S&P 500 Update – Churning for a Burning?

The S&P 500 reached our minimum down side target and rallied strongly. Is this rally for real or are stocks just ‘churning for another burning’?

Bullish Signals

This week’s rally is credited to the French election, but a series of solid buy signals triggered days before the news from France.

The CBOE equity put/call ratio signaled a S&P 500 rally.

Contango and the VIX/VXV ratio signal a VIX decline.

The chart below – which plots the S&P 500 against the VIX, VIX/VXV ratio, CBOE equity put/call ratio, and contango – was published in the April 16 PRR along with the following commentary:

The VIX/VXV ratio, equity put/call ratio and contango are at multi-month extremes.It appears like the amount of sellers left (needed to drive prices lower) is rather limited. The weight of evidence strongly suggests that we should focus on the upcoming buying opportunity, not on how much more down side may or may not be left.”

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.

The same Profit Radar Report also highlighted positive seasonality (see below).

Bearish Caveat

This bounce is in sync with seasonality and various buy signals, but will it last?

The April 9 PRR featured the yellow projection shown below. According to this scenario (based on Elliott Wave Theory), the S&P would reverse above 2,390 and fall to new lows (2,320 or below).

The S&P 500 is above 2,390 and has entered a price zone where a relapse becomes possible.

We will be watching various breadth, money flow, sentiment and technical indicators to determine whether this rally will stop here or not.

Continuous 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.

 

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Bi-Polar Investors Dump Stocks on Fear of Bull Market End

Based on a recent poll, investors feel strongly that this bull market is coming to an end (or has already ended). Ironically, this kind of conviction is usually fertile soil for a continuation of bull markets.

All good things come to an end.

What goes up must come down.

Both of those clichés will certainly catch up with this bull market.

In fact, retail investors appear ready to bury the bull right now and slap an RIP sign on it.

Based on the latest AAII (American Association of Individual Investors) poll, not even a complimentary 9-foot pole would entice retail investors to ‘touch’ stocks.

The chart below plots the percentage of bullish investors polled by AAII against the S&P 500.

Last week only 27.22% of polled retailed investors were bullish on stocks (red line).

That’s unusual considering that the S&P 500 (NYSEArca: SPY) is still within a few percent of its all-time high.

The AAII poll is not the only sentiment gauge around. In my humble opinion it is actually one of the most volatile and least accurate gauges. Nevertheless, ignoring it would be as shortsighted as elevating it to a fail proof indicator (the Profit Radar Report publishes a full panel of sentiment gauges once a month).

The simple truth is this: Nobody rings a bell on the top. Major peaks come as a surprise and a top right now would be the first one in history to be foreseen by retail investors.

Don’t get me wrong, I believe the S&P 500 and cohorts are due for a correction, but bulls will continue to torture bears.

One of those ‘torture instruments’ may be new all-time highs (followed by a correction?). One exotic technical indicator that suggested a bounce at S&P 1,814 points towards new all-time highs.

You can read about it here, along with a short-term forecast for the S&P 500:

S&P 500 Short-Term Analysis – This is the Bear’s Last Chance

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.

This Might Be the Only Bullish S&P 500 Chart Right Now

Last week’s decline has turned many short-term trend following and technical indicators bearish. There’s little evidence for an immediate bottom, aside from this one chart (which has an impressive track record):

A one-week decline doesn’t wipe out a five-year bull market, but it can ruffle some bullish feathers. That’s exactly what happened last week.

Aside from this chart, few indicators suggest an immediate end to stocks new-found attraction for lower prices.

The chart plots the S&P 500 against the VIX:VXV ratio.

The VIX (NYSEArca: VXX) is a gauge of expected volatility for the next month.

The VXV is a gauge of expected volatility for the next three months.

We’ve previously dubbed this the ‘Incredible VIX Market Bottom Indicator,’ because prior readings above 1 (= expected 1-month volatility > 3-month volatility) have coincided with every S&P 500 bottom since 2012.

Now, once again, the VIX:VXV ratio has spiked above 1.

This is good news if the S&P (NYSEArca: SPY) follows the bullish 2013 pattern, but not every year can be like 2013 (I personally think we might see another VIX:VXV hook higher like in February – green circle).

There’s another, even better, explanation why stocks rallied today (and whether this is a ‘real’ or ‘fake’ bounce. More details here:

Don’t Get Fooled by S&P 500 Bounce

There are two potent reasons why this VIX spike may not have the same results now as it did in 2013. More details here:

MACD Triggers the Year’s Most Infamous Sell Signal (make sure to look at date of article)

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.

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

 

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

Is it Time to Bury Your Head in the Sand and Hope for the Worst?

Welcome to the new and not just imaginary QE world where weak GDP (only the most followed gauge of economic activity in the U.S.) numbers are applauded and received with cheer by Wall Street. Confused? Oh you shouldn’t be anymore.

Ignorance is bliss. We are all familiar with the bad news is good news phenomenon created by the Fed’s QE.

Bad news is good news because it means either more QE or the same QE over a longer period of time. Many commentaries have been written about today’s backwards state of affairs.

Below is one of the most blatant displays of the new up side down investment paradigm.

For your enjoyment, here is a section from a June 26, 2013 Reuters article under the headline: Wall Street Climbs as GDP Data Eases Fear of Fed Pullback.

