Video and Report Headlines
- Bull Market Sequence
- From Warning to Signal
- Seasonal Pattern for S&P 500
- SPY Extends with Another Surge
- MDY Surges to New High
- GOOGL Recovers after Big Gap
- Apple Breaks Short-term Support
- AMD Consolidates Near High
- BAX Surges to 200-day SMA
The next Chart Trader will be posted on Thursday morning, February 15th.
We are in a bull market, but evidence is pointing to a corrective period and a correction could begin this week. Warning signs appeared over the last few weeks as fewer stocks made it back above their 20-day SMAs this month. Seasonal patterns are also turning negative this week. SPY, however, has yet to move from warning to signal. For the signal, I am watching for SPX 4wk High-Low Percent to cross below -20%. A bearish now signal would carry more weight because of weakening breadth and negative seasonal patterns.
Bull Market Sequence
The weight of the evidence remains bullish, which means we are in a bull market. SPY and QQQ are leading the charge as both hit new all-time highs here in February. The chart below shows the bullish sequence starting with the Zweig Breadth Thrust on November 3rd (ZBT1500) and the channel breakout a week later. SPY also moved above the upper Keltner Channel for a volatility breakout. The Composite Breadth Model turned bullish on December 7th with a move to +1.
Links: Zweig Breadth Thrust [7] and Composite Breadth Model [3]
From Warning to Signal
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 over the last few weeks and will keep it on the radar. 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 64.81% 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. Divergences, however, are not so good at timing a pullback.
The bottom window shows 4wk High-Low Percent, which is the percentage of stocks making 4wk highs less the percentage making 4wk lows. This short-term breadth indicator is better suited for timing the swings. It triggered bearish with a move below -20% on January 17th (red arrow), but then popped back above +20% on January 29th to turn bullish (green arrow). At this point, the indicator remains with a bull signal. A move below -20% would turn it bearish again.
Seasonal Pattern for S&P 500
The chart below shows the 30 year seasonal pattern for the S&P 500. A rising line (green shading) reflects the bullish seasonal periods, while a falling line (red shading) reflects the bearish seasonal periods. The seasonal pattern for the S&P 500 argues for a correction from mid February to mid March (red shading). February is also one of the weakest months.
SPY Extends with Another Surge
The S&P 500 SPDR (SPY) surged 10% in 17 days to kick off this bull run (27-Oct to 20-Nov). It added another 10.5% from 21-Nov to 12-Feb (55 days). The second advance is less steep, but a 10.5% advance in 55 days is exceptional. SPY is already up 3.75% in February. There are no signs of material selling pressure, but the rate of ascent is unsustainable and looking parabolic. The green dashed trendline and late January low mark first support at 482.
QQQ surged 13.3% in 17 days to start this bull run (27-Oct to 20-Nov). It then added another 12.2% over the last 55 days (21-Nov to 13-Feb). QQQ surged above the upper line of the rising channel on Friday and stalled on Monday. It is very extended and ripe for a pullback. The late January low and lower trendline mark first support at 416.
Chart Analysis, Setups and Trading Ideas
MDY Surges to New High
Mid-caps and small-caps came to life the last five days as MDY surged to a new high. The ETF broke out of a falling flag three days ago and followed through with further gains on Friday-Monday. I featured MDY on Thursday with this setup. Now is the time to manage the trade, which I consider a swing trade. As noted before, I like to book partial profits and go for the free ride. For MDY, this would involve closing half now and setting a trailing stop for the remainder. By closing half now, the entire trade is less likely to turn into a loss. The green line marks the breakout zone and first re-evaluation level at 503. The red line is the ATR Trailing Stop, which is 2 ATR(22) values below the highest close since the breakout. It is currently at 504.43 and a close below this level would trigger the stop.
GOOGL Recovers after Big Gap
Alphabet (GOOGL) surged to a new high in late January and then fell sharply on January 31st. The stocks gapped down and returned to the triangle breakout around 140. GOOGL bounced with the rest of the market in February and retraced around 2/3 of the prior decline. The stock also formed a harami the last two days (long white candlestick and smaller black candle). Harami (yellow oval) are short-term candlestick patterns that signal indecision because the second candlestick is inside the first. Indecision is the first step towards a reversal and a break below Friday’s low (146) would be short-term bearish. I would then look for a deeper correction towards the mid December low in the 130s.
Apple Breaks Short-term Support
Apple (AAPL) is underperforming the broader market and in a downtrend for 2024. SPY is up 5.4% and QQQ is up 6.3% year-to-date. Meanwhile, AAPL is down 2.8% this year and seriously lagging. Note that a third of Nasdaq 100 stocks are down year-to-date. The chart shows AAPL hitting its summer highs in December and falling sharply in early January. AAPL firmed into mid January and then surged off the Support-Reversal Zone in the second half of the month. This breakout failed as the stock fell sharply again in early February. AAPL bounced with the rest of the market here in February, but the bounce retraced 50-67% and peaked last week. I elected to ignore the 2-Feb open below 180 because the stock immediately recovered. The stock broke short-term support with a decline on Monday and I view this as bearish. A close above 190 would argue for a re-evaluation.
AMD Consolidates Near High
Advanced Micro Devices (AMD) epitomizes the momentum runs since October 2022. The first half of the chart shows the stock advancing 144% from October 2022 to June 2023 with three tradable patterns along the way. After a gap down on May 3rd, the stock surged 56% in 18 days. This big surge led to a peak in June and a correction into October 2023. This extended correction returned to the 200-day SMA and reversed with the early November breakout.
AMD advanced some 98% from late October to late January. The stock actually peaked on January 25th and moved sideways the last few weeks. It is starting to underperform QQQ, which moved to new highs in February. With a narrowing range this month, a pennant formed on the price chart and a breakout at 180 would be bullish. Despite this pattern, I think the odds favor a corrective period that could retrace 33 to 50 percent of the 98% advance. Thus, a downside break on the pennant would argue for a correction.
BAX Surges to 200-day SMA
Baxter (BAX) is pretty much the opposite of AMD. Whereas AMD is a cutting-edge semiconductor company that can use the term AI in its business description, Baxter is a medical equipment company most famous for its intravenous drip bags. The chart for BAX is also in sharp contrast to AMD with two 35% declines between October 2022 and October 2023. Both AMD and BAX advanced from October to January and formed pennants. BAX is also consolidating in a retracement-reversal zone because it retraced 50-67 percent of the prior decline. A break below the February low (red line) would be bearish.
I am not highlighting BAX for a bearish setup. In contrast, I am highlighting it for the bullish setup. It is also a defensive play should the broader market correct in the coming weeks. The pennant is a bullish continuation pattern forming around the 200-day SMA. A pennant breakout would also solidify a break above the 200-day SMA. I would view this as bullish and target a move to the low 50s.