Russell 2000 Delivers New All-time High with Bearish Divergence

The Russell 2000 has been on a tear. On November 28, the R2K ended a 15-day winning streak when it touched red trend line resistance at 1,349 mentioned by the Profit Radar Report.

This pullback was to be temporary. The November 30 Profit Radar Report stated that: “The R2k is nearing an oversold condition and strong support at 1,309 – 1,296,” and recommended to buy R2k at 1,305. The corresponding level for the iShares Russell 2000 ETF (IWM) was 129.90.

Now the R2K is back at trend line resistance, but this time it carved out a bearish RSI divergence. There was no such divergence on November 25, which strongly suggested new all-time highs.

Bearish RSI Divergence, a Red Flag?

Under normal conditions, this bearish RSI divergence would be a serious red flag. However, the November 13 Profit Radar Report included the following observation:

The DJIA and Russell 2000 ended the week overbought, which normally will cause a pullback. However, if the S&P is truly in a wave 3 advance, stocks will continue to plow higher without much letup.”

The Russell 2000 has plowed higher ever since. The unique condition that allows for continuous gains despite on overbought condition is discussed here: S&P 500 Update – Expect the Abnormal?

Here is another statistic in favor of higher prices: Since 1979, there’ve been 12 other times when the R2K rallied at least 12 days in a row. A month later, the R2K was higher 10 times. 3 month later, the R2k was higher 7 times. 6 months later the R2k was higher 10 times.

The chart above provides long-term context for the R2K. The red trend line going back to 2011 is obvious resistance. If (and as long as) the R2K is able to sustain a break above this line, it may just continue higher.

Until it does, some caution is warranted.

Continuous updates for the Russell 2000, S&P 500 and other asset classes 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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Apples Bounces from Key Support

Apple’s slow slide lower accelerated earlier this week after falling through trend line support at 125.

This trend line buoyed prices seven times since mid-March (blue ovals), but the jug can only go to the well so often before it breaks.

Once Apple (Nasdaq: AAPL) broke below 125, it quickly moved to 120 on high volume.

120 is important, because it represents the November and January highs.

It just so happens that the 200-day SMA is just below 120.

The 200-day SMA is the go-to indicator for many investors, which ironically makes it more susceptive to whipsaws.

With or without whipsaw, 120 is an important level to watch.

Another important level (based on the log scale chart) is 116.

In terms of AAPL’s ‘summer to-do-list’, there are open chart gaps at 114.36 and 99.96, which may want to get filled

July 21 is an important date if you’re thinking about buying or selling AAPL. That’s when AAPL releases its earnings (after the bell).

AAPL tends to pop the day after earnings (pink), but that’s not guaranteed. The last all-time high occurred the day after earnings, and it’s been down ever since.

According to UBS, half of AAPL’s revenue growth cames from China. According to FactSet, China accounts for 16.2% of AAPL’s total revenue. Chinese stocks are down 30% since June 5. This could make its way into earnings … and spook investors.

AAPL seasonality suggests being careful in July and early August. Click here for AAPL seasonality chart.

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.

 

Watch RSI for a Possible S&P 500 Breakout

Here is a chart frequently seen in recent Profit Radar Report updates.

In my humble opinion, it is the best visual nutshell summary of the stock market right now. Here is what we see:

  1. The S&P 500 (NYSEArca: SPY) is at the top of its trading range, just below key resistance. The bold red trend line goes back almost two decades. No wonder the S&P has stalled here.
  2. The percentage of stocks above their 50-day SMA has been lagging significantly. Buyers are obviously getting picky.

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  3. RSI (Relative Strength Indicator) is bumping against its very own trend line resistance. Every attempt to move above has been repelled, thus far.

Summary: The S&P 500 and RSI are at key resistance. A breakout here should reel in more buyers. However, the lack of participation (indicated by the % of stocks > 50-day SMA) cautions that buyer’s remorse will set in eventually and limit up side potential. Failure to break out may lead to lower prices.

Detailed target levels for a breakout (if it occurs), and continued out-of-the-box analysis are available via the Profit Radar Report.

Some recent sentiment readings increased the odds of a (temporary?) ‘pop.’

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.

 

What’s Next for S&P 500? Here’s the Good News and the Bad News

Bad news: The S&P 500 has lost 4.36% since its January 2014 all-time high. Good news: The news is so bad; it may actually be good for stocks … at least for a little while. Here’s some short-term good news and long-term bad news.

This is a good news/bad news or glass half full/half empty kind of a market.

What do you want first, the good news or the bad news?

Let’s think positively (or bullish as it’s called on Wall Street) first.