“The broad-based advance lifted the S&P 500 above the 1,600 threshold for the first time since last Thursday. Stocks have recently sold off after the Fed said it is moving closer to reducing its monthly bond-buying efforts, but the last two days of buying show some believe the market has overreacted.

The rally followed data showing the U.S. economy grew at an annual rate of 1.8 percent in the first quarter, well below expectations for gross domestic product to grow at a 2.4 percent annual rate.

While the GDP data looks backward and includes the start of cutbacks in federal spending, analysts said it could influence the Fed’s considerations of whether the economy is strong enough for it to begin scaling back its $85 billion a month in bond purchases. Should this contribute to keeping the Fed from moving sooner, it would be seen as supportive for stocks.

Stocks have been closely tied to the central bank’s easy money policy, with the Dow and the S&P 500 hitting a series of record closing highs as investors bet that the bond buying would remain in place, and then dropping dramatically on hints that the stimulus could be reduced before the end of the year.

In a nutshell, GDP – the most watched gauge of the economy’s health – came in 25% lower than expected, but Wall Street applauded because this means more QE.

What about the second-most watched gauge of the economy’s health – unemployment figures?

As per last Friday’s BLS (Bureau of Labor Statistics) release, the U.S. economy added 195,000 jobs in June. The unemployment rate stayed at 7.6%.

Stocks rallied. Why?

Associated Press: Stronger Than Expected Job Growth Raises Hopes for Stronger Economy.

But shouldn’t that be bad news for the stock market?

Reuters: Brightening Jobs Picture May Draw Fed Closer to Tapering

Is anyone confused? If so, just hope for bad economic news to drive up stock prices. If that doesn’t work, keep in mind that good news is good news and bad news is good news (really, any news is good news).

I personally feel that economic news and the medias spin on the news deserves only a very limited portion of my attention span.

I rely on technical analysis. Technical analysis is not flawless, but it is consistent.

Technical indicators told us a week ago that the S&P 500 and Nasdaq-100 will come up and close open chart gaps at 1,629 and 2,960. The gaps have been closed and the market is at a key inflections point. How stocks react here should set the stages for the coming weeks.

S&P 500: Bearish RSI Divergence Waives Red Flags

The December 2, Profit Radar report predicted new recovery highs, but warned that: “Any new recovery high marked by a bearish price/RSI divergence could mark the end of this rally.” That’s exactly where we’re at now.

Research studies show that investors as a group buy high and sell low. The media fuels this kind of crowd behavior, trashing stocks near a bottom and hyping them up near the top.

The “headline index” – a fictitious index based on a not entirely worthless evaluation of media sentiment – depicts a media more cheery than any other time in 2012. The upside is limited whenever the media is implying a sustainable rally.

But this article isn’t about sentiment or the media; it’s about a technical divergence. One that incidentally runs contrary to the media’s blissful mood.

RSI Basics

The Relative Strength Index (RSI) is a very basic and commonly used momentum indicator. I usually don’t subscribe to popular indicators (the more folks use any given indicator the less effective it is), but RSI just happens to work very well for me (perhaps because I use an unusual setting to make it more ‘special’).

My simple theory is to look for unconfirmed highs or lows. Any new price high/low unconfirmed by a new RSI high/low is a bearish/bullish divergence. This theory works at multiple time frames. I like to use it for spotting highs/lows that last for weeks or months.

This simple strategy has helped me to identify the May 2011 top and October 2011 and June 2012 lows.

Bearish RSI Divergence

The chart below is visual evidence that every bigger top since 2010 (vertical dashed red lines) sported a bearish RSI divergence (new price high without new RSI high).

The September 14 high fooled me, because there was no bearish divergence (dashed green line). Due to the lack of divergence, I refused to abandon my outlook for new recovery highs above 1,475, which at the time was quite unpopular.

Via the September 30, Profit Radar update I stated that: “The September 14 recovery highs for the S&P, Dow, Russell 2000, and XLF were all accompanied by new RSI highs. It would be rare for stocks to form a long-term peak without a bearish price/RSI divergence. Because of this lack of divergence we expect new recovery highs.”

The December 2, Profit Radar update again noted that: “The decline from September 14 – November 16 was a correction on the S&P’s journey to new recovery highs. This scenario is supported by the lack of bearish price/RSI divergences at the September 14 high, continuous QE liquidity, and bullish seasonality. There is no specific target, but any new recovery high marked by a bearish price/RSI divergence could mark the end of this rally.”

Something’s Changed

As of last week, the S&P 500 recorded new recovery highs above 1,475 void of a new RSI high. In itself, that’s not a sell signal, but it’s a red flag.

As with any indicator, RSI divergences become more potent when confirmed by other technical indicators or support/resistance levels.

I was excited to discover two important resistance levels not far above current trade. In fact, one of the resistance levels caused a major S&P 500 reversal in May 2011, one that shaved nearly 300 points off the S&P.

It can be treacherous to buck a QE-stock market on a mission, but this major inflection point along with the bearish RSI divergence and increasingly bullish sentiment suggests definite caution ahead.

The Profit Radar Report reveals the key resistance level (and target for this rally) along with conservative and aggressive trade recommendations to take advantage if this strong inflection point.