Video and Report Headlines
- VIX Spike Could Signal Regime Change
- Nasdaq 100 Breadth Deteriorates
- Breadth Models Remain Bullish
- S&P 1500 Zweig Breadth Thrust Becomes Oversold
- SPX and NDX Breadth Composites Not Yet Oversold
- Support-Retracement Zone for SPY
- Small-caps and Mid-caps Fail to Hold Breakouts
- Bond Market Spooks the Stock Market
The next Chart Trader will be posted on Thursday morning, August 8th.
Selling pressure broadened over the last three days with the broader market (S&P 500 stocks) joining tech-related stocks (Nasdaq 100 stocks) in the sell off. The long-term trends are still up for SPY and QQQ. In addition, the Composite Breadth Model and the SPX-NDX Breadth model remain bullish. SPY is above its rising 200-day SMA and QQQ briefly broke its 200-day with Monday’s low. Basically, the market was broadsided the last three days and may need some time to stabilize and find its footing.
VIX Spike Could Signal Regime Change
Volatility spiked as the VIX shot to 38.57, its highest level since October 2020. VIX spikes signal a sharp increase in fear that can give way to an oversold bounce. There is also the chance, however, that we are moving into a rising volatility regime, which would be negative for stocks. The chart below shows the VIX in a high volatility regime from December 2021 to November 2022 (yellow shading). VIX then fell to new lows in 2023 and remained below 25 until July 2024. This low volatility environment was bullish for stocks. With the recent surge to multi-year highs, the VIX could be moving into a high volatility environment that would be negative for stocks.
Nasdaq 100 Breadth Deteriorates
SPX %Above 200-day SMA fell to 60% on Monday and hit its lowest level since December 5th. It held above 60% for eight months, which is pretty impressive. I am, however, concerned with the speed of the fall over the last few days. The indicator was at 78% last week and fell to 60% (-18). This shows a rapid deterioration within the S&P 500.
The bottom window shows NDX %Above 200-day SMA felling to 40.59%, which is its lowest level since October 2023. It held the 40% level in October. A break below 40% would turn this indicator bearish. This would imply that some 60% of Nasdaq 100 stocks are below their 200-day SMAs.
We also saw an expansion in 52-week lows and 26-week lows with in the S&P 500 and Nasdaq 100. This is negative because it means more stocks are in long-term downtrends. The next chart shows 26-week High-Low Percent, which is the percentage of 26-week highs less the percentage of 26-week lows. SPX 26-week High-Low Percent (-13.92%) hit its lowest level since October 2023. NDX 26wk HiLo% (-21.78%) hit its lowest level since October 2022. This pushed the indicator below 20% for a bearish signal.
Breadth Models Remain Bullish
The next chart shows the SPY, the Composite Breadth Model, QQQ and the SPX-NDX Breadth Model. The Composite Breadth Model uses breadth indicators from the S&P 500 and S&P 1500, while the SPX-NDX Model uses breadth indicators from the S&P 500 and Nasdaq 100. These models reflect the risk environment for stocks. We want to own stocks and take risk when they are positive, and shun stocks when they are negative. The CBM turned bullish on December 7th and SPY is up around 13% since this signal. It remains positive (bullish).
The SPX-NDX Model turned bullish on 2-February-2023 and QQQ is up around 45% since this signal. The model fell from +10 to +8 as one of the Nasdaq 100 indicators turned bearish (NDX 26wk HiLo%). Overall, the model remains bullish until it turns negative.
S&P 1500 Zweig Breadth Thrust Becomes Oversold
The next chart shows the Zweig Breadth Thrust for the S&P 1500 and S&P 500. This indicator is based on the 10-day EMA of Advances / (Advances + Declines). The Zweig Breadth Thrust consists of two parts. First, there is the oversold condition with a dip below .40. Second, there is the thrust with a surge above .615 within 10 trading days. The chart below shows the S&P 500 ZBT and the S&P 1500 ZBT in the indicator windows.
