Short Video Examining Mean-Reversion Signals when SPY is Extremely Oversold

Only three of the sixty ETFs in the core list advanced this week: AGG, TLT and LQD (bonds). Everything else declined, but the biotech ETFs (IBB and XBI) declined the least of the common stock ETFs. The banking and insurance ETFs (KRE, KBE, KIE) led the way lower with the banking ETFs hitting 52-week lows.

There are Black Swan events and then there are BLACK SWAN events. The current decline, 12% in six days, ranks as one of the sharpest on record. Not counting 1929, the sharpest decline on record is the crash in October 1987, when the S&P 500 fell some 28% in 4 days.

Stocks were broad-sided as the stock market fell sharply. Even though the S&P 500 SPDR remains in the falling knife category and has yet to bounce, I am on the look out for ETFs that hold up relatively well during this onslaught. There are several ways to separate ETFs with relatively strong charts and those with relatively weak charts.

As technical analysts and chartists, we study historical prices and patterns to get an idea of what to expect going forward. No two patterns are exactly the same, but they often rhyme with a few common characteristics.

Weekend Video, Chart Notes and ChartBook Update ETF Chart Notes for Saturday, February 22nd * These chart notes are also

There are plenty of cautionary tales to go around, and yet the new high parade continued this week. This is why process, price action and signals are so important. I can find plenty of reasons for caution and these were highlighted over the last few weeks.

Stocks extended their advance this week with most of the ETFs in the core list participating. The flag and pennant breakouts from early February worked as many moved sharply higher the last 12 days (February). QQQ, FINX, XLK, IPAY and IGV are up over 7% this month and leading. Tech, tech and more tech.

Stocks moved sharply higher for the second straight week with broad participation. RSP, SPY and QQQ recorded 52-week highs, 8 of the 11 sector SPDRs recorded new highs and 8 of the 11 equal-weight sector ETFs hit new highs.

The principle of confirmation stems from classic Dow Theory, which used the Dow Industrials and Dow Transports to confirm price movements. The bull market was in good shape as long as both recorded higher highs by exceeding their prior peaks.

There are lot of new highs already this week and lots of flag breakouts. However, these new highs and fresh breakouts are still overshadowed by an overextended stock market (SPY). Yes, the odds of a corrective period remain high. The flag breakouts and gaps from early February

Stocks are still looking overextended and ripe for a rest. SPY formed three outsized weekly candles, the tallest since the advance began, over the last five weeks. In addition, the weekly gain/loss was well above average for three of the last five weeks.

The S&P 500 SPDR and Nasdaq 100 ETF led the market by surging to new highs. After a bashing at the end of January, these two came roaring out of the gates and answered with big moves in the first week of February. As the chart below shows, SPY held its early January low during the dip and showed relative strength in late January (less weakness).

My, that was quick. A few days ago, Friday January 31st, to be exact, the S&P 500 SPDR and Russell 2000 ETF were down year-to-date. The S&P 500 had just suffered its worst weekly decline since late July (-2.14%) and the small-cap Russell fell 2.94%. In addition, seven of the twelve sector SPDRs were down year-to-date on January 31st

The stock market took a hit this week as money rotated into safe-have assets, such as bonds. Gold also moved higher and hit a 52-week high on Friday. It looks like a correction has started in the stock market as SPY confirmed its weekly harami and the short-term indicators trigger bearish.