3 Strike Wall Street Law – QE Bull Market Only One Strike away From Knock Out

We all know the ‘three strikes and you’re out’ rule. Historic data (based on the 1987, 2000 and 2007 tops) strongly suggests that every bull market also follows the three strikes rule. This bull is one strike away from being over and out.

“Dead man walking” is an expression used by prison guards as the condemned were led to their execution.  Is the stock market a ‘dead bull walking’?

I asked that question back in February right after completing my 2014 S&P 500 forecast.

At the time there was no sign of a major top yet, but since no bull market goes on forever, I published a 3-step quick guide on how to discern a dying bull market (or the formation of a major market top).

Based on historic data, a bull market dies in three stages:

3 Stages of A ‘Dying’ Bull Market

Psychological process: Finding value becomes a challenge and investors become pickier.
Technical manifestation: The number of stocks hitting new 52-week highs or the percentage of stocks above the 50-day SMA slides lower, while prices climb higher.

Psychological process: Finding value becomes more challenging and investors feel attracted to safer large cap stocks.
Technical manifestation: Small-and mid-cap stocks are lagging large cap stocks.

Psychological process: ‘Smart money’ is selling stocks to ‘dumb money.’
Technical manifestation: Selling pressure increases behind a façade of rising large cap indexes. Declining stocks outnumber advancing stocks.

Back in February the S&P 500 was in stage 1. It was basically graying around the temples, but still a safe distance away from the coffin.

How About Today?

Here’s the pulse of today’s market:

Value is harder to find  and investors are becoming pickier. On January 14, 2013, 89.54% of NYSE stocks traded above their 50-day SMA. Only 46.24% of NYSE stocks traded above the 50-day SMA at the most recent S&P 500 high on September 19.

Stage 1: Complete

Small cap stocks are under performing. The chart below plots the S&P 500 against the IWM:IWB ratio. IWB represents the iShares Russell 2000 (small cap) ETF. IWB represents the iShares Russell 1000 (large cap) ETF.

The ratio shows just how badly small caps lag behind large caps, but it also shows why this is only stage 2 of 3 of a dying bull market: Despite small cap weakness, the S&P 500 is still trading near its high.

Stage 2: Complete

Stage 3 – One Foot in the Coffin?

During the third and final stage, stocks move from strong hands (smart money) to weaker hands (‘dumb’ money).

This gradual shift takes many months and may still deliver sizeable gains and even blow off frenzies.

Nevertheless, the internal deterioration of stage 3 divergences are terminal.

Being familiar with the three stages of a dying bull market protects investors against turning bearish too soon. Premature bears leave money on the table and/or lose their pants going short.

My favorite ‘third stage indicator’ correctly foreshadowed the 1987, 2000 and 2007 bear markets. It also telegraphed that any correction since 2010 was to be followed by new bull market highs.

This indicator currently shows a fledgling multi-week divergence, which – if not reversed – may have put an expiration date on this bull market.

A detailed look at this historically accurate ‘third stage indicator’ is available here:

The Missing Ingredient for a Major Bull Market Top

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.

Will the 3 Best Investing Tricks of 2013 also Work in 2014?

The best investment strategy in 2013 was: “Stay long until you are wrong.” This sounds easier than it actually is, but there were 3 specific patterns and tricks that continually kept investors on the right side of the market.

Every dog or cat has its own little personality. Like most animals, every bull market too has its own personality. Sometimes even every individual bull market leg has its own character and features.

Being aware of those idiosyncrasies may make the difference between making and losing money.

For example, the first installment of the QE bull market saw some violent corrections, such as the May 2010 Flash Crash and 21% S&P 500 correction in 2011.

Since 2012 however, the S&P 500 and its other index cousins have been on cruise control with just minor speed bumps.

2013 sported some very clear and repetitive patterns. Those patterns have kept aware investors on the right side of the trade. What were those patterns?

3 Most Predictable Patterns of 2013

1) “Persistence wears down resistance.” This was probably the Profit Radar Report’s most commonly used phrase in 2013.

Persistence around resistance basically means that sideways trading generally serves as a launching pad for the next rally leg. This point was illustrated by the S&P 500 chart below (published by the Profit Radar Report on September 20, 2013).

2) Investors begrudgingly accept the bull market, and vocal bears are driving the bull market higher.

