Video and Report Headlines
- A Two Year Round Trip for SPY
- SPY Becomes Overbought and Remains Overbought
- Small-caps? Fuhgeddaboudit!
- Follow Up for DRIV and HERO
- TLT Hits Resistance-Reversal Zone
- GOOGL Forms Bullish Continuation Pattern
- MSFT Consolidates above Prior High
- Two Speculative Biotech Stocks with Setups
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The next Chart Trader will be posted on Tuesday morning, December 16th.
There is no change in the broad market environment: bullish and short-term overbought (strong). We saw a parade of bullish signals in November starting with the Zweig Breadth Thrust on the 3rd [7]. SPY then continued higher and broke above the upper Bollinger Band (125,1) and the upper line of the Keltner Channel (65,2,65). These moves triggered a bullish trend-following signal. The bulls are in charge as long as the 5-day SMA (blue line) holds above the lower line of the Keltner Channel, which is currently at 446.67.
The Composite Breadth Model [3] is a trend-following type model that relies on strength in small and mid caps. In particular, S&P 1500 %Above 200-day SMA exceeded 60% and S&P 1500 High-Low Percent Exceeded +10% in early December. These two breadth indicators, which are part of the CBM, are dependent on small and mid caps. With this broadening in upside participation, the 5-day SMA for the CBM hit +1 on December 7th. Thus, the weight of the evidence is bullish for stocks.
A Two Year Round Trip for SPY
The next chart shows SPY since late 2021. SPY closed at 475 at the end of 2021 and is currently 3 points below this close. In the meantime, the ETF dipped to 357 in October 2022. SPY was down 25% at its nadir and is currently up around 32% since early October. This two year chart provides us with one market cycle (bear market and bull market). Let’s work from left to right for some insights.
First, SPY reversed its long-term uptrend with a break below the October 2021 low in February 2022 (red arrow). The ETF was oversold by early March 2022 and surged above its early February high (blue arrow). The surge also retraced around 66.7% of the prior decline. Despite breaking its early February high (red line), SPY reversed on a dime and fell sharply into June. The ETF then surged above the early June high with a rally that retraced 2/3 of the prior decline (blue arrow). Again, we see another strong surge and a higher high. Even so, SPY again reversed on a dime and plunged into October. There are four takeaways to consider during bear markets. First, bear market rallies are often sharp. Second, be careful with breakouts and overbought conditions. Third, we do not often get a tradeable pattern, such as a rising wedge or bear flag. Fourth, be alert for reversals when near the 2/3 retracement.
Now let’s analyze the right half of the chart. SPY reversed its downtrend with a break above the November 2022 high in early February. The ETF then fell back with a falling channel that retraced just over 66.7% of the prior surge. SPY broke out in late March and continued higher into late July. Along the way, there was a short flag in April-May and a breakout in mid May. SPY fell sharply from August to October and broke the 200-day SMA. Even so, this decline retraced 2/3 of the prior advance and returned to the prior breakouts. Broken resistance turns support and this area marks a support-reversal zone (gray shading). SPY broke out with a surge in early November and continued higher. There are four bull market takeaways. First, bullish continuation patterns form in bull markets. Second, sometimes we may need to exercise some patience to wait for one to form. Third, prior breakout zones and key retracements mark support-reversal zones. Be on alert for a reversal when price hits such zones. Fourth, stocks can become overbought and remain overbought in strong uptrends. This happened in June-July and in November-December.
SPY Becomes Overbought and Remains Overbought
The term overbought could actually be replaced with the word “strong”. After plunging in late October, SPY became strong with the surge into early November and remains strong. SPY is up around 15% since late October and we can divide this advance into two marks. First, there is a 10.5% surge from October 30th to November 22nd. The ETF then stalled in the 455 area for two weeks. This stall actually alleviated some of the overbought condition. The second move saw SPY surged 3.8% in six days. An even sharper surge on top of a 10.5% surge shows a frothy market that has perhaps gotten ahead of itself. Frothy conditions are not always bearish, but they do increase the odds for subpar performance over the coming weeks. In other words, frothy conditions increase the chances for a pullback or consolidation.
The next chart shows QQQ with a 13.7% surge from late October to mid November. The ETF then stalled for two weeks and surged 5.7% the last eight days. QQQ is also looking frothy and strong.
Small-caps? Fuhgeddaboudit!
