What’s Next: New Highs or Lows?

Even just a quick glance at the S&P 500 chart reveals a tug-of-war between bulls and bears, buyers and sellers. Although there’ve been many – at time violent – swings, there’s been no net progress.

What will we see first, new highs or new lows? Here’s a look at various pieces of market research:

Long-term:

Hypervolatility – April 11, 2018 Profit Radar Report:

What a contrast: In 2017, the S&P 500 swung more than 1% on only 10 days. That’s measured from daily high to low, not open to close. In 2018, the S&P 500 had already 41 daily swings of more than 1%.

Below is a closer look at actual volatility, not the VIX. The first chart plots the S&P 500 against the daily percentage change measured from high to low (gray graph) along with a 20-day SMA of the daily percentage change (blue graph).

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In February, the daily swing range was nearly as big as in September 2015 and January 2016, which is when stocks bottomed. Back then, volatility came and went quickly (like the shape of a ‘V’). This time around, volatility is lingering longer.

The second chart provides a long-term perspective, which includes the 1974, 1987, 2002, 2007, and 2011 market lows. Back then, daily swings (20-day SMA) peaked around 4%, twice the current average of around 2%.

Based on positive liquidity (NYC a/d line) and the parallels to 2011, it’s unlikely that the daily swing range will double from 2% to 4% as stocks melt lower.

The main takeaway is that volatility extremes are usually seen towards market lows.”

Elliott Wave Theory (EWT) – February 11, 2018 Profit Radar Report:

For well over a year stocks have almost exclusively gone up, slow but steady. For the past two weeks, stocks have gone down quickly.

What’s next? The temptation (and trap) is to think two dimensional – up or down – since that’s most of what we’ve experienced lately. However, stocks could also go sideways for a period of time.

The weekly S&P 500 chart provides some long-term perspective. 1 – 2 – 3 is how we label the rally from the February 2016 low. Wave 3 (wave 5 of wave 3 to be exact) extended much higher than normal.

Based on EWT, wave 3 is followed by wave 4, which is where we are currently at. Waves 4 are generally choppy, range-bound, long-winded, unpredictable corrections that retrace ideally 38.2% of the preceding wave 3. The 38.2% Fibonacci retracement level is at 2,536 (reached on Friday).

In terms of price, wave 4 has already reached its down side target. In terms of time, wave 4 would be unusually short.”

Liquidity – April 18, 2018 Profit Radar Report:

On the bullish side of the ledger, we find that the NY Composite advance/decline line (and NYC OCO a/d line) made new all time highs. This follows the bullish divergence noted in the April 4 PRR.

Long-term summary:The weight of evidence suggests that this correction will be temporary and followed by new all-time highs. But how much longer will this correction last and how low can it go?

Short/Mid-term:

Breadth – May 2, 2018 Profit Radar Report:

As early as February 11, the Profit Radar Report expected a frustrating, drawn out correction like in 2011. There are many parallels between the 2011 and 2018 correction, but here is one difference:

In 2011, there were multiple strong up days (where more than 80% or 90% of stocks advanced – green lines), and strong down days (where more than 90% of stocks declined – red lines).

The strong down days exhausted sellers, and the strong up days indicated internal strength not yet reflected in price.

The 2018 correction is much different. There’ve been only two days that come close to be considered a 90% down day, and only one 80% up day.

To end this sideways range, it appears that either more 90% down days or 80%-90% up days (like in October 2011, see green arrow) are needed. Ideally we’d like to see both, first a bout of strong down days followed by strong up days.”

Seasonality, cycles, pattern – May 6, 9, 2018 Profit Radar Report:

Based on mid-term seasonality (blue graph, chart below), the S&P has a tendency to bottom between late June and late September. Cycles are fairly similar to seasonality at this time.

Year-to-date the S&P is down 0.38%. Since 1950, the S&P 500 showed at loss of 1% (but no more than 5% below 200-day SMA) after the first 4 months 17 other times.. 6 of those 17 instances occurred in mid-term election years (like 2018). The average full-year performance is shown below (average bottom: trading day #193).”