Although a number of sentiment bulls waived a warning sign early in 2013, the Profit Radar Report shared this observation and conclusion previously back in March 2013:

The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Jones Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Excessive optimism was worked off by the February correction. Sentiment allows for further gains.”

According to the financial media, the S&P 500 (NYSEArca: SPY) should have tumbled many times in 2013, but it didn’t.

Obviously there were still plenty of bears left to be converted into bulls, a process that drives up prices. It wasn’t until very recently that sentiment has become bullish to a degree that’s worrisome.

The simple investment trick to profit from these patterns has been easy. Stay long until you’re wrong.

When Are the Bulls Wrong?

3) But how do you know when you’re wrong? In other words, how do you maximize gains with the least amount of risk?

Here’s where an evergreen pattern comes into play. This pattern is so powerful, I call it insider trading.

Click here for a fascinating explanation of this insider trading trick along with brief visual trivia and the key ‘insider trading’ level for the Dow Jones. Insider Trading Just Became Legal

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, 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.

The Secret QE Bull Market Trade Pattern that Almost Never Fails

Experience is a cruel teacher, but nevertheless it teaches perceptive investors valuable lessons. Here’s the most important lesson this QE bull has taught me. It’s a pattern that allows us to identify when the bull is likely to strike next.

Have you ever attended a seminar where the teacher said: ‘if you only remember one thing, remember this.”

If you only know one thing about this QE bull market (in my humble opinion), let it be this: Persistence wears down resistance.

Before I explain what this means, let me insert this disclaimer:

I do not agree with the Fed’s easy money policy. It is not right, it is not fair, and it shouldn’t be legal, but my job as a market forecaster is to make money for my subscribers. If rising stocks translate into gains for my Profit Radar Report subscribers, so be it.

What I’m about to share with you has kept us on the right side of the trade (being long), even though I’ve gone on record saying that the odds of a significant market top around current prices are higher than 50%.

I also want to admit that my September 10 article on the equity put/call ratio showed a bearish extreme, which was supposed to lead to lower prices. Well, it didn’t, but QE bull trading patterns prevented us from going short at a time when (as we know now) stocks were getting ready to soar.

On the flip side (and unrelated to the QE bull trade pattern), I would be remiss not to mention that the August 7 Profit Radar Report saw higher prices coming:

“We continue to expect higher prices, since the important resistance level of 1,730 for the S&P 500 (SNP: ^GSPC) hasn’t been touched yet.” We actually went long the S&P 500 ETF (NYSEArca: SPY) when the S&P 500 moved above resistance on August 29 (buy trigger was at 1,642).

Ok, with that out of the way, let’s talk about the QE bull pattern.

Persistence Wears Down Resistance – The Pattern

Persistence wears down resistance basically means that sideways trading almost always leads to higher prices. Corrections originate from intraday reversals or gap down opens, but almost never develop straight out of range bound trading.

The green boxes in the S&P 500 (NYSEArca: VOO) chart below highlight times when range bound trading (usually 3 – 6 days) was followed by a spike higher (the red box marks an exception to the rule).

The spikes are often caused by gap up opens. The biggest chunk of the gains happen within the first minute of trade, which tends to bypass investors waiting on the sidelines. Today’s bypassed investor is tomorrow’s buyer.

Quite frequently we see the pattern highlighted via the gray oval. Consolidation – spike – consolidation – spike – consolidation – spike.

Only a coiled up snake can strike. Like a snake, the stock market (NYSEArca: VTI) coils up and strikes, and coils up and so on. The opposite is true of the VIX (Chicago Options: VXX), which has been taking a nap for most of the year, allowing investors to snooze in complacent bliss.

The night before this week’s Fed spike, the Profit Radar Report (September 17 issue) referred to this pattern once again and wrote: “A range bound market rarely precedes a top. Tuesday’s lackluster sideways session suggests at least another spike.”

When Will the Pattern Break?

Obviously QE is at the root of this pattern, and it’s commonly believed that the amount of dispensed QE (taper or no taper?) will eventually break the pattern.

This may well be, but there is another – so far unnoticed – force that can break the QE bull pattern.

This force is discussed here: Who or What Can Kill this QE Bull Market?

Hint: It’s up to investors themselves.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

S&P 500 – Technical Analysis Shows the Trend

Markets are inherently unpredictable, but technical analysis is the most accurate forecasting tool available to investors. Since technical analysis is based on past price action, it is quite simple to confirm (or expose) when and where technical analysis has been right or wrong.

