Video and Report Headlines
- Large-caps Lead and Small-caps Lag
- Deteriorating Breadth within S&P 500
- Small and Mid Caps Trigger Bearish
- Seasonal Pattern for S&P 500
- SPY Hits Top of Channel (Again)
- ALGN Forms Bullish Ascending Triangle
- IOT Consolidates after Big Surge
- LHX Gears Up for Next Move
The next Chart Trader will be posted on Thursday morning, February 8th.
The weight of the evidence remains bullish, but the stars are aligning for a correction. SPY and QQQ are overbought. Breadth is deteriorating within the S&P 500. Small-caps and mid-caps are weak with MDY and IWM forging lower highs from December to February. Seasonally, February is one of the weakest months of the year. The period from mid February to mid March is perhaps the weakest 4-5 week stretch. As with February 2023, the odds for a correction are above average right now. This could make trading very tricky over the next few weeks.
Article on Zweig Breadth Thrust [7]
Page for Composite Breadth Model [3]
Large-caps Lead and Small-caps Lag
The long-term trends for SPY and QQQ are up because both recorded all time highs this month (green arrows on chart below). The S&P 500 EW ETF (RSP) tagged an new high in late January, but did not confirm the new high in SPY (blue arrow). Also note that the S&P MidCap 400 SPDR (MDY) and Russell 2000 ETF (IWM) hit new highs in December and did not exceed these highs in 2024 (red arrows). Once again, large-caps are leading, while mid-caps and small-caps lag. Technically, we are in a bull market, but it is a very selective bull market that does not lift all boats.
Short-term Breadth Rebounds
There are roughly three groups in the S&P 500: the Mag6, the top 50 stocks and the other 450 stocks. The Mag6 (MSFT, AAPL, NVDA, AMZN, META and GOOGL) account for 28% of the S&P 500 and the top 50 stocks account for around 58%. The remaining 450 stocks account for just 42% of the S&P 500. This large-cap weighing is why deteriorating breadth does not always hamper performance for SPY.
Even though SPY is at a new high, the percentage of stocks above the 50-day SMA continues to deteriorate with a bearish divergence forming this year. I covered this last week and with a weekend post [8]. The chart below shows SPX %Above 50-day SMA exceeding 80% from December 1st to January 16th (yellow shading). This indicator peaked at 91.45% on January 2nd and fell to 57.85% over the last few weeks. SPY extended its surge, but fewer stocks held above their 50-day SMAs. This shows weakness within the index and could foreshadow a correction. A 6% decline would extend to the early January low around 468.
The bottom window shows 4wk High-Low Percent, which is the percentage of stocks making 4wk highs less the percentage making 4wk lows. It is a short-term breadth indicator. This indicator triggered bearish with a move below -20% on January 17th (red arrow), but then popped back above +20% on January 29th (green arrows with oops?). A similar “oops” or whipsaw occurred in mid September. See the green bar with “oops” above it. At this point, the indicator is technically bullish. A move below -20% would turn it bearish again. Note that it finished at -12.72% on Monday. This negative value means more stocks recorded 4wk lows than 4wk highs on Monday.
Small and Mid Caps Trigger Bearish
The next chart shows the percentage of stocks above the 50-day SMA for the S&P 500, S&P MidCap 400 and S&P SmallCap 600. A bull signal triggers when the indicator becomes oversold (<20%) and then moves above 40% (green arrows). A bear signal triggers when the indicator becomes overbought (>80%) and then moves below 60% (red arrows). It is a medium-term timing signal. On the price chart, a signal triggers when two of the three trigger (red and green arrows). SML %Above 50-day triggered bearish on January 17th (bottom window) and MID %Above 50-day triggered bearish on January 31st. SPX %Above 50-day triggered bearish on Monday with a move to 57.85%. All three are arguing for a corrective period.
