Video and Report Headlines
- Nasdaq 100 Stocks Still Leading
- SPY Becomes Short-term Overbought
- SPY Challenges July High
- QQQ Breaks Short-term Support
- Small-cap ETFs Resolve with Upside Breakouts
- Cisco Firms in Support-Reversal Zone
- QualComm Forms High Flag
- Hologic Pulls Back after Breakout
- Universal Health Services Holds Breakout
I will post a System Trader report on Wednesday, December 6th.
The next Chart Trader will be posted on Thursday morning, December 7th.
Stocks surged from October 30th to December 1st with the major index ETFs making big gains (11-15%). Almost all stock-based ETFs are up over this five week period with many up more than 10%. Energy-related ETFs are down, as are ETFs related to some commodities (oil, agriculture, base metals, palladium and lithium). There were plenty of trading setups from late October until mid November, but setups are getting harder to find because most stocks and ETFs are short-term overbought.
Those looking can find logical reasons for the surge since late October. First, stocks were quite oversold at the end of October. Second, the eight day turn of the month is a bullish period and the October-November turn is the strongest. Third, November is historically one of the strongest months for stocks. Fourth, there was an S&P 1500 Zweig Breadth Thrust on November 3rd. Thrust signals worked pretty well in the past.
Now what? Stocks are quite extended short-term and ripe for consolidation or a pullback. This means we could see a choppy period as the market digests the gains of the recent weeks. We could even see a pullback in the major index ETFs. I will put forth some targets for SPY and QQQ.
Nasdaq 100 Stocks Still Leading
The Nasdaq 100 continues to lead the market with the highest percentage of stocks above their 200-day SMAs (71.29%). The S&P 500 and S&P MidCap 400 are in second place with around 63% of components above their 200-day SMAs. Note that both moved above 60% on Friday. The green shading on the chart below shows when the %Above 200-day SMA indicators exceed 60% and stay in their bull zones (40-100 percent). The red shading shows when these indicators move below 40% and stay in their bear zones (0-60 percent). The Nasdaq 100 is the only one showing consistent strength because it has been bullish since late January.
The bottom window shows SML %Above 200-day SMA at 57%. It has yet to cross above 60% and move into its bull zone. Also notice that the SPX, MID and SML indicators moved in an out of their bull-bear zones over the past year. They were unable to maintain a consistent trend either way. This reflects a largely split and directionless market. We are not seeing broad and extended trends either way. In short, it is a stock pickers market that favors shorter trends.
SPY Becomes Short-term Overbought
The next chart shows the SPY with the OBOS5 indicator. This indicator aggregates overbought and oversold conditions using five S&P 500 breadth indicators. SPX OBOS5 becomes overbought (OB) when at +3 or higher and oversold (OS) when at -3 or lower. The indicator hit +4 last Friday, which means four of the five indicators became overbought.
Overbought and oversold conditions are tricky to trade because conditions can become overbought and remain overbought if the upswing extends. This is why we need a second indicator to signal a downturn after becoming overbought. The lower window shows SPX %Above 20-day SMA. After becoming overbought, a subsequent move below 40% shows a short-term downturn. Chartists can also use a short-term support break. A close below 453 would reverse the short-term upswing in SPY.
SPY Challenges July High
Technically, SPY hit a 52-week high on Friday. The close was above the closing high in July and the high was above the July high. The short-term trend is clearly up and we can also argue for a long-term uptrend with 52-week highs in July and December. Short-term, SPY is very overbought after a 12% advance off the late October low. The green line marks support at 453 and a close below this level would reverse the short-term uptrend. I would then use broken resistance (red shading) and the retracements (blue shading) to mark a target zone. Broken resistance in the 435-437 area turns into support and the 33-50 percent retracements mark support in the 435-442 area (blue shading).
QQQ Breaks Short-term Support
QQQ is starting to lag as money moves into other areas of the market. QQQ is still leading long-term because it was the first to hit a 52-week high (November 20th). QQQ is lagging short-term because it broke short-term support with a sharp decline on Monday. This puts the ETF in pullback mode with the support-reversal zone set in the 368-377 area. Broken resistance turns support (red shading) and the 33-50 percent retracement resides here as well (blue shading).
Small-cap ETFs Resolve with Upside Breakouts
I featured the Russell 2000 ETF (IWM) and S&P SmallCap 600 SPDR (IJR) last week as they formed shooting stars and pennant patterns. The shooting stars showed failed rally attempts intraday, but the pennants were bullish continuation patterns. Both surged in early November and then consolidated into early December. A consolidation after a sharp advance is a bullish continuation pattern. IWM broke out on November 30th and IJR broke out on December 1st. Both surged over 4% the last two days as money moved into small-caps.
Long-term, both ETFs are still in downtrends with 52-week lows in October. IJR sports a large falling channel, while IWM dipped below the lower line of its falling channel (red dashed lines). Small-caps are also lagging because they have the lowest percentage of stocks above their 200-day SMAs. The swings within these falling channels are up. For now, the late November lows mark short-term support.
Chart Analysis, Setups and Trading Ideas
Cisco Firms in Support-Reversal Zone
Cisco (CSCO) did not partake in the market surge over the last six weeks, but is firming in a support-reversal zone. The stock advanced some 50% from October 2022 to August 2023 and hit a 52-week high. CSCO fell from this high and then gapped down after announcing its acquisition of Splunk (SPLK). The stock gapped down again after earnings on November 15th. Overall, the decline since September retraced 50-67 percent of the prior advance. CSCO also returned to support from the January-May lows (green shading). Support and the retracement zone mark a support-reversal zone. The stock firmed the last few weeks and a breakout at 49 would reverse the short-term downtrend.
QualComm Forms High Flag
The next chart shows Diamondback Energy (FANG) surging 20% in October and hitting a 52-week high. The stock fell back into November with a falling channel. Notice that this decline retraced around 2/3 of the 20% advance. This is basically three steps forward and two steps backward. FANG firmed in the 150 area and a breakout at 158.22 would be bullish.
Hologic Pulls Back after Breakout
I am often looking for the continuation move after a breakout. This means letting the initial breakout pass and then trading the pullback. Pullback patterns often form as falling flags or falling wedges. Subsequent breakouts signal an end to the pullback and a resumption of the breakout move. The chart below shows Hologic (HOLX) with a surge and gap off the late October low. HOLX broke the October high with this 12% move and then pulled back into early December. This pullback looks like a falling flag with resistance at 72. A breakout here would signal a continuation higher and target a move to the 79-82 area.
Universal Health Services Holds Breakout
Universal Health Services (UHS) lagged the market from January to October, but is starting to lead in November-December. First, UHS is in a long-term uptrend with a 52-week high in late June and a rising channel in 2023. The stock fell from July to October and underperformed during this period. Buyers stepped up in November and UHS broke short-term resistance in late November. This breakout reverses the downswing within the channel and argues for a move towards the upper boundary (and a new high). This breakout is valid as long as 132 holds.