Some define technical analysis as mumbo jumbo, others (and that’s the official definition) see it as a method of forecasting prices based on past market activity.

Isn’t using past market activity (or prices) to forecast future prices like driving by looking in the rearview mirror? That’s a great question.

The Past Matters

Why does the past matter? Allow me to use a tennis analogy. Roger Federer (possibly the best ever all-around tennis player) has never won a clay court match against Rafael Nadal (possibly the best ever clay court tennis player) at the French Open Tournament (one of the big four Grand Slam tournaments).

Who do you think has a mental advantage the next time Federer and Nadal meet at the French Open? Federer knows he’s never beaten Nadal at the French Open, Nadal knows he’s never lost to Federer at the French Open.

Federer has to overcome a mental ‘resistance’ to beat Nadal at the French Open. I use the term mental ‘resistance’ because it relates to resistance (and/or support) seen in the securities market.

Charts of specific securities, such as the S&P 500, reflect the mental state of the composite of all investors. Charts reveal past price areas where either sellers or buyers prevailed, creating areas of support or resistance.

Being unaware of previously established support/resistance levels is like climbing a ladder without knowing which steps are broken.

Past Significance of Support/Resistance Levels

The proof is in the pudding, so let’s take a look at a 14-year chart of the S&P 500 Index (corresponding ETF: SPDR S&P 500 ETF – SPY).

The chart includes four long-term support/resistance levels made up of two trend lines (red lines) and two parallel channels (black and dashed lines).

The trend channels are created by connecting the 2002 and 2009 lows with the 2000 high (dashed black line) and 2007 high (solid black line). Since the last touch point of this channel is the 2009 low, it could be used as a guide only thereafter.

2000 High Parallel Channel

In May 2011, the S&P approached the upper dashed parallel channel resistance (gray circle). I remember that time vividly as my wife and I were vacationing on a little island in the Bahamas (for some reason the market usually sells off when I’m on vacation).

My May 1, 2011 update for subscribers featured the chart below and stated: “The chart below updates the S&P’s position relative to various resistance levels and the ideal target range for a potentially historic market top. The ideal target range is between 1,369 and 1,382.

The next day (May 2, 2011) the S&P briefly spiked as high as 1,370.58  (right into the 1,369 – 1,382 target range) on news that Osama Bin Laden had been killed. The stock market euphoria was short-lived, as the S&P sold off, fell below trend line support (pink line) and ultimately plunged as much as 20%.

The S&P 500 paid attention to this parallel channel once more in November 2011, when it was used as a springboard for the most powerful leg of the post-2009 QE bull market.

2007 High Parallel Channel

In January 2013 the S&P 500 approached the ‘big brother version’ of the same parallel channel (this time the upper line was created by the 2007 not the 2000 high – gray circle).

The parallel channel resistance coincided with trend line resistance (red line). This was powerful resistance and I thought stocks would pause and temporarily reverse there … but they didn’t.

With that resistance out of the way, it was clear that the S&P wanted to test its all-time high and the next trend line resistance (red line) around 1,593.

It barely shows on the weekly bar chart, but the S&P was actually repelled by trend line resistance at 1,593 in April (subscribers of the Profit Radar Report went short at 1,593 and closed out short positions at 1,540).

This (temporary) decline from 1,593 to 1,536 left several open chart gaps (one at 1,588), that’s why we expected a deep retracement. That deep retracement however, turned into a rally to even higher highs.

With the S&P above the last trend line resistance and with no other overhead resistance levels caused by prior support/resistance levels left (the S&P carries no more ‘inherited technical burdens’), there is nothing holding stocks back.

That doesn’t mean stocks can’t and won’t decline, but as long as prices remain above trend line support, the larger trend is simply up.

Unlike the S&P 500 and Dow Jones (which are trading at all-time highs), the Nasdaq-100 still trades well below its heyday highs of the year 2000. This means there are more well-defined support and resistance levels available.

Those support/resistance levels are powerful risk management tools and can be used to find low-risk entries and high probability trade set ups.

At the time of this article’s publication, the Profit Radar Report is long the Nasdaq-100 with a stop-loss just beneath an important long-term support.

The Profit Radar Report reveals key support/resistance levels along with low-risk and/or high probability trade set ups.