The Most Promising S&P 500 Setup Since February 11 (when it was at 1,810)

In terms of actual trading recommendations, 2016 has been a fairly quite year for the Profit Radar Report. We’ve had only seven actual trade recommendations (only one losing trade).

Barron’s rates iSPYETF as a “trader with a good track record.” Click here for Barron’s assessment of the Profit Radar Report.

Until last week, the only stock-related trade was the S&P 500 buy at 1,828 on February 11 (closed on March 17 for a 11.6% gain).

Based on hindsight, not trading the choppy range from March 20 to June 8 has been the right decision.

Stalking Pays Off

Starting on May 24, the Profit Radar Report was looking for a false S&P 500 breakout and subsequent reversal.

After stalking the S&P 500 for two weeks for a low-risk entry, our carefully selected short trigger was met at 2,110 on June 9 (click here for more details on how we ‘stalked’ the S&P and avoided shorting prematurely). The corresponding ETF trade was to buy the ProShares Short S&P 500 ETF (SH) at 19.80.

This became the first S&P 500 trade since February 11, 2016. What’s special about this trade?

The FOMO (Fear of Missing Out) Trade

The chart below (published in the June 8 Profit Radar Report) shows that the ATR (average true range) dropped to the lowest level since June 29, 2015. ATR is a measure of volatility, and it showed a dangerous level of complacency (dotted red arrows).

As the horizontal red lines indicate, there was a cluster of resistance levels at 2,110 – 2,139. There was also an obvious bearish divergence on the hourly chart (not shown).

In short, the S&P was ripe for a reversal in a strong resistance range. The ingredients for a pullback where in place. The fact that the S&P 500 was near its all-time high (which means considerable down side potential) added to the intrigue.

Therefore, the June 8 Profit Radar Report stated the following:

At this point, we can’t quantify the maximum down side risk, but we know there’s potential for a deeper pullback once this rally is complete. We are attempting to carefully short so we have some skin in the game should there be a sizeable decline. This is an insurance trade against missing outWe will go short if the S&P 500 drops below 2,110.”

The decline since the June 8 high has been kind of odd. The S&P 500 has been down for six consecutive days, the VIX went soaring (click here for recent VIX anomalies), but the S&P loss has been relatively small (2.8%).

At this point, the S&P is oversold, by may have entered a powerful wave 3 down (according to Elliott Wave Theory). There are a number of open chart gaps, which suggest that the S&P will recover once this correction is done.

Continued S&P 500 analysis is 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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6 Reasons for a (Deceptive?) Stock Market Rally

On Thursday, February 11, the S&P 500 dropped to new lows, which was our minimum down side target outlined in the January 27 Profit Radar Report: “We are looking for some short-term up side followed by new lows, followed by a more sustainable rally.”

Thursday’s (Feb. 11) special Profit Radar Report update recommended to buy at S&P 1,828 and listed six reasons for a rally. Below is an excerpt from Thursday’s Profit Radar Report.

Forrest Gump would probably describe this market as a ‘box of chocolate.’ Let’s open the box and look what we’ve got.

Obviously, momentum is to the down side. Betting against momentum is always a risky proposition. Having said that, there are a number or tell-tale signs hinting of a (temporary?) momentum shift.

1) Today’s open left another chart gap (first and second S&P 500 chart, dashed purple lines).

2) There’s a bullish RSI divergence on the hourly chart (first chart).

3) There’s a bullish RSI divergence on the daily chart (second chart).

4) Some investor sentiment gauges are nearing pessimistic extremes (third chart). Longer-term sentiment readings (such as the II and AAII polls shown below) suggest a bullish bias for the coming months. Short-term sentiment readings (such as the CBOE equity/put call ratio – fourth chart) are not yet in nosebleed territory and allow for further losses.

5) Today’s low could be the spring board for the updated projection shown in Wednesday’s PRR.

6) Based on correlations between asset classes, investors are piling into the ‘fear trade’ (buying gold and Treasuries when stocks are down). 30-year Treasury prices and gold are up more than 10% in recent weeks. This combination (gold and Treasuries up more than 10% in a couple of weeks) has only occurred three other times since 1975 (according to SentimenTrader). Chart #5 captures the November 2008 and August 2011 occurrences. In 1982 (not shown), the S&P bottomed closely thereafter, and rallied 44% over the next year.

Summary: Although we anticipate an eventual drop below S&P 1,800, today’s lows increase the odds of at least a temporary rally. The risk/reward ratio is now attractive. Buy S&P 500 around 1,828 or SPY around 183.”

Although this rally may relapse eventually, Thursday’s dip provided a low-risk entry, to get some ‘skin in the game’ in case this turns into a runaway rally with higher than anticipated targets.

