5 ‘Keep it Simple’ Stock Charts and 1 Bearish Constellation

The rally from the June 3 low has created many bullish price and breadth patterns and studies (5 of them are discussed here). The market has followed through on them thus far.

However, the short-term Elliott Wave structure does not look bullish, and the long-term projection published in the June 2 Profit Radar Report (shown here) points to a serious speed bump.

In short, there is a measure of conflict between indicators. When that happens, I like to go back to the basics and keep it simple.

Resistance

The DJIA shows probably the most important resistance range to watch: around 27,300.

Support

The S&P 500 shows some important support levels to watch: around 2,910 and 2,875.

Short-term Trend Channel

The June 23 Profit Radar Report used this chart to simplify the short-term: “A break below channel support would unlock a pullback. The wave labels show the most bearish EWT-based option. It’s not ideal, but it seems more likely than other options.”

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Trend channel support failed the next day and unlocked the biggest pullback of June. It is possible to count the decline from June 21 as 5 waves, which cautions that the trend may have changed from up to down.

Leader Fatigue

The rally from the June low has been led by defensive sectors like consumer staples. Contrary to popular belief, such (defensive-led) rallies are statistically not doomed to fail.

However, the Consumer Staples Select Sector SPDR ETF (XLP) carved out a pattern with a lot of bearish potential. I recommended to go short at 59.07 on June 13. The stop-loss is now set at breakeven, which allows us to ‘play with house money.’

Overlap

Small cap stocks represented by the Russell 2000 ETF (IWM) are lagging. In fact, IWM fell below the June 5 high. If one wanted to count the June rally as 5 waves, June 5 would be wave 1, but yesterday price dropped below the June 5 high. This creates a bearish (wave 4 / wave 1) overlap (blue arrow) that’s not allowed and voids a short-term bullish Elliott Wave count.

Bearish Constellation

Not only small caps are lagging. The transportation and banking sector are too (see chart below).

Only two other times (July 1990 and July 1998) has there been such a big divergence between the S&P 500 and small caps, transportation, and banking. This is a small sample size, but it led to a rocky and negative performance over the next quarter.

Conclusion

Even during times where there is conflict among indicators, going back to the basics provides some general guidance.

It will take a sustained move above resistance to unlock higher targets, and a break below support to unlock lower targets.

Another big but temporary drop would certainly clear up the structure and provide a lot more certainty, but we’ll let the above levels indicate whether it will happen.

Continued updates 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 evaluation 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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

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5 Tempting High Reward S&P 500 Sector ETF Setups

If you like team sports, you know that a team may win even though some of its players had a bad day, or vice versa.

Just as a team is made up of individual players, the S&P 500 is comprised of individual sectors. Not all sectors perform at the same level at the same time, in fact, some may boom while others bust.

Here is a look at some sector ETF setups (boom and bust, ripe and stale):

Health Care Select Sector SPDR ETF (XLV)

The April 17 Profit Radar Report noted that the following about XLV:

The health care sector represented by XLV has taken a beating, too. XLV dropped to the lowest level since January 4, and sentiment has become extremely bearish. Purely based on sentiment, when there was so much pessimism, XLV has rallied over the next month 90% of the time, with an average gain of 5%. Seasonality is positive for the next month as well.

Aside from the green bar, there’s no ‘must hold’ support level, but RSI-2 is over-sold. We are committing a small amount to buying XLV below 86.”

We bought XLV when it dipped below 86 on April 18, and sold XLV when it became over-bought and reached the 5% average gain threshold at 90.50 and May 6.

XLV is now in neutral territory, and the setup has become stale.

Real Estate Select Sector SPDR ETF (XLRE)

The April 14 Profit Radar Report featured the chart below and stated:

The Real Estate Select Sector SPDR (XLRE) looks interesting. 3 support and resistance levels meet up to form resistance at 36.80 on Wednesday. Price is wedging higher with a small bearish divergence. Based on the wedge, the down side risk is significant if price fails to hold support. For now, we will go short if XLRE moves above 36.85 and subsequently drops below 36.50.”

Unfortunately XLRE missed my sell limited by 15 cents. After a sizeable drop, XLRE bounced from support, but a break below that support (around 35) is likely to unlock the next down side target. The potential down side risk could be significant, partially because XLRE’s sector ‘cousin’ may be in trouble.

SPDR S&P 500 Homebuilders ETF (XHB)

The May 5 Profit Radar Report pointed out that: “The SPDR S&P Homebuilders ETF (XHB) is wedging higher, and close to wedge resistance and general resistance with a bearish RSI-35 divergence. In terms of seasonality, May and June are the worst months for XHB. We will short XHB if it spikes above 41.80 and subsequently moves below 41.70 (stop-loss at day’s high). Considering futures, XHB may open lower tomorrow, and we may consider to go short on a drop below 40.70.

