Art's Charts

Medium-Term evidence remains slightly bearish

It remains a tricky period for the stock market. Overall, the market summary table comes in at -2, which is slightly bearish. There are, however, a few indicators that could go either way. The McClellan Oscillators both surged above +50 in mid February, but only for a day and I elected to keep this indicator bearish. Trend & Structure are deemed neutral because some indices broke their late November lows (SPY,DIA) and some held (IWM,QQQQ). Market (SPY) momentum is still deemed bearish, but the three momentum oscillators have recovered nicely with the February bounce. These three are at their make-or-break levels. In fact, I would say that the stock market bounce is at its make-or-break level. Further strength would suggest a bullish renewal. A decline from current levels would reinforce the bearish argument. Indicator details can be found after the jump. 

Falling flag taking shape in SPY

Before looking at the falling flag on the 60-minute chart, let’s review some candlestick action on the daily chart. There is no change in the overall analysis as SPY appears to be developing a falling price channel. A break above 111.10 would throw cold water on this theory. I added a 10 cent buffer to 111. RSI is also meeting resistance in the 50-60 area. A break above 60 would be bullish for momentum. With a gap down and strong close, SPY formed a long hollow red candlestick. These are interesting candlesticks because they show a reversal off the lows and strong close. I would be especially impressed if this candlestick formed after an extended decline. So far, I am mildly impressed with yesterday’s price action, but I would like to see follow through with a breakout at 111.10.



On the 60-minute chart, SPY has a falling flag working over the last few days. A move above 111.10 would break flag resistance and call for a continuation of the prior advance. The upside target would be the January highs around 115 and the flag low would turn into support. RSI is back in the 50-60 zone. A break above 60 would be short-term bullish for RSI.

SPY and charts of interest

There is not much change on the daily chart. SPY hit resistance in the 111 area over the last few days. This resistance zone stems from broken support and the early February high. It also marks a 62% retracement of the January-February decline. Should a lower high form, I can then draw a falling price channel (blue dotted lines). This is still a developing pattern than could “undevelop” with a break above 111.5. As long as it remains possible, the downside target is around 102-103 for mid March. RSI is also meeting resistance in the 50-60 zone. The next signal would be a break below 50 in RSI and below 109.5 in SPY.

A crack in the bounce

After yakking about SPY resistance in the 111 area and RSI resistance in the 50-60 area for at least a week, it finally came to pass. With a broad decline on Tuesday, SPY backed off the potential resistance zone to turn it into a confirmed resistance zone. All major indices were down 1% or more and all sectors were down with five falling over 1%. This week’s high could be the first lower high since early July. The last correction occurred in June-July. SPY declined the second half of June, bounced at the end of the month and then declined below the prior low in July. It was a classic three legged decline (A down, B up and C down). Should the current decline follow the same pattern, I would expect a move below the February low and support around 102-103 (October-November lows). The blue dotted lines show a developing channel that extends to 102 by mid March. Yes, the ides of March.


On the 60-minute chart, SPY broke minor support with a sharp decline in early trading. Also notice that RSI broke below 50 to turn short-term momentum bearish. With a quick decline below 110, the ETF is already trading at support from the channel trendline. There could be a throwback towards 110.8-111 area, but I expect resistance in the 111-111.5 area to hold. Expectations are no guarantee though. Bernanke appears before the House financial services panel today and Geithner appears before the House budget panel. Either one or both could produce a few fireworks on Wall Street today.

SPY holds its gains

Even though the advance slowed over the last few days, the S&P 500 ETF (SPY) continues to hold its gains as buying pressure exceeds selling pressure. On the daily chart, SPY is up around 5% in the last two weeks and trading in a potential resistance zone around 111. I qualify this zone as potential because the gains are holding and we have yet to get confirmation with a decline. RSI is also trading in a potential resistance zone in the 50-60 area. Keep in mind that RSI 50-60 acts as a resistance zone in a medium-term DOWNTREND, which is the current assumption. While I think the prior decline (115 to 105) was enough to reverse the medium-term uptrend, I am always questioning my assumptions. In fact, it is possible that the uptrend remains in place and the plunge below 107 was an overshoot because of the quick move back above 108. Also, looking at the prior reaction lows, we have higher lows in early November and now in early February. SPY is essentially flat since mid November, but there could still be some upward drift at work here.

Looking at the 60-minute chart, SPY surged above 110 and then worked its way higher the last few days. Even though upside momentum is slowing, the ability to continue higher after a surge shows sustained buying pressure. A smaller channel formed with support based on yesterday’s lows. A break below Monday’s low would be the first sign of weakness with a downside target around 108-109. RSI moved from overbought levels over the last two days, but remains above 50 to keep short-term momentum bullish.

SPY remains near resistance zone

When marking support, resistance and reversal levels, zones are preferred to exact levels for two reasons. First, indices and ETFs are based on a basket of stocks. With more than one stock influencing price, we cannot expect support, resistance or reversal levels to be EXACT. Second, there are many buyers and sellers in the market. Believe it or not, not everybody uses technical analysis. Support, resistance and reversal zones are used to heighten alert levels. We need to be extra attentive to possible changes when a security enters one of these zones.

SPY is currently trading in one such zone - a resistance zone around 111. The ETF actually edged above 111 with some strength on Friday. Resistance around 111 stems from broken support and the early February high. In addition, RSI typically hits resistance around 50-60. Price resistance and momentum resistance are based on the assumptions that the medium-term trend is down and the advance over the last two weeks is an oversold bounce. This assumption could, of course, be wrong.

