Comprehensive S&P 500 Analysis Reveals Longevity of this Rally

The S&P 500 has soared almost 10% since Election Day. This move has been dubbed the Trump rally or Trump bump.

The media is quick to slap a label on an event (especially after the fact), but lest we forget that the media, analysts and pundits a) did not see a DJ Trump win and b) expected a market crash in the unlikely event of a DJ Trump win.

Key stock market indicators strongly suggested prior to the election that stocks would rally regardless of the election outcome (the four most powerful stock market indicators are discussed in detail here).

Here is what indicators said before the election, and what they are still telling us today:

Money Flow

The stock market is a supply and demand-based market place, that’s why money flow is one of the most important indicators. Falling demand will eventually be followed by falling prices and vice versa.

The September 25 Profit Radar Report published the chart below. The dark and light blue graphs make up our favorite money flow indicator (two versions of the same indicator). This indicator has correctly foreshadowed the 1987, 2000 and 2007 bear markets and projected higher prices since 2009 (except for a brief ‘caution’ signal in 2015). The indicator and its track record is discussed in detail here.

Out of respect for paying subscribers (who know the indicator’s real name), we will call this indicator ‘secret sauce.’

On September 22, the ‘secret sauce’ money flow indicator (blue graphs) rallied to new all-time highs even though the S&P 500 did not. This was to be longer-term bullish, because rising demand was to be followed by rising prices.

The percentage of stocks above their 50-day SMA (purple graphs) did not confirm the new ‘secret sauce’ highs. This suggested short-term weakness.

The September 25 Profit Radar Report concluded the following: “Longer-term: We are still looking for the S&P 500 to reach our long-standing up side target around 2,300. Short-term: We are waiting whether the S&P will break below 2,119 prior to moving higher.”

Investor Sentiment

Investors have been predominantly bearish throughout this bull market. Based on bearish investor sentiment (bullish for stocks), we never wavered from our position that a major market top is not visible.

For example, the Profit Radar Report’s 2016 S&P 500 Forecast stated back in January that: “Investor sentiment near the May 2015 all-time highs was not as euphoric as at prior tops and not bullish enough for a major market top.”

The January 29 Profit Radar Report, however, pointed out bearish sentiment extremes (bullish for stocks) and noted that: “The pessimistic extremes were relieved enough to allow for another drop lower in the coming days. A drop lower is not required, but would be a good buying opportunity if it happens.”

The buying opportunity appeared in February, when the S&P 500 dropped into the low 1,800s.

The most recent comprehensive sentiment update (November 27 Profit Radar Report) compared current sentiment with the 2015 S&P 500 highs (see chart below).

The conclusion: “On average, investors today are still not as bullish as one would expect at a major market top. This allows for, and suggests, further gains in the months to come.”

Technical Analysis

The August 28 Profit Radar Report showed three uber-bullish forward projections (shown here) and stated that: “At this point we don’t know the scope of any pullback, but EWT and the June breadth thrust suggest that any weakness will be bought (perhaps even furiously). We consider the longer-term up side potential to be significantly larger than the down side risk.”

The June breadth thrust is discussed in detail here: 2016 Bear Market Risk is Zero Based on this Rare but Consistent Pattern

A detailed technical analysis and Elliott Wave Theory-based outlook is available here: S&P 500 Update – Expect the Abnormal (the ‘abnormal’ refers to continuous gains despite overbought conditions).

Seasonality

S&P 500 seasonality is bullish for the entire fourth quarter into the New Year.

Conclusion

All important indicators pointed higher before the election. The question was only how much of a pullback and how deep of a shakeout move we’ll get prior to the melt up. “The question therefore is not if stocks will rally, but when they will rally” was the conclusion shared in this MarketWatch article.

An indicator-based investment approach is superior to a news-based approach.

Using multiple credible and time-tested indicators further enhances results, especially when all indicators point in the same direction (such as before the election).

The image below illustrates how the odds of a winning trade are improved by a multi-indicator approach.

This doesn’t guarantee a profitable trade, but Profit Radar Report subscribers rarely ever find themselves on the wrong side of the trade.

