Comprehensive S&P 500 Update

The S&P 500 has arrived at major trend line resistance (see chart). Will it relapse lower or climb above?

To answer this question, we’ll look at various indicators:

  • Investor sentiment
  • Market breadth & liquidity
  • Seasonality & cycles
  • Technical analysis

Investor sentiment – Obsession with Recession

The August 25 Profit Radar Report pointed out various bearish sentiment extremes – including that google searches for ‘recession’ spiked to the highest level since 2008 – and warned that stocks are likely to rally to flush out investors’ obsession with recession (for more details and chart go here: “Today’s stock market pessimism is a reliable sign of a stock market rebound“).

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.

The >150-point rally since certainly alleviated recession fears and turned investors more bullish.

The chart below plots the S&P 500 against 6 longer-term sentiment gauges.

The second chart plots the S&P 500 against 4 shorter-term sentiment gauges.

Sentiment summary: Sentiment is not frothy enough where it eliminates the possibility of further gains, but it now is more of a headwind than tailwind and more likely to curb gains and cause a pullback.

Market Breadth & Liquidity

The S&P 500 reached new all-time highs on four of the last eight trading days (November 5 – 14). But, on six of the eight days, more stocks declined then advanced.

There’s weakness ’under the hood,’ and it caused a number of bearish divergences shown on the chart below.

Bearish divergences can be erased quickly, but while they exist, they reveal a measure of weakness often seen prior to pullbacks.

Seasonality & Cycles

In terms of seasonality, the S&P 500 has passed the riskiest period of the year. However, cycles do not agree with the bullish year-end seasonality.

Technical analysis

The chart below highlights all the levels highlighted by the recent Profit Radar Reports:

  • Blue trend line: Potential resistance, but move above will lead to test of purple trend line
  • Purple trend line: Potential resistance, but move above will unlock higher targets
  • Red trend line: Potential resistance, but move above allows for further gains.
    Although the yellow triangle formation cautions that a move above red trend line resistance will not last.

Initial target for any pullback will be the purple trend line. A break below the purple trend line is needed to get lower targets.

Summary

The S&P 500 is at red trend line resistance. A temporary move above (post triangle spike) seems likely, but the risk of a relapse and test of purple trend line support (at minimum) is high. A break back below red trend line resistance (assuming there will be a spike above it) is needed to signal a reversal.

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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S&P 500: Year-end Rally or Breakdown?

2015 has been the year of trading ranges. The S&P 500 was stuck in a 100-point range from February to August and again from October until now.

Prolonged periods of zig-zagging tend to wear down support/resistance levels and dilute the effectiveness of technical analysis.

At times like this, it makes sense to overweigh other indicators to get a better read on the market. Here are a few of them:

Seasonality:

As of December 11, the S&P 500 was down 3.27%. Such poor performance is unusual for December. In fact, since 1970, the S&P 500 lost more than 3% after the first nine December trading days only four prior times (1975, 1980, 1996, 2002).

The graphs below (originally published in the December 13 Profit Radar Report) represent all years with 3%+ losses after the first nine December trading days (dashed black line) along with the performance over the next 30 trading days. December seasonality (green graph) typically turns notably bullish in mid-December.

Here’s another December anomaly:

Last week (Thursday/Friday), the S&P had two 1.5% back-to-back losses in the second half of December. According to SentimenTrader, this hasn’t happened since 1937.

Since 1928, there’ve only been eight back-to-back losses of more than 1% during the second half of December. All of those were during bear markets, but the S&P ended the year above the second down day level every single time.

Market Breadth

The December 6 Profit Radar Report pointed out extremely weak market breadth (more details here: Why are Stocks Down Despite Bullish Seasonality?).

Buyers fatigue is not always a short-term timing toll, but it’s been like a dark cloud over Wall Street, and certainly contributed to the lousy December performance.

There’s a small tell tale sign that buyers may be awakening (perhaps only for a little while). How so?