Bounce turns Market Summary Neutral

Transition periods are tricky. The bulk of the evidence shifted towards the bears on February 5th, but the Market Summary Table shifted to +2 this week, which slightly favors the bulls. Three items are responsible for this shift. The McClellan Oscillators both moved above +50. The Nasdaq is outperforming the NY Composite this year. Small-caps are outperforming large-caps in 2010. It is either the start of a bull run, like July and October, or this will result in a whipsaw. This is the point where intuition and sixth sense come into play. Looking at the three responsible indicators, I am inclined to reverse my position in the McClellan Oscillators because they are prone to whipsaws. First, the two week market surge could be just an oversold bounce. Second, the last few McClellan Oscillator surges above +50 did not last long. Therefore, I will make an executive decision to call the McClellan Oscillators bearish, which changes their score from +1 to -1. This moves the Market Summary Total from +2 to 0 (neutral). Indicators are detailed after the jump.

• AD Lines: Neutral. The Nasdaq AD Line is trending down with lower lows in January-February. The NYSE AD Line remains in an uptrend overall.
• AD Volume Lines: Bullish. The Nasdaq and NYSE AD Volume Lines are still in uptrends.
• Net New Highs: Bullish. Nasdaq Net New Highs are positive (+100), but half the level seen in early January (+200). NYSE Net New Highs are also positive (+160), but well below the highs seen in early January (+400 to +480).  
• McClellan Oscillators: Bearish. The Nasdaq and NYSE McClellan Oscillators surged above +50 this week. Technically, this up thrust in breadth is bullish, but I am not sure it will hold. Prior surges in mid September and late December were soon reversed so I will stay bearish for the moment.
• Updated breadth charts can be seen here.
• Bullish Percent Indices: Bullish. Although a lagging/coincident indicator, all major index BPI’s are above 50%. All sector BPI’s are also above 50%.
• Fear Index: Bearish. After breaking their late November highs, the VIX and VXN pulled back sharply as the market bounced the last two weeks. The moment-of-truth is near. 
• Trend Structure: Neutral. SPY and DIA broke their late November lows, but QQQQ, IWM and RSP held corresponding lows and their 62% retracements.
• SPY Momentum: Bearish. The Aroon Oscillator broke -50, MACD (5,35,5) turned negative and 14-day RSI broke uptrend support zone (40-50) in January.
• Offensive Sector Performance: Bearish. The Financials SPDR (XLF) and Technology SPDR (XLK) continue showing relative weakness, while the Consumer Staples SPDR (XLP) hit a new 52-week high on Thursday. 
• Nasdaq Performance: Bullish. The Nasdaq led the NY Composite over the last two weeks.
• Small-caps Performance: Bullish. Small-caps led large-caps over the last two weeks.
• Intermarket: Bearish. Dollar is rising as investors turn risk averse

SPY reaches Fibonacci Retracement

Even though SPY closed at its highest close of the month, I still think the ETF is in a resistance zone and this oversold bounce is getting long on tooth. In short, yesterday’s advance does not change my overall view. SPY was oversold in early February and this is an oversold bounce. Resistance in the 111 area stems from broken support, the early February high and a 62% retracement of the Jan-Feb decline. In addition, RSI is in the downtrend resistance zone (50-60). If this is indeed just an oversold bounce, then I would expect it to end sooner rather than later. It all depends on my assumption that this is an oversold bounce, not a continuation of a bigger uptrend. There is always the chance that my assumption is, gasp, wrong.

Truth or Consequences time for SPY

The bounce over the last seven days does not look that strong and resistance is nigh. First, I pointed out mixed breadth and weak volume on Wednesday. Second, individual days show more indecision than strength. After plunging from 115 to 105 (high to low), SPY was oversold in early February and formed a hammer. This hammer marked the short-term low as the ETF bounced over the next seven days (four up, three down). Of these seven days, only two featured white candlesticks with sustained gains. The other five candlesticks either closed lower or showed indecision, like Wednesday’s doji. Indecision just below resistance suggests that this bounce could be running out of steam. Also notice that RSI moved into the 50-60 zone, which marks resistance in an overall downtrend. In contrast, note that the 40-50 zone marked RSI support in an overall uptrend. The key is my assumption that the medium-term trend is now down. If my assumption is wrong and the medium-term trend is still up, RSI would likely move through 50-60 resistance. 

Strong move on mixed breadth

Stocks started strong with a gap up on the open and finished strong with a close near their highs for the day. Overall volume was not that strong and Net Advancing Volume was mixed. NYSE Net Advancing Volume ($NYUD) finished at +877, while Nasdaq Net Advancing Volume ($NAUD) finished at +1377. The Nasdaq number was impressive enough, but the NYSE number below +1000 was not impressive and gives cause for concern. On the other hand, NYSE Net Advances ($NYAD) finished above +2000 and Nasdaq Net Advances ($NAAD) finished above +1000. In contrast, NYSE Net Advances were impressive, but Nasdaq Net Advances were not impressive. It is a strange situation with a rather split market, meaning we could be moving into a high level trading range for the next few months. Here are two chart links: Nasdaq breadth and NYSE breadth.

With Tuesday’s strong advance, SPY surged above short-term resistance and closed near 110. The breakout is positive with the next target around 111. Broken support and the early February high mark resistance here. In addition, a 62% retracement of the January-February decline would extend to around 111. I am also marking a momentum resistance zone around 50-60 for RSI. This is based on the premise that a downtrend started with the plunge below 40 in mid January. Notice that the 40-50 zone acted as momentum support during the uptrend. Things could get very interesting if/when SPY and RSI hit their respective resistance zones.


On the 60-minute chart, SPY broke through the 108 barrier with a gap and follow through. The gap zone around 108 becomes the first support area to watch. A strong breakout should hold and a move back below 108 would show uncertainty. Overall, the pink trendlines capture the five day uptrend with support at 106. A break below this level would fully reverse this uptrend.