Short-term, the market is overbought and over-loved and may pull back, but the bullish longer-term factors present months ago (aside from sentiment) remain valid.

Continuous updates with actual buy/sell recommendation 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.

 

Detailed S&P 500 Forecast – Profit Radar Report Sneak Peek

Below is a complete excerpt of the S&P 500 analysis featured in the February 28 Profit Radar Report. This is a rare, and longer than usual re-print of s subscription-based report, but I believe you’ll find it interesting and worth your time.

To put this update into context, allow me to highlight some of the comments leading up to the February 28 Profit Radar Report.

The February 11 Profit Radar Report listed six reasons why the S&P is expected to rally and recommended to buy at 1,828.

The February 17 Profit Radar Report stated the following: “The S&P 500 is now at trend line resistance (1,930) and near the February high (1,947), which is likely to introduce some selling pressure. How the S&P reacts (and recovers) to any upcoming selling pressure may set the tone for coming weeks, possibly months.”

The last observation builds a nice bride to the February 28 Profit Radar Report. Enjoy.

* * * * * * * * * *

February 28 Profit Radar Report:

Since February 17, when the S&P 500 first spiked to 1,930.68, we’ve been watching how the S&P reacts to its overbought condition. It’s been a topsy-turvy eight trading days since, but the S&P gained an additional 18 points. This is a positive development for stocks thus far.

There hasn’t been much net-movements and little new information the past week, so we’ll use the time to review and perhaps clarify our outlook and analysis.

Revisiting our Projections

The February 10 Profit Radar Report listed four projections. One was outdated (#1). One was unlikely (#4). We’ve been following the other two projections (#2 and #3) ever since. Here they are again:

2) A drop towards or just below 1,812, followed by a rally just above 1,950 and a ‘better’ bottom, likely below 1,800 (solid thick yellow line)

3) An immediate drop to new lows (or at minimum test of prior low) followed by a rally towards and likely beyond 2,040 (thick dashed yellow line)

The chart below shows both projections along with some additional information.

On February 11, the S&P 500 dropped to 1,810.10, which was 2.19 points below the January 20 low (1,812.29). This new low activated both projections.

Although the S&P did not drop as low as the dashed yellow line shows (projection #3), it triggered the minimum requirement for projection #3 (“immediate drop to new lows”). Projection #2 (solid yellow line) was validated as well.

Initially, the dashed yellow line (projection #2) was our preferred outlook, but as mentioned in the February 17 PRR: “The solid yellow projection has lost some of its edge, and will lose more if the S&P shrugs off short-term overbought readings without major damage.”

Classic Technical Analysis

The blue lines outline a W or double bottom formation. The projected up side target of a valid W formation is somewhere in the 2,060 – 2,100 range. What would validate the W formation?

Depending on which criterions are used, the W formation is validated with a break above the February 1 high at 1,947.20 or the January 7 high at 1,985.

As a point of reference, the last W formation was carved out in August – October 2015 (blue box). The red bar highlights the W resistance zone(s), the green bar the post-bottom kickoff(s). A detailed analysis of the February kickoff rally (three consecutive daily gains of 1.5%+) was published in the February 21 PRR. If you are a new subscriber, take a moment to review the significance of this pattern.

2011 vs 2015

The February 7 PRR re-visited a comparison between 2011 and 2016. In 2011, the S&P broke its initial August low on October 4 against various bullish divergences. In 2016, the S&P broke its initial January low on February 11, also against various bullish divergences.

However, there were only 16 days between the January 20 and February 11, 2016 lows. In 2011, the S&P 500 chopped around for 40 days until finally carving out a lasting bottom on October 4.

In terms of price and divergences, the S&P already fulfilled the minimum requirement. In terms of time, it could take until March or April until we see a more lasting low.

Elliott Wave Theory

Based on Elliott Wave Theory, there are a number of valid interpretations. Here are a the 3 most applicable ones:

1) The S&P 500 completed a larger-scale wave 4 correction on February 11, which is to be followed by further gains and ideally new highs (dashed yellow projection #3). The conceptual chart below marks where we’re at right now, assuming this scenario is playing out.