Summary:

The April 2 Profit Radar Report (when the S&P 500 closed at 2,582) stated that: “The S&P 500 has met the minimum criteria to consider this correction complete. There is, however, a difference between minimum and ideal.”

The S&P continues to be stuck in the ‘twilight zone between minimum and ideal.’

Short-term, the May 13 Profit Radar Report probably defined it best: “The S&P 500 broke above triangle resistance. Although we view this breakout with a fair amount of skepticism, we need to allow for higher prices while trade remains above 2,700. Due to the overbought condition, it is unlikely for the S&P to move above 2,750 early this week.”

Continued updates will be 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.

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Under the Hood is more Strength than the S&P 500 Chart Shows

If you own stocks, this is a good new / bad news scenario.

On one hand, U.S. stocks are stronger than the S&P 500 (NYSEArca: SPY) chart suggests. On the other hand, stocks are (or were) overbought, at least based on this indicator.

Here are the details:

The percentage of NYSE stocks above their 50-day SMA nearly matched their previous highs last week, while the S&P 500 stayed below its prior highs.

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The potential implications are two-fold:

  1. The buying pressure behind the latest rally leg is actually stronger than the S&P 500 chart suggests.
  2. The % of NYSE stocks above their 50-day SMA reached an overbought reading. Prior such instances either saw stocks struggle to move higher or correct.

Based on technical analysis, investors should watch last weeks high – 2,111.91 for the S&P 500. Trade below allows for further weakness, trade above would translate into further up side (at least temporarily).

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.

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Short-term S&P 500 Forecast

I invite you to inspect a very insightful S&P 500 chart with me.

Since February 2nd, the S&P 500 (NYSEArca: SPY) is tracing out a very symmetric pattern (see blue box and blue lines).

The only thing missing to complete a decline that mirrors the February 2 – February 25 rally is another leg down to 2,000.

Will the market complete the pattern?

Patterns like that can break apart at any time. I never rely on just one single pattern or indicator. Here’s what else the chart is telling us:

Prior support at 2,090 is now important resistance. On Friday, March 6, the Profit Radar Report recommended shorting the S&P as soon as 2,087 is violated.

Important support is around 2,040.

Wednesday’s Profit Radar Report highlighted the confluence of trend lines and observed that: “The S&P 500 is right about where a bounce becomes likely. The daily and hourly chart peg support around 2,040. There is a small bullish RSI divergence on the hourly chart. At a 1-3 day time frame, a (counter trend) bounce seems likely.”

Per a special intraday update, we closed our S&P short position already at 2,048 on Tuesday for a 39-point gain.

Based on the symmetrical pattern, resistance of the ‘left shoulder’ is around 2,072. There is also an open chart gap at 2,079. And of course there’s resistance at 2,090. This resistance cluster is illustrated via the red zone.

Supply & Demand

Selling pressure leading to Tuesday’s 2,040 low may have been enough to exhaust supply (Tuesday was almost a 90% down day), but buying pressure thus far (Thursday was only a 71% up day) is not indicative of a more lasting low.

Unless buying pressure picks up, and trade moves above 2,090, there’s still above average risk of a down side reversal towards 2,000 (especially if 2,040 gets broken).

The Profit Radar Report will continue to monitor proprietary measures of buying/selling pressure along with investor sentiment, divergences and support/resistance levels to stay ahead of the trend.

>> click here to test drive the Profit Radar Report with a 30-day money back guarantee.

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.

This Might Be the Only Bullish S&P 500 Chart Right Now

Last week’s decline has turned many short-term trend following and technical indicators bearish. There’s little evidence for an immediate bottom, aside from this one chart (which has an impressive track record):

A one-week decline doesn’t wipe out a five-year bull market, but it can ruffle some bullish feathers. That’s exactly what happened last week.

Aside from this chart, few indicators suggest an immediate end to stocks new-found attraction for lower prices.

The chart plots the S&P 500 against the VIX:VXV ratio.

The VIX (NYSEArca: VXX) is a gauge of expected volatility for the next month.

The VXV is a gauge of expected volatility for the next three months.

