S&P 500: Long-term Explains Short-term

In late October we were looking for a strong counter trend rally (S&P 500 projection published here), and wanted to short the S&P 500 in the 2,830 – 2,850 zone (red bar). The S&P fell short of our target, and relapsed at 2,817.

This week we wanted to buy the S&P 500 after a brief dip below trend channel support (2,615 – green bar). Again, the S&P fell short of our target, and bounced from 2,631.

Why is the market falling short of our targets, and what does it mean?

Long-term Outlook Explains Short-term Movements

Here is one explanation (in my humble opinion the most plausible one):

In mid-October I analyzed various indicators to help determine the S&P’s larger pattern, and ideally future path. Indicators included:

  • Breadth & momentum
  • Price patterns
  • Support & resistance levels
  • Liquidity & breath
  • Investor sentiment
  • Elliott Wave Theory
  • Seasonality & cycles

The entire analysis, along with the three most likely scenarios were published in the October 14 Profit Radar Report.

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 chart and commentary below were published as scenario #1:

Scenario #1: The September high is wave 3 (primary degree). The current decline is wave 4. Waves 4 are generally choppy, drawn out, frustrating and nearly impossible to predict. Shown are the two most common Fibonacci retracement (down side) targets: 

— 23.6%: 2,500 — 38.2%: 2,228. Once this correction is complete, the stock market will rally to its final bull market high (wave 5). 

Although a new multi-year bear market with much lower targets is possible, the size of the bearish divergence at the September high and lack of absolute investor bullishness surrounding the top, suggest that scenario #1 or #2 are more likely than #3.”

“Waves 4 are generally choppy, drawn out, frustrating and nearly impossible to predict.” True to that! Although we correctly anticipated the decline from the 2,800s and the bounce from the 2,600s, the notion that the S&P is in a larger-scale wave 4 correction would explain why price keeps falling short of my targets.

Short-term Outlook

The hourly chart below, published in the November 27 Profit Radar Report, showed that 2,685 was a short-term inflection point, because that’s where a number of trend lines met up with an open chart gap.

As it turns out, the break above 2,685 uncorked quite a pop (I personally would have preferred a drop). Next resistance is not far away, but as long as trade remains above the breakout level (2,685), it can continue to move higher (likely in a choppy fashion) … and reach the 2,830 – 2,850 range missed earlier this month.

Nasdaq-100 – QQQ ETF

Unlike the S&P 500, the Nasdaq-100 QQQ carved out a bullish divergence at the November 20 low. The November 21 PRR stated that: “The Nasdaq-100 QQQ gave back most of its gains, but closed above short-term support. Since QQQ already carved out a bullish divergence, bulls already have their window of opportunity to take trade higher, as long as support around 160 holds.”

Bulls took advantage of their window of opportunity, but resistance is not far away, and RSI-2 is nearing over-bought.

Summary

First the S&P 500 missed our up side target (2,830 – 2,850), then our down side target (2,615).

This is likely caused by the unpredictable nature of choppy wave 4 corrections. Nevertheless, the weight of evidence suggests that the S&P will hit (and exceed) both of the above target zones in the coming weeks/monhts.

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 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.

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Is FAANG Weakness Bearish for Stocks?

The spotlight has been on FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) for much of this bull market, but lately it’s gotten kind of quiet around them. Perhaps that’s because they are actually under-performing the Nasdaq-100.

Is FAANG weakness bearish for stocks?

FAANG vs Nasdaq-100

The chart below plots an equal weighted FAANG index against the Nasdaq-100. The dashed lines highlight non-confirmations.

The black lines mark times where new Nasdaq-100 highs were unconfirmed by FAANG (as currently the case), the blue lines mark times where new FAANG highs were unconfirmed by the Nasdaq-100.

Since 2014, there have been 7 similar non-confirmations, where FAANG were lagging the Nasdaq-100. The last 4 very followed by micro pullbacks and renewed strength for both. The first 3 saw slightly larger pullbacks before renewed strength.

It was actually more of a warning sign when the Nasdaq-100 failed to confirm new FAANG highs (August and December, 2015 – blue lines).

Based on the short available history, FAANG under-performance is not bearish for stocks in general.

Nasdaq-100

The Nasdaq-100 QQQ ETF chart looks more bullish than bearish, as trade is above long-term Fibonacci resistance at 181.80, and on the verge of breaking out of a triangle formation.

