 (NYSEArca: SPY) found support exactly where it should have. However, when this bounce is finished, seasonality and the MACD sell signal may take over and push stocks lower.

Why is seasonality such a big deal?

A chart says more than a thousand words, and this chart shows that (based on history) investors do not want to own stocks after April in a midterm election year.

The chart and further explanation is available here:

Historic S&P 500 Seasonality is about to Turn Ugly

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.