The Last Hope for S&P 500 Bears

The S&P 500 has closed higher seven out of the last nine trading days and shattered the short-lived mojo of stock market bears, but there’s one reason for bears not to give up hope yet.

The S&P 500 has closed higher seven out of the last nine trading days and shattered the short-lived mojo of stock market bears.

Here is pretty much the last hope for bears (at least over the short-term).

A deep retracement rally!

Strong bounces that retrace more than 90% of the previous decline do happen, but we have to go back to 2011 and 2012 to find the last such specimens.

The first S&P 500 chart shows deep retracement rallies in July 2011, May 2012, and October 2012. Those rallies appeared intent on taking out the prior highs, but failed to do so and were followed by new lows.

The chart below shows a projection published in the February 3 and 5 Profit Radar Report, which stated that: “Selling pressure is subsiding. The potential for a roaring rally exists.”

The February 9 Profit Radar Report added that: “Corrective bounces (rallies that retrace some of the previous decline) have been quite deep during the QE bull. The strongest resistance is around 1,830 with an open chart gap at 1,828.5.”

Obviously, the S&P 500 (NYSEArca: SPY) has already surpassed the 1,830 resistance level. This decreases the odds of an immediate trip to new lows, but so far the S&P 500 is more or less following the script outlined by the Profit Radar Report.

It may be too soon to completely abandon bearish views. Here are three bearish indicators that refuse to budge:

3 Bearish Indicators Buck the Avalanche of Bullish Signals

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.

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XLF Financial ETF is Teetering Above Key Support

The average investor may not be aware of this, but the SPDR Financial ETF (XLF) is sitting right above major support. This in itself is noteworthy, but its message is further emphasized by the fact that the S&P 500 and Nasdaq are struggling to overcome major resistance.

The Financial Select Sector SPDR (NYSEArca: XLF) chart below features exactly the same support/resistance levels highlighted in my September 12 article about XLF.

It is interesting to note that XLF has come back to test support made up of prior support/resistance levels at 20.30 – 20.50.

We also note that XLF peeled away from resistance at 21.15, which was the September 2001 monthly candle low.

I’ve kept past trend lines on the chart to illustrate that XLF tends to respect support/resistance trend lines created by prior price action.

The green bubble, for example, marks a technical breakout in August 2012. This breakout was foretold by the August 5, 2012 Profit Radar Report, which stated that: “Financials are currently underloved. With such negative sentiment, a breakout above 14.90 could cause a quick spike in prices.”

The gray bubble highlights a fakeout trend line break, which can also be seen on the S&P 500 chart.

In fact, the October 7 Profit Radar Report expected the fakeout trend line break for the S&P 500 (at the time the S&P 500 trend line was at 1,668) and stated that: “A dip below 1,668 followed by a close above 1,671 would most likely be a buy signal.

The fakeout dip below support was expected based on prior fakeout breakdowns that led to new highs (see chart below, originally published in the October 7 Profit Radar Report).

The S&P 500 (NYSEArca: SPY) and Nasdaq Composite (Nasdaq: ^IXIC) are currently bouncing against major long-term resistance. Failure to overcome resistance may cause a correction.

That’s why this support shelf for XLF gains additional importance. A drop below support for XLF will likely indicate more down side, while the ability to stay above would be net bullish for the broad market. The chart for the Vanguard Financial ETF (NYSEArca: VFH) looks similar.

Summary

Investors should keep a close eye on whether support for XLF and resistance for the S&P 500 and Nasdaq holds.

As long as both hold, the broad market is ‘trapped’ in a sideways range (as we’ve seen over the last two weeks).

Where is key resistance for the S&P 500 and Nasdaq? Detailed charts and commentary are available here: Nasdaq and S&P 500 Held Back by ‘Magic’ Resistance.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

VIX Seasonality Near Best Turning Point of the Year

Fear is on the rise just as the VIX is headed for a major seasonal signal. Based on seasonality, the VIX offers two major trading opportunities every year; one of them is in October. Here’s what seasonality says about the next VIX move.

