Did the Dow Jones Just Invalidate the Ominous Rounding Top Formation?

There’s been a lot of talk about a super bearish long-term formation called a rounding top.

The bearish rounding top interpreation has been circulating for months, but particularly gathered steam near the January/February lows, when even more market pundits jumped on the already crowded bear market wagon.

Below is just one of many rounding top articles. This one was featured in Barron’s on March 2, 2016. It points out two bearish patterns:

  1. Rounding top
  2. Low trading volume

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Rounding Top – R.I.P.?

The Profit Radar Report never even mentioned the rounding top pattern in its analysis, for two reasons:

  1. Everyone was talking about it. The market likes to surprise investors not fulfill their expectations.
  2. According to many ‘pros’, a rounding top sent stocks into a tailspin in 2000 and 2007. It would have been highly unlikely for the market to deliver the same pattern three times in a row.

Contrary to this bearish doom-and-gloom pattern, the February 11 Profit Radar Report recommended to buy and issued an up side target of 2,040 (S&P 500).

What’s the status of the rounding top pattern?

The chart below shows that the Dow Jones Industrials Average (DJIA) moved above the rounding top resistance.

On March 19, Chip Anderson with Stockcharts.com declared the rounding top pattern R.I.P.

Low Volume Doesn’t Matter

The Barron’s article mentioned the bearish implications of low trading volume.

Technical analysis 101 teaches that low volume rallies are doomed to fail, but the fact is that every single rally leg since the 2009 market low has been on low volume.

My analysis published here on MarketWatch shows that low trading volume is basically meaningless. In fact, as the article shows, volume patterns actually helped us predict some of the mini-meltups that ultimately carried the S&P 500 above 2,040.

More Important than the Rounding Top

More pertinent than the rounding top resistance is the red trend line resistance that connects all recent DJIA spikes.

Furthermore, prior to yesterday’s small loss, the DJIA logged seven consecutive daily gains. This rally pushed every single DJIA component above its 10, 20 and 50-day SMA.

Historically, this is a sign of long-term strength, but tends to result in short-term weakness (to digest the overbought condition). In summary, there’s reason to expect a pullback, but such weakness may be more temporary than many anticipate.

Continuous stock market updates will be available via the Profit Radar Report.

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, 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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Can the Nasdaq QQQ ETF Break out of a Bull Flag Pattern and Rally 10%?

A bull flag is described as a consolidation period that interrupts a sharp, almost vertical rally. QQQ had a sharp rally from the October low and a pro-longed consolidation period thereafter. The classic bull flag breakout target projects a 10% rally.

The Nasdaq QQQ ETF (Nasdaq: QQQ) chart is simple, but packed with information.

QQQ has been consolidating for 2 ½ months. The consolidation range is defined by a parallel channel with a slant to the down side.

Channel resistance is at 104.  Resistance created by the January 23 and November 29 highs is at 104.58 and 105.25.

There’s also a Fibonacci projection level, going back to the October 2002 low, at 105.29.

I’ve read some articles that describe the channel consolidation as a bull flag.

What is a bull flag?

As the name implies, this pattern looks like a flag. A bull flag represents a digestive period after a sharp rise.

In a bull market, the flag is usually formed with a slight down trend and tends to separate two halves of a steep rally.

If this is indeed a bull flag, a breakout above 104 projects a target around 120.

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Is this a bull flag?

  • Duration: In their technical analysis books, authors Pring, Edwards and Magee state that flags can form for a period as short as 5 days or as long as 3 – 5 weeks. But a formation that lasts longer than 4 weeks should be treated with caution.

    This particular flag pattern is already 10 weeks old.

  • Trading volume: Trading volume should diminish appreciably and constantly during the pattern’s construction and continue to decline until prices break away from it.

    Trading activity dried up in February, but saw significant volume spikes early in the pattern.

In summary, the 10-week long QQQ consolidation pattern looks like a bull flag, but it does not meet the qualifications of a bull flag.

Nevertheless, certain measures of sentiment show above average pessimism for the Nasdaq QQQ ETF, which could support further up side.

Here is a bit more context: The SPDR S&P 500 ETF (NYSEArca: SPY) is gnawing on similar resistance, and the SPDR S&P MidCap 400 ETF (NYSEArca: MDY)  just broke to new all-time highs. The 104 – 106.25 QQQ range appears pretty significant for the next big move.

I’ve taken a pretty bold stand regarding the next S&P 500 move, and am watching the QQQ ETF carefully for clues.

My bold S&P 500 call is available here with the latest update posted here.

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 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.

S&P 500 Suffers First 1%+ Drop Since April 10 – Is this Bad News?

Today the S&P 500 lost more than 1% for the first time since April 10, 2014. This sell off comes amidst many predictions for a bull market end or market crash. In reality, how significant is today’s loss?

Streaks exist to be broken. The S&P 500 just broke a 66-day streak of not losing more than 1%. April 10 (blue box) was the last time the S&P 500 lost more than 1%.

Is today’s loss a bad omen?