As the chart below shows, on Friday, the S&P closed at the lowest level since October 13. Some market technicians may consider this a technical breakdown, however, there was a bullish divergence between the S&P 500 and the percentage of NYSE stocks above their 50-day SMAs.

At least by one measure, selling was not as strong as price suggests. More often than not that’s a good sign.

Based on technicals, last week’s low at 1,993 seems important for the S&P 500.

Summary

As long as the bullish divergence and support at 1,993 hold, positive December seasonality deserves the benefit of the doubt.

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.

Is the S&P 500 Carving Out a Major Market Top?

This indicator is so valuable, I don’t want to keep it to myself. Unfortunately, I’m a bit in a pickle though.

I want to be fair to my subscribers. It just wouldn’t be right to share research reserved for paying subscribers for free, so I came up with this compromise:

You will see the indicator in its full power and glory, but I won’t disclose its name. It will simply be dubbed ‘secret sauce.’

As the charts below will show, ‘secret sauce’ correctly telegraphed the 1987, 2000 and 2007 market crashes.

Perhaps even more importantly, ‘secret sauce’ told investors to stay invested throughout this 6-year old bull market. Although there’ve been corrections along the way, ‘secret sauce’ has consistently pointed to new (all-time) highs.

What is Secret Sauce?

‘Secret sauce’ is basically a market breadth and liquidity indicator. Here’s how it works:

You know something’s wrong if the S&P 500 is at new highs, but ‘secret sauce’ isn’t.

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That’s what happened prior to the 1987, 2000 and 2007 crashes. ‘Secret sauce’ failed to confirm the new S&P 500 highs, which was an early indication of internal deterioration.

Like a ceiling fan that keeps going after it’s switched off, the market tends to keep going for a little while after liquidity and breadth peaks. ‘Secret sauce’ is a good reflection of when liquidity peaks and momentum slows before stocks roll over.

The first chart plots the 1987 and 2000 top against the S&P 500 (NYSEArca: SPY). The vertical red lines show the ‘incubation period’ between peak liquidity/breadth and peak price.

The second chart highlights the 2007 bearish divergence, which essentially marked the beginning of the end for stocks. It also captures the bullish green confirmations that kept pointing to continual new highs following the 2009 low.

I stumbled upon ‘secret sauce’ in 2013, and first introduced it to subscribers in the December 1, 2013 Profit Radar Report. Ever since then we’ve known to expect higher prices.

Obviously ‘secret sauce’ isn’t a short-term timing tool, but knowing whether a correction will morph into a full-fledged bear market or not has been incredibly helpful.

Especially since the media and self-proclaimed market pros have been calling for a market crash for years.

  • December 30, 2013: Why the market could see a 17% drop in 2014 – CNBC
  • May 15, 2014: Stocks are telling you a bear market is coming – MarketWatch

Imagine knowing when to simply ignore headlines as baseless fear-mongering. Is the recent pullback the beginning of the end?

All the details about ‘secret sauce’ 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 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.

S&P 500 Falls Below Important Support Level

The S&P 500 sliced below a key support level on Friday. This was followed by a 20-point decline short-term, but does it matter longer-term? Here are two charts that may have the answer.

Fridays drop, the biggest decline since January 28, drew the S&P 500 below important support at 2,090.

The green line and blue circles show why 2,090 is important for the S&P 500 (NYSEArca: SPY).

Support at 2,090 also coincided with the 20-day SMA, which actually complicated things as I pointed out via the Wednesday morning, March 4 Profit Radar Report:

The S&P 500 fell 20 points in the first hour of trading. It briefly dipped below support at 2,090 and is now back above 2,090. This is also where the widely watched 20-day SMA is. Whenever a popular indicator coincides with our support levels, there’s increased potential for seesawing around that level.

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I suppose that a renewed break below 2,090 will lead to more down side. We will go short with a small amount on a break below 2,087.”

Prior to breaking support at 2,090, the S&P 500 was unable to overcome resistance at 2,110 – 2,138.

