Weekly ETF SPY: Nasdaq-100 and QQQ Reversal Candles

The stock market sold off sharply right as Mr. Bernanke spoke before Congress, but there were other – more predictable reasons – for stocks to fall: Sentiment, seasonality and technicals. Here’s the technical analysis that kept investors ahead of the trend.

On April 24, the S&P 500 broke above its all-time high at 1,576. Since then the Profit Radar Report analysis has been focused on the Nasdaq-100. Why?

Unlike the S&P, the Nasdaq-100 (and its corresponding ETF, the PowerShares QQQ) trades well below its 2000 high. There are fewer resistance levels for the S&P 500 – an index trading at all-time highs – compared to the Nasdaq-100.

Support and resistance levels are effective tools to manage risk, so it made sense to switch ‘vehicles.’

The weekly chart below shows the two trend lines we’ve been focusing on. The green trend line goes back to 2008 and is key support. The red trend line served as initial target and now early warning indicator.

Wednesday’s giant red candle high (daily chart) looks significant for a number of reasons:

1) It’s a reversal candle that engulfs the four prior candles and occurred right against the long-term trend line as well as short-term resistance at 3,050.

2) Sentiment was getting too bullish: The May 19, Profit Radar Report warned that: “The increasing number of bullish polls and money flow indicators shows that risk is rising and we will be alert for a change of trend.”

3) Seasonality is about to turn sour as pointed out by the May 19, Profit Radar Report: “Based on post election seasonality stocks are due for a pullback in a week. VIX seasonality projects weakness for late May/early June.”

Reversal candles are not foolproof. For example, a reversal candle for the Dow on February 25 did no lasting damage.

But unlike the Dow’s February 25 candle, yesterday’s reversal was the common denominator of all major markets.

What’s Next?

We looked at the Nasdaq-100 because it gives us the support/resistance levels needed for risk management and low-risk buy/sell triggers. Let’s take advantage of them.

Prices often retest a previously broken support level, so a move up to the red trend line would be a low-risk opportunity to go short. A stop-loss should be used as a move above the red trend line would point to a continuation of the rally.

Selling tends to accelerate when support is broken (this was true with the red trend line). Therefore, a move below the green trend line would unlock lower targets.

Based on past experience, stocks should bounce to digest yesterday’s decline. There’s an open chart gap for QQQ at higher prices. At least that chart gap should be closed.

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RSI Dangerously Overbought for S&P 500, Dow Jones and NYSE Composite

As a standalone conventional indicator RSI can give some misleading signals. However, RSI has ventured into an overbought zone rarely attained. There are also other forces at work that suggest paying more than the usual attention.

Parents remember the famous words, “Are we there yet?” Investors are probably wondering, “Are we overbought yet?”

The S&P 500 has gone more than six months without a correction greater than 5%, so the question, “Are stocks overbought” is certainly a valid one.

The weekly bar chart below shows one of the most rudimentary momentum gauges – the Relative Strength Index (RSI).

RSI attempts to gauge the extent of ‘overboughtness’ by comparing the magnitude of recent gains to recent losses.

I prefer not to walk the ‘beaten path’ of technical indicators and use a 35-period RSI instead of the 14-period RSI default. The 35-period RSI spits out some signals that may go overlooked by the investing masses.

Here are the signals:

1) RSI is above 70 and overbought. In fact, RSI is at or near the highest level over the past decade. The dotted purple lines mark periods of similar RSI readings.

2) This week’s RSI high has confirmed this week’s new all-time high. There is no bearish divergence (most prior price highs occurred against a lower RSI reading).

Here are the conclusions:

1) Prices are likely to struggle moving higher or correct.

2) RSI (along with other momentum indicators) confirmed the latest price high, which suggests that any decline is unlikely to mark a major market top.

Here is RSI in context:

Various sentiment indicators have reached the ‘danger zone’ and post-election seasonality is about to turn sour.

The up trend is still intact and coming up with possible price targets or resistance levels is tougher for indexes that are trading at all-time highs. There simply is less overhead resistance.

For that reason, the Profit Radar Report has been recommending long positions in the Nasdaq-100 Index (corresponding ETF: PowerShares QQQ – QQQ).

The Nasdaq-100 has well-defined resistance and support levels. Thursday’s trade briefly poked above long-term trend line resistance and fell back below. This was a sell signal for half of our Nasdaq-100 position.

It is too early to tell if prices are ready for the seasonal summer siesta, but with sentiment heating up, seasonality cooling down and prices falling away from resistance, it’s prudent to take some profits off the table and prepare for the balancing act between milking the bullish potential and minimizing bearish risk.

