US Stocks: 5 Intriguing Charts, 1 Conclusion

Here is a look at the 5 (in my humble opinion) most intriguing and important charts right now. As you will notice, not all charts point in the same direction. Nevertheless, I will conclude with a weight of evidence-based conclusion.

1) S&P 500 Tug of War

The July 15 Profit Radar Report introduced subscribers to a massively bullish S&P 500 chart pattern with an up side target of 3,000+.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The chart insert shows price since July 15. Thus far, triangle support has held, the pattern has not been invalidated, but also not confirmed.

Short-term, as brought out by the August 8 Profit Radar Report, sellers have a window of opportunity due to triple resistance around 2,860.

2) Nasdaq Resistance

The Nasdaq-100 QQQ is up against double resistance comprised of the red trend line and a Fibonacci projection level going back to its 2002 low. As long as resistance holds, bears have a window of opportunity to take QQQ lower.

3) Bear’s Best Friend

All major indexes (S&P 500, Dow Jones, Nasdaq, Russell 2000) have been dancing to the beat of their own drum.

For a broader assessment of US stock’s health, some look at the NY Composite (NYC), which includes some 2000 stocks.

The NYC thus far only retraced 61.8% of the decline from the January high. 61.8 is a Fibonacci number, in fact, it is the ideal retracement of a counter trend rally, a dead cat bounce. That’s what makes the NYC “bear’s best friend” right now.

A look under the hood however, reveals two important facts:

  • More stocks have been advancing than declining (blue graph)
  • The ratio of advancing stocks has slowed significantly (gray graph)

Based on the NYC advance/decline line and ratio, the most likely outcome is short-term weakness followed by longer-term strength.

4) VIX

The August 1 Profit Radar Report published the chart below, which plots the VIX against hedgers’ (smart money) exposure and seasonality. Based on those factors, a spike to 17 (red trend line) seemed likely.

This week, the VIX spiked from 10.17 to 15.02, a 47% move. Higher readings are still possible.

5) Doom-and-Gloom Hurray

Investors loved doom-and-gloom stories a couple weeks ago. I took a screenshot of most popular MarketWatch articles on July 31. The top two were:

  • Prepare for the biggest stock-market selloff in months, Morgan Stanley warns
  • This ‘prophet of doom’ predicts stock market will plunge more than 50%

Admittedly that’s anecdotal evidence, but heavily bearish investors tend to get burnt first. The early August rally did just that.

Conclusion

If you want to be bullish, there’s plenty of data to support your view.

If you want to be bearish, there’s plenty of data to support your view, too.

Looking at the data objectively, my conclusion (based on the weight of evidence) is that short-term weakness will provide at least one more buying opportunity.

Weakness may not materialize if the S&P 500, Nasdaq, NY Composite move above their respective resistance levels.

Support levels, up side targets and continuous updates are available in the Profit Radar Report.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s 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, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Europe’s ECB Warden Draghi is Alarmed … For the Wrong Reason

Like Bernanke, ECB President Draghi is famous for flooding the European financial system with cheap money. The European QE (LTRO) has brought forth some side effects that have Draghi worried, although for the wrong reasons.

This came in from Germany’s Handelsblatt newspaper:

European Central Bank (ECB) President Mario Draghi is concerned about the European banking system and is ready to unleash more emergency loans.

His concern however is over the ‘wrong reason.’ What’s the wrong reason?

Excess liquidity in the European financial system has dropped from 800 billion euro to euro 225 billion.

This sounds like bad news, but it’s not.

Liquidity has dried up because European banks are paying back their 3-year LTRO loans sooner than necessary.

Here’s a brief refresher on LTRO, which stands for Long-term refinancing operations. LTRO is essentially the European counter part to QE.

There were two tranches, LTRO I and LTRO II.

  • Via LTRO I (December 21, 2011) the ECB provided euro 489 billion worth of 1%, 3-year loans to 523 banks.
  • Via LTRO II (February 29, 2012) the ECB provided euro 529.5 billion worth of 1%, 3-year loans to 800 banks.

Good News, Bad News – All Good News

This is a good news/bad news kind of scenario.

The good news is that banks are doing well enough to repay their loans sooner.

The bad news is that shrinking liquidity has resulted in higher interest rates for bank-to-bank lending.

This development threatens to choke the economic recovery in the euro zone.

“We will watch this development very carefully,” says Draghi.

No doubt they will. How dare a natural side effect of an artificial medicine challenge the EU spin doctor.

What it Means for Investors

In theory more euro loans would be bad for the euro (NYSEArca: FXE) and good for the dollar (NYSEArca: UUP). In reality, technical analysis is likely a better indicator if you are trying to figure out what’s next for the euro and dollar.

