S&P 500 Update – Curveball

On June 6, I published a bigger picture S&P 500 outlook. Since this update builds on the June 6 outlook, you may find it helpful to first read the June 6 bigger picture S&P 500 outlook.

For the past few months we’ve been looking to buy the S&P 500 on dips. We bought the SPDR S&P 500 ETF (SPY) on April 3 and May 31.

As mentioned in the June 6 outlook, the May 29 shakeout and May 30 recovery (see chart below) increased the odds that either a low is in place or that a more significant rally is developing. Our upside target mentioned in the June 13 PRR was 2,800 – 2,830.

There was one caveat mentioned in the June 6 outlook (and May 30 Profit Radar Report): “Since the S&P still remains in its larger trading range, it is impossible to confirm for certain that wave 4 is indeed complete. Nevertheless, unless the S&P drops back below 2,700 (and the May 29 low), we will assume that a low is in. Additional support worth watching is around 2,740.”

This week support at 2,740 failed, and the S&P swiftly dropped to 2,700.

Not profitable, but Successful

Our SPY sell limit was waiting at 280.50 (S&P 2,810), but SPY reversed before, and Profit Radar Report subscribers got stopped out of SPY at breakeven (271.25, which correlates to 2,710 for the S&P 500). Although the SPY trade was not profitable, it was a success! Why?

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.”

When the S&P 500 rallied more than 100 points from the May 31 low, we did not feel the need to chase price, because we bought near the low, and had skin in the game. Based on various sentiment readings, many investors suffered from FOMO (= fear of missing out) and bought near the high.

Back to square one. Pause and reset.

The break below 2,740 opens various short-term (and longer-term) possibilities, many of which point to a choppy market.

Evaluate and Cross-check

The chart below outlines 5 possible scenarios based on Elliott Wave Theory (the chart below makes more sense when read in context with the bigger picture S&P 500 outlook). They range from immediately bullish (dark green) to short- and long-term bearish (blue, orange and red).

The Profit Radar Report tends to monitor multiple scenarios and cross-checks them against other indicators (technicals, sentiment, liquidity, seasonality/cycles, etc.) to assess each scenarios viability and probability.

For example, our trusted liquidity indictor already eliminated 2 of the 5 scenarios illustrated above.

In short, we remain in “buy the dip mode,” the question is just how big of a dip we’ll get. For someone who just got stopped out at 2,710, worst case scenario would be a strong, immediate rally (dark green scenario above).

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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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Weekly ETF SPY: SPY ETF vs S&P 500 – Technical Analysis Variations

The S&P 500 Index triggered a beautiful ‘kiss good bye’ signal on Tuesday, before Bernanke spoke and sunk stocks. Interestingly, the sell signal for the S&P 500 could not be seen in the chart of the SPDR S&P 500 ETF (SPY).

SPY S&P 500 ETF or S&P 500 Index. What’s the difference? It’s like tomato or tomato (imagine the second ‘tomato’ spoken with a British accent).

I always try to base my analysis on the purest representation of any given index or asset class. When it comes to the S&P 500, the purest representation is the actual S&P 500 Index you always see quoted.

The SPDR S&P 500 ETF (SPY) tracks the S&P 500 very closely, but even minor variations can make a major difference.

For example: The June 18 Profit Radar Report (released the night before Bernanke opened his mouth and buried the market) noted that the S&P 500 is at an important inflection point and warned:

There is a parallel channel going back to the October 2011 low. Indexes often touch a previously broken support (in this case the black October 2011 parallel channel at 1,655) before dropping to a new low. The S&P touched this channel today and failure to move above could spell trouble.

The first chart below shows the S&P 500 parallel channel referred to in the Profit Radar Report (if you aren’t a subscriber, I tweeted a close up picture of this channel on Tuesday).

I have often observed the S&P 500 (and other indexes) double back a broken support before letting go and peeling away for good. This upper line of the parallel channel was a key ingredient to the bearish forecast (the recommendation of the Profit Radar Report was to go short at S&P 1,635 and Nasdaq-100 2,970). I call it the ‘kiss good bye.’

Drawn in the second chart is the exact same parallel channel for the SPDR S&P 500 ETF (SPY). However, unlike the S&P 500 Index, SPY’s channel is placed differently. There was no kiss good bye for the SPY ETF.

Key support (red line) was broken for both, when prices dropped below the June 6 low (160.25 for SPY and 1,598.23 for the S&P 500).

The SPY chart allows us to draw a support trend line (green line) that’s unique to SPY. I wouldn’t say there is a clear winner in the SPY vs S&P 500 debate, but I prefer to base my S&P 500 technical analysis on the S&P 500 chart. It’s as pure as it gets.

Why further down side is still ahead, what the down side is, and why stocks will rally again when this is all over is discussed in Thursday’s special Profit Radar Report.