Video and Report Headlines
- Small-caps Have Nothing to Show for 2024
- 4wk High-Low Percent Reinforces Bear Signal
- SPY and QQQ Takes Hits, But Have yet to Break
- TLT Extends Breakdown as 10Yr Turns Up
- Outsized Declines in Retail and Housing ETFs
- Breakouts Failing Since March (ADI, MCHP)
- Charting Options for ATR-SAR
The next Chart Trader will be posted on Tuesday morning, April 16th.
Small-caps Have Nothing to Show for 2024
Weakness is spreading as the 10-yr Treasury Yield rises above 4.5%. Even though the rise is not that sharp, the market is re-pricing interest rate expectations going forward. This is especially visible in the Consumer Discretionary sector and Small-caps. Selling pressure increased markedly over the last two weeks as small-caps fell sharply on 1-2 April and 10-April. We also saw big bearish engulfing candlesticks in SPY, QQQ and IWM last Thursday. SPY and QQQ have yet to trigger outsized declines, but the 4wk High-Low Percent combo triggered bearish last week. The evidence for a corrective period continues to build. SPY and QQQ, as usual, are the last holdouts.
4wk High-Low Percent Reinforces Bear Signal
The next chart shows the 4-wk High-Low Percent indicators for the S&P 500, Nasdaq 100, S&P MidCap 400 and S&P SmallCap 600 (see explanation below the chart). SPX 4wk High-Low Percent dipped to -24.65% and NDX 4wk High-Low Percent hit -30.69% on Wednesday, April 10th. This is the second time within a week that these indicators exceeded -20%. These indicators first signaled bearish last week Thursday as SPY formed a big bearish engulfing pattern. Dips below -20% reflect an expansion of 4wk lows and this shows more stocks in short-term downtrends. Also notice that 4wk High-Low Percent for the S&P MidCap 400 and S&P SmallCap 600 also dipped below -20% on Wednesday. Short-term weakness is broadening.
About the Indicators: 4-wk High-Low Percent is the percentage of 4-week highs less the percentage of 4-wk lows within an index. These indicators turn bullish with a move above +20% (green bars) and bearish with a move below -20% (red bars). I am only focused on the S&P 500 and Nasdaq 100 for signals. The green shading on the chart above shows the active bullish signals for the S&P 500 and Nasdaq 100. The red shading shows the active bearish signals. The green arrows on the price chart show when 4-week High-Low Percent is bullish for both the S&P 500 and Nasdaq 100. This means BOTH must be bullish to signal a short-term uptrend in SPY. A downtrend signal triggers when BOTH are bearish.
SPY and QQQ Take Hits, But Hold ATR-SAR Levels
The ATR-SAR (stop and reverse) is a bull-bear version of the ATR Trailing Stop. Note that I show charting options at the end of today’s report. ATR-SAR is a trend-following indicator that chartist can use to set stops for long and short positions. There are two parameters: the periods for the Average True Range (volatility) and the Multiplier. I set the ATR periods at 22, which is around one month. The multiplier setting determines the tightness of the stop or trend signal. A multiplier of 2 would set a tight stop, while a multiplier of 4 would set a wide stop. Wider stops are more suited for trend-following. I often test different multipliers to find the one the defines a particular move, such as the advance off the October lows.
The chart below shows SPY with two ATR-SARs for comparison. The blue-gray lines use 4xATR(22) and the red-green lines use 3xATR(22). The 3xATR(22) version hugs prices closer and is more prone to whipsaw. The 4xATR(22) version is wider and produces fewer whipsaws (and more lag). This is the eternal tradeoff with indicators. The price we pay for fewer whipsaws is more lag. The price we pay for less lag is more whipsaws. Notice how the 3x ATR(22) version whipsawed in late August and mid October because outsized advances (breakouts) did not hold. In contrast, the 4x ATR(22) version did not whipsaw during this period and generated three good trend signals (early April 2023 (up), mid August 2023 (down) and November 2023 (up)).