After many months of complacency the VIX (Chicago Options: ^VIX) has sprung back to life.

In fact, seasonality and technicals suggest that the VIX (NYSEArca: VXX) is near a key inflection point.

An absolutely unique tool available only to iSPYETF readers is the VIX seasonality chart.

The VIX seasonality chart is created from averaging together 23 years of VIX behavior.  But since the VIX is at a different price level every year, using an average of the VIX’s actual values would inappropriately skew the result by overweighting the years when it was at a higher level and vice versa.

To equally weigh every year, the price history is adjusted (using a divisor) to begin at the same level on the first trading day of every year.  Then each day’s values for the rest of the year reflect the percentage change from that first day of the year.

The chart below shows VIX seasonality compared to this year’s VIX performance.

The VIX has been dancing to the beat of its own drum for much of the year, but the latest 60%+ VIX spike follows the seasonal pattern nicely.

Seasonality projects a minor VIX high around October 9 and a major VIX high in late October.

Of course this is important for stock investors as VIX movements have a direct effect on the S&P 500 (NYSEArca: SPY), Nasdaq (Nasdaq: QQQ) and other major indexes.

But seasonality is not the only force driving the VIX.

In fact, here’s an interest development unrelated to seasonality: Since September 19, the S&P 500 (SNP: ^GSPC) lost about 4%, yet the VIX soared 63%.

This 63% spike pushed the VIX above a 5-year old resistance level. Normally a move above such important resistance is bullish. Bullish for VIX means bearish for stocks.

What about this time? Will the VIX continue to rally, pushing stocks lower? Here’s a detailed look at the VIX from a technical analysis perspective. VIX Above 5-Year Resistance – What Does it Mean?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

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.

This week’s ETF SPY is more ‘special’ because it includes information generally reserved for subscribers to the Profit Radar Report. >> Sign up for the Profit Radar Report if you’d like to enjoy this kind of analysis.

If you don’t want to miss future editions of the Weekly ETF SPY, >> sign up for our FREE Newsletter.

Dow – Record Winning Streaks Rarely Lead to Lasting Tops

The Dow Jones just extended its run to the longest rally in over 16 years. Common sense would suggest that ‘what goes up must come down,’ but prior instances of prolonged and overextended rallies paint a different technical picture.

If you like superlatives, 2013 is your year. After edging out another gain on Wednesday, the Dow Jones closed higher for the 9th consecutive trading day. This is the longest such streak since November 1996.

Now, stocks are overbought, volume is waning and RSI is lagging. How Bearish is this for the stock market? How have stocks done after previous 9-day winning streaks?

The sample size for 9 consecutive up closes is extremely small. There’s only one since 1996.

To get a larger sample size and better read, we’ll look at recent times the Dow closed higher for 7 or 8 days in a row.

The chart below highlights all 7-and 8 consecutive day up closes since the 2009 low.

There are two 7-day streaks (July 2009, March 2007) and three 8-day streaks (August 2009, March 2010, February 2011) and of course this year’s 9-day streak (March 2013).

Every 7-or 8-day run was followed by at least one more short-term high within the next two trading days (twice the very next day, followed by marginally lower prices).

In July 2009 and February 2011 the Dow just kept trucking higher. In August 2009 and March 2012 the Dow corrected approximately 4% within days after the streak ended.

Somewhat bigger corrections (up to 10%) were seen about a month after the February 2011 and March 2012 streak highs. All losses were eventually recovered.

It is interesting to note that 3 of the 6 runs occurred in March and (one more happened in February), so March momentum runs are nothing unusual.

The gray/black trend lines in the above chart show important resistance levels, that once broken led the extended rallies (resistance levels were outlined in the Profit Radar Report).

To sum up, the Dow is ripe for a correction, but any correction is likely to draw in enough buyers to bid up prices to new all-time highs.

