S&P 500: Year-end Rally or Breakdown?

2015 has been the year of trading ranges. The S&P 500 was stuck in a 100-point range from February to August and again from October until now.

Prolonged periods of zig-zagging tend to wear down support/resistance levels and dilute the effectiveness of technical analysis.

At times like this, it makes sense to overweigh other indicators to get a better read on the market. Here are a few of them:

Seasonality:

As of December 11, the S&P 500 was down 3.27%. Such poor performance is unusual for December. In fact, since 1970, the S&P 500 lost more than 3% after the first nine December trading days only four prior times (1975, 1980, 1996, 2002).

The graphs below (originally published in the December 13 Profit Radar Report) represent all years with 3%+ losses after the first nine December trading days (dashed black line) along with the performance over the next 30 trading days. December seasonality (green graph) typically turns notably bullish in mid-December.

Here’s another December anomaly:

Last week (Thursday/Friday), the S&P had two 1.5% back-to-back losses in the second half of December. According to SentimenTrader, this hasn’t happened since 1937.

Since 1928, there’ve only been eight back-to-back losses of more than 1% during the second half of December. All of those were during bear markets, but the S&P ended the year above the second down day level every single time.

Market Breadth

The December 6 Profit Radar Report pointed out extremely weak market breadth (more details here: Why are Stocks Down Despite Bullish Seasonality?).

Buyers fatigue is not always a short-term timing toll, but it’s been like a dark cloud over Wall Street, and certainly contributed to the lousy December performance.

There’s a small tell tale sign that buyers may be awakening (perhaps only for a little while). How so?

As the chart below shows, on Friday, the S&P closed at the lowest level since October 13. Some market technicians may consider this a technical breakdown, however, there was a bullish divergence between the S&P 500 and the percentage of NYSE stocks above their 50-day SMAs.

At least by one measure, selling was not as strong as price suggests. More often than not that’s a good sign.

Based on technicals, last week’s low at 1,993 seems important for the S&P 500.

Summary

As long as the bullish divergence and support at 1,993 hold, positive December seasonality deserves the benefit of the doubt.

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.

AAPL Drops Right Before Annual ‘Shock’ Period

A bigger and better iPhone, the new iWatch and new AAPL all-time highs … Apple has a lot of good things going. But, ironically this exciting time of the year (in terms of product launches) is the most treacherous for Apple shareholders.

Autumn is an exciting time for Apple geeks, but a treacherous time for Apple (Nasdaq: AAPL) shareholders.

Product rumors are planted in the spring and ripen in the fall as rumors mature towards tangible reality. Apple fans are hoping to feel, touch and buy a big screen iPhone or even an iWatch.

Ironically the autumn excitement doesn’t spill over to AAPL shares. September 21, 2012 was the kickoff for a 45% correction and August 19, 2013 saw a 12% pullback.

The August 24 Profit Radar Report summed up Apple’s position like this: “AAPL rallied to new all-time highs. As the chart shows, AAPL is just above green trend line support and just below red trend line resistance. AAPL seasonality points higher for another few weeks before the biggest seasonal weak spot of the year (AAPL topped on Sep. 22, 2012 at 705, split-adjusted). In short, the path of least resistance is up, as long as AAPL doesn’t close below 100. Danger will rise in mid-September.”

A detailed full-year AAPL seasonality chart is available here.

The chart below shows the various trend lines and support/resistance levels mentioned.

AAPL sliced below 100 on Thursday. Support around 100 has now become resistance. Green trend line support is at 97.

Based on seasonality, risk is rising and the path of least resistance is down as long as trade remains below 100 – 101.

Apple’s ‘bad Thursday’ spilled over to the Nasdaq-100 as the PowerShares QQQ ETF (Nasdaq: QQQ) painted a big red candle.

Thus far, QQQ remains above support at 99. A close below 99 may elicit more selling.

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.

Renewed Euro Concerns May Coincide with Euro Currency Bottom

‘Bad News Europe’ is back in the headlines and the euro is trading at a three and a half month low. European contagion concerns appear to be bearish for the euro currency, but technical analysis provides a different outlook.

Negative European news just made their first media appearance of 2013 and the prospect of a Cypriot bailout sent the euro currency to the lowest level since December 10, 2012.

Renewed concerns about the euro zone sound bearish for the euro, but technical analysis suggests the euro currency is ripe for a (temporary) comeback.

The chart below tracks the euro since the July 2012 low. It also shows some of the trend lines and support/resistance levels the Profit Radar Report uses to pinpoint highs/lows and reversals.

The February 2013 high coincided exactly with parallel trend channel resistance. On January 30, the Profit Radar Report warned that: “The headwind is getting strong. A close below 1.3488 will be the first sign of an impending correction.”

This was followed up on February 3 by the observation that: “The euro spiked to the upper parallel channel on Friday, a potential stopping point for this rally.”

The euro has fallen precipitously since. Today’s drop created a green candle low which was unconfirmed by RSI – a bullish RSI divergence.

A bullish RSI divergence in itself doesn’t mean the euro won’t fall any further, but two multi-year support levels (solid and dashed green line) suggest that the down side for the euro should be limited.

The CurrencyShares Euro Trust (FXE) is a currency ETF that tracks the euro currency closely and provides easily accessible long exposure to the euro.

A word of caution, it appears that the upcoming euro rally will only retrace a portion of the previously lost points and may not reach new recovery highs.

We also note that the euro dropped to a new multi-month low, while the US dollar didn’t eclipse last weeks high. I’m not sure what this divergence means, but it’s reason to take a cautious approach.

