Video and Report Headlines
- Seasonal Pattern Turns Mixed
- 4wk Lows Expand in Nasdaq 100
- SPY and QQQ Not yet Oversold
- Equal-weights and Mid-caps Pull Back
- IWM Holds Up the Best
- Utilities SPDR Breaks Wedge Line
- Healthcare SPDR Holds Above Breakout
- Medical Devices ETF Goes for a Breakout
- JNJ Breaks Double Bottom Resistance
- JKHY Battles Breakout Zone
The next Chart Trader will be posted on Tuesday morning, July 30th.
A Correction after a 46% Advance
After a massive advance from late October to mid July, we are seeing a pullback unfold with large-caps and technology stocks leading the way lower. SPY was up 38% from late October to mid July and QQQ was up 46%. There was a pullback in April, but this was relatively short-lived as these two were back to new highs by mid May. Pullbacks and corrections are like a box of chocolates: you never know what you are going to get. We could see a short and sweet pullback like April, an extended correction like late July to late October or a choppy trading range. Right now we are simply in corrective mode for QQQ and this will weigh on SPY because 35% of its weighting comes from Nasdaq 100 stocks. The QQQ chart below shows the next Support-Retracement Zone around 450.
Seasonal Pattern is Turning Choppy
The next chart shows the seasonal patterns for the S&P 500. There are two bullish periods (green arrow-lines) separated by a relatively flat period (August to mid October). We will enter this period soon. Seasonal patterns do not always work, but market action is pointing to a correction and the seasonal patterns support this evidence.
In addition to the sharp declines over the last ten days, we are seeing a negative reaction to earnings. The earnings reports are not important here. It is the reactions to the reports that matter. Q1 reactions were positive and current reactions are negative. We are also seeing breakouts failing. Recent breakouts were highlighted in MLM and PAVE – and these failed. I also featured breakouts in VMC, XLI, XLY, IPAY and FINX. These are close to failing. It could be tough sledding the next two months.
4wk Lows Expand in Nasdaq 100
The Nasdaq 100 continues to lead the decline as NDX 4wk HiLo% plunged to -35%. With the move below 30%, this indicator signals a short-term downtrend for QQQ. As with all trend-following indicators, there is some lag because QQQ is already down 7.87% the last ten days. More on that later. SPX 4wk HiLo% dipped to -6.76% and has yet to reverse its bullish signal. Thus, the 4wk HiLo% combo remains bullish because BOTH indicators need to turn bearish for a combo signal. Note that NDX 4wk HiLo% was the first to trigger bearish in April and SPX 4wk HiLo% followed with a signal four days later (see yellow shading).
The 4wk High-Low Percent indicators turn bullish with a move above 30% and bearish with a move below -30%. For short-term market signals, a bullish combo signal triggers when BOTH are bullish and this remains in place until BOTH turn bearish. Note that a bullish (bearish) combo signal does not reverse when just one turns bearish (bullish).
SPY and QQQ Not yet Oversold
The next charts show SPY and QQQ with three short-term oscillators. The first is a 12 indicator overbought/oversold oscillator based on six index-specific breadth indicators and six price indicators. It becomes oversold with a dip below -8 and overbought with a move above +8. Most of the time, I look for oversold conditions within a bigger uptrend. This means there was a decent pullback within the uptrend. Both SPY and QQQ are in long-term uptrends so I am looking/waiting for short-term oversold conditions. Once the ObOs12 indicator becomes oversold, I look for a tradable pattern on the price chart, a bullish divergence in the %Above SMA indicators in the lower windows or a short-term upside catalyst.
The first chart shows SPY hitting a new high in mid July and then falling 3.58% the last ten days. This is the steepest 10-day decline since 10-day ROC hit 4.5% on April 19th. The ETF is right at its 50-day SMA (green line). Note that break below the 50-day is not always bearish. In fact, a break of the 50-day often leads to the first oversold conditions, which set up the subsequent rebound. The last break below the 50-day and oversold condition occurred in April (green arrow-line). SPX ObOs12 is currently at -1 and has yet to become short-term oversold.
The green arrows on the price chart show prior oversold readings. Oversold readings in December 2022, March 2023 and April 2024 foreshadowed sizable rebounds. Oversold readings in August and September 2023 foreshadowed short-term bounces because SPY extended its decline into October 2023. A divergence and tradable pattern emerged in October 2023 and the November breakout was massive.