The February 25 Profit Radar Report showed this long-term chart and warned that:

Today showed the first cracks in the strong price action. Some measures of sentiment continue to rise and market breadth is lagging. Creeper up trends like this usually end with a quick drop that erases several days of gains.”

The S&P 500 peaked on February 25 and has been drifting lower since. At least another dip lower is likely, and prior support at 2,090 is now resistance.

Despite broken support, my reliable ‘ultimate market top indicator’ still didn’t trigger a sell signal and seasonality is strong. This may only by a ’15-minute of fame’ scenario for bears.

The Profit Radar Report provides the next support and a detailed forecast on when a major market top is expected.

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.

Will New MidCap ETF Highs Propel All Stocks Higher?

Quietly, and in the shadow of it’s more popular and range bound S&P 500 cousin, the SPDR S&P MidCap 400 ETF (NYSEArca: MDY) just soared to new all time highs.

Most market technicians would grade this performance as bullish, and it may well turn out to be bullish.

However, I can’t help but be suspicious. Here’s why:

On February 1, I published the green S&P 500 (NYSEArca: SPY) chart projection for Profit Radar Report subscribers and stated:

“A drop below widely watched support around 1,990 followed by a reversal and rally towards 2,080” is very likely. The red projection would only come into play if trade stayed below 1,990.

Here is an updated look at the green projection. This projection has played out perfectly thus far, and there’s no concrete reason to abandon it.

However, there’s no room for tunnel vision either. Dale Carnegie beautifully illustrated the cost of tunnel vision:

“Here lies the body of William J., who died maintaining his right away. He was right, dead right as he sped along, but he’s just as dead as if he were wrong.”

Nobody wants to be William J.

The SPDR MicCap ETF breakout, when viewed in isolation is bullish.

Even the S&P 500 broke above bold red trend line resistance, which is also bullish.

Internal market breadth has been solid, which would also allow for further strength.

However, from a psychological perspective, a reversal after the S&P 500 breaks out of its recent trading range (blue line), would trip up a great number of investors, which is what Mr. Market likes to do (it did so at the January 22 high, with a ‘gnarly’ MACD signal).

I stated via the February 2 Profit Radar Report that: “Swing traders may be able to scalp a percent or two (or more with leveraged ETFs) by playing this bounce, but I believe the next best opportunity will be to the down side.”

For now I’ll stick with my green projection. The market will probably tell me within the next few days if I’m wrong.

Continuous updates are available for 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.

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

Will the ‘Tryptophan Effect’ Put Stock Market Asleep?

Posted on iSPYETF.com on 11-29-13

Stocks are known to run on bullish fumes going into the Thanksgiving holiday, but running out of gas thereafter. The ‘tryptophan effect’ doesn’t only hit investors, it seems to also embalm Wall Street.

The anticipation for a tasty and heavy turkey dinner is often followed by an unruly urge to nap. Stocks tend to feel the same way.

Long-term stats tell us that bullish seasonality leading up to Thanksgiving (and other holidays) is often followed by some sort of post holiday hangover.

The S&P 500 (SNP: ^GSPC), Dow Jones  and in particular the Nasdaq fulfilled the first part of the equation (pre-holiday strength), but will there be a post-holiday tryptophan hangover?

The stock market’s up trend has yet to be broken, but it is weakening and headwinds are picking up.

Tiring Up Trend

The percentage of S&P 500 stocks above their 50-day simple moving average (SMA) has fallen from 87% on October 22 to 76% on Wednesday.

Another way to measure market breadth is by the number of new highs. The Nasdaq (Nasdaq: ^IXIC) chart below plots the Nasdaq Composite against the number of new 1-year Nasdaq Composite highs.

There were 445 new Nasdaq 1-year highs on October 18, but only 357 on November 27.

This means that a fair number of stocks are already failing to perform, while a few heavy weighted large cap stocks like Apple and Google buoy the broad indexes a la S&P 500 and Nasdaq.

