Video and Report Headlines
- Weight of the Evidence Remains Bullish
- Seasonal Pattern for S&P 500
- SPY and QQQ Rebound to December Highs
- Breadth Deteriorates, even as SPY and QQQ Bounce
- Timing a Bearish Reversal in SPY
- ARK Innovation ETF Breaks Early January Low
- Defense Stocks Finish the Strong (NOC, LMT, TXT)
- Verisk Analytics Traces out Possible H&S Pattern
- Hologic Goes for a Breakout
The next Chart Trader will be posted on Tuesday morning, January 18th.
Broad Market Recap
The broad market environment remains bullish, which means we are in a bull market. There can still be corrections and pullbacks along the way. Corrections and pullbacks, however, create opportunities when the weight of the evidence remains bullish. One pullback or correction will be deep enough to signal a bear market. I will cross that bridge when the time is appropriate.
The bull market started with the Zweig Breadth Thrust [7] (green bar) and channel breakout in SPY in early November (green arrow). SPY also moved above the upper line of the Keltner Channel. The advance broadened in December with the Composite Breadth Model [3] turning bullish (lower window).
We now have the usual bull market conundrum: SPY and QQQ are still looking overbought after big advances since October (15+ percent). Overbought conditions could give way to a corrective period, but timing corrections within uptrends is a challenge. Nevertheless, short-term breadth is deteriorating and the seasonal patterns are not positive the next two months. This could give way to a correction and I will show an indicator for timing the correction.
Seasonal Pattern for S&P 500
Even though timing a correction within a strong uptrend is difficult, seasonal patterns argue for a correction sometime between now and mid March. The chart below shows the seasonal pattern for the S&P 1500 over the last 30 years. Four periods stand out. First, there are two exceptionally strong periods: mid-March to end-May and mid-October to mid-December (green arrows).
The two negative periods are from mid February to mid March and August to mid October (red shading). Seasonally speaking, February is one of the weakest months. This weak period then gives way to an exceptionally bullish period. Weakness from August to mid-October also gives way to an exceptionally bullish period the rest of the year. Seasonal patterns do not figure into my timing models. However, the seasonal pattern suggests we could see a correction or pullback between now and mid March.
SPY and QQQ Rebound to December Highs
The first chart shows SPY since the October 2022 low. SPY is up 33% since mid October 2022 and up 16% since late October 2023. SPY hit a new high in late December, pulled back the first week of January and rebounded last week. SPY is still quite extended at this point and vulnerable to a corrective period. Corrections can be based on price, time or both. Price corrections form as pullbacks and we could see a move back to the breakout zone around 455-460 (blue shading). A time correction would be a sideways trading range. A zigzag pullback that forms a falling wedge would be a combination of the two.
The next chart shows QQQ with a 19% surge the last 53 days. QQQ also fell back hard in early January and then rebounded with a move back above 400 last week. The ETF did not forge a new high, but remains in an uptrend overall. As with SPY, I do not see a setup on this chart. The long-term and short-term trends are simply up. A setup requires a pullback or consolidation so now is the time to wait. The blue shading in the 380-390 area marks potential support based on the prior resistance levels.
Breadth Deteriorates, even as SPY and QQQ Bounce
Stocks rebounded last week with large-caps leading the way. SPY was up 1.9%, QQQ gained 3.2% and the S&P MidCap 400 SPDR (MDY) was up .60%. Once again, small-caps did not partake as IJR and IWM finished unchanged for the week. Even though SPY and QQQ are back near their late December highs, far fewer stocks are above their 20-day SMAs. Over 80% of S&P 500, S&P MidCap 400 and S&P SmallCap 600 stocks were above their 20-day SMAs in late January. All three are now below 50%, even with last week’s bounce (SPX 46.72%, MID 33.50%, SML 22.30%). The red arrows on the charts show these indicators moving below their early January lows. This means even fewer stocks are above their 20-day SMAs this year. This short-term deterioration in breadth could foreshadow a pullback or corrective period for stocks.
