Video and Report Headlines
Broad Market Analysis
- Bearish Chain of Events
- SPY and QQQ Extend Lower after Breakdowns
- Breadth Indicators are Short-term Oversold
Chart Analysis, Setups and Trading Ideas
- The Benchmark Low
- Communication Services SPDR (XLC)
- Cyber Security ETF (HACK)
- Software ETF (IGV)
- Palo Alto Networks (PANW)
- CrowdStrike (CRWD)
- Abbvie (ABBV)
The next Chart Trader will be posted on Tuesday, October 3rd.
SPY and QQQ remain in corrective mode, but they are both oversold after sharp declines the last nine days. These oversold conditions could pave the way for a bounce in the coming days. The risk is that SPY becomes oversold and remains oversold (continues lower). Most stocks and stock-based ETFs are likely to remain under pressure as long as SPY and QQQ are in corrective mode. A few will buck the selling pressure, but risk remains above average for stocks right now. Trade accordingly.
Bearish Chain of Events (oldest at bottom)
- S&P 500 is correcting hard, but still above rising 200-day SMA
- Average Stock is Hurting: Equal-weight S&P 500 is below its 200-day SMA
- QQQ broke August low, but is holding up the best of the major index ETFs
- Internal weakness: 62.5% of S&P 1500 stocks are BELOW their 200-day SMAs
- New Lows Expanding: 52-week Lows in the S&P 1500 exceeded 10% this week
- Short-term Oversold: 18.42% of S&P 1500 Stocks are above their 50-day SMAs
- Risk-ON groups leading lower since mid July (SOXX, BLOK, ARKK, FINX)
- SPY broke short-term support on 20-Sept.
- QQQ broke flag support on 19-Sept.
- SOXX broke flag support on 15-Sept.
- XLK broke flag support on 12-Sept.
- Regional Bank ETF broke support on 15-Aug (leading lower).
- Retail SPDR broke support on 14-Aug (leading lower).
- RSP, IWM and MDY hit resistance from their February highs in July.
SPY and QQQ Extend Lower after Breakdowns
The first chart shows candlesticks for SPY. Overall, SPY and QQQ are in correction mode. This chart does not show a downside target zone or the next support level. Instead, it focuses purely on price action and the current signal or setup. The active signal is the 20-Sept breakdown, which triggered just after the lower high. SPY continued lower after this break down and broke the August low for a lower low. SPY closed off the lows on Wednesday by forming a hammer candlestick. At this point, SPY is short-term oversold after a 5.4% decline in nine days. The indicator window shows 9-day ROC dipping below -5% (red bar) for the first time since late December. These oversold conditions could give way to a bounce.
The next chart shows QQQ with a rising flag into mid September and a flag break. The ETF continued sharply lower after the flag break and exceeded the August low. Of the broad market ETFs (SPY, QQQ, RSP, MDY, IWM, IJR, IWC), QQQ is the closest to its August low, which means it is holding up the best. Even so, the trend since July is down. QQQ is also short-term oversold after a 5.89% decline the last nine days. This is the sharpest nine-day decline since February (red bars on 9-day ROC indicator).
Breadth Indicators for S&P 500 are Short-term Oversold
The next charts show an overbought/oversold breadth indicator that ranges from +5 to -5. It uses the McClellan Oscillator, Bollinger Band %B, Advance-Decline Percent, 4-week High-Low Percent and %Above 50-day SMA. For example, I am looking for the percentage of stocks in the S&P 500 that have an overbought or oversold reading using %B. An oversold condition appears when three of the five indicators are oversold (-3 or lower). An overbought condition is present when three of the five indicators are overbought (+3 or higher).
The chart below shows overbought conditions with the green arrows and oversold conditions with the red arrows. SPY does not usually hit its exact low when oversold, but a low often forms within a few days and there is a bounce. Sometimes the bounce is short-lived. Sometimes a bounce does not materialize and SPY continues lower (see green shading in September 2022). Most recently, SPY became oversold on Tuesday and remained oversold on Wednesday. This increases the chances for an oversold bounce.
Overbought conditions are tricky. The indicator called three tops. Note the red OB’s in late March, mid August and mid July. Sometimes, however, the market continues higher after an overbought reading and becomes more overbought. See the red shading in August and December 2022. This is the challenge with overbought and oversold. Sometimes the market continues higher or lower and does not reverse. There is no such thing as the perfect indicator.
The Benchmark Low
The August low is a benchmark low we can use to compare performance. SPY clearly broke its August low and remains well below this low. QQQ exceeded the August low, but rebounded a bit on Wednesday and is trading near the low now. The Russell 2000 ETF (IWM) and S&P MidCap 400 SPDR (MDY) formed lower highs and decisively broke their August lows.
Stocks and ETFs that held their August lows are holding up better. Stocks and ETFs that did not even test their August lows are holding up the best. Note that there are a lot of ugly charts out there. Many stocks and stock ETFs formed lower highs from July to August and decisively broke their August lows. There are, however, a few holding up and my focus remains on relative strength.
Chart Analysis, Setups and Trading Ideas
Communication Services SPDR (XLC)
The Communication Services SPDR (XLC) did not break its August low. The chart below shows XLC with a possible Double Top, but this pattern is not confirmed. A break below the August low would confirm the Double Top. Until then, XLC shows relative strength because it held the August low. The trade here is for a successful support test and bounce. A break below the August low would confirm the Double Top.
Cyber Security ETF (HACK)
The three cybersecurity ETFs are holding up better than the broader market because these three remain above their August lows (HACK CIBR, BUG). The Cyber Security ETF (HACK) is the strongest of the three because it recorded a 52-week high on September 1st. HACK fell with the rest of the market in the last two weeks, but the decline retraced 50-67% of the prior advance. A falling flag formed and a breakout would reverse the downswing.
Software ETF (IGV)
The next chart shows the Software ETF (IGV) with a possible triangle taking shape. IGV surged 29% from early May to mid July and hit several 52-week highs this summer. The ETF then fell in the first half of August, rebounded in the second half and fell in September. The September low is just above the August low. This September low, however, is still tentative because the downswing has yet to reverse. A breakout at 453.5 would reverse this downswing and put the triangle into play. This triangle would then be considered a large consolidation within a bigger uptrend (a bullish continuation pattern).
Palo Alto Networks (PANW)
PANW is part of the cyber security group. The stock forged an island reversal in August and surged back to its summer highs in September. PANW then fell with the rest of the market in September. This decline looks like a correction after the sharp advance. It retraced 50-67%, returned to the gap zone and formed a falling flag. There is also a short-term reversal over the last five days with a long black candlestick, three indecisive candlesticks and a long white candlestick. This last candlestick broke the flag line with a gap. I view this breakout as bullish and would re-evaluate on a close below 226.
CrowdStrike (CRWD)
CRWD is also part of the cyber security group. The stock surged above the July highs in early September and then fell back over the last two weeks. The decline looks like a falling flag ad a breakout at 165 would reverse this downswing. The blue shading shows broken resistance turning into support in the 160 area. This falling flag also represents a throwback after the breakout. After a breakout, broken resistance turns into the first support zone.
Abbvie (ABBV)
Abbvie develops and sells pharmaceutical products. ABBV is bucking the selling pressure in September with a 4.2% gain. In contrast, SPY is down 5.4% so far this month and the Healthcare SPDR (XLV) is down 3.1%. The chart below shows ABBV with a surge in July, a pullback into early September and a breakout surge in mid September. The stock consolidated after this surge with a flat flag and a breakout would be bullish. Should the stock break out, I would use the flag lows to set a re-evaluation level.
