Video and Report Headlines
Broad Market Analysis
- Bearish Chain of Events
- Downside Participation in Increasing
- Breadth Indicators for S&P 500 are Short-term Oversold
- SPY Firms Above Rising 200-day SMA
- QQQ Gets Oversold Bounce
Chart Analysis, Setups and Trading Ideas
- Analog Devices (ADI)
- Synopsys (SNPS)
- Lululemon (LULU)
- Costco (COST)
- United Health (UNH)
The next Chart Trader will be posted on Thursday, October 5th.
RSP Failure at February High in July
There is a clear bearish chain of events over the last few months. It all started when the Russell 2000 ETF, S&P 500 EW ETF and S&P MidCap 400 SPDR failed at their February highs in July. SPY and QQQ were well above these highs, but small-caps and mid-caps were not keeping pace. The chart below shows RSP failing at the February high in July and nearing the May lows here in October. The RSP:SPY ratio in the lower window hit a 52-week low on Monday. The average stock within the S&P 500 is struggling.
Regional Banks and Retail Break Down in August
We then saw breakdowns in the Regional Bank ETF and Retail SPDR in mid August (two important groups). Large-caps and large-cap techs were holding up in August, but they too succumbed to selling pressure in September. The Technology SPDR, Semiconductor ETF and QQQ broke flag supports in mid September. All three exceeded their mid August lows with the September declines.
Junk Bonds Break Down
We are now seeing junk bonds break down. The Junk Bond ETF (JNK) led the market with a big bounce from October 2022 to February 2023. This bounce, however, was a big counter-trend advance after a massive decline from July 2021 to October 2022. JNK broke wedge support with a sharp decline into March 2023 (red arrow), but managed to firm and oscillate around the 200-day SMA. The trading range narrowed into the summer and JNK broke down with a sharp decline the last few weeks. The ETF hit a new low for 2023 on Monday and this shows risk-aversion in the market.
Downside Participation Continues Increasing
Breadth was a sore spot in August and downside participation increased in September. The chart below shows the percentage of stocks above their 200-day SMAs for the S&P 500, Nasdaq 100, S&P MidCap 400 and S&P SmallCap 600. NDX %Above 200-day SMA is by far the strongest at 60%. Mid-caps (41.85%) are holding up better than large-caps (37.92%) and small-caps (34.67%). Notice that SPX %Above 200-day SMA and SML %Above 200-day SMA broke below 40% here in September and they are leading lower. Both indicators bottomed in the 35-40 percent area in March and May 2023. However, these two fell below 15% in June and September 2022. Overall, the %Above 200-day SMA indicators show more downtrends than uptrends and the weight of the evidence is bearish for stocks.
The next chart shows the High-Low Percent indicators for the same indexes. High-Low Percent is the percentage of new highs less the percentage of new lows. All are negative as new lows outpace new highs. SPX High-Low Percent dipped below -10% on Monday and SML High-Low Percent exceeded -10% last week (red lines). Small-caps and large-caps are the weakest. NDX High-Low Percent is at -2.97% and holding up the best. MID High-Low Percent is at -8.21% and somewhere in the middle.
Breadth Indicators for S&P 500 are Short-term Oversold
The next charts show an overbought/oversold breadth indicator that ranges from +5 to -5. It uses the McClellan Oscillator, Bollinger Band %B, Advance-Decline Percent, 4-week High-Low Percent and %Above 50-day SMA. An oversold condition appears when three of the five indicators are oversold (-3 or lower). An overbought condition is present when three of the five indicators are overbought (+3 or higher). The red arrows show overbought situations and the green arrows show oversold situations.
Overall, the indicator is pretty good at foreshadowing oversold bounces and overbought pullbacks. Sometimes the bounces are just a few days and sometimes the bounce extends (April to July). Currently, the indicator was oversold four of the last five days. These oversold conditions increase the odds for a bounce. Be careful though. The indicator was oversold on 21-Set-2022 and SPY fell another 5% before getting a bounce.