We’ve previously dubbed this the ‘Incredible VIX Market Bottom Indicator,’ because prior readings above 1 (= expected 1-month volatility > 3-month volatility) have coincided with every S&P 500 bottom since 2012.

Now, once again, the VIX:VXV ratio has spiked above 1.

This is good news if the S&P (NYSEArca: SPY) follows the bullish 2013 pattern, but not every year can be like 2013 (I personally think we might see another VIX:VXV hook higher like in February – green circle).

There’s another, even better, explanation why stocks rallied today (and whether this is a ‘real’ or ‘fake’ bounce. More details here:

Don’t Get Fooled by S&P 500 Bounce

There are two potent reasons why this VIX spike may not have the same results now as it did in 2013. More details here:

MACD Triggers the Year’s Most Infamous Sell Signal (make sure to look at date of article)

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.

S&P 500 – Stuck Between Triple Top and Triple Bottom – What’s Next?

Since the middle of February the S&P 500 has been stuck between two long-term trend channels, one acting as resistance, one as support. The chart now shows a possible triple bottom or triple top. Which one is it?

Was today’s new S&P 500 all-time high another fake out breakout?

I don’t have a crystal ball, but I can lend you my flashlight for a moment.

A flashlight doesn’t tell anyone what’s happening next, but it sheds light on issues invisible without a light. That’s exactly what the two charts below will do.

Long-Term ‘Flashlight’

The weekly S&P 500 bar chart goes back to March 2009, the beginning of this QE bull market, and shows two long-term trend channels. The black channel started in March 2009, the blue channel in October 2011.

Since the middle of February, the S&P 500 has been wedged between both channels.

The March 5 Profit Radar Report highlighted the blue channel and noted that: “In times past, this channel has caused at least a short pullback.”

On March 6 and 7 the S&P 500 hit the blue channel, but couldn’t break above it, which indicated (along with a weekly MACD failure) that the S&P didn’t have the escape velocity needed to break out.

While the blue channel acted as resistance, the black channel acted as support. In fact, there were many other support levels that confirmed the black channel support, that’s why the March 23 Profit Radar Report referred to: “a cluster of support levels around 1,840 – 1,830.”

Short-Term ‘Flashlight’

The second S&P 500 (NYSEArca: SPY) chart zooms in on the daily action and shows two additional support (green line) and resistance (red line) levels.

There’s a good chance that we’ll see another fake breakout, such as on March 21 (red arrow), when the S&P 500 rallied to a new all-time high (keep in mind that the red line wasn’t available on March 21 yet).

A special early morning March 21 Profit Radar Report warned that: “There is at least one Elliott Wave count allowing for a fake out break out and the week after Triple Witching ended with a loss 14 out of 21 years.”

This market is very tricky and more than ever is intent on separating as many investors as possible from their hard earned dollars. Discipline and risk management are a must.

The latest Profit Radar Report features a full April forecast and identified the buy trigger, that – once broken – will lead to higher prices (although any long position will be kept on a short leash).

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.

S&P 500/Bond Ratio Shows Stocks are Overvalued

Much has been written about the ‘great rotation’ from bonds into stocks. In reality, investors ask themselves every day if there’s more value in stocks or bonds. There’s one accurate measure to determine where’s more value.

Stocks or bonds? Essentially that’s a decision investors make every day.

As with pretty much every other purchase, investors want to get the biggest bang for their buck and avoid risk. In other words, risk/reward is key.

What’s the better risk/reward play right now? Stocks or bonds?

To find out we will take a look at the value of the S&P 500 Index relative to 10-year Treasury prices. The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) is used as proxy for 10-year Treasuries.

The chart below plots the S&P 500 Index against a ratio attained by dividing the S&P 500 against the price of IEF (S&P 500:IEF).

This is one of the easiest and most effective ways to determine the value of both asset classes relative to each other.

The chart shows that S&P 500:IEF ratio extremes put the kibosh on stocks every time. The degree of the correction varied, but the direction for the S&P 500 was the same every time – down.

There is one problem though.

It usually takes hindsight to determine what constitutes an S&P 500:IEF ratio extreme.

The ratio, although extreme right now, could become more stretched. Will it?