Regardless of this divergence and the next moves longevity, simple RSI and support/resistance level analysis like this identifies low-risk trade set ups and the risk management levels needed to spot an attractive risk/reward ratio trade.

The Profit Radar Report analyzes the S&P 500, euro, dollar, gold, silver, Treasuries and other indexes/ETFs to provide low-risk and high probability trade setups.

What The Dow’s Big Red Reversal Candle Means

On Monday the Dow spiked within 120 points of a new all-time high before falling hard. In fact, Monday’s red candle engulfs all of the 21 previous candles. However, the bearish candle is in conflict with bullish short-term indicators.

The Dow Jones Industrial Average (DJIA) reversed trends with an exclamation mark on Monday. After spiking to a new recovery high, the DJIA (corresponding ETF: Dow Diamonds – DIA) fell to a 21-day low.

A chart simply and elegantly displays a ‘bad day’ like this with a big red candle. This one red candle engulfs the 21 previous candles (shaded gray box).

This red candle high is also called a reversal candle. Candles like it tend to mark trend reversals. In this case from up to down. This doesn’t mean the Dow can’t and won’t eventually move higher (short-term bullish developments discussed below), but it cautions of lower lows ahead.

Two other facts enhance the message of this red candle. The high occurred right against a parallel channel anchored by the June/November 2012 lows and September 2012 high.

Perhaps even more importantly, the Dow stalled and reversed just before its all-time high water mark at 14,198.10. The Dow’s all-time high is huge resistance.

The February 18 Profit Radar Report referred to the all-time high resistance: “Next week has a bearish seasonal bias. With its all-time high just ahead, the Dow has a well-defined resistance level for a short trade. Aggressive investors may short the Dow close to its 2007 high with a stop-loss at 14,200.”

At the Profit Radar Report we call this kind of a trade a low-risk trade. Why? Because we were only 200 points or 1.5% away from the stop-loss level.

One Swallow Doesn’t Make a Summer

But one swallow doesn’t make a summer one one red candle doesn’t make a bear market. After two 90% down days (February 20, 25) stocks were likely to rally. That’s why Monday’s (February 25) Profit Radar Report recommended to cover short positions at S&P 1,491.

In addition the VIX triggered a sell signal (buy signal for stocks) yesterday. Although I think that stocks will slide to a lower low, it will take a break below support or a spike to resistance to place a possible short bet. Important short-term support/resistance levels are outlined in the Profit Radar Report.

S&P 500 – Stuck Between Bullish Seasonality and Technical Breakdown

Technical analysis suggests lower prices, but seasonality points towards rising stocks. Is it possible to find a worthwhile trade in this conflicting environment? Yes it is. Find out how here.

The S&P is caught between a (seasonal) rock and a (technical) hard place. How so?

Seasonality for the remainder of the year is predominantly bullish, but the recent selloff has caused some technical damage. The technical picture is bearish unless the damage is “repaired” by a move back above resistance.

There’s an obvious conflict between indicators, which makes identifying high probability trades more challenging.

What is a high probability trade? A high probability trade signal (buy or sell) needs to be confirmed by the three pillars of market forecasting:

1) Technicals
2) Sentiment
3) Seasonality

When all three indicators are in alignment, there’s a high probability of a profitable trade/investment. That’s why I call it a high probability trade.

The Profit Radar Report continuously monitors technicals, sentiment, and seasonality to find high probability trades. Prior high probability trades include going short in April 2010 and May 2011 along with buy signals in March 2009, October 2011, and June 2012.

Putting the Odds in Your Favor

Bearish technicals currently disagree with bullish seasonality. Sentiment is more or less neutral. The three pillars don’t align. There  is no high probability trade set up right now, but that doesn’t mean there aren’t any good trades.

When indicators don’t align for high probability trades, the Profit Radar Report looks for the next best opportunity: A low-risk trade.

A low-risk trade has a higher reward than risk potential. In fact, the risk is limited by a well-defined support/resistance level used as stop-loss.

The chart below shows the most recent low-risk trade for the S&P 500 (SPY).

The thick horizontal red line is the 38.2% Fibonacci retracements of the points gained from June – September 2012 at 1,395. This level is reinforced by the ascending red trend line from the October 2011 low and S&P 1,396, which provided support several times in August/September.

In short, S&P 1,396 is a key support/resistance level. The S&P’s drop below 1,396 triggered a sell (as in go short) signal with a stop-loss a few points above. This makes it a low-risk trade.

Next support outlined in Sunday’s Profit Radar Report is at 1,37, which is made up of the 50% Fibonacci retracement and the April 2011 low. The S&P hit this support on the nose this morning and bounced 19 points.

A break below 1,371 will unlock more bearish possibility, with the potential for a steep decline.

Foot in the Door (with Steel Toe Shoes)

Regardless the size of the down move, going short at 1,396 keeps the trading “foot in the door” in case there will be a waterfall decline. All with minimal risk. The stop-loss just above 1,396 protects the “foot” against any bruising.

This is important because there are some bullish possibilities. For right now, the down trend is our friend, but we are fair weather trend friends willing to shift with a move above resistance.

The VIX seasonal pattern shows a clear seasonal opportunity right after Thanksgiving. This may make for a juicy VIX and stock trade if technicals confirm the message of seasonality.

The Profit Radar Report outlines high probability and low-risk opportunities along with the support/resistance levels needed to manage an active trade effectively.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.