Timing a Bearish Reversal in SPY
Timing a correction of a pullback within a bull market can be difficult. This is because stocks can become overbought and remain overbought. The next chart shows SPY with an overbought/oversold indicator based on five short-term breadth indicators. It becomes overbought at +3 or higher and oversold at -3 or lower. Once the indicator becomes overbought (red OB), a move below 30% in SPX %Above 20-day SMA signals a downturn (red arrows).
The SPX OBOS Indicator hit +4 on December 1st and SPX %Above 20-day SMA was above 70% at the time. The indicator exceeded +3 four more times in December as SPX %Above 20-day SMA held strong (>70%). %Above 20-day SMA deteriorated in January and moved to its lowest level since November 1st. Further weakness below 30% would trigger a bearish signal that could foreshadow the start of a correction or pullback in SPY.
ARK Innovation ETF Breaks Early January Low
The ARK Innovation ETF (ARKK) is a good barometer for risk appetite in the stock market. The green arrow-lines show two periods of Rick-ON from May to July and late October to late December. The red arrow-line shows an extended period of Risk-OFF from August to late October. ARKK fell sharply at the beginning of the year and hits its first support-reversal zone (33% retracement line). ARKK was oversold and got a 2-3 day bounce. This bounce did not last long as the stock fell sharply the last four days. In fact, ARKK broke below its early January low (green line) and is leading lower this year. The ARKK ETF comprises high-beta stocks involved in cutting edge technology. These stocks usually have high growth rates, high PE ratios and high Price/Sales ratios. This year’s decline and relative weakness show risk aversion in the stock market. The next support-reversal zone is around 44.
Chart Analysis, Setups and Trading Ideas
Defense Stocks Finish the Week Strong
Northrup Grumman (NOC) and Lockheed Martin (LMT) were featured on January 2nd [8] with bullish setups. Textron (TXT) was featured last Thursday [9] as it pulled back within a bigger bullish pattern. All three moved higher on Friday and this group remains strong. I am not covering NOC today because it was featured on Saturday [10]. The first chart shows LMT with a 17% surge, an extended pennant and a breakout in early January. LMT fell back with a flag last week and broke out with a surge on Friday. I view this as bullish and would target a move to the 500 area. A close below 450 would call for a re-evaluation.
The next chart shows TXT with a 30% surge and an extended consolidation. Overall, I view this as a big bullish continuation pattern. The stock broke out in late December, but fell back into the pattern. Even though the breakout did not hold, I am still bullish because the stock forged a 52-week high and the long-term trend is up. The January pullback to around 78, therefore, was more of an opportunity than a threat. TXT firmed near the 67% retracement area and broke short-term resistance with a surge on Friday. This breakout is bullish and I would set a re-evaluation level at 77.
Verisk Analytics Traces out Possible H&S Pattern
VRSK has an inverse head-and-shoulders pattern working since September. The September dip formed the left shoulder, the decline into early November formed the head and the right shoulder is under construction. This is a bullish continuation pattern because it is forming within a bigger uptrend. VRSK surged to neckline resistance in mid December and then fell back with a falling wedge. Notice that this decline retraced around half of the November-December advance. Throw in support from the early December low and we have a support-reversal zone in the low 230s. I am marking wedge resistance at 239 and a breakout here would be bullish.
Hologic Goes for a Breakout
HOLX is a bit of an exception for me because it remains in a long-term downtrend. It is below the falling 200-day SMA and has yet to fully clear the mid November high (red shading). I am, however, noticing strength and a breakout at 73 would be bullish. The sector, Healthcare, is also strong this year. HOLX surged to 73 in November and then retraced 50-67 percent with a decline to around 68. The stock bounced off this retracement zone and then stalled in the 70-72 area in late December. A triangle unfolded and HOLX broke out with a surge in early January. This breakout did not hold as the stock fell back below 72 with a long black candlestick. I am using the high of this candlestick to mark resistance at 73. A breakout here would be bullish and I would then target a move to the low 80s (blue shading).
