Video and Report Headlines
Broad Market Analysis
- S&P 500 Remains Short-term Oversold
- Tech and Energy Leading, but Majority in Downtrends
- Oil and Energy ETFs Plummet (USO, XLE)
- QQQ Forms a Bearish Pennant
Chart Analysis, Setups and Trading Ideas
- HACK Breakout Gets Cold Feet
- Dupont Consolidates after Breakdown
- Expeditors Forms Pennant after Breakdown
- Hewlett Packard Enterprise Forms Complex H&S
- Ralph Lauren Forms Bearish Pennant
The next Chart Trader will be posted on Tuesday, October 10th.
SPY: Evidence is Bearish, but Short-Term Oversold
The S&P 500 SPDR (SPY) almost tagged its rising 200-day SMA after a sharp decline from early September to early October. SPY is short-term oversold, but the weight of the evidence is bearish. The Composite Breadth Model is at -1 and most stocks within the index are in long-term downtrends. SPY is also near the top of a support/reversal zone, but, again, the weight of the evidence is bearish. With the weight of the evidence bearish, the odds favor further weakness in the coming weeks, perhaps months. We could see an oversold bounce for a week or two. However, bounces are for selling when broad market conditions are bearish.
S&P 500 Remains Short-term Oversold
The next chart shows 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. SPX OBOS5 is oversold when 3 of the 5 indicators are oversold (-3 or lower). It is overbought when 3 of the 5 indicators are overbought (+3 or higher).
A security can become oversold (overbought) and remain oversold (overbought). Buying when oversold is like catching a falling knife. Sometimes we will catch it by the handle, and sometimes the blade will be pointing down. I am looking short-term signal to suggest that oversold conditions are waning. The middle window shows SPX %Above 20-day SMA (the percentage of S&P 500 stocks trading above their 20-day SMAs). It is oversold below 20%. A move above 20% suggests that oversold conditions are waning. The green arrows show when SPX %Above 20-day SMA crosses above 20% (within five days of SPX OBOS5 being oversold (-3 or lower)).
SPX OBOS5 became oversold five of the last seven days (green bars). SPX %Above 20-day SMA moved below 20% on 22-Sept and has yet to cross back above 20%. This is a case of becoming oversold and remaining oversold. A cross above 20% would suggest that oversold conditions are waning and could give way to a bounce. The red arrows show when SPX %Above 20-day SMA crosses below 60% (within 10 days of SPX OBOS5 becoming overbought). I used different parameters for overbought because stocks often remain overbought longer than they remain oversold.
QQQ Forms a Bearish Pennant
QQQ broke rising flag support on September 19th and fell below its August low. The ETF firmed the last five days as it battles the August low. Will the second shoe drop for QQQ with a pennant break or will we first get an oversold bounce? Admittedly, this is a tough question to answer. A pennant is taking shape and this is a short-term bearish continuation pattern. I realize that QQQ is one of the stronger ETFs in the market right now, but it is still part of the market and vulnerable to broad market conditions. A pennant break would signal a continuation lower and target a move to the 335 area.
Tech and Energy Leading, but Majority in Downtrends
The table below comes from the Trend, Momentum and Profit Target Strategy that trades 74 stock-based ETFs. This strategy is only active during bull markets and uses the 5-day SMA of the Composite Breadth Model for market timing. The 5-day SMA of the CBM is currently at -.20 and will likely reach -1 on Friday. This would signal a bear market environment and the strategy would move to cash. See Wednesday’s System Trader article for more details.
I use this table to find the leaders within the ETF universe. Currently, 24 of the 74 ETFs are in uptrends (Eligible). This means their Trend Composites and 120-day Exponential Slopes are positive. Roughly one third of the 74 ETFs are in uptrends, which means two thirds are in downtrends. Thus, the majority are in downtrends.
Of the 24 uptrends and leaders, 9 come from the technology/growth area and 6 from the energy sector. ETFs related to small-caps, mid-caps, financials, industrials, materials, clean energy, healthcare, REITs, utilities, consumer staples, biotech and dividends are all in downtrends.
Oil and Energy ETFs Plummet (USO, XLE)
I featured the US Oil Fund (USO) on September 21st because RSI(14) was above 80 for the first time since March 2022. A normal overbought reading is above 70 and these are often a sign of strength. An excessive overbought reading is above 80 and these are signs of excess that could lead to a sharp pullback. Timing the pullback, however, is a different matter. USO surged above 82 on September 27th and then plunged. USO is down around 9% in five days. The ETF is short-term oversold after this five day decline and could bounce, but the ultimate target is broken resistance in the lows 70s.
The next chart shows the Energy SPDR (XLE) breaking short-term support on September 21st, bouncing a few days later and continuing lower the last four days. XLE was also featured on September 21st (before the open). XLE is down around 7% in four days and also short-term oversold. XLE also hit the downside target zone in the mid 80s. Support from the August lows and the 50% retracement zone mark this zone.
Chart Analysis, Setups and Trading Ideas
HACK Breakout Gets Cold Feet
There are some pockets of strength in the market, and also pockets of relative strength (less weakness). However, a stock is still a stock and anything tied to stocks is vulnerable to broad market conditions (bear market). HACK is a case in point. The chart below shows the Cyber Security ETF (HACK) hitting a 52-week high in early September and leading. HACK then held well above its August low after the September decline (relative strength). A falling flag formed and HACK broke out with a surge on Friday-Monday. This breakout did not last long as the ETF fell back with a sharp decline on Tuesday. A close below the flag closing low (50.60) would fully negate this setup.
Dupont Consolidates after Breakdown
The next chart shows Dupont (DD) with a Double Top at resistance and a support break in late September. The stock got an oversold bounce to around 75 after the breakdown and fell back the last three days. Overall, I would view the post-breakdown price action as a consolidation after a sharp decline. This makes it a bearish continuation pattern and a break below this week’s low would signal a continuation lower.
Expeditors Forms Pennant after Breakdown
The next chart shows Expeditors (EXPD) with a bear flag break and a pennant forming. The stock fell sharply into mid August and then rebounded with a rising flag. This pattern is a counter-trend move or oversold bounce. EXPD broke flag support in mid September and then consolidated with a pennant. The pennant is a short-term bearish continuation pattern and a break would signal another continuation lower. A close above 116 would negate the pennant.
Hewlett Packard Enterprise Forms Complex H&S
The next chart shows Hewlett Packard Enterprise (HPE) with a Double Top in August-September and a complex head-and-shoulders since June. Either way, support from the June-August lows holds the key. A break below support would confirm both patterns. Short-term, notice that HPE surged above 17.5 last week and fell right back to support this week. HPE established short-term support at 16.72 and a break here would provide the early signal.
Ralph Lauren Forms Bearish Pennant
The next chart shows Ralph Lauren (RL) plunging into mid August and then stalling with a pennant. Within the pennant, the stock also surged last week and then fell back with a long black candlestick on Tuesday. The pennant is a bearish continuation pattern and a break would signal further weakness.