XHB fell below lower wedge support, which unlocks significant down side potential. RSI-2 is near over-sold, and a bounce is possible. In fact, any bounce that gets close to the broken purple trend line (such a re-test of previously broken support is often a ‘kiss good-bye’) would be another low-risk set up to go short.

Utilities Select Sector SPDR ETF (XLU)

March 27 Profit Radar Report:

The utility sector (represented by XLU) rallied to new all-time highs with more than 80% of its components at a 52-week high..

In addition, XLU was rejected by trend line resistance. Additional trend channel resistance is around 59.50. Support is around 58.20 and 57.20. There was a bearish RSI-35 divergence on the daily chart.

Based on technicals and statistics, shorting XLU has high odds of being profitable. Unfortunately XLU seasonality is very bullish for March/April. 

XLU could move a bit higher, but we will leg into a short position now (and will probably add more if it moves higher). There is no good inverse utility ETF, so we will short XLU above 58.40.”

XLU is making slow down side progress, but it’s not been able to move below support around 57 – 56.75. A move below support could unlock further down side, but immediate down side may be limited due to a near over-sold RSI-2.

PHLX Semiconductor Index (SOX)

The PHLX Semiconductor Index is often the ‘MVP’ that drives the ‘team’ to more gains (or vice versa). SOX is at a convergence of support (black trend channel and green trend line). If bulls are going to make a stand, it would be here. If not, the next stop is around 1,440.

Continued sector and stock market analysis 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 evaluation 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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

As mentioned in part I of “How to Outsmart a Choppy, Range-bound Market” (published on March 27), we anticipated a rollercoaster-like stock market.

Our strategy was to look for low-risk opportunities in certain industry sectors.

The April 24 Profit Radar Report stated the following:

The S&P 500 has reached a point where a bounce is likely. It’s possible that the bounce may morph into the next bigger rally. We would prefer to see even lower prices (the lower, the better the risk/reward), but we’re not certain if our wish will become reality.

We’ve been here before (February 8, April 2). Both times the S&P rallied … and eventually pulled back again. In February we bought XLU as a lower-risk bet on equities. Now XLP sports an interesting setup.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Low-Risk Sector Trades

The Utility Select Sector SPDR ETF (XLU) and Consumer Staples Select Sector SPDR ETF (XLP) were over-sold and over-hated at the time. In addition they were trading against support with bullish divergences. And, paying some of the best dividends in the business didn’t hurt.

We bought XLU on February 12, and sold XLU on April 6 for a 6.16% gain.

We bought XLP on April 25, and sold XLP on May 1 at breakeven.

We again bought XLP on May 31, and sold XLP on July 10 for a 5.50% gain (yes, sometimes it may take two attempts to get it right).

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At no time did XLU or XLP fall below our purchase price, and both trades offered a 11.66% (including dividends) absolutely no risk, no stress return.

The Profit Radar Report continuously looks for low-risk trade opportunities, which includes stocks, gold, silver, oil, currencies. Continued updates and recommendations 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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

How to Outsmart a Choppy, Range-bound Market

From January 26 to February 9, the S&P 500 lost as much as 11.84%. This initial freefall was followed by a rollercoaster-like performance.

The large February drop (340 S&P points) expanded the trading range and complicated the search for low-risk S&P 500 entries (see S&P 500 analysis).

Hunt for a Better Risk/Reward Setup

In fact, there was no low-risk setup for any of the major indexes. However, the February 11 Profit Radar Report featured the chart below and identified this low-risk sector trade:

The Utility Select Sector SPDR ETF (XLU) dropped as much as 17.22% since its November high. As of Thursday, XLU was deeply oversold while testing a long-term support line. On Friday, XLU jumped 2.10%. The only thing missing as a bullish RSI-35 divergence at the low. The risk/reward for XLU looks more appealing. We will leg into XLU is it drops below 48.40.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

We anticipated the S&P 500 to rally from the February 9 low, but ultimately relapse. XLU was a lower-risk vehicle to have ‘skin in the game’ just in case stocks continued higher than expected (runaway insurance).

XLU dropped below the 48.40 buy limit on February 12. Although the ride hasn’t been smooth, XLU never dropped below our entry price (allowing us to ‘play with house money’), and is currently up 3.88% (compared to a 1.30% loss for the S&P 500).

Next resistance is above 50.50, support around 49. Failure to move above 50.50 or a relapse below 49 would be a warning signal.

Although the Profit Radar Report’s analysis is centered on the S&P 500, there are times when it makes sense to think outside the box and go where opportunity takes you.

Continued updates 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.

 

Long-and Short-term S&P 500 Outlook

At the same time last year, the S&P 500 was in the early stages of a 270-point drop and logged one of the worst Januaries in history.

