5 ‘Keep it Simple’ Stock Charts and 1 Bearish Constellation

The rally from the June 3 low has created many bullish price and breadth patterns and studies (5 of them are discussed here). The market has followed through on them thus far.

However, the short-term Elliott Wave structure does not look bullish, and the long-term projection published in the June 2 Profit Radar Report (shown here) points to a serious speed bump.

In short, there is a measure of conflict between indicators. When that happens, I like to go back to the basics and keep it simple.

Resistance

The DJIA shows probably the most important resistance range to watch: around 27,300.

Support

The S&P 500 shows some important support levels to watch: around 2,910 and 2,875.

Short-term Trend Channel

The June 23 Profit Radar Report used this chart to simplify the short-term: “A break below channel support would unlock a pullback. The wave labels show the most bearish EWT-based option. It’s not ideal, but it seems more likely than other options.”

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.

Trend channel support failed the next day and unlocked the biggest pullback of June. It is possible to count the decline from June 21 as 5 waves, which cautions that the trend may have changed from up to down.

Leader Fatigue

The rally from the June low has been led by defensive sectors like consumer staples. Contrary to popular belief, such (defensive-led) rallies are statistically not doomed to fail.

However, the Consumer Staples Select Sector SPDR ETF (XLP) carved out a pattern with a lot of bearish potential. I recommended to go short at 59.07 on June 13. The stop-loss is now set at breakeven, which allows us to ‘play with house money.’

Overlap

Small cap stocks represented by the Russell 2000 ETF (IWM) are lagging. In fact, IWM fell below the June 5 high. If one wanted to count the June rally as 5 waves, June 5 would be wave 1, but yesterday price dropped below the June 5 high. This creates a bearish (wave 4 / wave 1) overlap (blue arrow) that’s not allowed and voids a short-term bullish Elliott Wave count.

Bearish Constellation

Not only small caps are lagging. The transportation and banking sector are too (see chart below).

Only two other times (July 1990 and July 1998) has there been such a big divergence between the S&P 500 and small caps, transportation, and banking. This is a small sample size, but it led to a rocky and negative performance over the next quarter.

Conclusion

Even during times where there is conflict among indicators, going back to the basics provides some general guidance.

It will take a sustained move above resistance to unlock higher targets, and a break below support to unlock lower targets.

Another big but temporary drop would certainly clear up the structure and provide a lot more certainty, but we’ll let the above levels indicate whether it will happen.

Continued 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 evaluation 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.

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As mentioned in part I of “How to Outsmart a Choppy, Range-bound Market” (published on March 27), we anticipated a rollercoaster-like stock market.

Our strategy was to look for low-risk opportunities in certain industry sectors.

The April 24 Profit Radar Report stated the following:

The S&P 500 has reached a point where a bounce is likely. It’s possible that the bounce may morph into the next bigger rally. We would prefer to see even lower prices (the lower, the better the risk/reward), but we’re not certain if our wish will become reality.

We’ve been here before (February 8, April 2). Both times the S&P rallied … and eventually pulled back again. In February we bought XLU as a lower-risk bet on equities. Now XLP sports an interesting setup.”

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.

Low-Risk Sector Trades

The Utility Select Sector SPDR ETF (XLU) and Consumer Staples Select Sector SPDR ETF (XLP) were over-sold and over-hated at the time. In addition they were trading against support with bullish divergences. And, paying some of the best dividends in the business didn’t hurt.

We bought XLU on February 12, and sold XLU on April 6 for a 6.16% gain.

We bought XLP on April 25, and sold XLP on May 1 at breakeven.

We again bought XLP on May 31, and sold XLP on July 10 for a 5.50% gain (yes, sometimes it may take two attempts to get it right).

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At no time did XLU or XLP fall below our purchase price, and both trades offered a 11.66% (including dividends) absolutely no risk, no stress return.

The Profit Radar Report continuously looks for low-risk trade opportunities, which includes stocks, gold, silver, oil, currencies. Continued updates and recommendations 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, 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.

Risk Off Gauge That Correctly Signaled 2000 and 2007 Top is In Freefall, But …

Twice in 2014 we looked at the XLY:XLP risk on/risk off ratio for clues about the market’s next move. Twice the XLY:XLP ratio pointed us in the right direction. Now it’s pointing lower, which contradicts an even more powerful indicator.

The ratio of two diametrically opposed asset classes often provides insightful clues about what investors are doing.

The XLY:XLP ratio is one such example.

Unlike many hypothetical indicators, the XLY:XLP ratio is an actual money flow indicator, based on what investors are doing, not saying or thinking.

XLY represents the Consumer Discretionary Select Sector SPDR ETF. XLP represents the Consumer Staples Select Sector SPDR ETF.

The XLY:XLP has offered some excellent signals and tell tale signs both long-term and short-term.

Long-term:

A breakdown of the XLY:XLP ratio correctly signaled the 2000 and 2007 market tops.

Short-term:

We looked at the XLY:XLP ratio twice this year.

The first time was on May 20, when it was at the verge of breaking down.