The dashed horizontal gray line shows today’s ratio in correlation to prior readings. In fact, the ratio is at a point where it turned down in early 2007 and early 2008. This appears as natural resistance for the ratio … and the S&P 500.

The S&P 500:IEF ratio suggests that risk is increasing for the S&P 500.

This harmonizes with the S&P 500 chart, which conveys the message that stocks are at a short-term inflection point. This article highlights some technical ‘speed bumps’ most investors aren’t aware of: What’s Next For the S&P 500?

 

Can the S&P 500 Rally another 20%?

The S&P 500 just gained 100 points in 10 days. Some suggest that further gains from an overbought condition are unlikely. This may well be correct, but with or without correction, can the S&P 500 rally another 20% from here?

The S&P 500 is trading at all-time highs and just even entertaining the idea of another rally leg makes me think of this quote:

“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

I’m not an economist and I’d like to think that I’m no madman, but I’m starting to warm up to the idea of another sizeable rally leg.

This is partially because QE wasn’t around when Kenneth Boulding, an economist born in 1910, uttered the above words.

Although absurd when considering the economic backdrop, based on a factual and objective examination of the S&P 500 (NYSEArca: IVV) chart and investor sentiment, considerably higher stock prices are possible, even likely.

Why Now?

Stocks are nearing an overbought condition, isn’t now the wrong time to talk about another 20% rally?

The timing of this discussion is based solely on the fact that the S&P 500 (NYSEArca: SPY) has reached my long-term target around 1,750.

Technical Target Price Captured

The target was based on a 55-month long trend channel (shown in chart below) and first mentioned in the July 14 Profit Radar Report, which stated the following:

“The May 22 high did not look like a major top and the current rally doesn’t have the attributes of a major high yet either. It would be reasonable to expect some weakness with support at 1,635 followed by the next rally leg to 1,700 – 1,750.”

The October 7 Profit Radar Report confirmed the prior forecast like this: “The scenario that appears to make most sense is a quick trip into the 1,660s or 1,650s followed by another rally to new all-time highs.”

The S&P 500 chart below shows the S&P trading as high as 1,765 and Monday, tapping the upper trend channel line and capturing my long-standing target for this rally.

 

If this trend channel is going to repel the S&P 500, it needs to do so soon. Otherwise ‘persistence wears down resistance.’ Persistent trade around current levels increases the odds of higher prices.

Sentiment Analysis

Famous investor John Templeton said that: “Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Based on Templeton’s rhetoric, bull markets have four stages: Pessimism, skepticism, optimism, and euphoria.

For good reason the artificial QE bull market has been called the ‘most hated rally ever.’ Not a day goes by without banter against the Federal Reserve or Ben Bernanke.

Everyone and their grandmother knows that the Fed can’t print an economy out of trouble and that this experiment will end badly.

There’s no scientific way to prove this, but skepticism seems to be the predominant emotion of the market’s current stage.

However, to keep this analysis objective, we need to mention some rather bullish sentiment readings that popped up lately.

Bullish sentiment readings (bearish for stocks) include the equity put/call ratio, bullish asset allocation of Rydex traders, near record-high margin debt and perhaps, most importantly, a very elevated SKEW Index reading.

The SKEW Index was created by the makers of the VIX and – unlike the VIX (NYSEArca: VXX) – has been a trusted indicator this year.

To read about the implications of the current SKEW extreme go here: Watch Out! The S&P 500 Just got ‘SKEWed’

I personally believe that QE has changed the dynamic and the meaning of pretty much all sentiment gauges, but I also believe that understanding the composite sentiment picture holds the key to identifying the next investable low and the major top so many investors are waiting for.

Profit Radar Report subscribers know that I’ve been chronicling various sentiment indicators and actual money flow gauges for a long time. The correct interpretation of investor sentiment has kept us on the right side of the trade since the beginning of the year.

For a quick summary of how sentiment has affected trading thus far this year and an updated look at various current sentiment gauges and indicators click here: Assessing QE Bull Market Longevity Based on Current Investor Sentiment

Simon Maierhofer is the publisher of the Profit Radar Report.

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