The S&P 500 has been tracking our yellow projection (see chart below) – initially published in the January 13 and 24 Profit Radar Report updates – very well, and may continue to do so.

Please keep in mind that the yellow projection was adjusted via the Wednesday, February 10, Profit Radar Report to show only a marginal low followed by a less dynamic bounce.

The updated projection with target levels is available to Profit Radar Report subscribers. Test drive the Profit Radar Report here.

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.

Selling Climaxes Spike to 4-year High

Last week saw the highest amount of selling climaxes since October 2011. Happy bulls and frustrated bears remember that October 2011 marked a major low. What does last week’s record number of selling climaxes mean?

Selling climaxes are considered a sign of accumulation as ‘strong hands’ happily buy the stocks offered for sale by ‘weak hands.’

A selling climax happens when a stock/index or ETF drops to a 12-month low, but bounces back and closes the week with a gain.

There were 605 selling climaxes last week; the Russell 2000 was one of them (more details here: Will Bullish Russell 2000 Signals Last?).

As the chart above shows, the last time there were more than 500 selling climaxes was the week ending October 7, 2011, when over 1,350 stocks saw a bullish reversal from a 52-week low.

Many happy bulls and frustrated bears will likely remember that the S&P 500 hit a major bottom on October 4, 2011.

I remember the October 4, 2011 low at 1,074 like it was yesterday, probably because it was one of my best calls. My October 2, 2011 note to subscribers said the following:

The ideal market bottom would see the S&P 500 dip below 1,088 intraday followed by a strong recovery and a close above 1,088, but technically any new low below 1,102 could mark the end of this bear market leg.”

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The problem with weekly climax data is the time delay. By the time Investors Intelligence reported last week’s climaxes, the S&P 500 was already 70 points above its low.

A closer look at the Russell 2000 chart shows that, although the spike in buying climaxes is net bullish, stocks are not out of the woods yet.

Here’s a look at the Russell 2000: Bullish Russell 2000 Signals – Will They Last?

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.

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

Too Much Bubble Talk? Can a Watched Bubble Burst?

If there were a contest for the most overused and loathed term in the financial universe, ‘bubble’ would be a serious contender. Not a week goes by without the media talking, writing, tweeting, or Facebooking some bubble warning. But can a watched bubble burst?

A watched pot never boils. What about a ‘watched’ bubble, can it burst?

There’s been much talk about the infamous bubble and ironically, investors have been waiting in vain for the S&P 500 to pause and reverse lower:

‘Stock Bubbles, Market Troubles and Aging Bulls’ – MarketWatch
‘Cramer: Deceptive Bubble Forming in the Market’ – CNBC
‘First Take: The Bubble is Getting Bigger and Bigger’ – USA Today
‘Internet Bubble is California’s next Quake’ – MarketWatch

In fact, there’s been so much talk that the chief bubble blower to be (Janet Yellen) took it upon herself to calm fears about the omnipresent bubble.

Jim Cramer called it a ‘deceptive bubble,’ but a bubble is only deceptive if it’s unseen or illusionary.

Based on a quick eyeball estimation, about half of all financial media outlets have spotted a stock market bubble sometime in the last week.

The problem with real bubbles is that it takes hindsight to catch one. Bubbles aren’t caught, let alone predicted on live TV. If the stock market were currently in a bubble, it would be the first ever watched bubble to burst.

Bubble Trouble Memory

I looked through my notes and found another recent period when bubble talk was popular – May 2013.

According to a MarketWatch article – ‘Bubble’ References on Twitter Soar – the volume of bubble-related tweets soared from 168 in late 2012 to almost 30,000 in April/May 2013.

The S&P 500 chart below shows how the S&P 500 performed following this ‘burst of bubble talk.’

There was a brief correction that ultimately drove the S&P 500 ETF (NYSEArca: SPY) 8% lower.

So, there was actually some truth to investors’ concerns, but instead of the expected post bubble storm there was no more than a tempest in the teapot.

Beware of Non-Scientific Headline Analysis

Obviously, this kind of financial media headline analysis is totally non-scientific and in itself doesn’t provide any actionable investment ideas.

Nevertheless, the above pattern – non-scientific as it may be – confirms the message of a very reliable set of divergence indicators. This duo of divergence indicators suggested only temporary corrections in May, August and September followed by new highs. What’s the current message of this reliable ‘divergence duo?’

Here’s a detailed analysis of what the two divergence indicators say is next for the S&P 500 and broad stock market.

Divergences and Their Immediate Effect on the S&P 500

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

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

 

Tesla Hit By Technical Circuit Breaker

Few companies ever reach the kind of ‘cult’ status Tesla generated in a few short years. At one point, TSLA was up over 450% in 2013 alone, but the stock has dropped almost 30% in recent weeks. Is Tesla the new Apple?