Above analysis was initially published in the August 26 Profit Radar Report. 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.

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, 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 Newsletter to get actionable ETF trade ideas delivered for free.

Free Access to the Profit Radar Report

For the first time ever, anyone can get FREE ACCESS to the Profit Radar Report. The last 6 complete Profit Radar Report updates covering the S&P 500, Dow Jones, Nasdaq, XLU, US dollar, EUR/USD, gold, silver, and 30-year Treasuries, TLT are available here. Enjoy!

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.

April 4, 2018 (6:00pm PST)

Yesterday’s PRR stated that: “We will set our stop-loss at breakeven. If SPY gaps below 258.87 in the morning, we will keep our stop-loss at 256.”

Since SPY gapped lower and opened at 256.75, we set our stop-loss at 256. After another 200-day SMA seesaw, SPY closed at 263.56. We will now raise our stop-loss back to breakeven (258.87).

Monday’s PRR mentioned that the NY Composite a/d line is still above its February and March lows. The chart below provides more details. From March 23 – April 2, the S&P 500 drifted lower, while the NYC a/d line inched higher. This bullish divergence suggests that selling pressure is abating.

This fact, in addition to the S&P 500, DJIA and Nasdaq-100 hitting our down side targets and/or support (March 28 PRR) contributed to the SPY buy signal.

However, bullish outlooks are rare. In fact, some Elliott Wave Theory analysts are vehemently bearish, which is reminiscent of early March, when the March 7 PRR published the chart below and stated:

This is one of those times where it’s dangerous to rely solely on Elliott Wave Theory (EWT). Some EWT analysts currently advocate a 1 – 2 constellation to the up side (green labels), others a 1 – 2 to the down side (red labels). “1 – 2” meaning waves 1 and 2 are complete (or nearly so), with a powerful wave 3 (up or down) to follow, essentially EWT analysts expect either a melt-up or melt-down. We know at least one group will be wrong.

The path that would make most sense (in terms of fulfilling more indicators/patterns than the other paths) is continued range racing, an eventual re-test of the February panic low (blue box), and subsequent rally to 3,000 +/- (blue labels, or scenario #2 shown in the February 28 PRR).”

Our indicators supported the blue path weeks ago, and continue to do so (with or without another drop to 2,530 – 2,460).

However, we wanted to let subscribers know that we always monitor various developments, and if our indictors change (i.e. an increase in selling pressure or emergence of bearish divergences) we will have to adjust accordingly.

Currently we want to have some ‘skin in the game’ if stocks continue higher, but will continue to manage risk.

The DJIA may have finished the 5-waves lower shown in the March 28 PRR. The chart below shows some short-term resistance levels: Red line: 24,300. Trend channel: 24,700.

XLU continues to gnaw on resistance around 51. The pattern of this rally is not exactly bullish, but nevertheless continues to make higher highs and higher lows. RSI-35 is positive, on balance volume not (yet?). The near overbought RSI-2 condition has been digested. We will still close XLU if it moves above 51. XLU could be tracing out a messy triangle with support around 50 or 49 and resistance at 50.80 – 51. Our entry was on February 12 at 48.40.

Summary: Some bullish divergences are building, which is positive. The S&P closed today at minor resistance around 2,644. A move above 2,644, followed by 2,695 – 2,700 would increase the odds that a bottom is in.

The US Dollar Index has not moved for the past 4 days. The March 27 low at 88.942 remains key. As long as trade remains above, the US dollar can continue to move higher. The EUR/USD remains still above 1.2240. A move below 1.2240 may well usher in a protracted decline.

Gold bounced from the 61.8% Fibonacci support level, but that bounce has been feeble. On balance volume remains weak.

Silver is trading uninspired between support and resistance.

April 3, 2018 (10:00pm PST)

Our SPY buy order was triggered today at the open (258.87), which was above 258.10 but below 259. SPY closed 260.77, about 0.7% above our entry. The question is whether we want to limit risk and set the stop-loss at breakeven, or give SPY a longer leash.

The March 24 PRR stated: “The 200-day SMA is too popular for its own good, that’s why we rarely talk about it (aside from February 5, because it coincided with important Fibonacci support at 2,536). On February 9, the S&P 500 briefly tested the 200-day SMA, and bounced 269 points. Now the S&P is back at the 200-day SMA. It would almost be too simple if the S&P again bounces 200+ points after hitting the 200-day SMA (as it did in early February). With or without small bounce, a 200-day SMA seesaw seems more likely.”