The next chart shows QQQ hitting a new high in mid July and falling around 7.87% the last ten days. This is the steepest 10-day decline since 28-Dec-2022 when QQQ fell 9.89%. QQQ broke the 50-day SMA with a gap down and continued lower after the gap. This is the second time in two weeks that QQQ gapped lower on the open and moved lower after the gap. The down gaps, the steepness of the fall and the depth of the decline suggest that this pullback may have further to go. In fact, the NDX Obos12 indicator is only at -3 and has yet to become oversold. The chart shows the next Support-Retracement Zone in the 450 area. An oversold condition and decline to this zone would provide the setup for an oversold bounce.
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.
Equal-weights and Mid-caps Pull Back
Breakouts are bullish until proven otherwise. We saw breakouts in the S&P 500 EW ETF (RSP), S&P MidCap 400 SPDR (MDY) and Russell 2000 ETF (IWM) over the last two weeks. It is now time to set the level that would negate these breakouts. A strong breakout will hold, while a weak breakout will fold. These three ETFs surged on July 11th with big gains that led to breakouts. It is important that the majority of this breakout surge holds. As such, I am using the breakout zones and a buffer to mark support going forward. The first chart shows RSP breaking out and surging above 170 in mid July. The ETF fell back below 170 the last five days and I am marking re-evaluation support at 165. A close below this level would negate the breakout.
The next chart shows MDY with a wedge breakout on July 11th and an Ascending Triangle breakout last week. The latter is not holding as the ETF fell back below 550 this week. Broken resistance and the 50-day SMA mark my re-evaluation level. A close below 542 would negate the wedge breakout.
IWM Holds Up the Best
The next chart shows IWM breaking out on July 11th and following through with a surge above 225. The ETF fell back with the rest of the market over the last six days, but remains above last week’s low at 215. IWM surged the most into mid July and has the biggest buffer to hold its breakout. However, I would not expect IWM to hold up if MDY and RSP break my re-evaluation levels. IWM broke out around 210 and I am marking re-evaluation support at 206. A close below this level would clearly negate the breakout.
Utilities SPDR Breaks Wedge Line
The Utilities SPDR (XLU) is showing relative strength the last few weeks as it broke out of a falling wedge. First, the long-term trend is up as XLU hit a 52-week high in mid May and price is well above the rising 200-day SMA. XLU advanced 23% into May and then retraced around a third with a decline below the 50-day (green line). A falling wedge took shape and the ETF broke out with a surge above 70. This breakout is largely holding and I am marking my re-evaluation level at 69.
Healthcare SPDR Holds Above Breakout
The Healthcare SPDR (XLV) is also showing relative strength as it broke out of a triangle and hit a 52-week high in mid July. The ETF took a hard hit on July 18th with a 2.3% decline, but quickly rebounded to reclaim the breakout level. Overall, the long-term trend is up and the triangle is a consolidation within this uptrend. This makes it a bullish continuation pattern. The breakout signals a continuation of the long-term uptrend. I will leave my re-evaluation level at 145.
Medical Devices ETF Goes for a Breakout
Within the Healthcare sector, the Medical Devices ETF (IHI) is perking up with a break above the May-June highs. Overall, the ETF advanced 35% and hit a new high in March. It then consolidated into June with a long triangle. IHI fell sharply on July 18th (-2.5%), but immediately rebounded and broke resistance. I view this breakout as bullish and will use the early July lows to mark re-evaluation support at 54.8. A close below this level would be negative.
JNJ Breaks Double Bottom Resistance
The next chart shows Johnson & Johnson (JNJ) lagging the market from January to June as it fell to a 52-week low. The stock found support in the 145 area in April and again from late May to early July. A double bottom took shape and the stock broke the intermittent high with a surge above 155. JNJ broke out last week on a positive reaction to earnings. It then fell below the 200-day and renewed the breakout with a close above 155 on Wednesday. I am setting my re-evaluation level at 150.
JKHY Battles Breakout Zone
The next chart shows Jack Henry (JKHY), a company that provides payment processing software and services to financial institutions. The stock caught my eye because it broke out of a falling channel and is holding up well over the last ten days. SPY is down 3.58% and JKHY is up 4.39%. JKHY also advanced on Wednesday. Overall, the falling channel retraced half of the prior advance. The pattern and the retracement amount are normal for corrections after a big advance. JKHY broke out in mid July to signal an end to the correction. Even though JKHY is currently battling this breakout zone, I view the cup as half full and will mark re-evaluation support at 163. JKHY reports earnings on August 20th.
