Video and Report Headlines
- %Above 50-day SMA Sinks
- It Doesn’t Matter Until it Does
- SPY and QQQ Gap Down
- Weakening Breadth in QQQ
- Breakouts Already Failing
- Apple Heads for October Lows
- GOOGL Gaps Down Again
The next Chart Trader will be posted on Tuesday morning, February 6th.
Stocks were hit with strong selling pressure on Wednesday with dozens of ETFs gapping down and falling more than 2%. Small-caps led the way lower with the biggest declines and all sectors lost ground. The Healthcare SPDR (XLV) had the smallest loss. Tech-related ETFs were especially hard hit, but this is understandable because they had the biggest gains over the last three months. Corrections are part of the game and it looks like we are finally entering a corrective period for stocks. This changes the trading game because now the odds are less favorable.
%Above 50-day SMA Sinks
A bearish divergence formed between SPY and SPX %Above 50-day SMA. The chart below shows SPY moving higher from late December to late January (green arrow line). Meanwhile, SPX %Above 50-day SMA moved lower (red arrow line). This indicator was above 80% from December 1st to January 16th. It fell below 80% in the second half of January and did not get back above 80% when SPY hit surged to a new high on Monday. This indicator moved to 64% on Wednesday and points to a corrective period ahead. Also notice that the indicator formed a more pronounced bearish divergence exactly a year ago (December 1, 2022 to February 1, 2023). This led to a correction that extended into mid March.
The indicator window shows 4-week High-Low Percent for the S&P 500. This is the percentage of 4wk highs less the percentage of 4wk lows. In general, a move above +20% is bullish and a move below -20% is bearish. The red and green arrows show these signals on the price chart. A bearish signal triggered on January 17th, but the indicator triggered bullish with a move above +20% on Monday. This could be an “Oops” whipsaw similar to mid September. Notice how 4wk High-Low Percent moved above +20% for one day and then moved back below -20% a week later. This was a whipsaw and Monday’s move above 20% could also be a whipsaw.
It Doesn't Matter Until it Does
As with many things in the stock market, seasonal patterns do not really matter – until they do. What the heck does that mean?! Price is really the only thing that matters. In other words, the price chart often tells you all you need to know. Indicators are secondary to price action. Seasonal patterns matter most when they jibe with price. In other words, an uptrend has a tailwind when seasonal patterns are also bullish. Similarly, a downtrend or bearish signal carries more weight when seasonal patterns are neutral or bearish. As the chart below shows, the seasonal pattern from January to mid March is neutral. The S&P 500 tends to trade choppy and sideways over this two and a half month stretch. Within this stretch, we can see a clearly negative period from mid February to mid March. Also note that SPY corrected from February 1st to March 13th in 2023.
SPY and QQQ Gap Down
Technically, SPY is still in a short-term uptrend, as defined by the steep rising channel. There are, however, early signs of a reversal with a gap and long black candlestick. SPY surged to a new high with a long white candlestick on Monday, stalled on Tuesday with a small indecisive candlestick and then gapped down. Not only did SPY gap down, but it also continued lower after the gap and formed a long black candlestick. This loss erased the gains of the prior six days. This short-term reversal looks similar to the reversal in early August (yellow oval).
There are gaps and then there are gaps with follow through. The blue shadings in June and January show gaps and pullbacks. Notice that SPY gapped down, but did not form a long black candlestick. This means selling pressure did not continue after the gap. The decline continued as SPY fell another 3-4 days. Selling pressure, however, was not that intense and these were “normal” pullbacks. Wednesday’s gap and post-gap decline are different, and could herald the beginning of a corrective period. Before leaving SPY, the indicator window shows the 1-day Percent Change. SPY fell more than 1.5% and this is an outsized decline (above average decline). This shows the most intense selling pressure since September.