The conclusion back then was that there were simply to many bears to drive the S&P 500 down.

The second time was on August 7, when the XLY:XLP ratio rose despite an S&P 500 selloff (see chart below for dates).

The conclusion was that the XLY:XLP ratio rally actually reduced the risk of an immediate stock market decline. The S&P 500 rose steadily for the next 90 days or so.

This time around the picture looks different, as the ratio has broken below long-term trend line support. This suggests that the time of shallow, V-shaped corrections – so prevalent throughout 2013 and 2014 – is over.

Another 2000 or 2007-like Top?

Does this breakdown also foreshadow another bear market, like it did in 2000 and 2007.

Context may be key here. The 2000 and 2007 market tops were also preceded by an even more important sell signal (more about this signal in a moment). This signal hasn’t triggered yet convincingly.

Furthermore, a close-up look at the XLY:XLP ratio since 2008 shows two prior trend line breaks (2012 and 2013, red circles) that turn out to be false signals. Unlike the 2001 – 2007 move, the post 2009 rally has been quite choppy, testing and breaking support more frequently.

The XLY:XLP ratio by itself is telling us that there is potential for further losses, but as the 2012 and 2013 breakdown reversals show, any correction may hit rock bottom without notice.

Looking at the ‘Big Guns”

As mentioned above, another indicator that not only foreshadowed the 2000 and 2007 market tops, but also predicted that every correction since 2009 would lead to new highs, has not yet given a convincing sell signal.

The indicator is probably the most valuable gauge for any investor at this moment.

It is discussed in detail here: 3 Strike Wall Street Law – QE Bull Market Only One Strike away From Knock Out

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.

S&P 500 Selloff Ironically Reduced Risk of Market Crash

This is a truly counter intuitive development: The recent sell-off, which knocked the S&P 500 from 1,991 to 1,911, actually decreased the risk of a market crash a la 2000 or 2007. Here’s why:

On May 20, we looked at an indicator that has the distinct reputation of signaling the 2000 and 2007 meltdowns (“A Look at the Risk Off Gauge That Correctly Signaled the 2000 and 2007 Tops“) .

Since then, this indicator has delivered a surprising twist.

We are talking about the XLY:XLP ratio.

XLY represents the Consumer Discretionary Select Sector SPDR ETF. XLP represent the Consumer Staples Select Sector SPDR ETF.

Consumer discretionary is an economically sensitive, high-octane sector. Consumer staples is an economically defensive sector.

The XLY:XLP ratio reflects how much risk investors are willing to take.

The chart below plots the S&P 500 against the XLY:XLP ratio.

In late February, XLP started to outperform XLY (‘risk off’ mentality’). This led to a falling ratio. By May, the XLY:XLP ratio was on the verge of breaking below the trend line support.

Such a breach of trend line support foreshadowed the 2000 and 2007 rallies.

But then something curious happened. XLY recovered and so did the ratio.

Defensive sectors tend to fair better during poor markets, but despite the most recent selloff, which knocked the S&P 500 (NYSEArca: SPY) from 1,990 to 1,910, investors actually preferred XLY over XLP.

Why? I don’t know.

At the end of the day, a ‘market crash’ signal (like in 2000 and 2007) was averted.

The XLY:XLP ratio is just one of many indicators used to analyze the market and assess the (much talked about) risk of a market crash.

The Profit Radar Report just published an article on the most accurate ‘market crash vs correction’ indicator. This indicator correctly anticipated the 1987, 2000 and 2007 crash. At the same time, it exposed the 2010, 2011 and 2012 corrections as temporary blips.

More information is available here: How to Discern a Major Market Top

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.

A Look at the Risk Off Gauge That Correctly Signaled the 2000 and 2007 Tops

Here is a look at an indicator that has the distinct reputation of signaling the 2000 and 2007 meltdowns. This indicator obviously has a decent track record, but is today’s environment the same is in 2000 or 2007? Is another crash likely?

Here is a look at an indicator that has the distinct reputation of signaling the 2000 and 2007 meltdowns – the XLY: XLP ratio.

XLY (Consumer Discretionary Select Sector SPDR ETF) represents a dynamic and economically sensitive sector of the S&P 500.

XLP (Consumer Staples Select Sector SPDR ETF) represents a stable, boring and supposedly recession proof sector of the S&P 500.

The XLY:XLP ratio shows which sector investors prefer, and as such serves as a historically accurate risk on/risk off indicator.

The first chart plots the S&P 500 against the XLY:XLP ratio (I’ll call it XXR from here on). The green lines show that XXR respects trend line support.

In fact, a break below this trend line support in 2000 and 2007 is what foreshadowed trouble for the S&P 500 (SNP: ^GSPC).

This week, the XXR is exactly at trend line support once again. Extrapolating the past into the future would suggest another meltdown (assuming XXR will go on to drop below support).

However, there are some differences.

The second chart adds the percentage of bullish investors polled by AAII into the equation.

For the past several weeks the Profit Radar Report has been pointing out that retail investors along with the media (or investors influenced by the media) have turned quite bearish.