I am not a fan of small-caps. I do not view them as the canaries in the coal mine and place little importance on their relative performance. Right now, QQQ is the place to be and SPY is second. QQQ and SPY are in long-term uptrends, whereas IWM is in a long-term trading range. The chart below shows IWM rangebound since summer 2022. The swing within this range is up, but IWM remains short of a breakout. I would also not be impressed with a breakout. Notice that the breakout in November 2021 coincided occurred a month before SPY peaked. The bottom window shows the IWM:SPY ratio. This ratio rose as small-caps outperformed the last five weeks, but the long-term trend is down (underperformance).
Chart Analysis, Setups and Trading Ideas
TLT Hits Resistance-Reversal Zone
The everything rally over the last nine weeks included Treasury bonds as the 20+ Yr Treasury Bond ETF (TLT) surged some 20%. The move is massive and the ETF is running into a resistance-reversal zone. Broken support in the 98-100 turns into resistance (blue shading). This advance also retraced around 2/3 of the prior (24%) decline. The 200-day SMA is also in play here. With prices near this resistance-reversal zone, we should be on alert for signs of a reversal in the coming days and weeks. A rising channel defines the current advance and a channel break would start the reversal process.
Follow Up for DRIV and HERO
Note that DRIV and HERO were featured last week [8]. The Autonomous EV ETF (DRIV) formed a flag into early December and broke out on December 11th. DRIV followed through on this breakout with a surge to the 24.5 area and is up around 4.5% from the December 12th open. This is when traders need to plan their exit and trading timeframe. Long-term traders can consider the flag lows for support and exit on a close below these levels. Short-term traders may consider taking some money off the table by closing half of the position at current prices or when price hits a profit target. I am also showing the ATR Trailing Stop (22,2) for reference. It moved to 23.68 as prices surged.
The next chart shows the Video Game eSports ETF (HERO) breaking out of a flag with a surge on December 13th. The ETF continued higher on the 14th and then fell back the last two days. Overall, the breakout is bullish and it is holding. I used 2.5 for the multiplier in the ATR Trailing Stop (22, 2.5) so its starts just below the flag low on the 13th. Notice how it ticked higher as HERO advanced on the 14th. The summer highs mark a potential resistance zone that can also be used for the first target (blue shading).
GOOGL Forms Bullish Continuation Pattern
The next chart shows Alphabet (GOOGL) hitting a 52-week high in October and then falling sharply with a decline to the 120 area. While this is a break away gap and there is a “support” break, I still think the long-term trend is up. Prices are moving from the lower left to the upper right of the chart. GOOGL formed a triangle over the last two months and this is a bullish continuation pattern. It represents a consolidation within the uptrend. A breakout above the early December high would signal a continuation higher and open the door to new highs. I would then use the mid December low to mark first support.
MSFT Consolidates above Prior High
Stocks are overbought (strong) and staying overbought (strong). Nobody knows how long this condition will last. It will simply last until it doesn’t, which is something Yogi Berra might say. The next chart shows Microsoft (MSFT) hitting a new high in November and then consolidating above this high. A small triangle or pennant is taking shape and this is a short-term bullish continuation pattern. A break above last week’s high would signal a continuation higher.
Two Speculative Biotech Stocks with Setups
I use TradingView for most of my web-based charting needs. A benefit/drawback is the ability to see earnings and news items on the chart. Tradingview places symbols at the bottom for earnings (E) and news (lightning bolt). Such information presents us with a double-edge sword because this information can influence what we see on the chart. Be very careful with what you read and how you interpret it. There is a lot of garbage out there. Personally, I avoid anything from Zacks because they seem to have a story for every stock. I prefer news from dry and boring sources, such as Reuters and Dow Jones.
These two biotech stocks are highly speculative because they are still in long-term downtrends and have above average volatility. Risk is mostly comparable to reward. Thus, a big risk translates into big reward potential. Remember, both risk and reward are big.
The first chart shows BioNTech (BNTX) with a short-term breakout and surge in early November. The stock then consolidated into mid December with a falling flag like pattern. BNTX broke out with a surge last week and this breakout is largely holding. The red line marks the ATR Trailing Stop (22, 2) at 92.05, which is some 10% lower. I would use broken support and the August-September high to mark a resistance zone around 125, which is ~20% higher. This is the first target zone. This also means there is a 20% reward for a 10% loss, provided all goes to plan…
The second chart shows Beigene (BGNE) with a short-term bullish continuation pattern (falling wedge). The long-term trend is still down because the stock hit a 52-week low in October. BGNE surged 30% into November and then fell back with a falling wedge. Notice that this wedge retraced around 2/3 of the 30% surge. Both the pattern and retracement amount are typical for corrections after big advances. BGNE broke the wedge line with a surge last week and then fell back the last two days. Another push above 190 would be bullish and target a move to the 220-225 area. For reference, the ATR Trailing Stop (22,2.5) is currently at 171.46.