So which one do we use? I will stick with ATR-SAR 3xATR(22) to define the immediate uptrend for SPY. This level held since the November surge-breakout and a close below 510 would signal an outsized decline. Such a move would rattle the uptrend and throw it off of it’s trajectory. This would be enough to signal the start of a corrective period for stocks.
The next chart shows QQQ with the same ATR-SAR indicators. ATR-SAR 4xATR(22) caught three good trend signals (red/green shading). ATR-SAR 3xATR(22) whipsawed in late August, mid October and January. Even so, I will stick with ATR-SAR 3xATR(22) to define the current uptrend. A break would signal an outsized decline and the start of a corrective period.
The weight of the short-term evidence is not yet bearish, which means the bullish signal has yet to be proven otherwise. 4-wk High-Low Percent for SPX and NDX triggered bearish. SPY and QQQ are stalling, but have yet to break down and reverse their short-term uptrends. Price needs to confirm breadth before arguing for a correction.
Chart Analysis, Setups and Trading Ideas
TLT Extends Breakdown as 10Yr Turns Up
The chart below shows the 20+ Yr Treasury Bond ETF (TLT) hitting a Resistance-Reversal Zone near 100 in January 2024. TLT surged to this level along with the stock market in November-December. The 67% retracement and broken support mark the Resistance-Reversal Zone (blue shading). TLT reversed here as it broke short-term support in mid February (red arrow). The long-term trend is down and the short-term trend is down. This downtrends target a test of the October low. Resistance is set at 95.
The next chart shows the 10-yr Treasury Yield with a surge from 1.5% to 4% in 2022 and then a slower advance into 2023. Yields fell in November-December as the stock market took off, but held above the April 2023 lows and turned back up in February this year (green dashed line). The red line is the 40-week SMA and it is rising. The 10-yr Yield worked its way higher in February-March and then surged above 4.5% the last two weeks. Note that the average 30-yr Mortgage [7] rate is back near 7% (6.95%).
Outsized Declines in RSPD, XRT and ITB
Outsized declines in three key groups could spell trouble for the broader market. The first chart shows the EW Consumer Discretionary ETF (RSPD) with the ATR Stop & Reverse (ATR-SAR) indicator (red/green) and the price-relative in the indicator window (RSPD/RSP ratio). RSPD broke below the ATR-SAR 4xATR(22) and this signals and outsized decline (red shading). This bearish signal reverses the bullish signal from early November, which is when RSPD surged above the ATR-SAR (green shading). ATR-SAR turns green with an outsized advance and stays green until there is an outsized decline. The indicator window shows the RSPD:RSP ratio moving below its January low, which means the EW Consumer Discretionary ETF shows relative weakness. The combination of a bearish trend signal on the chart and breakdown in the price-relative is negative for the most economically sensitive sector.
The next chart shows the Retail SPDR (XRT) hitting a new high in early April and then falling over 4 ATR(22) values from this high. XRT broke the ATR-SAR line for the first time since the November surge. This also shows an outsized decline and reverses the uptrend.
The next chart shows the Home Construction ETF (ITB) hitting a new high in early April and then falling over 4 ATR(22) values. ITB broke the ATR-SAR line and reversed the uptrend that started with the November surge. ITB held the ATR-SAR since the November breakout. As such, a decline below this ATR-SAR is the largest since October.
Breakouts Failing Since March
Trading in December, January and February was quite fruitful because most breakouts held and trends extended. This started changing in early March as breakouts started failing as leaders either corrected or moved into consolidations. The charts below show the breakouts in ADI and MCHP failing as prices fell right back into the patterns. Is this just an “oops” moment? While these two remain above support levels from the early April lows, the inability to hold a breakout is negative. A second breakout surge with a strong close above the red resistance lines would put these two back in play.
Charting the ATR-SAR on StockCharts and TradingView
The images below show charting options for StockCharts [8] and TradingView. The ATR-SAR is part of the TIP Indicator Edge Plugin for StockCharts ACP. TradingView users can search the indicators for “CDC ATR Trailing Stop V2”. Here is an affiliate link for TradingView. [9]