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Real Nasdaq Lagging, But Ex-Apple Nasdaq Just Hit 12-year High

Stock market domination by one stock is a double-edged sword and Apple’s two-fold for better and for worse mastery over stocks has introduced the need for a more objective technology index – The ex-Apple Nasdaq.

Much has been written about the bearish divergence between the Dow Jones and S&P 500 compared to the Nasdaq and Nasdaq-100.

In fact, the Nasdaq-100 is trading 4.5% below its 2012 high, while the S&P 500 is trading more than 2% above its 2012 high water mark.

This could be (and has been) interpreted as a bearish sign, but that’s not necessarily the case.

For better and for worse the Nasdaq-100 has been hijacked by one stock – Apple. A few months ago Apple accounted for more than 20% of the index. As Apple went, so did the Nasdaq-100 (more about the correlation between Apple and Nasdaq here).

Just in September, Apple drove the Nasdaq-100 to the highest point since the 2000 tech bubble. Since then Apple lost as much as 35%. Apple’s decline has been a significant drag on the Nasdaq (corresponding ETF: PowerShares QQQ) and technology sector (corresponding ETF: Technology Select Sector SPDR – XLK).

Apple’s performance is holding the Nasdaq back from reaching new recovery highs, but the Nasdaq-100 without Apple’s drag (aka ex-Apple Nasdaq-100) would trade at new 12-year highs.

I haven’t figured out a way to reconstruct an exact ex-Apple Nasdaq-100 index, but a comparison between the PowerShares QQQ ETF and First Trust Nasdaq-100 Equal Weight ETF (QQEW) illustrates the point.

QQEW assigns an equal weight to all Nasdaq-100 components. The equal weight approach doesn’t eliminate Apple, but it comes close to an ex-Apple Nasdaq index.

The first chart plots the price of QQQ against QQEW since the March 2009 low.

The second chart shows the percentage gain of QQQ and QQEW since March 9, 2009. Although QQQ and QQEW took different routes, both ETFs gained exactly 167% from March 9, 2009 – February 1, 2013.

The steepest portion of AAPL’s ascent started on November 25, 2011. Within the next 10 months AAPL soared from 370 to 705. The powerful rally was followed by a gnarly 35% drop.

The third chart captures the period from November 25, 2011 – February 2013. This period includes Apple’s steep ascent and subsequent descent. The equal weighted Nasdaq-100 ETF (QQEW) clocked in at the highest level since December 2000 just a couple of days ago.

Never before has any one single stock exerted so much power on the stock market as a whole. This illustrates that extraordinary times call for ‘extraordinary’ and out of the box analysis.

Stripped of Apple’s performance, the Nasdaq-100 is trading at new recovery highs, thus erasing the bearish divergence between the senior U.S. indexes. This doesn’t mean stocks can’t decline, but it won’t be because of a true bearish divergence.

Will Google’s Fumble Take Down the Entire Technology Sector?

Due to a combination of facts, Google shares dropped as much as 11% on Thursday before trading in GOOG was halted by the Nasdaq. What caused this meltdown and will it carry over and drag down the Nasdaq and technology sector?

Google couldn’t wait to share its disappointing Q3 earnings with Wall Street. Although slated for an after-hours earnings report, Google accidentally spilled the beans around 12:30 EST.

At first it looked like a refreshing change to Washington’s modus operandi of extend and pretend or snore and ignore. But as it turns out, R.R. Donnelley (the company that does Google’s financial filings) accidentally filed Google’s 8-K form too early.

Heading for the Exits

Surprise turned into disappointment and distain as investors dumped GOOG as fast as they could. At one point GOOG was down $83.43 or 11%. Nasdaq even suspended trading in GOOG. Why the rush for the exits?

Analysts surveyed by Thomson Reuters expected earnings of $10.65 a share and net revenue of $11.86 billion.

The actual profit was only $9.03 a share on revenue of $11.33 billion. Another  major concern was that the average price that advertisers paid Google per click fell 15% from a year earlier. If Google, the king of monetizing advertising dollars, can’t charge top dollars anymore, how will Facebook and others?

What’s Next for Google?

Google is the third largest component of the Nasdaq-100 Index (corresponding ETF: PowerShares QQQ) after Apple and Microsoft. What does Google’s sell off mean for the Nasdaq QQQ and the technology sector (corresponding ETF: Technology Select Sector SPDR – XLK)?

GOOG trading volume was through the roof as prices tumbled below the 20 and 50-day SMA and a couple of trend lines. Prices generally stabilize somewhat after large sell offs like this before falling a bit further. A new low parallel to a bullish price/RSI divergence would be a near-term positive for Google. Next support for GOOG is around 660 and 630.