The next chart shows QQQ with a gap down and long black candlestick. QQQ peaked a few days before SPY as the Mag7 started to lag a bit. The blue oval shows an island reversal of sorts. The gaps do not exactly match up, but we can see a gap up, a four day stall and a gap down. This is also a short-term reversal. The indicator window shows the 1-day Percent Change. The bars are green when QQQ is up more than 2% and red when QQQ is down more than 2%. QQQ fell 1.96% and this is the largest 1-day decline since October 25th. It is not quite an outsized decline, but close enough. Outsized declines are more likely in downtrends (corrections).
Weakening Breadth in QQQ
The next chart shows QQQ with three breadth indicators: 4wk High-Low Percent, %Above 50-day SMA and %Above 20-day SMA. I widening the bullish and bearish thresholds for 4wk High-Low Percent to +30% and -30%. This is because the Nasdaq 100 has only 100 stocks and is more homogenous than the S&P 500. Using plus and minus 20% generates too many whipsaws. Plus and minus 30% reduces the whispaws, but adds to the lag. This is ALWAYS the trade off. This indicator is still in bull mode because it has yet to cross below -30%.
The other two indicators show weakening breadth with bearish divergences. QQQ forged a higher high from late December to late January (green arrow line), while %Above 50-day and %Above 20-day formed lower highs (red arrow lines). Fewer stocks got back above their 50 and 20 day SMAs during the January advance. Notice that %Above 20-day SMA did not make it back above 80%. The indicator also failed below the 80% level during the August-October decline.
Chart Analysis, Setups and Trading Ideas
Breakouts Already Failing
Most stocks and stock-related ETFs will be under pressure if the S&P 500 moves into corrective mode. Small-caps are lagging and will likely suffer more than large-caps. I highlighted the Materials SPDR (XLB) on Tuesday and it followed through on its breakout for one day. It fell sharply on Wednesday to prove that the materials sector is not immune to broad market weakness. This is probably a time to tighten stops and reduce exposure, in general. For XLB, I would use this week’s low as a new re-evaluation level. A close below 82 would call for a reassessment.
The next chart shows the FinTech ETF (FINX) with a breakout on Monday and sharp decline the last two days. This decline erased Monday’s big gain and the breakout is already looking shaky. A close below 24 would negate this breakout.
Apple Heads for October Lows
I featured Apple (AAPL) on January 6th as it tested its breakout zone and hit the 50% retracement. The blue shading marks this Support Reversal Zone. StochRSI popped above .80 on January 12th and 18th to signal a short-term momentum thrust (green arrows). AAPL followed through with further gains to the 195 area and then fell like a rock. Overall, APPL failed in the 197 area in July and December and formed a lower high from December to January. There is strong momentum behind the recent decline and the stock could test the October lows.
There are two items for traders to consider. First, consider taking some money off the table after the initial pop. One could close half the position after a 3% gain. Second, use a trailing stop. The red line shows the ATR Trailing Stop starting with the first StochRSI pop. This stop is 2 ATR(22) values below the highest close since the breakout. I set the multiplier at 2, which insures that the stop starts just below the early January low. It trails higher along with prices. Apple closed below this stop on Tuesday to trigger an exit.
GOOGL Gaps Down Again
For the second time in four months, Alphabet (GOOGL) gapped down over 5% and fell over 7% in one day. This last occurred on October 25th. GOOGL benefited from a strong market in November and fully recovered after the October gap-decline. GOOGL may not be able to count on a strong market in February, which means it could fall further before stabilizing. The 131-136 area marks potential support from the 50-67 percent retracements and the apex of the triangle.
GOOGL was featured on December 19th as the triangle consolidation took shape. The stock caught my eye after its surge off support in the 130 area (green arrow). GOOGL broke out, fell back a little and then surged to the 153 area. This is another example where a profit target and trailing stop can help with trade management. Traders could have closed half the position after a 3-5 percent gain and set a trailing stop for the remainder. The red line shows the ATR Trailing Stop (3 x ATR(22)). I used 3 for the multiplier to start this stop just below the early December low. The stock triggered this stop on Wednesday.