The S&P 500 (and SPY) closed below the 200-day SMA yesterday and back above today. This seesaw stopped out a large number of 200-day SMA focused investors. We wanted to see a minimum of one seesaw, but more are possible.

Today’s rally gives us the luxury to ‘play with house money.’ Although risk of another seesaw across the 200-day SMA (which is only 0.10 points below our breakeven point) exists, our first consideration is usually safety. We will set the stop-loss for SPY at breakeven. If SPY gaps below 258.87 (S&P 500 futures are down 7 points in after hours trading), we will set the stop-loss at 256.

Investors more afraid of missing out on potential up side than being concerned with down side risk, may keep SPY without stop-loss.

April 2, 2018 (7:30pm PST)

Tonight’s PRR includes an update to the open SPY recommendation.

For the past 7 weeks we’ve frequently referred to our preferred, or ideal path for the S&P 500 going forward. The February 11 PRR suggested a path similar to 2011, and the February 19 PRR reiterated that: “We would like to see a retest of the panic low (W-shaped recovery) like in October 2011 or September 2015.”

The W-shaped recovery (wave 4 correction according to Elliott Wave Theory) was identical to scenario #2 outlined in the February 28 PRR or the blue path featured in the March 7 PRR.

On March 19, the wave 4 scenario (similar to 2011, or scenario #2 or blue path), which required a test of the initial February panic low at 2,533 became our primary focus (March 19, PRR: “The blue wave 4 projection (March 7 PRR) and scenario #2 (February 28 PRR) is now the preferred path.).”

The chart below compares the 2011 correction (and subsequent rally) with the 2018 correction. Today the S&P dropped below 2,590 – 2,575 (March 28 PRR: “We would still like to see a drop below 2,590 – 2,575.”) and came within 21 points of the February panic low.

The S&P dropped below the 200-day SMA (for the first time since June 27, 2016), but closed 0.88 points above the February 9 closing low. Although RSI-35 is stronger than price, it would take a new S&P closing low to call this a bullish divergence. However, the RSI margin is so slim that an immediate S&P drop lower could erase any bullish divergence.

Below is an updated look at short-term sentiment extremes. All VIX-and option-based sentiment gauges had an uptick in bearishness, but not extreme. The green bars highlight the last two W-shaped corrections. Panic readings only occurred on the initial low (left W wing). The same is true this time.

80% of NYSE stocks closed the day lower, but the NY Composite a/d line is still above its February and March lows.

Our two-prong SPY buy recommendation required: 1) a drop below 256.25 and 2) a subsequent rally above 258.10. The chart below shows the 256.25 and 258.10 level. SPY did not meet both qualifications. The SPY buy order was not triggered. See summary section below for update SPY buy levels.

Unlike the S&P 500, SPY closed below its February low and displays a bullish RSI-35 divergence.

The same is true for the DJIA (new closing low, bullish divergence).

As anticipated, double support around QQQ 154.50 acted as magnet. QQQ fell as low as 153.88, but closed at 155.51. Even though QQQ remained above its February low, RSI-35 and on balance volume are at or below February level. Not bullish.

Summary: The S&P 500 has met the minimum criteria to consider this correction complete. There is, however, a difference between minimum and ideal. The ideal target is 2,530 – 2,460 (see chart below published in the March 24 PRR). S&P 500 futures are up 10 points in after hour trading. At current price, the S&P 500 would open above its 200-day SMA. SPY would gap higher an open above 258.10. It would take at least a 130-point rally to get an initial confirmation that the bottom is in. Since there is a chance the S&P won’t drop into our ideal down side target, investors may need to ‘pick their poison.’

1) Be early and risk further losses

2) Be late and risk missing out on gains.

In short, the minimum target has been met, but we would prefer to see the S&P drop into and reverse in the ideal target zone (2,530 – 2,460).

We will buy SPY at the open or during the day (as long as it is above 258.10 but below 259). Our initial allocation is a conservative 5%. Our stop-loss will be at 256.