How will it affect European stocks? If European stocks (NYSEArca: VGK) respond to liquidity like US stocks (NYSEArca: SPY), we can assume that good news is good for European stocks (NYSEArca: FEZ) and that bad news is good for stocks, as long as the ECB keeps the money going.

To assure just that, Draghi confirmed that banks will have access to cheap money for years to come.

Below is a small selection of news featured in German newspapers (translated into English). You’ll find that German news sometimes brings out facets omitted domestically or simply offer a different take.

Simon Maierhofer is the publisher of the Profit Radar Report.

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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

Can The Dollar/Stock Correlation Predict The Next Move?

A rising dollar has spelled trouble for stocks for much of the 21st century. Right now the US dollar is sitting right above important long-term support. The odds of a dollar rally are above average. Does that mean lower stock prices? Here’s a detailed look at the correlation between the dollar and stocks.

Everybody (including me) is trying to get a handle on the market they follow, but not ‘all roads lead to Rome’ when it comes to market forecasting.

Some roads (aka market forecasting approaches) are simply dead ends.

Correlations between asset classes and currencies are a legitimate tool to estimate future moves.

One of those relationships is the correlation between stocks and the US dollar.

Theoretically a falling dollar is good for US stocks. Why? A falling dollar makes US products cheaper in foreign countries, which in turn is good for US profits and stocks.

Does the theory hold up in real life?

The first chart below plots the S&P 500 against the PowerShares US Dollar Bullish ETF (NYSEArca: UUP), a proxy of the US dollar.

Obviously, the correlation is an inverse one and somewhat difficult for the untrained eye to detect.

The second chart plots the S&P 500 (NYSEArca: SPY) against an inverted UUP. This makes the correlation a bit more apparent. In fact, comparing the S&P 500 (NYSEArca: IVV) to the inverse dollar is almost like comparing it to the euro (NYSEArca: FXE).

The correlation held up for much of July 2008 to November 2011. What happened in November 2011? Operation Twist was reintroduced, but I’m not sure if that’s enough to upset the correlation.

Regardless of the cause, since November 2011 investors haven’t been able to count on the US dollar/stock correlation to predict future moves for either stocks or the dollar.

Still, it is interesting to note that the dollar is close to important long-term support with above average odds of rallying from here. The red boxes in the first chart shows that recent dollar rallies usually turned into speed bumps for stocks.

So, there’s reason in not ignoring the dollars effect on stocks entirely.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

US Dollar Rally Conflicts With US Stock Rally

Hot or cold, light or dark, black or white are common sense opposites. The US dollar and US stocks are a financial opposite, or inverse correlation. When the dollar goes up, stocks usually come down, but what happens when both go up?

2012 was a terrible year for Northern Michigan Cherry farmers. A hard freeze in late March did serious damage to the local cherry crop. What’s unusual about a hard freeze in winter?

Nothing really, and technically the freeze wasn’t the problem. It was the record-setting mid-March heat wave that coaxed out blossoms. Cherry trees started blooming when the freeze came and caused an 80-90% bud kill on Northern Michigan’s tart cherries.

Financial Climate Changes

Unprecedented climate changes are not only seen in weather patterns, they are also observed in financial patterns. The Federal Reserve’s ‘carbon footprint’ may be to blame for U.S. dollar/stock pattern shifts.

The U.S. dollar and stocks generally have an inverse teeter totter-like relationship. When the dollar goes up, stocks usually come down and vice versa.

The first chart plots the SPDR S&P 500 ETF (SPY) against the PowerShares DB US Bullish ETF (UUP). Green and red arrows are used to illustrate the inverse relationship between the S&P 500 (SPY) and the U.S. dollar (UUP).

Every green trend arrow is matched by a corresponding red trend arrow and vice versa. Since February 2013 we are seeing two green arrows as the S&P and dollar are trending up.

The second chart plots the SPY ETF against the inverse UUP to further illustrate the same point (plotting SPY against the euro or CurrencyShares Euro Trust – FXE – would yield similar results).

What Does This Mean?

UUP is about to run into resistance around 22.7 (the equivalent for the U.S. Dollar Index is 82.8 – 83.6). This is illustrated by the red range in the first chart. After a strong rally, the U.S. dollar is due for a breather.

The S&P 500 is not far away from an inverse head-and shoulders target around 1,565 in the all-time high at 1,576. This is strong resistance and should lead to some weakness, possibly even a larger reversal.

However, a falling dollar and declining stocks would still be contrary to the normal inverse correlation between stocks and the dollar.

This doesn’t mean it can’t happen, but it’s a missing piece to get a high probability signal (sell for stocks, buy for dollar). When historic correlations disagree with an overall decent trading opportunity, it’s prudent to be nimble and keep a tight leash on your positions.