A Zweig Breadth Thrust triggered in early November as the indicators dipped below .40 in late October (27th) and surged above .615 on November 3rd. Since this signal, the S&P 1500 ZBT (lower window) dipped below .40 five times and S&P 500 ZBT dipped below .40 twice (red bars). These dips represent oversold conditions that could give way to an oversold bounce. The green arrows on the price chart show when S&P 1500 ZBT and S&P 500 are both below .40. These oversold readings often cluster with three more oversold days, which means we could see a few more oversold readings before getting a sustainable bounce. See August, September, October and April for cluster examples.
SPX and NDX Breadth Composites Not Yet Oversold
The next charts show SPY and QQQ with short-term oscillators based on 7 index-specific breadth indicators and 5 price indicators. These become oversold when they reach -8 or lower. The green arrows on the price chart show when this indicator becomes oversold. Once it becomes oversold, I look for a tradable pattern, an upside bullish catalyst or a bullish divergence in the %Above 50 and 20 day SMA indicators.
The first chart shows SPY with the SPY ObOs12 indicator at -6. It has yet to become oversold. Also notice that SPX %Above 50-day SMA and SPX %Above 20-day SMA have yet to become oversold with dips below 20 and 10 percent, respectively.
The next chart shows QQQ with the NDX ObOs12 indicator at -7. It is close, but not quite oversold. Also notice that NDX %Above 50-day and NDX %Above 20-day have yet to become oversold with dips below 20 and 10 percent, respectively.
Support-Retracement Zone for SPY
The breadth models remain bullish, but we are seeing some deterioration in the long-term breadth indicators. The S&P 1500 Zweig Breadth Thrust is oversold, but the S&P 500 Zweig Breadth Thrust has yet to become oversold. In addition, the SPX ObOs12 and NDX ObOs12 oscillators are not yet oversold. SPY may have further to fall and could test the 200-day SMA.
The next chart shows SPY with a Support-Retracement Zone in the 485-500 area. First, there is support from the April low around 496. Second, there is support from the rising 200-day SMA around 500. Third, a 50% retracement of the October-July advance extends to the 487 area.
The S&P 500 and SPY are the most widely followed benchmarks for US stocks. Furthermore, the 200-day SMA is the most widely used long-term moving average. Taken together, the world notices when the S&P 500 and SPY trade near their 200-day SMAs. It is a real battle zone.
Bond Market Spooks the Stock Market
The employment report spooked the bond market and the bond market spooked the stock market. Short-term yields (3 months to 2 years) reflect the future of Fed policy. Long-term yields (10 to 30 years) reflect the economic outlook. Long-term yields fall when economic prospects dim and/or inflationary expectations subside. Inflation seems to be under control so the sharp decline in the 10-yr Treasury Yield means the bond market is concerned about the economy. The chart below shows $TNX falling sharply from late October to late December 2023. Note that the stock market surged during this decline. $TNX fell sharply with a move below 4% last week and the stock market also fell. Clearly, stocks are also concerned with the economic outlook. The blue shading marks the downside target in the 3.3% area.
Bonds rise when yields fall and the 20+ Yr Treasury Bond ETF (TLT) extended on its channel breakout. The falling channel is a correction within a bigger uptrend and the mid June breakout reversed the decline. This signaled a continuation of the bigger uptrend and the upside target is in the 107-108 area (blue shading).
Chart Analysis, Setups and Trading Ideas
The following charts show price bars with the 200-day SMA (red line), the 50-day SMA (green line), the price-relative (ITB/RSP ratio) with the 200-day SMA and the percentage difference between the 5 and 200 day SMAs. On the price chart, I am looking for tradable pullbacks within a bigger uptrend or bullish consolidation patterns. With the price-relative, I am looking for relative strength. The price-relative (ITB/RSP ratio) rises when the ETF or stock outperforms. And finally, the percentage difference between the 5 and 200 day SMA is bullish (long-term uptrend) with a move above 3% and stays bullish until a move below -3%. This basically measures the tide or long-term bias.
Small-caps and Mid-caps Fail to Hold Breakouts
The Russell 2000 ETF (IWM) broke out with a big surge and close above 210 on July 11th. The ETF followed through with further gains above 220 and then gave it all back in three days. This breakout failed and IWM is trading back below its January high.
The S&P MidCap 400 SPDR (MDY) broke falling wedge resistance on July 11th and surged to a new high a few days later. The ETF chopped around the breakout zone (560) and then fell sharply the last three days. This breakout clearly failed.