April 1, 2018 (5:30pm PST)

For the first time since February 2016, the S&P 500 suffered two consecutive montly red candles. Since the beginning of the 2009 bull market, the S&P recorded more than 2 consecutive red candles on 6 occasions (3 x 2 month, 1 x 3 month, 1 x 5 month, current – purple boxes). After the 3 x 2 red candles (Aug/Sep 2015, Apr/May 2012, May/Jun 2010) the S&P briefly broke below the prior low twice (Jun 2012, Jul 2010) and came within 25 points of the prior low once (Oct 2015). In February 2016 (the 1 x 3 month period), the third red candle exceeded the prior low by only 2 points.

The S&P 500 doesn’t have to rhyme with prior consecutive monthly declines, but if it does, it would be in harmony with our ideal path of one more new low followed by rising prices.

As mentioned on Wednesday, “sentiment is bearish enough to spark a bounce.” The bounce happened on Thursday, and may continue on Monday (first trading day of April has a solid bullish bias, S&P 500 up 17 of last 23 years, average gain: 0.49%).

Minor short-term resistance remains around 2,640-ish and 2,690-ish.

Below is a renewed look at our set of short-term sentiment gauges. The extremes seen around the February panic low have been digested. During double-bottoms (W-shaped corrections), investors are almost always more optimistic during the second ‘W’ low. That’s why a new closing low (if it occurs) will probably not cause the same kind of panic seen in early February, and set up a bullish divergence.

Our New York Composite advance/decline liquidity indicator shows a similar pattern. The NYC a/d line has been trending higher (green line) and down side pressure seen in late March was less intense than in early February (in early February nearly 90% of stocks declined, in late March ‘only’ 80% of stocks declined – vertical red bars & green line).

Short-term, the DJIA closed above the trend channel shown on Wednesday. As the purple lines show, DJIA could carve out a triangle (purple lines, S&P shows similar formation). This kind of micro-analysis during larger waves 4 is less reliable than at other times, but it’s about the only thing somewhat worth mentioning right now.

XLU closed (barely) above red trend line resistance. RSI-35 confirmed this move, on balance volume did not. RSI-2 is near overbought. Next resistance is just above 51. The positives we saw near the February low are starting to fade a bit, and XLU will have to overcome 51 to unlock further upside. If XLU rallies to 51 on Monday/Tuesday, RSI-2 will likely be fully overbought. We will lock in gains and sell XLU if it spikes above 51.

Summary: Short-term sentiment and money flow (liquidity) suggest that fear and selling pressure are improving, setting the stage for bullish divergences. For a true bullish divergence, we would have to see a new S&P 500 closing low, which is what we’re waiting for to confirm our ideal path for a more significant bottom.

Although we are looking to buy, our indicators and cycles do not project massive up side, even once a low is in place.

The EUR/USD, US Dollar Index, gold and silver did not move much since Wednesday’s PRR.

March 28, 2018 (6:10pm PST)

The market will be closed on Friday in observance of Good Friday. The next update will be published as usual on Sunday.

The week started with a massive rally (Monday) and was followed by an even bigger drop (Tuesday). Normally pops and drops like Monday/Tuesday would validate a special PRR, but considering the larger context (March 19 PRR: “Waves 4 cause a lot of whipsaw and require patience. There may well be times where it will feel like we missed an opportunity … just before stocks reverse and offer a second [or even third] chance.”) it’s sometimes best not to over-analyze certain moves.

The S&P 500 is stomping around atop the blue support cluster at 2,590 – 2,570. We would still like to see a drop below 2,590 – 2,575 (ideally to around 2,530 or 2,460), but short-term sentiment is bearish enough to spark a bounce.

Pinpointing resistance levels in a wave 4 environment tends to be a fools errand, but 2,645-ish and 2,690-ish may be worth watching. A move above 2,645-ish could lead to 2,690-ish, but such a bounce would not eliminate the potential for a drop below 2,590.

The hourly DJIA chart below outlines a short-term trend channel and potential short-term Elliott Wave Theory count. If that’s correct, DJIA should drop below 23,360, find support (ideally at 23,000 – 22,800) and rally.

Double Nasdaq-100 QQQ support around 154.50 could act as magnet and reversal target. At this point, there is no bullish divergence as RSI-35 is toying with new lows (even though QQQ remains above its February low) and on balance volume is already at new lows.

Summary: This is a difficult environment to trade, which is why we trade only if the S&P follows our ideal path (drop below 2,590 at minimum, followed by a rally). The current constellation of various indicators suggests that carving out a low may be a process that could take a few more days, even weeks. For now we will keep our SPY buy recommendation open.