For example, when the S&P traded around 1,860 on May 7, the Profit Radar Report stated that: “The weight of evidence suggests the onset of a larger correction in May, but we are not the only ones expecting a correction. A false pop to 1,900 – 1,915 would shake out the weak bears.”

Last week’s spike to 1,902 may have been this ‘false pop.’

Is Today’s Environment the Same as in 2000 and 2007?

I’ve added the % of AAII bulls to show that today’s environment differs from what we saw in 2000 and 2007.

In 2000 and 2007 most market participants were bullish. Today they are not.

It should also be noted that XXR’s 2007 break below trend line support came a few weeks too early and could have resulted in some annoying short-term losses as the S&P 500 (NYSEArca: SPY) staged its final rally leg.

Summary

The XLY:XLP Ratio has done a decent job foreshadowing the 2000 and 2007 crashes, but the overall environment suggests that this time is different.

There is not enough fuel (aka bullish investors) to drive the S&P 500 down substantially (more than 20%) and keep it down.

As mentioned above though, in the 2014 S&P 500 Forecast (published on January 15 via the Profit Radar Report), I projected a correction in May or June. This forecast remains valid.

Here is the key must hold short-term S&P 500 level that – once broken – would trigger further selling along with key short-term resistance:

Short-term S&P 500 Analysis

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.

Sector ‘Heat Map’ Shows Cooling Appetite for Risk

Every bull market has a certain life expectancy. Nobody knows how long this bull will live, but a look at the S&P 500 industry sector ‘heat map’ shows ‘graying around the temples’ as investors rotate out of higher risk industries.

A rising tide lifts all boats. This sounds cliché, but was certainly true in 2013.

The first chart below shows the Q4 2013 performance of the nine S&P 500 sector ETFs. Those nine ETFs are:

  • Industrial Select Sector SPDR ETF (NYSEArca: XLI)
  • Technology Select Sector SPDR ETF (NYSEArca: XLK)
  • Consumer Discretionary Select Sector SPDR ETF (NYSEArca: XLY)
  • Materials Select Sector SPDR ETF (NYSEArca: XLB)
  • Financial Select Sector SPDR ETF (NYSEArca: XLF)
  • Health Care Select Sector SPDR ETF (NYSEArca: XLV)
  • Consumer Staples Select Sector SPDR ETF (NYSEArca: XLP)
  • Energy Select Sector SPDR ETF (NYSEArca: XLE)
  • Utilities Select Sector SPDR ETF (NYSEArca: XLU)
    The ETFs are sorted based on Q4 2013 performance.

More risky, high beta sectors (red colors) like technology and consumer discretionary were red hot in the last quarter of 2013.

‘Orphan & widow’ sectors (green colors) like utilities and consumer staples lagged behind higher risk sectors.

The first chart is a snapshot of a healthy overall market. No wonder the S&P 500 ended 2013 on a high note.

The second chart shows that the tide turned in 2014. Conservative sectors are now swimming on top, while high octane sectors have sunk to the bottom of the performance chart.

This doesn’t mean the bull market is over, but the distribution of colors illustrates that investors have lost their appetite for risk (for now).

Like graying around the temples, this rotation out of risk reminds us of an aging bull market.

It’s not yet time to order the coffin, but indicators like this do warn of the potential for a deeper correction.

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.

Weekly ETF SPY: XLV – Head-and Shoulders Above Other Sectors

The Health Care Select Sector SPDR ETF (XLV) sports the second best year-to-date performance. Recent price action has exposed a key short-term support level that can be used as a trigger level for investors looking to short the health care sector.

The Health Care Select Sector SPDR’s (XLV) performance ranks head-and shoulders above the rest. XLV is up 19.19% year-to-date, outperformed only by utilities (XLU is up 19.66%).

Other double-digit year-to-date performers include the Consumer Staples Select Sector SPDR (XLP – 17.89%), Consumer Discretionary Select Sector SPDR (XLY – 15.46%), Financial Select Sector SPDR (XLF – 14,48%) and Energy Select Sector SPDR (XLE – 10.08%).

Technology (XLK), industrials (XLI) and materials (XLB) are stuck in single digit performance territory.

Looking at the performance (and possible cracks) of leading sectors often provides clues for the overall stock market. Prior ETF SPY’s identified key support for other leading sector ETFs like the iShares Russell 2000 ETF (IWM) and SPDR Retail ETF (XRT).

Key support for IWM and XRT has proven crucial to the short-term performance of IWM and XRT. Bot sectors/ETFs bounced exactly from support.

Not all technical analysis proves correct with that much clinical precision, but XLV is at a point where key support has become visible.

The chart below shows that XLV may be carving out a short-term head-and shoulders pattern with a neckline around 46.70. This week this potential neckline coincides with trend line support.

A break below 46.70 would unlock a measured target of 45.15 +/-, which also coincides with trend line support.

As long as support holds, the up trend remains intact and we’re just talking about ‘unhatched eggs.’ Investors fishing for a price top may use broken support as a trigger level for short positions.

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