Nowadays everything seems to be a bad omen, otherwise we wouldn’t read headlines such as:

  • “Two signs a market crash is coming”
  • “Bubble paranoia setting in as S&P 500 surge stirs angst”
  • “The indicator that proves the bull market is ending”

The S&P 500 is still within 1.5% of its all-time highs, so calls for a bull market end or crash are no doubt premature (we all know the odds of catching a falling knife).

Could today’s sell off lead to a deeper correction?

Here are a few facts to consider:

  • Today’s loss happened on elevated trading volume. The S&P 500 ETF (NYSEArca: SPY) chart shows other recent high volume declines (dashed red lines). Some of them were followed by additional selling, but most of them were not.
  • The July 8 Profit Radar Report pointed out that 1,955 is important short-term support (on a closing basis) for the S&P 500. This support has yet to be broken.
  • The July 13 Profit Radar Report highlighted key resistance at 1,980 – 1,985. So far the S&P wasn’t able to break above resistance.

In other words, despite today’s sell off, the S&P 500 remains range bound between support and resistance.

So could today’s decline be the beginning of a larger correction? Yes, but it could just as well be a minor buying opportunity.

Trusted indicators certainly have a better track record distinguishing one from another than attention-grabbing headlines.

In fact, one of those trusted indicators has predicted 6 of the last 8 buying opportunities correctly. If this indicator fails (and it’s at a ‘do or die’ point right now), it will foreshadow lower prices.

Here’s a look at this underrated and underappreciated, but accurate indicator:

S&P 500 Short-Term 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.

Short-Term SPDR S&P 500 ETF Analysis

This short-term S&P 500 ETF outlook deals with two clichés – 1) Declines below the 20-day SMA on elevated volume are always bearish, and 2) The trend is your friend – and offers three interpretations (one of which is favored).

The SPDR S&P 500 ETF (NYSEArca: SPY) displayed some bearish patterns based on conventional technical analysis.

However, conventional analysis only works in a conventional market, not necessarily in a QE market.

Here is the bearish pattern and its interpretation (conventional and non-conventional).

Last Thursday the S&P 500 ETF dropped below the 20-day SMA on increased trading volume. On Friday, the S&P 500 dropped below green support, also on increased volume (blue bars).

On Monday, SPY gapped above green resistance (prior support) and closed above the 20-day SMA on much lower volume.

Conventional interpretation: Volume = conviction and conviction on the way down was much higher than on the way up. This suggests more selling to come.

The non-conventional interpretation takes into account a similar prior pattern (second chart).

On January 23 and 24 the S&P 500 ETF and S&P 500 sliced below the 20-day SMA and prior high support on elevated volume (blue bars).

The recovery back above resistance (prior support) and the 20-day SMA occurred on anemic volume, but nevertheless pushed SPY to a new all-time high.

Based on the non-conventional interpretation, the bearish volume pattern may mean nothing.

There may also be a third interpretation. The current volume/price pattern could correspond to the brief dip below support and the 20-day SMA on January 13 (black circle).

This would suggest a bit more sideways trading followed by another leg down (which is my personal favorite).

In summary, this analysis doesn’t tell us what’s next, but it shows that:

  1. The S&P’s recent dip on increased volume is not necessarily bearish. A drop below 184.44 (the March 14 low) would change that  and point to lower prices (watch next support).
  2. Monday’s bounce was weak (despite today’s follow up). The S&P 500 ETF needs to move above 188 to unlock higher targets.

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.

Can Yellen Shatter This Bearish S&P 500 Pattern?

Janet Yellen’s first public remarks since succeeding Ben Bernanke will be carefully scrutinized. This opens another round of technical analysis vs Fed talk. Will Yellen’s remarks be strong enough to negate or even shatter this bearish S&P 500 pattern?

Here’s a look at the most basic component of technical analysis: Trading volume.

In mid-January the S&P 500 hit a rough patch that actually caused some seriously red candles.

Two down days in particular (January 24 and February 3 – see black arrows) rattled the market as sellers flooded Wall Street and trading volume picked up.

In fact, January 24 trading volume was the highest since July 31 (with the exception of September and December triple witching).

To provide a visual, I’ve plotted the S&P 500 against NYSE trading volume (chart 1) and the SPDR S&P 500 ETF (NYSEArca: SPY) along with SPY shares traded (chart 2).

Both charts show the same pattern. High volume on down days, and low volume on up days.

Under normal circumstances this would suggest that investors are more eager to sell than to buy. However, a QE market doesn’t qualify for ‘normal circumstances status.’

We’ve seen this pattern fail many times since 2009. Will this time be different? Will Yellen’s reassuring remarks to Congress negate the bearish volume pattern?

A number of indicators suggest that stocks will make another trip to lower lows.

The second SPY chart shows the 20-day and 50-day SMA not far above current prices. Equivalent resistance for the S&P 500 is at 1,802 – 1,810, with 1810 being more important resistance.

Sustained trade above 1,810 would unlock the next up side target.

A more detailed S&P 500 forecast and the next key resistance is available here:

S&P 500 Forecast: Short-Term Gain vs Long-Term Pain

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.

Technical Analysis – The Most Unique S&P Candle Stick Pattern Ever?