We will take another close look at investor sentiment and money flow in Sunday’s PRR.

As anticipated, the US Dollar Index tested trend channel support at 88.90 (blue oval). From there it rallied strongly. Yesterday’s low (blue oval) could be important and can be used as a stop-loss level for long positions (like UUP). We may soon be adding to our existing UUP position.

Short-term, the EUR/USD allows for a triangle (purple lines), with a potential bullish breakout. This doesn’t have to happen, but it could. If it does, it would likely lead to a test of the long-term trend channel at 1.2620 (black line) and a great opportunity to short the euro (long dollar). A break below 1.2240 would very likely mean that a EUR/USD top (and dollar bottom) is in and signal a longer-term trend reversal.

Long-term, the EUR/USD shows a bearish RSI divergence, is close to long-term trend channel resistance, with cycles soon turning lower, and sentiment supporting falling euro prices.

Gold validated our suspicion and fell hard, retracing almost exactly 61.8% of the March 20 – 27 rally. If gold started a rally with a target north of 1,382 (wave 3 up next?), it should stay above Fibonacci support at 1,328 or 1,318. For aggressive traders, this is a low-risk opportunity to go long with a stop-loss just below support.

Of course, a strong gold rally is unlikely if the US Dollar Index is also about to rally.

Silver is once again back at support around 16.2.

This is a follow up to the 30-year Treasuries analysis published on March 14 PRR.

TLT closed above the bold (previously red, now) green trend line. According to Elliott Wave Theory, TLT can still relapse to a new low. However, a move above 122.42 as good as eliminates this bearish option. Cycles are pointing higher. In short, the trend is higher as long as TLT stays above ascending trend line support (120.40) and once TLT clears 122.42.

Below is an updated look at the 30-year Treasury Yield trend channel shown on March 14. Since then there’ve been two more trend channel touch points. A sustain yield break below 3% (based on trend channel) and 2.98% (based on Elliott Wave Theory) will point to lower yields/higher prices.

Continued updates and 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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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.

Is Big Tech Underperformance Bearish for Stocks?

Large cap technology stocks – the notorious US stock market ‘alpha male’ – is trailing behind.

The chart below plots the Nasdaq-100 (represented by the QQQ ETF – right graph) against the S&P 500 and NYSE Composite.

QQQ has been stuck in neutral, while the S&P 500 and NYSE move ahead in second and third gear.

What does this mean for the stock market in general?

We’ve probably been conditioned to believe that large tech underperformance is bad for the broad market. And over the short-term (1-4 weeks), historical performance numbers support this conclusion.

Over the long-term (3-12 months) however, large tech underperformance is actually positive for the overall market. How come?

There are probably several plausible explanations, here is mine:

‘Bullish Ointment’

Since the very beginning of this rally, the Profit Radar Report pointed out the remarkable strength of the post February 11 meltup:

February 17 PRR: “The rally of last Thursday’s low at 1,810 has been very strong. Historically, this kind of ‘escape velocity’ can potentially carry stocks higher for months.”

February 21 PRR: “From February 12 – 17, the S&P 500 gained more than 1.5% a day for three days in a row. Since 1970, this has happened only eight other times. One year later, the S&P 500 traded higher every time, with an average gain of 19.16%.”

March 20, PRR: “Although the S&P 500 is still 3.16% below its November 3, 2015 intraday high at 2,116.48 (and 4% below its all-time high), the NY Composite a/d line already surpassed its November 3, 2015 high. While the S&P retraced only 78.6% of its prior losses, the NYC a/d line already retraced 117.83%. This data suggests that the rally from the February 11, 2016 low is stronger than the rallies from the September 2015 and October 2014 lows.”

A strong rally is like the proverbial tide that lifts all boats. Unlike other rallies in 2014 and 2015, which were more selective, this rally is actually ‘lifting all boats.’

The NYSE Composite Index consists of some 1,900 stocks (large, mid, small-cap stocks). The Nasdaq-100 of only 100 large cap tech stocks.

The fact that the NYSE Composite started to outperform the QQQs shows that liquidity is penetrating all corners of the market. That’s a good long-term sign.

Fly in the Ointment

However, there is a bearish fly in the bullish ointment. The second chart plots the S&P 500 against the percentage of S&P 500 and NYSE stocks above their 50-day SMA.

