How S&P 500 ‘Puppet Master’ Covertly Pulls Strings

Many believe the market is rigged as high frequency trading (HFT) and the Federal Reserve have become major driving forces. However, there is another age old ‘force’ that often pulls the strings in plain sight, yet undetected by many.

A puppet master is a person, group or force that covertly controls a matter. Wielding this kind of covert power is also known as pulling the strings behind the scenes.

We know that the Federal Reserve is openly pulling strings, but that’s not what this article about.

It’s about a different kind of ‘force’ that drives the S&P 500. It doesn’t drive the S&P 500 every single day, but often enough to be considered a valid force.

To recognize, oust, and ultimately profit from this force, please join me in a little experiment.

Experiment: Stage 1 (do not peek)

Below is a chart of the S&P 500. Please take a moment to look at the chart and see if you can observe certain patterns (do not peek ahead to the second chart).

Experiment: Stage 2

Below is the same chart with three very simple annotations.

  1. A blue trend channel going back to the March 2009 low.
  2. A black trend channel going back to the October 2011 low.
  3. Fibonacci projection (red line) going back to the March 2009 low.

Please keep in mind that I didn’t create those lines. The market did. I only connected the dots.

Experiment: Stage 3

The third chart shows the same two channels and Fibonacci resistance, but shows daily bars to allow for a closer examination of the more recent price action.

Here is what we see:

  1. The S&P 500 was repelled by the black channel in January, March and April (red dots).
    On April 2 (green arrow), the S&P 500 staged a technical breakout to new all-time highs, but the Profit Radar Report pointed out resistance at 1,898 (created by a short-term channel) and 1,900 and warned that this looked like a false breakout.
  2. The S&P 500 found support around the blue channel three times in March and April (green dots).
  3. The S&P 500 (NYSEArca: SPY) essentially treaded water in an expanding range wedge created by two powerful long-term trend channels.
  4. Yesterday, the S&P 500 sliced below the blue channel. Support is like thin ice, if broken it gets investors wet. Trend lines like that make great guidelines for stop-loss levels.

Please Mock Me

Usually when I write articles about trend lines, readers post comments like this one:

“More BS from the techies. I can take any chart and draw these lines and call it a trend.”

Ironically, those kinds of comments are a good sign. A puppet master ousted as puppet master is no longer able to covertly influence others.

In order for trend lines to continue working, there need to be enough doubters, mockers, hecklers, and investors simply unaware of the power of this simple tool.

So please, go ahead and disregard trend channels and allow the rest of us to enjoy their full benefit.

Even before the channel was broken, a number of indicators suggested lower prices. The April 7 Profit Radar Report reported an MACD sell signal and bearish seasonality and concluded that:

“Today’s decline looks like an important building block for a multi-week bearish structure.”

We’ve all heard about MACD, but this particular MACD signal is especially unique and potent. The reason why it’s discussed here:

MACD Triggers the Year’s Most Infamous Sell Signal

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.

 

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Beware of False TLT Treasury ETF Breakout (and S&P 500 breakdown)

The long-term Treasury ETF (TLT) just saw a technical breakout above resistance. This is bullish for TLT (and bearish for stocks), but it may be a premature fake out. Here’s how to get confirmation for a real Treasury breakout.

A number of technical analysts believe to have identified a bullish technical breakout for the iShares 20+ Year Treasury ETF (NYSEArca: TLT).

The TLT Treasury ETF chart below highlights Thursday’s breakout (green bubble).

At first glance, TLT’s push above resistance qualifies as a breakout.

TLT314

As great as ETFs are, I personally prefer to use the purest representation of an asset class as a foundation for my analysis. For long-term Treasuries, that’s the 30-year Treasury Futures (/ZB).

The 30-year Treasury Futures chart looks slightly different. Trade has not yet broken above resistance.

TLT314

Both charts include all (trend line) support/resistance levels and how prices reacted (blue bubbles).

TLT has been more prone to false breakouts or breakdowns than futures.

This doesn’t mean 30-year Treasury futures won’t break out. Bullish TLT action may act as a magnet and pull prices higher. The prudent approach is to wait until futures confirm TLT (especially sinse TLT’s breakout didn’t occur on highly elevated volume).

The action of Treasuries may also provide important clues for the S&P 500 (SNP: ^GSPC). The S&P 500 has been stuck in a rut for all of 2014 and a Treasury breakout may coincide with an S&P 500 breakdown.

Just as Treasuries have to confirm a bullish breakout, the S&P 500 has yet to confirm a break down.