Will Google Drag Down the Technology Sector?

The Nasdaq Indexes and the Technology Select Sector SPDR (XLK) has been much weaker than the Dow Jones and S&P 500 as of late. There were no bearish divergences at the recent S&P and Dow highs. This lack of indicators pinpointing a major top limits the down side of the tech sector.

Key support for the Technology Select Sector SPDR (XLK) is at 29.50. A move below 29.50 would be technically bearish although there may not be much more down side. Traders may use 20.50 as trigger point for bullish and bearish trades.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Bi-Polar Technology Sector is Torn By Performance of Groupon, Facebook and Apple

About 18 months ago stocks were fueled by the Facebook, Groupon, and the smart phone app frenzy (i.e. Angry Birds). None of the above companies are actually included in the Technology Select Sector SPDR ETF, but the prospect of a new tech boom was enough to lift the entire sector.

And while the technology sector has continued to move higher, it has left Facebook, Groupon and others in the dust. Why? Allow me to republish some research notes previously reserved for subscribers.

Facebook Warning: Published May 11, 2012

“Facebook (FB) is expected to go public on Friday, May 19. The media will gladly spread the frenzy, but I’d like to point out a few nuggets to put Facebook’s insane valuation into perspective:

– Assuming a valuation of $100B, FB will trade at 33x advertising revenues. Google trades at 5.5x.

– At $100B, FB will be worth more than: Caterpillar, American Express, Home Depot, Walt Disney and even McDonalds. In fact, 15 components of the mighty Dow Jones Industrial Average have a market cap of less than $100B.

– The market value of Google at its IPO was “only” $27B

– Apple currently trades around 3.8x sales. The same metric applied to FB would put its valuation at $15B.

To some degree the social media bubble is reminiscent to the 1999 tech boom. Most social media companies are valued based on promises more than established accounting standards. Recent IPO’s of Groupon, Pandora, Yelp, and Zynga created a lot of hope during the first couple of days of the IPO and fizzled thereafter.

Will FB await the same fate? You can’t predict the extent of any frenzy, but the amount of fizzled frenzies dwarfs that of sustainable ones. My bold prediction is that FB will loose at least 30% of its IPO price by sometime in 2013.”

Well, it turns out I was wrong. Since its May 2012 IPO ,Facebook shares have fallen as much as 61% (from a high of $45 to a low of $17.55). Facebook’s market cap is now $44 billion.

Groupon Warning: Published December 17, 2010

It was my belief that the Groupon movement (group coupons) is dangerous for the economy and unsustainable. This was contrary the most of Wall Street‘s outlook. I picked on James Altucher, a popular tech cheerleader, to contrast our difference of opinions.

“Altucher doesn’t believe there’s a new social media/coupon bubble. This time is different because Groupon’s rejection of Google’s $6 billion bid is ‘the dawn of a new and improved internet bubble. Unlike the bubble of the late 90s, though, this one is based on fundamentals, not irrational exuberance’.

It’s ironic that Groupon’s success and refusal of Google’s advance is seen as the dawn of a new era. Groupon has a killer business model, which is a goldmine for Groupon, but poison for healthy economic growth.

This new way of buying nurtures frugality and robs restaurants and other retail stores of their pricing power. Groupon is feasting on a deflationary trend while wizards like Altucher see the company as a gateway to the new and improved economy.

According to Altucher this is ‘not a bubble, it’s a real significant boom.’ It’s a boom all right, we’ll just have to see whether it’s an economic or deflationary boom. My money is on the later.”

Since its November 2011 IPO Groupon shares have fallen from a high of $31.14 to a low of $4. Groupon’s current market cap is $3 billion, half of what Google was willing to pay for the company.

Technology Sector at 11+ Year High. Why?

The Facebook, Groupon, smart phone app boom is deflated, so why has the tech sector moved on to an 11+ year high?

A look at the top holdings of the Technology Select Sector SPDR ETF (XLK) may hold the answer.

Apple, IBM, and Google account for 34% of XLK and trade at or near all-time highs.

Microsoft, AT&T, and Verizon account for 19% of XLK and, like the Nasdaq-100, trade at or near a 10-year high.

Former highflyers like Cisco, EMC, Hewlett Packard, Corning, Yahoo, Broadcom, Dell, Applied Materials, Sandisk, Juniper Networks and others continue to trade near the lower end of their 15-year range.

It appears that a few strong companies mask the performance of many weak companies. That’s not the definition of a strong market or sector.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.