Seasonal Pattern for S&P 500
Even though timing a correction within a strong uptrend is difficult, the seasonal pattern for the S&P 500 argues for a correction sometime between now and mid March. Two negative periods stand out: mid February to mid March and August to mid October (red shading). Seasonally speaking, February is one of the weakest months.
SPY Hits Top of Channel (Again)
SPY is again overbought after a two day surge. SPY hit the top of a rising channel last week Monday (29-Jan) with a long white candlestick, stalled the next day and then gapped down with a long black candlestick on 31-Jan. This looked like a breakaway gap and short-term trend reversal, but the bulls stepped in at the beginning of the month and pushed SPY back to the top of the rising channel. Once again, SPY is looking extended, but still in a short-term uptrend. The lower line of the rising channel and last week’s low mark support. A close below 482 would reverse the short-term uptrend and call for a correction.
QQQ is also overbought, but still in a short-term uptrend. QQQ surged above the upper line of the rising channel and formed an island reversal last week (blue circle). The sharp decline on 30-31 January did not extend lower as QQQ surged back to its late January highs on Thursday and Friday. This dip and rebound provides us with at short-term support level to define the short-term uptrend. A close below 416 would reverse the short-term uptrend and call for a correction.
Chart Analysis, Setups and Trading Ideas
ALGN Forms Bullish Ascending Triangle
Align Technologies (ALGN) is part of the Healthcare SPDR (XLV) and the Healthcare Equipment ETF (XHE). Healthcare is a leading sector because XLV hit a new high on Monday. I did a search at ETF.com to learn which ETFs hold ALGN. Turns out that ALGN is part of 209 ETFs [9]! This group includes the ARK 3D Printing ETF (PRNT) and the Fidelity Disruptive Medicine ETF (FMED). According to TradingView: Align Technologies designs, manufactures, and markets orthodontics, restorative and aesthetic dentistry products.
The chart shows ALGN plunging in October and recovering with a bounce into November and surge in mid December. The stock consolidated in January-February with an Ascending Triangle taking shape. This is a bullish continuation pattern that represents a rest after a big advance. A breakout at 280 would signal a continuation higher and target a move to the mid 300s. Upon a breakout, I would mark support at 260. Note that I am ignoring the spike above 300 on February 1st, which was a knee-jerk reaction to earnings. The closing price was below 280 and this is my current resistance level to watch.
IOT Consolidates after Big Surge
Samsara (IOT) develops Internet connected sensor systems. Its symbol (IOT) stands for the internet of things. It is a cutting edge tech stock with no earnings, a high price/sales ratio and a one year beta of 2.29. Expect a wild ride on this one. IOT reports earnings on March 1st.
The chart below shows IOT within a long-term uptrend. The stock broke resistance with a surge in December and hit new highs. After the breakout, the stock fell back to the breakout zone, which turns into support (blue shading). A triangle formed and this is a consolidation after a big advance. This makes it a bullish continuation pattern and I am watching resistance at 34 for a breakout. Upon a breakout at 34, I would mark support at 31 and re-evaluate on a close below this level.
LHX Gears Up for Next Move
L3Harris (LHX) was featured on November 2nd as it broke out of a bull flag pattern. The stock extended on this breakout and hit the target zone in the 205 area (blue shading). This example and the commentary from November 2nd show [10] how a few great trades can pay for the losers. I also featured Zscaler (ZS) on November 2nd and it advanced more than 40% the next two months. EQT and FCG were also featured on November 2nd and they were losers.
LHX is part of the Aerospace & Defense ETF (PPA), which is leading because it hit a new high in early February. As with the current bull market, not all defense stocks are strong. It is selective strength. Some of the big defense contractors are serious underperformers (LMT, NOC). These two were featured as bullish setups in mid January, but failed to hold their breakouts and broke down.
The chart shows LHX with a massive surge and a triangle consolidation. A hammer candlestick formed on Monday and a surge from here would confirm this short-term reversal pattern. As far as the pattern is concerned, a breakout at 211 would be bullish. I would then mark re-evaluation support at 203.