Every bull market has its ‘darling’ stocks. Stocks that drive the market up … and may just pull it down.

Tesla (Nasdaq: TSLA) is one of them. In fact, Tesla has almost become a cult movement.

But what goes up must come down.

I have a hard time chasing overvalued stocks (perhaps due to my frugal German heritage) and sometimes feel tempted to ‘oust’ cult stocks that just don’t deserve their price tag.

This is a dangerous game so I don’t play it often. In fact, there have only been two stocks I’ve ‘ousted’ in the last two years.

Back in September 2012 it was Apple (Nasdaq: AAPL). Via the September 12 Profit Radar Report I gave this – at the time almost sacrilege – warning and recommendation:

“Aggressive investors may short Apple or buy puts or sell calls above 700.” The rest is history.

I have only written once about Tesla in my Profit Radar Report. This was on August 31, 2013:

Every once in a while I like to look at stocks that look too ‘bubbleicious’ to ignore. The current target on my radar is Tesla (TSLA). Tesla is overpriced and the business model is not as sustainable as the stock price suggests, at least in my humble opinion. Bubble stocks often move higher than expected, but when they crash it’s a sight to behold. For aggressive capital, I would consider to start buying longer-term (4 – 7 months) puts. The key is to spread out small amounts over a period of time. This is a ‘gamble trade’ for gambling money. Initial support appears to be around 158.”

On September 3 (August 31 was a Saturday) Tesla opened at 173.4. Today TSLA is around 140. More importantly, TSLA is below support at 158.

Investors today are almost as gung ho about stocks in general as they were about Tesla a couple months ago. Click here for an Analysis of Current Sentiment Extremes.

Is Tesla’s slump a harbinger for what’s next for stocks?

Tesla is a component of the Nasdaq Composite and the Nasdaq-100 (Nasdaq: QQQ), so TSLA does affect the broad market, but only by a small margin.

Perhaps more importantly, Tesla’s stock may be a reflection of a shift in sentiment. Time will tell. Next support is around 135.

More important for the broad market is the fact that the S&P 500 (NYSEArca: SPY) and Nasdaq are bumping against major long-term resistance.

Failure to overcome such resistance could morph into frustration and lower prices.

Two eye-opening charts featured in this article reveal the key resistance for the S&P 500 and Nasdaq. Where is Long-term Resistance for the S&P 500 and Nasdaq?

Simon Maierhofer is the publisher of the Profit Radar Report.

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

Mutual Fund Managers are Fully Embracing this Rally

Investors find mental safety in group behavior or group think. It’s always easier to buy when everyone else is buying. If everyone’s doing it, it must be right. More often than not, group think is the biggest investment trap. Professional managers as a group now are fully embracing this rally. Good news?

Financial pros tend to have a bad rep. Often for good reason. When financial advisors or money managers as a group start endorsing a stock market rally, it’s often time to bail.

How are the pros – professional investment managers – feeling now? In two words: long and confident.

According to the National Association of Active Investment Managers (NAAIM), the average manager is currently (as of last Thursday) 94.6% invested in stocks.

Contrarians will view this as bearish.

However, the actual data puts the current sentiment extreme into perspective.

The chart below plots the S&P 500 against the stock exposure of professional investment managers polled by NAAIM.

The current stock exposure is the second highest in the survey’s seven-year history.

Somewhat surprising though, previous extremes (dashed red lines) did not lead to immediate declines. In fact, the S&P 500 (NYSEArca: SPY) continued rallying for weeks in 2007 and 2013.

As a standalone contrarian indicator, the NAAIM survey is about as helpful as the VIX has been in 2013.

That doesn’t mean the survey is worthless, because lesser extremes (gray dashed lines) preceded (and correctly foreshadowed) the 2010, 2011, and 2012 corrections.

Based on the history of the survey, it appears that absolute extreme NAAIM readings (horizontal red line) could be a reflection of strong momentum (and continued gains), while lesser extremes (horizontal gray line) have a better track record as a contrarian indicator.

The NAAIM survey is only one of dozens of investor sentiment indicators I follow.

I don’t ever base my recommendations on any single indicator. However, the general message of increasing enthusiasm is confirmed by a number of other sentiment polls.

Composite sentiment cautions that the up side may be limited, but a few other indicators suggest an impending correction.

The question is how much further the S&P 500 and Nasdaq (Nasdaq: QQQ) can rally from their overbought condition. The following article takes a closer look at the up side potential:

Can the S&P 500 Rally another 20%?

Simon Maierhofer is the publisher of the Profit Radar Report.