Investors are Embracing the ‘Most Hated Rally’ Ever

Up until a few weeks ago investors and the media despised the FFF (fake Fed-fueled) rally. Things started to change in early November when various sentiment polls showed increased bullishness.

Via the November 13 Profit Radar Report I recommended a crazy S&P 500 trade at 1,775:

“I would totally understand if you called me crazy for even suggesting to go long right now. There’s no arguing that investment sentiment gauges are redlining.

But the financial media has not yet been swept up by the euphoria conveyed by various polls/gauges, which allows for more temporary gains. Regardless of sentiment, technicals suggested that stocks want to move at least a little bit higher.”

Investors were bullish on November 13 and are even more bullish today. In fact, according to Investors Intelligence (II), the percentage of bullish investment advisors and newsletter-writing colleagues is the highest since April 2011 and the percentage of bearish advisors the lowest since the late 1980s.

When most investors are all in, the only action left to do is cash out. When buyers dry up sellers show up.

Speed Bumps Ahead

Technicals were bullish on November 13, but now there are a few technical ‘speed bumps’ ahead.

The S&P 500 is about to hit a small Fibonacci projection level, the Dow Jones (DJI: ^DJI) is about to touch technical resistance (looks more like a barricade than speed bump) that’s been 13 years in the making (more below) and Apple, the key component of the S&P 500 (SPY) and Nasdaq is within striking distance of double resistance.

None of this guarantees that stocks will decline, but the weight of evidence suggests that the S&P 500, Dow Jones and Nasdaq are due for a nap.

Extremes, such as bullish sentiment and lagging breath, can go on longer then expected (thus the saying: “The market can stay irrational longer than you can stay solvent), so when is the correction (aka nap) likely to start?

Here’s the best answer to this question: The long-term chart of the Dow Jones along with the resistance (barricade?) that’s been 13 years in the making.

Forgot Dow 16,000 – Here’s the Real ‘Bubble Popper’

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

Stock Market Breadth So Bad, It Might Actually Be Good

On the surface the decline from the May 22 high has been tame and orderly. However, the NYSE advance/decline ratio suggests otherwise. The ratio has dropped to a level usually seen at or near market bottoms. Here’s how we treat this somewhat odd reading:

One indicator suggests that stocks are about to bottom, but please don’t take this as a buy signal.

Starting with the May 22 reversal day – which painted a huge red reversal candle for the S&P 500, Nasdaq-100, Dow Jones, Russell 2000 etc. – the Profit Radar Report turned bearish.

We sold all our Nasdaq-100 long positions at 3,030 and also issued a signal to go short (for aggressive investors) at 3,030.

Why? The Nasdaq-100 reached the Profit Radar Report’s target of 3,050 and S&P 500 seasonality, sentiment and technicals all suggested lower prices and lower prices is what we got.

In fact, the decline has been so pervasive that declining stocks outnumber advancing stocks by a near-record margin.

Wednesday’s NYSE decliners outnumbered advancers by a ratio of 4.3:1. Monday’s NYSE decliners outnumbered advancers by a ratio of 5.7:1.

The 10-day moving average advance/decline ratio (advancing issues divided by declining issues) has dropped to 0.79.

The chart below plots the S&P 500 against the NYSE advance/decline ratio. Readings around 0.80 have often resulted in a bottom of some sort as the dashed red lines illustrate. Plotting the S&P against the McClellan Oscillator paints a similar picture.

Quite frankly, this indicator is at odds with many others I follow, but it shouldn’t be ignored. This doesn’t mean that stocks will jump here. It merely shows that there’s potential for a rally that lasts more than a couple days.

This is the kind of data I keep in mind when setting a stop-loss level, in this case for our short positions. The first priority is to keep profits and protect capital. A runaway rally – which according to the advance/decline ratio is possible – would be an unwelcome surprise by shorts and needs to be hedged.

The stop-loss level for current short Nasdaq-100 and S&P 500 positions is available via the Profit Radar Report.