Candle formations are one of the more comical technical indicators, but comical doesn’t mean ineffective. Here are two takeaways from one of the most unique SPY candle formations ever.

Market analysts and market forecasters can’t be picky or biased. You can’t cherry pick data to support a bias. The tail doesn’t wag the dog and any forecast needs to be data driven.

A ton of data and indicators go into each Profit Radar Report update. There are different sentiment measures, various seasonalities and cycles and a wide variety of technical indicators.

Candle formations are one of the technical indicators I look at. I don’t follow them religiously, but they often add weight to the message conveyed by other indicators.

Anatomy of a Candle

Let’s review the anatomy of a candle before we look at a never before seen candle formation for the SPDR S&P 500 ETF (SPY).

The image below shows the main components of a candle: Open/close price, body, upper/lower shadow (also called wig) and the trading range (green or yellow, depending on up or down day).

The Only SPY Triple Outside Day

On Wednesday, the SPDR S&P 500 ETF or SPY opened below the low of the past three days and closed above the high of the past three days. This is called a triple outside day and has never happened before (see chart below).

That’s a curious factoid, but has it any directional implications? It just might. There have been seven double outside days. Each of them led to positive performance of the next couple of weeks.

Trading volume also picked up on Wednesday. Elevated volume increases the message of any candle formation, which suggests that this rally is not yet over.

A recent article here on iSPYETF.com (Nov. 19: Is it Time to Buy Apple Again?) referred to a reversal candle for AAPL at 506 and concluded that: “Prices are likely to move higher” (Apple traded as high as 595 since).

The November 18 Profit Radar Report spotted a similar reversal candle in combination with a bullish engulfing pattern (see image above) in the S&P 500 and stated that: “the immediate down trend is exhausted and stocks are ready to bounce.” The S&P is up as much as 80 points since. This bounce will continue and quite possible morph into a sizeable rally as long as prices remain above support.

Before we snub our noses at funny sounding candle formations, we should remember that they just called an 80-point (S&P 500) turn around.

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.

S&P Doesn’t Show it, But Stocks’ Performance Has Investors Scared

An analysis of NYSE trading volume provides one of the most intriguing big picture forecasts available to investors today. Trading volume, although not a short-term timing tool, acts like a lie detector.

Technical analysis 101 teaches us that higher prices on rising volume (often considered a break out) are bullish. Rising prices on falling volume or falling prices on higher volume, on the other hand, are bearish.

Low Volume But New Recovery Highs

Volume/price analysis is fractal and can be applied to all time frames. The break out above 1,389 for the S&P 500 Index (SPY) on August 3 happened on low volume. The rally from the June 4 low occurred on low volume and low and behold the rally from the October 2011 low has seen low volume.

Theoretically that’s all bearish, nevertheless the S&P 500 Index (SPY) just saw a 50-month price high as the Nasdaq carved out a 12-year high. Obviously, volume is not a short-term directional indicator.

Does that mean we should dismiss ominous volume patterns? I don’t think so and here’s why:

Stock Market X-ray

Volume, and volume sub studies such as the advance/decline ratio, reveal underlying tendencies that price simply doesn’t reflect. It’s almost like an X-ray for stocks and what this X-ray reveals is extremely interesting and concerning.

The chart below plots trading volume on the NYSE against the S&P 500 (since 2005). The daily gyrations of volume make it tough to discern a trend (the big spikes are usually triple witching days), but the red 50-day SMA shows a clear down trend in market participation.

Why Volume is Low

There are three reasons why trading volume is low:

1) Since the 2007 market top the value of the S&P, Dow Jones, Nasdaq-100, Russell 2000 and pretty much all other indexes has been cut in half, doubled and jumped around like a jittery cursor. Investors simply don’t want to put up with the market anymore. Who can blame them?

2) High-priced stocks like Google and Apple (GOOG and AAPL trade close to $700 a share) contribute to lower share volume. According to Tom McClellan, the median share price of all NYSE-listed and traded issues was $14.50 in 2009. Today it’s $23.50.

3) Summer trading is always slow.

Volume Pattern More Worrisome than Shrinking Volume

More worrisome than shrinking volume is the actual ebb and flow pattern of trading volume. Within the overall down trend in trading volume there are times when volume spikes quite dramatically. Those spikes reveal investors true feelings about stocks.

The chart below plots the S&P 500 against a 10-day SMA of trading volume. Most declines since the 2007 market top have been swift, so a 10-day SMA captures volume increases nicely.

The gray boxes highlight that selling activity increases whenever stocks decline. Numbers don’t lie, and volume is like a lie detector that reveals investors true intentions. On balance investors are more eager to sell into declines than buy into rallies.

What’s the big picture message of trading volume? Prices for the S&P 500, Dow Jones and almost all major market indexes are still below their 2007 high.

This means that the current rally is a counter trend rally, which is confirmed by rising volume when stocks drop and anemic volume when stocks rally.

Obviously, the market’s behavior has been distorted by the record influx of faux Fed money, but volume analysis strongly suggests that the rally from the March 2009 low will remain a counter trend rally. This rally may not be over yet, but it looks more terminal than many believe.

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