SPY Firms Above Rising 200-day SMA
SPY remains above the rising 200-day SMA, but the trend is down with a lower high and lower low since August. SPY fell towards the rising 200-day SMA with a 5% decline in September. The ETF managed to firm the last few days and this firmness could give way to an oversold bounce, perhaps back to the 440 area. Any bounce at this stage, however, would be considered an oversold bounce within the bigger downtrend.
My downside target zone remains in the 405-420 area. The gray shading marks support from the spring lows and resistance from the February-April highs. A 50% retracement of the October-July advance would extend to around 408, as would a 66.7% retracement of the March-July advance. A 50% retracement of the March-July advance would extend to the 420 area and the rising 200-day is also in the 420 area.
The top of the zone is not far off, but the weight of the evidence remains bearish for stocks. The immediate trend for SPY and bearish breadth are more important than target zones.
QQQ Gets Oversold Bounce
The Nasdaq 100 has the strongest breadth and QQQ has the strongest chart. QQQ hit a new high in July and then fell with a falling wedge taking shape. Notice that QQQ is already back above its August low. SPY, in contrast, clearly broke the August low and remains below this break. A falling wedge is typically a corrective pattern after an advance. The immediate trend, however, is down as long as the wedge falls. A break above 380 would reverse this fall and signal a resumption of the bigger uptrend.
Can QQQ go it alone? I doubt it because of broad weakness. The Russell Microcap ETF (IWC) hit a 52-week low on Monday. The Russell 2000 ETF (IWM), S&P MidCap 400 SPDR (MDY) and Home Construction ETF (ITB) exceeded their September lows on Monday. The Industrials SPDR (XLI), Finance SPDR (XLF), Regional Bank ETF (KRE) and Retail SPDR (XRT) are below their 200-day SMAs. Life is not very good outside of QQQ, XLC and select large-cap tech stocks. Broad market weakness suggests that it will get worse before it gets better. QQQ and large-cap tech stocks are still part of the stock market and they are unlikely to buck the market.
Chart Analysis, Setups and Trading Ideas
Analog Devices (ADI) - 3-Oct-2023
The Nasdaq 100 remains my go-to list for stock setups because it is the strongest part of the market right now. The stocks below are part of the Nasdaq 100. The overall trading environment is not good right now because the weight of the evidence is bearish for stocks. Be careful out there.
The first chart shows ADI trading in a range since April. Support resides in the 170 area and resistance in the 200 area. The stock fell to range support in August, bounced and then fell back with the rest of the market in September. ADI did not break the August low and shows some relative strength the last few weeks. We can also interpret relative strength as less weakness. The blue lines define the short-term downtrend with resistance set at 178. A breakout here would reverse the short-term downtrend and argue for a bounce within the range.
Synopsys (SNPS) - 3-Oct-2023
SNPS remains one of the strongest stocks in the market as it challenges its summer highs. Overall, SNPS hit a new high in May and then formed a consolidation pattern. This looks like an Ascending Triangle, which is a bullish continuation pattern. SNPS surged to 370 in mid September, fell back with a pennant/wedge and broke out with a surge last week. The stock is again challenging resistance and showing relative strength. A breakout at 470 would confirm the Ascending Triangle and signal a continuation higher. I would then mark support at 440.
Lululemon (LULU) - 3-Oct-2023
Retail is one of the weakest groups in the market right now, but LULU is bucking the trend with a breakout and new high in September. The stock fell back after this breakout surge with a falling flag taking shape. This is a bullish continuation pattern and a breakout at 390 would reverse the short-term slide.
Costco (COST) - 3-Oct-2023
COST is another stock bucking the market over the last few weeks. The stock hit a new high in July and then consolidated with an inverse head-and-shoulders pattern. This is a continuation pattern and a resistance break would signal a continuation of the bigger uptrend. COST broke out on Monday and I would set re-evaluation support at 550.
United Health (UNH) - 3-Oct-2023
I do not see a setup or pattern on the UNH chart. Instead, I see a leading surge in September and a break above the summer highs (closing basis). Overall, the stock surged in July and then retraced 50-66.7% of this surge with a decline into early September. UNH firmed for two weeks and broke out in mid September. The stock shows relative and absolute strength in a tough market.