2) The S&P 500 completed the fourth wave of a larger wave 4 correction on February 11, and needs another new low to complete the larger wave 4 correction. The final correction low would be followed by further gains and ideally new highs. (solid yellow projection #2 and conceptual chart below).

3) The S&P 500 completed wave 1 of a new bear market on February 11. The current rally is a counter trend move. Once complete, this rally would roll over into a steep decline (this scenario is unlikely, see conceptual chart below).

How to Discern the Difference

The obvious conundrum is to discern whether the S&P is more likely to follow projection #2 or projection #3.

Unfortunately, there is no way of telling. The February 15 PRR foresaw and phrased the predicament as follows: “We soon may have to decide if we want to use this trade merely as an ‘insurance trade’ against a runaway up move (in which case we hang on at least until 1,950), or if we want to cash in a somewhat respectable gain of 3-4%.”

As per the February 12 PRR: “If the S&P is going to turn lower, it should do so between 1,945 – 1,990.” The S&P entered this general turnaround zone last week.

We cashed in half of our position for a 5.2% gain. We are holding the second half in case a ‘runaway rally’ develops. More often than not, the onset of a runaway rally is unpredictable. It is not prudent to bet on the unpredictable, however, based on what we see, the environment for a runaway rally is in place.

At this point, we feel comfortable holding on to our remaining half long position, but we are not confident enough to deploy new capital.

Summary: The S&P is in the 1,945 – 1,990 region where a reversal is becoming more likely. However, the recent price action increases the odds that an upcoming reversal may only be temporary and shallow.

Immediate support is at 1,947, followed by 1,915. A move above 1,990 would unlock higher targets (2,040 – 2,100). A move below 1,915 would be a first step towards lower targets.

* * * * * * * * * *

End of February 28 Profit Radar Report

Since February 28, another price pattern emerged. This new pattern emphasizes the importance of the S&P 1,990 zone. All the details about this new price pattern and how it affects the S&P 500 outlook are discussed in the March 2 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, 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.

 

S&P 500 Analysis

A couple weeks ago, I declared 2,040 as target and ‘make it or break it’ zone (Why 2,040? Is explained here).

I realize this is a strong statement, and although the S&P 500 easily reached the 2,040 target, it appears like the ‘make it or break it’ zone was a non-event. Nevertheless, 2,040 actually did what it was supposed to do. How so?

First, 2,040 acted as price target. The target was reached.

The October 4 Profit Radar Report (PRR) proposed that: “If the S&P doesn’t turn around at 1,953, the odds increase for a push to 2,040.”

What does ‘make it or break it’ mean anyway?

The October 7 PRR explained that: “The rally from the September 29 low has been stronger than it should have been, and a sustained move above 2,040 would likely mean that the correction is over. A break above 2,040 could also validate a W-bottom formation, and significantly reduce the odds of another low in 2015.”

Second, 2,040 didn’t require a reaction, but market action around 2,040 would indicate whether the S&P 500 will break the August low (1,867) or not.

The S&P moved above 2,040, thereby diminishing the odds of another low dramatically. The S&P 500 made it. This doesn’t mean there won’t be a pullback.

In addition to price, we’ve also been focusing on market breadth. Price is important, but it’s not the only thing that matters.

To illustrate, an electric car can only deliver the full horsepower (or kilowatts) if the battery is charged. An empty, or near empty battery, won’t get the driver far, regardless of how many horses are under the hood.

We wanted to see how things look under the hood as the S&P approached (and surpassed 2,040). Is there enough horsepower and battery life left to move stocks higher?

At times, market breadth was quite weak (especially on Friday, October 23). However, there were no bearish divergences suggesting a pullback.

The October 18 PRR stated that: “A decisive move above 2,040 would unlock the next up side target around 2,080.”

It would be a stretch to call the move decisive, but 2,080 was reached nevertheless.

