Art's Charts

Bullish evidence weakens

With a sharp decline over the last two weeks, it is hardly surprising that the bullish evidence weakened considerably since early January. Three indicators are considered bearish. The McClellan Oscillators both plunged below -50 to signal a sharp thrust in selling pressure. Momentum is bearish as MACD for SPY moved into negative territory and RSI broke below 40. Offensive sectors are leading lower as techs bore the brunt of recent selling pressure and the Nasdaq is lagging the NYSE. Even with these negatives, four indicators are still sitting on the fence and five remain bullish. The AD Lines are split. Even with the big surge the last two weeks, the volatility indices are trading near resistance levels. Interest rates fell in January, but the 10-Year Treasury Yield ($TNX) is nearing support and may be poised to bounce. Mr Market is nearing the moment-of-truth that distinguishes a mere pullback from a full-fledged correction. So far, this is a pullback similar to the one seen in October. Another serious down week and these indicators will most likely flip in favor of the bears. As it now stands, support levels are holding for the major index ETFs, all the Bullish Percent Indices are above 50% and Net New Highs remain positive. Keep in mind that this table is not designed to predict reversals. Instead, it is designed to identify the main trend and follow until proven otherwise. As such, it will turn bearish after an actual top and bullish after an actual bottom. Those looking to pick bottoms and tops should look elsewhere. These are my personal interpretations of the indicators.

SPY continues support test

SPY opened strong and closed weak to form a long red candlestick. After three indecisive candlesticks Monday through Wednesday, Thursday’s failed rally reflects the skittishness of traders/investors. Even so, SPY remains in a support zone around 109 (plus or minus 1 point). SPY has been fluctuating above/below 109 the entire week. So far, this decline looks similar to the October decline in that it has been short and sharp. SPY declined ~5.5% in two weeks in October and is now down ~5.6% in two weeks. It was tempting to turn bearish in October, but Mr Market managed to hold support around 102 and rebound strongly in November. The current decline represents the first shoe, which is so far just a sharp pullback within a bigger uptrend. Corrections in uptrends tend to be short and sharp. Should the second shoe drop and push SPY below support, we would then have a medium-term trend reversal on our hands.

Charts worth watching

ETFs: XLF, XLY, GDX, XHB, SMH, TLT
Stocks: A, DVN, ERTS, KBH, LAZ, PGN, PSA, QCOM, WFC

SPY continues to firm

After becoming oversold with last week’s decline, SPY firmed over the last three days and established some support around 109. There was an inside day on Monday, a failed rally candlestick on Tuesday and a strong close candlestick on Wednesday. Obviously, the strong close candlestick is the opposite of the failed rally candlestick. SPY hit 108.33 on the low, but closed at 109.83, which is near its high. The ability to bounce and close near the high shows an increase in buying pressure. Again, the medium-term trend remains up. Even though last week’s sharp decline looks ominous, it is so far not much different from the September or October declines. These were short-sharp affairs. It would take another sharp decline (second shoe drop) to affect the medium-term uptrend.

SPY remains on the canvas

After two long red candlesticks and a sharp decline last week, the S&P 500 ETF (SPY) stalled the last two days. A small black candlestick formed on Monday and a failed rally candlestick formed on Tuesday. I call this a failed rally candlestick because the ETF hit 110.47 on the intraday high, but failed to hold these gains and closed at 109.31, well off the high. SPY closed near the low of the day. In addition, SPY closed near the open and had little to show for a full day of trading. Overall, the ETF is still stalling just above key support. 5-day RSI is still oversold as it remains below 30. Look for SPY to close above the Monday-Tuesday high and 5-day RSI to close above 30 to signal the start of an oversold bounce.

SPY stalls in support zone

After a long red candlestick and sharp decline on Friday, the S&P 500 ETF (SPY) stalled with an inside day on Monday. Taken together, the red candlestick and smaller black candlestick form a harami, which is a potential reversal pattern. The inside day signals indecision that sometimes foreshadows a change in short-term direction. SPY is short-term oversold after 5-period RSI dipped below 30 for the first time since late October. However, notice that the first bounce attempt failed in late October (blue arrow) and SPY moved lower one more time before finally bouncing. It is possible that SPY moves further towards support before getting an oversold bounce. 

Mean reversion strategies kicking in

Last week’s three-day decline in the S&P 500 ETF (SPY) was the steepest 3-day decline since March, Despite two long red candlesticks and this 3.9% decline, I still consider the medium-term trend up. As long as the medium-term trend remains up, declines are viewed as corrections or pullbacks within a bigger uptrend. Perhaps more importantly, the ETF is already trading in a support zone from the prior consolidation (yellow area). Friday’s close is pretty much in the middle of this consolidation.


10-period RSI became oversold for the first time since late October. At this point, many short-term mean-reversion systems are turning bullish. In an uptrend, mean reversion systems view short-term oversold situations as bullish. With the bigger trend up, the theory is that prices will revert to the mean after becoming oversold. 5-period RSI was oversold in early September, early October and late October. After the long red candlesticks and oversold conditions, SPY formed indecisive candlesticks to signal a short-term bottom. Note that the indecisive candlestick in late October occurred three days after the RSI became oversold.

The 60-minute chart is skewed after last week’s sharp decline. The only item to take from this chart is broken support around 113.2 turning into resistance. Frankly, I would not be surprised to see short-term resistance a little lower - perhaps around 112.

Evidence remains bullish for stocks

The bulk of the evidence remains bullish for stocks, but this week’s sharp decline put a dent in the bullish case. Some brief comments are posted after the jump. I will also be posting a market message later this afternoon.

 

Correction Targets for SPY

After consolidating around 114 for a couple weeks, SPY broke short-term support with a long red candlestick on Thursday. Even though this looks like a convincing support break, it is still just a short-term phenomenon because the medium-term trend remains up. With a medium-term uptrend still underway, a short-term downtrend is considered a correction within the bigger uptrend. Estimating the extent of pullbacks within a bigger uptrend is tricky because the bigger uptrend carries more weight. How far might this correction extend? Using the Fibonacci Retracements Tool and the prior consolidation, the first target is around 110-111, which is marked by the 38% retracement and the top of the consolidation (late Nov to early Dec). The second target is around 108-109, which is marked by the 50-62% retracement and the bottom of the consolidation.

SPY breaks short-term support

Even though the trend on the daily chart remains up, SPY broke short-term support and a correction appears to be unfolding. With the short-term support break, we can now start estimating a downside target for this correction. The last big move extends from the early November low to the early January high. A 50-62% retracement of this advance would extend to the 108 area. There is also support in this area from the late November lows and the September trendline. It is also possible that SPY finds support a little higher. Perhaps the first support level will materialize in the 110 area.



On the 60-minute chart, SPY clearly broke support with a sharp decline on Thursday. A short-term downtrend is now underway with downside targets shown on the daily chart above. Broken support around 113.2 turns into the first resistance level to watch. It is also worth noting the setup over the last two days. First, SPY gapped down and briefly pierced support on Wednesday morning. Second, the subsequent bounce in the afternoon retraced 62% with a move to around 114.3. The 62% retracement marked the reversal point for this bounce as SPY continued lower on Thursday.