This following article features the messiest S&P 500 chart I’ve ever published. But ironically it may explain the stock market’s up-and down better than any other chart:

Short-Term S&P 500 Forecast

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.

The Most Basic S&P 500 Indicator Turns ‘Red’

The market is been downright gnarly. Today’s performance shows once again the stock market’s #1 goal: Separate as many investors as possible from their money. Here’s how the market did it and how it could have been avoided.

Driven by financials, the S&P 500 was the only major U.S. index to see a new high today. The Dow Jones, Nasdaq and Russell 2000 were unable to overcome their previous high watermarks.

Today’s lonesome S&P 500 all-time high (ATH) was a bull trap (at least for the short-term).

Reason enough to take a closer look at the S&P 500, in particular the SPDR S&P 500 ETF (NYSEArca: SPY).

The stock market has crushed some of the most commonly referred to tall tale signs.

How did gnarly Mr. Market fool much of Wall Street? (see chart for corresponding numbers)

1) January 23, 24 saw a high volume sell off below the 20-day SMA and the prior ATH. This was bearish (as technical analysis 101 suggests) and resulted in marginally lower prices.

2) On February 11, the S&P 500 rallied back above the 20-day SMA and prior support (now resistance) on much lower volume.

Basic volume analysis would have suggested that such an anemic move will sooner peter out, but a few weeks later the S&P traded 4% higher.

3) On March 13, 14 the S&P once again sliced below the 20-day SMA and the prior ATH on elevated trading volume. Like in January, textbook analysis would point to lower prices.

Since than, the SPY ETF has rallied on low volume and declined on high volume. This is normally bearish.

4) Today’s the S&P spiked to new ATH’s, by many considered a technical breakout.

But this didn’t last long. In fact, today’s selloff created an ominous red candle high.

In a special early morning update, the Profit Radar Report warned that:

From a purely technical point of view, this morning’s intraday all-time high is bullish and suggests higher prices. However, there is at least one Elliott Wave count allowing for a fake out breakout, followed by a drop lower. Today is also Triple Witching. Stocks close lower on Triple Witching 71% of the time.”

The recommendation given by the Profit Radar Report was to go long only after a move above 1,885 for the S&P 500 (today’s high was 1,883.97).

What’s next?

The S&P 500 and SPY ETF found support at a trend line going back to February 5.

Unbeknownst to many, March Triple Witching also has a longer-term bearish seasonality. This may well draw stocks lower if support fails.

Historical Fact: March Triple Witching Sends S&P 500 Lower

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.

Will Apple Pull Down the Nasdaq?

Monday’s pop and drop performance doesn’t look too alarming at first glance, but the chart turns more bearish if you add a few technical indicators to the mix. Nevertheless, aside from one bearish Apple fact, I can’t quite get myself to turn overly bearish on the tech heavy index.

“All’s well that ends well.” Monday on Wall Street started out with a bang, but didn’t end well.

Two of the most bearish charts are Apple and Nasdaq-100 (Nasdaq: QQQ).

AAPL opened at 461, but was down 3.18% by the close.

The Nasdaq-100 lost over 1% over the course of the day.

On the surface the Nasdaq’s (Nasdaq: ^IXIC) performance doesn’t look bad (it lost 1%, so what?), but the devil is in the details.

The chart below highlights why Monday’s reversal could be more bearish than the 1% decline suggests.

Please note the 46-month trend channel (black lines). Monday’s open propelled trade outside the trend channel before reality reeled price back in.

The chart insert shows that Monday’s action created a red candle high. In summary we have a red candle high after a potential throw-over top with a close below key resistance.

Nevertheless, I can’t bring myself to get overly bearish. I discuss why and what exactly this formation means via the Profit Radar Report. The black trend line is now the ‘line in the sand’ between short-term bullish and bearish potential.

Another AAPL Breakdown?

AAPL has given back all the gains since it’s technical breakout on August 2 (the green circle highlights when the Profit Radar Report issued a buy signal).

The prior breakout level at 450 – 447 (where AAPL closed yesterday) is now soft support. Other than that the AAPL chart doesn’t offer many directional clues for the stock or must hold support levels.

But, AAPL is the ‘alpha male’ for US stocks, the biggest company in the world (based on market capitalization) and the biggest component of the Nasdaq and S&P 500 (SNP: ^GSPC).

It accounts for 12.21% of the Nasdaq QQQ ETF, 2.9% of the S&P 500 ETF (NYSEArca: SPY) and 14.38% of the Technology Select Sector SPDR ETF (NYSEArca: XLK). Let’s dig deeper.