The hourly chart shows that the S&P 500 reached and eventually (after appropriate testing of resistance) exceeded all up side targets (blue ovals). There was a bearish divergence at yesterday’s high.

There is also trend channel resistance (going back to 2009) at 2,093 (increasing about 0.75 points per day).

It will now take a new RSI high and a move above 2,093 (adjusted for time) to unlock further up side targets. There is risk of a shallow pullback as long as the RSI divergence persists and trade remains below resistance.

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.

 

S&P 500 Analysis – The Next Turn

On June 15, I noticed (and wrote) that 2015 is Shaping up to Look a lot Like 2011.

In 2011, the S&P 500 fell 20% in July/August. 18% of that loss happened within a 3-week meltdown.

The rearview mirror shows a similar ‘crash’ in August 2015. Will the 2011/2015 analogy continue?

I suspect it will. Not tick for tick, nothing every does, but reasonably close.

The chart below plots the S&P 500 of 2011 (black line) against the S&P 500 of 2015 (blue line).

In 2011, the initial low (August 9 at 1,101.54) was followed by a multi-week consolidation and another new low (October 4 at 1,074.77).

According to Elliott Wave Theory (EWT), the 2011 decline followed a 5-wave format (see black numerical labels). Elliott Wave Theory is an exotic indicator, and should not be followed blindly, but there are times when EWT can be very helpful.

Now appears to be such a time.

A complete 5-wave decline, as happened in 2011, usually means two things:

  1. A bounce (or rally to new highs) is next
  2. A longer-term trend change may have occurred (this was not the case in 2011).

Regardless, a rally was to be expected after the initial (wave 3) low.

I noted via the August 24 Profit Radar Report that: “It looks like today’s low (1,867 for the S&P 500) marks the end of wave 3. Next should be a choppy and potentially violent wave 4 rebound.”

There are a number of other possibilities, but at this point there is no reason to complicate matters. If the next moves don’t match our parameters (many of which were already shared with Profit Radar Report subscribers), we’ll adjust.

For now, the likely path is the one outlined by the 2011 template: Perhaps more choppy sideways action, and a new low followed by a Q4 rally.

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.

 

Deep Tissue S&P 500 Analysis

A rip current is a powerful, fast-moving flow of water running from the beach back to the open ocean. About 80% of lifeguard rescues are related to rip currents, and about 150 people are killed by rip currents every year (just in the US).

Lifeguards and experienced swimmers/surfers can detect rip currents, and know what to do, but they are invisible to novice swimmers.

The stock market is full of rip currents, that’s why some investors sink (often because they don’t think) and others swim.

Here are some of the cross currents lurking beneath the surface.

The chart below plots the S&P 500 against the percentage of NYSE and S&P 500 stocks below their 50-day SMA, and my favorite indicator (I call it ‘secret sauce’).

Secret Sauce Warning Signal

Secret sauce is an incredibly potent indicator, and is the most important ‘bull market health meter’ I’ve found.

Up until April 2015, secret sauce has been giving the ‘all clear’ signal, meaning that higher highs were still to come (it never triggered a ‘danger’ signal from 2009 – 2015). That’s not the case anymore.

In fact, currently secret sauce is showing the same warning signals it flashed before the 1987, 2000 and 2007 bear markets.

A detailed description of secret sauce and how it works is available here: The Missing Ingredient for a Major Bull Market Top

Rip Current Warning

The percentage of stocks above their 50-day SMA has been declining since 2012/2013, but the lag accelerated in April.

Large cap stocks are holding up much better than the rest of the market. How so?

48.8% of S&P 500 stocks are above their 50-day SMA, but only 33.5% of NYSE stocks. The NYSE Composite is comprised of some 3,500 issues, including (and predominantly) small and mid cap stocks. The S&P 500 consists of the 500 largest U.S. corporations.

A quick glance at the Russell 2000 chart, which just dropped to new lows, confirms the lagging performance of small caps.

Small cap underperformance is one of the 3 stages of a dying bull market (click here for the anatomy (3 stages) of a dying bull market).