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How Elliott Wave Analysis Helps and Harms Investors

If you look at your graduation class you’ll probably find that some of the biggest oddballs or nerds have landed the best jobs. Elliott Wave Theory (EWT) is the oddball of technical analysis, but has produced some spectacular results … spectacularly good and spectacularly bad. Here’s how to make EWT work.

The right dose is important, because it’s possible to have too much of a good thing.

Take for example mold. Mold can be dangerous so we try to stay away from it. In small doses though, mold can be all right, even tasty.

If you like Gorgonzola, Blue Cheese, or Roquefort cheese you are basically eating moldy cheese that contains Roquefortine, a mold dangerous in large quantities.

Like Gorgonzola, Blue Cheese or Roquefort, Elliott Wave analysis can be healthy (for your portfolio) in controlled quantities. Like moldy cheese, Elliott Wave analysis may also be an acquired taste.

The Technical Analysis Oddball

Elliott Wave Theory (EWT or Elliott Wave analysis) is the oddball of technical indicators. Some love it, others hate it.

But investing is supposed to be about results not emotions. So regardless of emotional bias, serious investors should take an objective look at EWT.

EWT – The Good, The Bad and The Ugly

I’ve been exposed to EWT for about 10 years and have seen EWT at its best and worst. Here are the top 4 most important facts you should know about EWT:

1) EWT is interpretative. Five different Elliotticians (that’s how followers of EWT call themselves) may have 5 different interpretations of the market’s current whereabouts and next move. Some Elliotticians (example below) know just enough to be dangerous, literally.

2) At certain inflection points the correct interpretation of EWT can be invaluable. It will provide insight no other form of analysis can (see example below).

3) Never use EWT as a stand-alone indicator. I always use EWT (when I use it) in combination with technical support/resistance levels, sentiment and seasonality.

4) EWT has been effective in spotting major market bottoms (with the help of EWT I’ve been able to get my subscribers back into the market in March 2009, October 2011, and June 2012), but rather ineffective in spotting tops.

EWT – The Good

As mentioned above, there’s a time to use EWT and there’s a time to ignore EWT.

One of the more recent times I referred to EWT was via the August 18 Profit Radar Report, which featured the S&P 500 chart below. At the time, EWT strongly suggested that with or without a minor new low, stocks are gearing up for a large rally with a target at 1,685 – 1,706 (open chart gaps) or higher.

Trend lines suggested that the S&P 500 will run out of gas (at least temporarily) at 1,735 (September 18 Profit Radar Report).

Partially based on EWT, subscribers to the Profit Radar Report were advised to go long on August 29 when the S&P 500 triggered a buy signal at 1,642.

EWT – The Bad and The Ugly

EWT is largely based on crowd behavior and social mood, which in turn affects the money flow. However, in recent years the Federal Reserve decided to ‘spike’ the money flow and throw EWT a curveball.

We’ll never know how much the Fed’s easy money policy affects EWT, but we know that since late 2009 some Elliotticians have stubbornly predicted a market crash.

Among them is the world’s largest (according to their claim) independent financial market forecasting firm, Elliott Wave International (EWI). EWI’s message has been the same for years. Below are just a few of EWI’s market crash calls:

August 2010: “Stocks are ready to resume the ongoing bear market. The next phase of selling should be broad-based.”

November 2011: “Short-term positive seasonal biases are now dissipating and an across-the-board decline should draw financial markets lower.”

September 2012: “The stock market’s countertrend rally from June stretched to an extreme. This weak technical condition should lead to an accelerated decline.”

July 2013: “U.S. stock indexes are in the very early stages of a multi-year decline.”

Interpretation Spoils Profits

As mentioned earlier, EWT is subject to interpretation. Just because one Elliottician’s (or company’s) interpretation is wrong doesn’t mean EWT is useless.

The last time the Profit Radar Report looked at EWT was on September 8. At the time the S&P 500 (NYSEArca: SPY) was trading at 1,655 and many Elliotticians thought that the market had topped for good.

In contrast, the Profit Radar Report (on September 8) focused attention on a bullish EWT option: “There is one (normally) rare exception that allows for new highs even after a completed 5-wave reversal. In fact, the 5-wave reversals in 2010, 2011, and 2012 all led to new highs. Bullish seasonality starting in October supports this outcome.”

Some Elliotticians are still fishing for a major market top and they may well be right.

However, the S&P 500 (NYSEArca: IVV), Dow Jones, and Nasdaq (Nasdaq: ^IXIC) erased their bearish divergences visible a few weeks ago and seasonality and various breadth measures suggest higher prices later on this year.

The odds of a major market top have dropped a bit, but there will no doubt be time when EWT will provide valuable clues.

Regardless of the next EWT signal, I’ll continue to evaluate the dozens of indicators that make up my forecasting dashboard and share my most valuable findings via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @iSPYETF