Since history doesn’t always repeat itself, it’s important to watch key support levels and become defensive if they are broken.

Is Japan’s Nikkei Rally for Real?

For four years the Nikkei’s performance has been flat as a pancake, but recent price action suggests that the time of boredom is over. A technical breakout looks to support the agenda of Japan’s new Prime Minister and higher prices for the Japan ETF.

Look at Japan and you see decades of economic contraction, which triggered dozens of financial stimulus packages. The new Prime Minister Shinzo Abe has vowed to continue the legacy of money printing.

Shinzo Abe announced Friday a $225 billion package of public works and other projects just after the Japanese government approved yet another emergency stimulus plan worth $116 billion.

Japan’s government debt is now about 230% of GDP.

Such fire hose financial dousing failed to buoy the Nikkei in the past, but this time might be different. Why?

Shinzo Abe has bullish technicals on his side, at least for now.

The Nikkei 225 just broke above multi-month trend line resistance and out of a multi-month trend channel (log scale, second chart).

As long as the Nikkei remains above trend line or channel resistance (now support), Japanese stocks will likely rally to their next resistance level. Where’s that?

The first chart pegs red trend line resistance around 11,800, about 9% above current trade.

The log scale chart (second chart) shows the same trend line around 14,000, about 30% above current trade.

A move above trend line resistance around 11,800 is needed to unlock the much higher target around 14,000.

Obviously, there will be pullbacks along the way, but the trend for the next few months looks to be up.

ETFs with exposure to Japan (Japan ETFs) include the iShares MSCI Japan ETF (EWJ) and Ultra MSCI Japan ProShares (EZJ), a double leveraged long ETF.

Will The S&P 500 Reward Politicians Shenanigans With New Recovery Highs?

It seems like the stock market is rewarding short-sighted politics and alibi deficit deals, but that’s not the case. The stock market seems to have a specific agenda revealed by a little-known but effective indicator.

I don’t like to dignify bad behavior. That’s probably why I’ve only written about the fiscal spectacle once before (December 7: Will the Fiscal Cliff Really Send Stocks Spiraling?).

Stocks rallied strongly on news that Congress approved a quick fix that buys a little more time. Will the S&P 500 and SPY ETF even go as far as reward politicians’ shenanigans with new recovery highs?

Confession Time

I have to admit that we didn’t get to profit (at least not much) from this week’s explosion to the up side. That’s not because it wasn’t expected.

The December 23 Profit Radar Report wrote that: “The decline from September 14 – November 16 was a correction on the S&P’s journey to new recovery highs. This scenario is supported by the lack of bearish price/RSI divergences at the September 14 high, continuous QE liquidity and bullish seasonality.”

The same update also warned that: “the S&P is littered with resistance levels from 1,417 – 1,440. This suggests that any immediate up side may be choppy.”

In fact, the up side was so choppy that it diluted many support/resistance levels and made it tricky to find a low-risk buying level. The chart below (it looks busy, that’s why there was no low-risk entry) highlights the support/resistance levels rendered nearly useless by 5 weeks of zig zagging back and forth.

This is frustrating, but crying over spilled milk is of no benefit. There will always be another trade set up, in fact a huge setup is in the making right now.

Wednesday’s move above 1,448 unlocked a number of temporarily bullish options. The up side from here is probably going to be choppy and limited, but should lead to the best low-risk sell signal in well over a year.

I am using a little-known but effective strategy to project the target (and reversal zone) for the current rally. Effective because the strategy is a mirror image of the strategy I used to pinpoint the April 2011 high (at S&P 1,365), which led to a 300-point free fall.

This strategy suggests a new recovery high followed by a major top. I don’t know if the reversal will be as significant or more significant than the one in April 2011, but investing is a game of probabilities. The odds for a low-risk entry just don’t get much better than this.

The latest Profit Radar Report reveals the little known strategy used to project the target for this rally along with the actual target level for a potentially epic reversal.