Market breadth is warning that the stock market is trying to drag investors into open waters.

The percentage of stocks above their 50-day SMA is not yet at rock bottom levels, so there is more down side risk.

However, some investor sentiment measures are showing a high degree of pessimisms (which tends to be positive for stocks).

Bottom line, there is risk, but it seems to be somewhat limited, and will only be triggered by a drop below support (click here for key S&P 500 support).

I would love to see a correction. The deeper the correction, the better the buy signal for a final hurray rally.

If the S&P 500 doesn’t bounce soon, despite some excessively bearish sentiment readings, it could be a warning sign that a short-term break down is near.

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.

 

Long-term S&P 500 Analysis

The last short-term S&P 500 forecast was published on July 14, when the S&P 500 closed at 2,109, and included the following forward guidance:

Stocks are reaching overbought territory, so resistance at 2,115 – 2,125 is worth watching for a pullback or relapse. Support (and an open chart gap) around 2,080 may be a low-risk spot to buy. Failure to hold 2,080 and more importantly 2,040, could unlock much lower targets.”

Resistance held. At the time of analysis (July 14), 2080 seemed like THE key level, but late last week I discovered the following S&P 500 pattern, shared via Sunday’s (July 26) Profit Radar Report.

The weekly S&P 500 chart shows three developments worth a look.

  • Since 2012, the S&P 500 found support at or near the 50-week SMA several times.
  • Last week’s red candle put in a bearish engulfing week and painted a formation called ‘bearish harami’. In recent times, bearish haramis haven’t been as bearish as they used to be.
  • Last week’s drop triggered a bullish percentR low-risk entry (click here for explanation of percentR).

In itself, none of the above three developments allows for a high probability forecast, but when combined, they would allow for a brief intra-week test of the 50-day SMA (2,053) without ‘killing’ the option of another high before a deeper correction into October.”

This week, the S&P 500 fell within 8 points of its 50-week SMA and S&P bounced again.

S&P 500 seasonality suggests higher prices, but breadth is terrible. With or without new highs, a deeper correction (possibly into October) is likely.

A move below the 50-week SMA and support at 2,040 would caution that the correction has begun.

Continued S&P 500 analysis is available to subscribers of 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.

 

2 Contrarian Indicators Triggered Buy Signals Last Week

For much of 2014, contrarian indicators were stuck in the ‘Bermuda Triangle’ of technical analysis. They crashed, burned and drowned. However, the recent sell-off revived a number of them … with buy signals (how about that for irony).

As mentioned in the Short-Term S&P 500 Analysis, the S&P 500 nearly hit important support located at 1,902 – 1,885.

Just before the S&P 500 (NYSEArca: SPY) approached this key support cluster, there was a buy signal by two option-based indicators.

The charts and commentary below were published in the August 6 Profit Radar Report.

“The 5-day SMA of the CBOE Equity Put/Call Ratio just spiked to a two year high. Options traders are more bearish today than any other time since June 2012. Obviously 2012 and 2013 were unusual years and may not be the best benchmarks, but nevertheless this is a noteworthy extreme.”

“The VIX:VXV ratio briefly poked above 1 on August 1. This means that expected 1-month volatility (VIX) was higher than 3-month volatility (VXV). All 2012 and 2013 spikes above 1 marked lows for the S&P 500 and highs for the VIX.”

The message of various indicators was summarized as follows by the August 6 Profit Radar Report:

The longer-term S&P 500 chart shows key support at 1,885 – 1,902. This would be the ideal target for a tradable low (a drop to support at 1,850 is only a low probability). However, the 100-day SMA is at 1,913 and the August s1 pivot is at 1,910. In essence, support/resistance levels confirm the message of EWT: A low is either already in place or nearly so.”

Unfortunately, the above two indicators don’t tell us how long this bounce will last.

We will be looking at various other gauges to judge the longevity of this bounce.

One clue comes from the VIX. VIX seasonality triggered a major buy signal on July 9 (which has been spot on), but sports a brief bearish window right now.

More details here: VIX Seasonality Sports Brief Bearish Window

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.