On January 20, and February 11, the S&P was as low as 1,810. Headlines, such as the one below, sprouted up everywhere (talk about financial bloopers):

  • “Warning: The Stealth Bear Market is About to Show its Teeth” – MarketWatch
  • “Here Comes the Recession and Bear Market” – Forbes
  • “Marc Faber: Assets will Crash like Titanic” – Bloomberg
  • “Soros: It’s the 2008 Crisis all Over Again” – CNBC
  • “Gartman: It’s Definitely a Bear Market this Time” – CNBC
  • “The Bear Market in Stocks has Finally Arrived” – MarketWatch
  • “Market could Go from Bear to Worse” – TheStreet
  • What a difference a year makes.

The chart below plots the S&P 500 against six different investor sentiment gauges. Sentiment has gone from extremely bearish in January/February 2016 (green bar) to extremely bullish today.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Bussines Daily says “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Here is the elephant in the room: From a contrarian perspective, is investor sentiment bullish enough to cause a significant drop right now?

When viewed in isolation, the answer is: Yes. By some measures, today’s sentiment extremes rival extremes seen in late 2007 (December 31 Profit Radar Report includes a comparison between investor sentiment in 2007 and 2016).

We never rely on any one single indicator, and other indicators – which predicted this rally before it started – continue to point higher (our longer-term bullish indicators were discussed here: S&P 500 – Expect the ‘Abnormal’ – Comprehensive S&P 500 Analysis).

The S&P 500 has yet to reach the up side target published by the August 5 Profit Radar Report (see chart below).

There are times where stocks continue to climb despite sentiment extremes. Now may be such a time.

Short-term Outlook

The December 14 PRR stated that: “Yesterday’s high could be the end of wave 3 (perhaps a wave 3 within a larger wave 3), to be followed by a choppy wave 4 correction with much sideways action (sideways action following strong moves has certainly been a pattern in 2016).”

After three weeks of choppy trading, the market did what it does best. It fooled the crowd by briefly dropping below the 20-day SMA and double trend line support at 2,245.

This drop triggered another set of buy signals for the S&P 500 SPDR ETF (SPY) and Nasdaq QQQ ETF (QQQ), and the January 2 PRR stated that: “The S&P 500 broke below support at 2,245. This may just be a fakeout move. The DJIA, Russell 2000 and Nasdaq are at support. We will allow stocks to regain their footing and move higher from around current levels.”

The strongest part of this rally is behind us, but further gains are still likely. Instead of straight up, future gains will probably take the shape of ‘two steps forward, one step back.’

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.

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Two Diametrically Opposed Sector Opportunities

The S&P 500 is trading at the same level where it was on July 8. Such a 15-week chop zone is pretty boring, but it doesn’t stop there. The S&P hasn’t made any net progress since May 2015.

When the broad market is stale, it makes sense to look at other opportunities.

The Profit Radar Report always scans various markets and sectors for sentiment extremes or seasonal trades with the potential to provide returns independent of the broad market.

Thus far this year, we’ve found such returns in gold, silver, natural gas, small caps, VIX and the utility sector.

Utilities ETF

The October 12 Profit Radar Report pointed out that every single utility sector stock has been below its 50-day SMA for more than five days. An extremely rare oversold condition.

The October 13 Profit Radar Report observed that: “XLU (Utilities Select Sector SPDR ETF) jumped above trend line resistance on strong volume. This increases the odds that some sort of a low is in place. We are buying XLU at 47.80.”

We didn’t want to chase the S&P 500 when it bounced from its 2,120 support level on October 13, but wanted some low-risk exposure to equities.

Being oversold and overhated, XLU fit the bill.

Sometimes there is no particular up side target (as is the case with XLU), but identifying low-risk buying opportunities allows investors to either grab quick gains or hold on and ‘play with house money.’

Bank ETF

The banking sector is approaching a very strong resistance cluster.

The chart of the SPDR S&P Bank ETF (KBE) shows price near trend line resistance, 78.6% Fibonacci retracement, and where wave A equals wave C.

Additionally, there was a bearish RSI divergence at the October 27 high.

Seasonality is bearish for the first three weeks of November.

This doesn’t mean that bank stocks will crash, but it certainly indicates that buying KBE right around 35 is a bad idea.

There is no short bank ETF, but traders may consider shorting KBE or buying inverse ETFs like SEF or SKF. This setup may only lead to a short-term correction.

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.

Energy Sector ETF (XLE) Drops To Triple Support

It’s not exactly been a high-octane year for oil and energy stocks. Here’s an interesting long-term chart for the Energy Select Sector SPDR ETF (NYSEArca: XLE).

After chopping back and forth for all of 2015, XLE has dropped down to long-and short-term support.

The black trend channel dates back to the March 2009 low, and the green trend line originates at the secondary January 14 low.

Both levels intersect around 77 this week.

Although XLE remains in a chop zone that’s watered down many support/resistance levels, 77 might be a number to keep in mind if you’re thinking about buying/selling XLE (don’t sell until support is broken, and vice versa).

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.