The percentage of NYSE stocks above their 50-day SMA has been stronger than the percentage of S&P 500 stocks, which confirms the strength of the broader, more diversified NYSE composite.

As of Wednesday’s close, the percentage of NYSE stocks failed to confirm the new S&P 500 (and NYSE Composite) recovery highs (short red line). The percentage of S&P 500 stocks above their 50-day SMA has been lagging since March 30 (longer red line).

All the strong breadth reading throughout this rally confirmed our February 11 buy signal.

Although we anticipated a temporary pullback, the April 3 Profit Radar Report stated that a break below 2,040 is needed as the first step towards confirming further weakness.

Staying above support, combined with the long-term bullish developments registered in recent weeks/months has buoyed the S&P 500 higher (the rally from the February low looks like a micro copy of the 2013 rally).

Unless the bearish divergences mentioned above are erased, the S&P 500 is nearing another inflection zone that may rebuff stocks for a little while.

Continued updates are available via the Profit Radar Report. Barron’s graded iSPYETF (and the Profit Radar Report) a “trader with a good track record.”

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.

 

The Obvious Yet Simple QQQ Clue

Sometimes, investing can be so simple … if we don’t complicate things.

Here is the most basic of ‘indicators’. It has a 100% accuracy rate since the start of the 2009 bull market. In fact, it’s so basic, calling it an indicator is probably overkill.

Open chart gaps. The gaps we’re talking about are price gaps caused by overnight losses.

Our March 7, 2013 article “QQQ – Open Chart Gap Magnets” noted that: “Open chart gaps have acted as a magnet for the S&P 500 and Nasdaq, 100% of the time since 2010. The 2010, 2011, and 2012 declines all left open chart gaps … and all of them got filled.“

Over three years later, the accuracy rate is still 100%.

Various market indexes – including the S&P 500, Nasdaq-100 and Nasdaq Composite – left a massive open chart gap on January 4, the first trading day of the year (see chart).

This open chart gap (at S&P 2,043.62) was one of six reasons why the Profit Radar Report issued a buy signal on February 11 at S&P 1,828. This chart gap also served as our up side target.

The S&P closed the open chart gap on March 17.

The Cohort Went Short

According to an April 5 Bloomberg article, investors were short $1 trillion worth of stocks (the highest short interest since 2008).

Looks like bears got trapped again. One reason the Profit Radar Report didn’t recommend shorting stocks is the open PowerShares QQQ ETF (Nasdaq: QQQ) chart gap; in fact, there are two chart gaps.

One at 111.84, another at 113.25. The gap at 111.84 is massive. History has taught us that shorting against chart gaps tends to be a losing proposition.

QQQ has now come within striking distance of the lower gap. There are some bearish breadth divergences already, but once the gaps are closed, the magnetic force pulling stocks higher diminishes, and the odds for a pullback increase.

A temporary pullback after (even before) closing the first gap followed by another bull leg to close the second gap is possible.

Continuous S&P 500 analysis/forecasts are available via the Profit Radar Report, which was just profiled by Barron’s.

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.

 

Nasdaq QQQ ETF Breaks out of Bull Flag

The April 22 Profit Radar Report showed this chart of the Nasdaq-100 and stated:

There are similarities between AAPL and the Nasdaq-100, which is forming a potential bull flag. A break above 4,465 – 4,485 (corresponding level for QQQ = 109.10) could drive the Nasdaq-100 to next resistance around 4,600. Aggressive investors may buy QQQ with a break above 109.10.”

The bullish breakout materialized, but how legitimate is it?

 

Below is an update chart of the Nasdaq QQQ ETF.

  • The breakout occurred on elevated volume. Bullish.
  • There’s on open chart gap at 109.55, which will probably get filled.
  • There’s a long-term bearish RSI divergence. Potentially bearish.
  • RSI may be about to close above trend line resistance. Potentially bullish.
  • Next resistance at 111.50 – 112.20.
  • Ideal bull flag target is around 112.50.

The trend is up, but lagging breadth and the open chart gap suggest an eventual pullback is likely.

AAPL, the MVP of the Nasdaq and most important stock in the world, shows one of the most fascinating chart formations. More detail here: Fascinating AAPL Chart Formation Telegraphed Bullish Breakout

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.