The S&P 500 (SNP: ^GSPC) hit a serious pothole and is down 4.36% from its all-time high. The Dow Jones got clobbered even harder, down 5.95% from its ATM.

Good News (Bullish)

There’s been a lot of selling over the last ten last trading days (although most of the losses were caused by only three strong down days).

But for now selling pressure looks to be exhausted.

S&P 500 price action suggests that a short-term low is in place.

The S&P 500 (NYSEArca: SPY) was originally published in Wednesday’s Profit Radar Report.

Yesterday the S&P 500 found support at the green trend line with a bullish RSI divergence. The Profit Radar Report stated that: “Wednesday’s low may have ended the initial selloff.”

However, there’s an open chart gap at 1,733.45 and additional support at 1,730. Chart gaps often act as magnets, so I’d like to have seen the S&P close the gap.

That’s why the yellow projection anticipated a brief dip to close the gap. This may still happen, but with or without gap closure, odds favor a rally to relieve the oversold conditions (yellow projection). Next resistance to overcome is 1,775. A break below 1,730 would caution of another ‘crash wave’ lower.

Looking at the bigger picture, we should note that at the recent all-time highs, the S&P 500 and Dow Jones did not register the kind of bearish divergences usually seen at major market tops.

Bad News (Bearish)

There are a number of factors and indicators that suggest 1) a deeper correction and 2) an upcoming major market top followed by a ferocious bear market.

Based on Elliott Wave Theory (admittedly the oddball of technical analysis, but very helpful at times), the S&P 500 and Dow Jones ETF (NYSEArca: DIA) have finished a 5-wave move to the down side.

This suggests a 3-wave counter trend rally, followed by at least one more leg lower (see chart below for a simplified visual of Elliott Waves).

More important for the bigger picture, two long-term stock market cycles top and roll over in 2014.

Those cycles correctly anticipated the 1987, 2000 and 2007 market crashes.

A chart says more than a thousand words. The chart featured in the article below shows just how powerful those two cycles are.

7-and 13-Year S&P 500 Cycles Project Major Market Top in 2014

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.

Has the Year-end Rally Already Started?

Isn’t it too early to start talking about a year-end rally? It might well be, but the S&P 500 just started a pattern that led to extended rallies and new highs in 2012 and 2013. Just as important as identifying pattern, is  knowing exactly when it becomes void.

Ok, it may be a bit too premature to talk about the year-end rally, but retailers plan early for Halloween and Christmas, why shouldn’t investors look a few months ahead?

There actually is one strong technical indication that stocks have put in a bottom and are getting ready to move higher for a while.

First off, the S&P 500 (NYSEArca: SPY) and Nasdaq-100 (Nasdaq: QQQ) have not yet reached their ideal up side target (target levels available to subscribers of the Profit Radar Report).

That’s unfinished business on their to-do list and based on Thursday’s strong bounce, the Nasdaq and S&P seem intent to put a check mark behind those to-do items.

The short-term key to a bullish outcome is the green trend line shown in the S&P 500 chart below.

At first glance, the green trend line seems like a natural border between the bull and bear case. There used to be a time when trend lines like this worked like a charm. But the market’s character changed in 2011. Since then the S&P 500 has broken similar trend lines various times and recovered every time.

The green trend line just got violated, is it still valid? Yes, especially so.

Allow me to use this excerpt from the October 7 Profit Radar Report to explain why this is good news for bulls (this is one of the rare times we publish a large section of the Profit Radar Report for free):

Why We Were Looking for a ‘Broken’ Trend Line

At first glance, the green trend line seems like a natural border between the bull and bear case. There used to be a time when trend lines like this worked like a charm. But the market’s character changed in 2011. Since then the S&P 500 has broken similar trend lines various times and recovered every time.

In 2012 and earlier in 2013 we successfully adjusted our strategy and waited for a drop below trend line support followed by a move back above to go long. The longer-term chart with additional trend lines shows that prior trend line breaks weren’t fatal (gray ovals).

Therefore going short against trend line resistance bears risks, especially since there are still unfulfilled up side targets (discussed in yesterday’s PRR) and an open chart gap (1,688) left by this mornings down open.

The main reason to search for a short entry point is that we do not want to miss out on a potentially sizeable decline. Bold green trend line support is at 1,668 tomorrow. A drop below 1,668 is not necessarily a sell signal. However, due to the potential for a larger decline, we will go short if the S&P drops below 1,665 (a 3-point seesaw buffer zone) and a stop-loss at 1,675.

The scenario that appears to make most sense is a quick trip into the 1,660s or 1,650s followed by another rally to new all-time highs. We will therefore lower our stop-loss to virtually guarantee a winning trade.”