My market outlooks are always based on, what I call, the three pillars of market forecasting: technical analysis, sentiment and seasonality.

We just looked at technical analysis and there are no sentiment extremes.

However, Apple is about to encounter the most powerful seasonality of the year, and purely based on seasonality I would not want to own Apple right now.

This seasonality is based on historic price action going all the way back to 1998, when Steve Jobs U-turned Apple from near bankruptcy to profitability.

The full AAPL seasonality chart along with its potent message can be found here:

Apple (AAPL) Seasonality Chart

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

Bullish Euro Gold Breakout May Be Misleading

Gold measured in US dollars has been treading water, but gold measured in euro just staged a bullish technical breakout. While this is good news, there’s reason to be cautious of another ‘shakeout’ move for gold prices.

Investors are forgetful and the market is relentless. The Cypriot Bailout was another reminder about gold’s safe haven advantages over fiat currency.

In times past, gold would have soared on similar economic scares. But not this time. Gold today trades around the same level as two weeks ago.

While the Cypriot Bailout failed to deliver the fuel needed for higher targets, gold could be getting a positive boost from elsewhere.

Gold prices measured in euros just staged a technical breakout above resistance (red circle). Gold measured in US dollars is trading well below similar resistance.

The red lines in the chart below mark previous times where euro-Gold broke above resistance. Euro-gold proved to be the bullish canary every time.

Price divergences between euro and dollar-Gold appear frequent at different degrees. The dotted boxes highlight some of the price divergences at larger turning points. More often than not, the euro pattern (gold colored boxes) sets the stage for the next move.

Based on the correlation between euro-and dollar-gold prices, higher prices seem likely (sentiment is sending the same message).

The question is when?

The Profit Radar Report has been expecting higher prices for gold. However, another new low below 1,555 would look like a more legitimate bottom. That’s why the March 3, update stated that: “Aggressive investors afraid of losing out on a possible up move may go long.”

One reason I would like to see a new low is the lack of an obvious bullish price/RSI divergence at the February 21 low (@1,555). There was a minor divergence, but the bigger the divergence, the bigger the confidence in the longevity of the bottom.

Over the past week gold prices have struggled to move past Fibonacci resistance. The reluctance to move beyond resistance (despite the ‘fear catalyst’ from Cyprus) and the lack of an obvious RSI divergence at the recent low, conflict with the bullish breakout of euro-Gold.

Since I’m always looking for low-risk entry points, buying gold at lower prices would represent a much more attractive risk/reward ratio.

Long gold ETF options include the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).

Financials at 22-Month High – What Does this Mean for The S&P 500?

Pssst, no one is talking about it, but one industry sector has quietly climbed to new 22-month highs – Financials. Will their run continue, how can you tell when it’s over and how will it affect the stock market?

The financial media can’t see the forest for the trees or the stairs for the cliff.

So much ink is being spilled reporting Obama’s and Boehner’s latest comments, hints and lunch menu, that the media missed the financial sector’s march to new 22-month highs.

Will financials continue to edge higher, and what does the financial sector strength mean for the S&P 500 and other broad market indexes?

The chart below provides a nutshell summary of the Financial Select Sector SPDR ETF (XLF).

1) Marks the technical breakout from a multi-week trading range. The Profit Radar Report expected this breakout on August 5, when it said:

“Financials are currently under loved. Of the $900 million invested in Rydex sector funds, only $18 million (2%) are allocated to financials. With such negative sentiment a technical breakout above 14.90 could cause a quick spike in prices.”

2) Shows that XLF never broke below the bold October 2011 trend line and never triggered a sell signal.

The strength in financials was one reason the Profit Radar Report maintained that the down side of the post September correction was limited and exited all short positions at S&P 1,348 and S&P 1,371 (and went long at S&P 1,424 last week).

3) Volume over the last couple of days has been solid.

4) RSI is lagging the September 14 high water mark and will be running into resistance. RSI may also set up a longer-term bearish divergence if it isn’t able to beat the September high.

XLF accounts for 15.42% of the broad SPDR S&P 500 ETF (SPY) and has the power to be the tail that wags the dog.

This price/RSI divergence in XLF might harmonize with my expectation for a large-scale market top sometime in Q1/Q2 2013.

There’s a newly formed support line (not shown in chart), which should be used as stop-loss for long positions.

No doubt by the time the media moves the spotlight on financials’ performance, the lion’s share of the gains will be already over.

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.