Video and Report Headlines
- Seasonal Patterns: Turn-of-the-Month and November
- SPY Hits Retracements and Becomes Oversold
- Oversold is Relative
- QQQ Bounces off Channel Line
- The Average Stock is Trending Lower
- Semiconductor ETF Hits Support-Reversal Zone
- Technology SPDR Become Oversold
- Cyber Security ETF Falls to Channel Line
- Aerospace & Defense ETF Forms Falling Wedge Correction
- Textron Tests Support
- US Oil Fund Consolidates after Breakout
- Oil & Gas Equipment & Services ETF Tests October Low
- Schlumberger Tests Support
The next Chart Trader will be posted on Thursday, November 2nd.
The weight of the evidence remains bearish for stocks. Over 75% of S&P 1500 stocks are below their 200-day SMAs and 52-week lows are outpacing 52-week highs by a wide margin. SPY (large-caps), MDY (mid-caps) and IWM (small-caps) are below their 200-day SMAs and in long-term downtrends. QQQ is still above its 200-day SMA, but took a hit in October. Overall, I still think we are in a bear market. There are some positive seasonal patterns coming into play and these could lead to oversold bounces. This bounces, however, are considered bear market bounces until the weight of the evidence changes.
Seasonal Patterns: Turn-of-the-Month and November
Short-term, stocks are oversold after sharp declines the last 2-3 weeks and we could see an oversold bounce. Also note that the turn-of-the-month [7] shows a bullish bias. The turn-of-the-month covers the last four trading days of one month and the first four days of the next month. The current period runs from October 27th to November 4th. Since January 2000, this eight day period was up 63.2% of the time with an average gain of 2%. Note that the turn from October to November is even stronger. The blue shading highlight performance for this period. Over the last 23 years, this eight day period finished positive 82% of the time.
I would also note that November and December are two of the strongest months of the year. The chart below shows the seasonal performance [8] over the last 29 years. The blue shading shows November as one of the strongest months of the year.
SPY Hits Retracements and Becomes Oversold
SPY fell around 6% in eight days (18-27 Oct) and broke its 200-day SMA. The ETF hit the 410 level on Friday and almost tagged the two retracements. The blue oval marks a 50% retracement of the March-July advance and the green oval marks a 66.7% retracement of the October-July advance. These retrecements mark potential reversal zones. There is also support from the spring lows in this area (gray shading).
Support levels do not carry much weight in downtrends. Why? Because lower lows and support breaks are expected in downtrends. Resistance levels matter because they hold the key to the downtrend. Resistance levels are expected to hold and a breakout would call for a re-evaluation. Even though we could see a bounce in SPY, I would consider it an oversold bounce within a bigger downtrend. We should be selling into bounces when the bigger trend is down.
Not All Indicators are Oversold
A 6% decline in eight days is enough to create an oversold condition. Also note that RSI(14) dipped below 30 on October 27th and the Momentum Composite became oversold. These are price-based indicators. Thus, the stage is set for an oversold bounce. Not all indicators became oversold during this recent decline though. The chart below shows the SPX OBOS5 indicator hitting -2 last week as only two of the five components became oversold. This indicator is based on S&P 500 breadth and signals oversold when three of the five are oversold. The bars turn green when the indicator hits -3 or lower. Thus, this indicator is not yet signaling an oversold condition for SPY.
QQQ Bounces off Channel Line
QQQ fell 7.40% in eleven days (12-26 Oct) and became oversold late last week. The ETF also tagged the lower line of the falling channel, which also denotes an oversold condition. QQQ bounced the last two days and is getting an oversold bounce. However, this is just an oversold bounce within a bigger downtrend and within a bearish environment. The October highs mark downtrend resistance at 374.
Most Major Index ETFs are in Downtrend
Stocks on the whole remain in bear mode. The Russell 2000 ETF (IWM) hit a 52-week low in late October. The S&P 500 EW ETF (RSP) and S&P MidCap 400 SPDR (MDY) broke their spring lows and hit new lows for the year (2023). These three are oversold, but staying oversold as the downtrends extend. SPY is also below its 200-day SMA, as is the Nasdaq 100 Equal-Weight ETF (QQEW). QQQ is the only one still above its 200-day SMA. Even so, it fell hard the last few weeks and large-cap techs are starting to fray.
Chart Analysis, Setups and Trading Ideas
Semiconductor ETF Hits Support-Reversal Zone
The Semiconductor ETF (SOXX) is trending lower, but short-term oversold and ripe for an oversold bounce. A falling channel defines the downtrend with lower lows and lower highs the last few months. Key resistance is set at 490. Short-term, SOXX tagged the lower line of this channel and the Momentum Composite dipped to -3 or lower three of the last four days (red bars). Thus, the ETF is short-term oversold and ripe for a bounce.
Technology SPDR Becomes Oversold
The next chart shows the Technology SPDR (XLK) with the Momentum Composite hitting -3 last Thursday. XLK bounced the last two days and is in the midst of an oversold bounce within a bigger downtrend. Key resistance is set at 171.
Cyber Security ETF Falls to Channel Line
The next chart shows the Cyber Security ETF (HACK) falling over 6% the last ten days. The Momentum Composite did not become oversold and RSI(10) did not dip below 30. However, a 7% decline in eight days is enough for an oversold condition that could pave the way for a bounce. HACK is also trading near the lower line of a rising channel.
Aerospace & Defense ETF Forms Falling Wedge Correction
The next chart shows the Aerospace & Defense ETF (PPA) with an 8% surge and a falling wedge pullback the last three weeks. This pullback retraced around 67% of the 8% surge and returned to the gap zone. The retracement and the gap zone mark a potential support/reversal zone. In addition, the falling wedge is typical for a corrective pattern after a sharp advance. A break above 81.5 would be bullish.
Textron Tests Support
The next chart shows Textron (TXT) surging some 30% and consolidating with a trading range the last few months. SPY fell sharply in September and October, but TXT held its August lows and traded flat. This shows relative strength. Overall, I view this consolidation as a bullish continuation pattern. Short-term, the stock fell sharply in the second half of October with a 7% decline in six days. It then firmed in the support zone the last three days. This is an area to watch for a bounce that could lead to a bigger breakout.
US Oil Fund Consolidates after Breakout
The next chart shows the US Oil Fund (USO) with a big summer surge and breakout. This move reversed the downtrend and signaled the start of an uptrend. USO became overbought with the surge above 80 in September and then moved into a consolidation. A triangle is forming and I view this has a bullish continuation pattern. It is a consolidation designed to alleviate overbought conditions. There are three swings within the triangle – down, up and down. The current swing is down with first resistance set at 79. A breakout here would increase the odds of a bigger triangle breakout.
Oil & Gas Equipment & Services ETF Tests October Low
The next chart shows the Oil & Gas Equipment & Services ETF (XES) testing the early October low in the 87 area (blue shading). The ETF fell 8% in nine days and is also short-term oversold. XES firmed the last three days with long lower shadows on the candlesticks. A spinning top candlestick also formed on Monday. The long lower shadows reflect an intraday dip and recovery, while the spinning top shows indecision. Indecision is often the first step towards a reversal. A surge off support and break above 90 would reverse the short-term downswing.
Schlumberger Tests Support
The next chart shows Schlumberger (SLB) testing support with a sharp decline the last two weeks. SLB is part of the Oil & Gas Equipment & Services ETF. There is a clear support zone around 55 with at least three touches since mid July (blue shading). A head-and-shoulders reversal pattern is possible here, but this pattern is not yet confirmed because SLB has yet to break support. Until a break, the bigger trend is still up. SLB is short-term oversold and at support, which could give way to a bounce.