The S&P 500 (NYSEArca: IVV) followed our script pretty closely and based on similar technical patterns in 2012 and 2013, odds favor higher prices. Any trade below the green trend line and the trade is off. The up side target for this rally is available to subscribers of the Profit Radar Report.

There are two other variables that help assess the viability and longevity of an upcoming rally.

1) Viability of the rally: The VIX (Chicago Options: ^VIX) is about to a major seasonal turning point. Fore more information about VIX seasonality and the most unique VIX seasonality chart click here: VIX Seasonality Near Best Turning Point of the Year

2) Longevity of the rally: The S&P 500 has been closely following a 13-year and 7-year top and bottom cycle since the 1970. Both cycles will meet this and next year for a potent signal. For a detailed analysis of the S&P 500 cycles click here: S&P 500 Cycle Analysis

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

VIX Jumps Above 5-Year Old Trend Line Resistance

Investors have been complacent for most of 2013, but this changed quickly. A, thus far, fairly shallow 4% decline in the S&P 500 has investors scared enough to drive the VIX above a previously unconquered 5-year old resistance level.

Fear is back for the first time since June, when the S&P 500 (SNP: ^GSPC) dropped 127 points and the VIX soared as much as 78%.

This time around, the S&P 500 (NYSEArca: SPY) has only dropped 68 points, but the VIX (NYSEArca: VXX) is already up 63% (since September 19).

In other words, investors are more shaken up by the 68-point post September drop than the 127-point June drop. What does this mean?

There are two possible interpretations:

1) The VIX is already overbought and ripe to move lower or

2) As the chart below shows, the VIX just broke out above two trend lines, one going back to October 2011, the other going all the way back to October 2008.

The large grey oval shows what happened the last time the VIX broke above a similar trend line in May 2013.

The dotted red lines mark near-term resistance for the VIX.

Based on the May breakout pattern there is more up side for the VIX (NYSEArca: TVIX), but to unlock this up side potential the VIX needs to move above near-term resistance first.

Perhaps more insightful than the VIX chart at this point is VIX seasonality. The VIX is about to hit the most important turning point of the season.

VIX seasonality is discussed here: VIX Seasonality Near Best Turning Point of the Year

Simon Maierhofer is the publisher of the Profit Radar Report.

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Could a Strengthening Dollar Sink Stocks?

On a walk down memory lane, we discover bold statements like this one – “Nobody wants toxic US dollar” – made in April 2011. Today the dollar trades 8% higher. In fact, the dollar is right above key support. Will it hold and potentially sink stocks?

According to analysts, the US dollar has been doomed ever since the Federal Reserve started QE back in 2008. Every new round of QE draws the dollar doomsday crowd out of their den. To wit, I’ve included a few headlines below:

April 8, 2011: Toxic Dollar: Why Nobody Wants US Currency – CNBC
June 15, 2011: Dollar Doomed to Drop – UBS Technical Analyst
July 28, 2011: U.S. Dollar Poised for a Plunge – Peter Schiff

But nearly five years later, the greenback is holding its ground.

It may not be the strongest currency of the global currency basket, but the US dollar today – and that may be hard to believe – is trading exactly where it was back in 2004 (dashed purple line).

Albeit choppy, since August 2011 the dollar has consistently climbed from higher lows to higher highs.

Connecting the recent lows creates obvious support (green trend line).

The US Dollar Index came within striking distance of this trend line last week.

Will Support Hold?

A trend line is called a trend line because it delineates a trend. In this case an up trend. The trend remains up as long as price stays above the trend line.

Being aware of such trend line support is important for at least two reasons:

1) The trend line makes it clear that the dollar is at a key inflection point. Key support is like a rung on a ladder. If the rung breaks, you fall. If support fails, the dollar falls. If support holds, the dollar should ‘climb up.’

2) Dollar strength or weakness is not just a currency story; it’s also an equity event. There is a correlation (see below) between movements of the US dollar and stocks. A US dollar rally may lead to falling stocks. Why?

A falling dollar is good for exports and corporate profits and therefore good for broad US indexes like the S&P 500 (SNP: ^GSPC). A rising dollar is generally bad for corporate US profits.

Based on my assessment, the odds of a sustained dollar rally are currently greater than the odds for a decline.

The PowerShares DB US Dollar ETF (NYSEArca: UUP) provides long US dollar exposure. If support fails, it may be time to look at the PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN) or CurrencyShares Euro Trust (NYSEArca: FXE).

Exactly how strong is the correlation between stocks and the S&P 500 (NYSEArca: SPY)? Could a US dollar rally sink stocks?

This article about the US Dollar/Stock Correlation shows exactly what a strengthening dollar would mean for US stocks.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF