Video and Report Headlines
- Bull Market Sequence
- From Correction Watch to Warning
- Seasonal Pattern for S&P 500
- SPY and QQQ Establish ST Support
- MDY, IPAY and IOT Follow Up
- An Island Reversal for XLK
- Watching Support for CIBR, SMH and IGV
- IBB Goes for a Breakout
- L3Harris Breaks out of Pennant
The next Chart Trader will be posted on Thursday morning, February 22nd.
We are in a bull market, but some indicators are still pointing to a corrective period and a correction may have started last week. First, fewer stocks made it back above their 50-day SMAs as SPY moved higher in the first half of February. Second, seasonal patterns turned negative last week (mid February). Thinking in tornado terms, a tornado “watch” is issued when conditions are ripe for a tornado. A tornado watch turns into a tornado warning when there is an actual tornado. This is really not a correction “warning”, but rather a correction “watch” because conditions are ripe for a pullback. To move from watch to warning, I would look for SPX 4wk High-Low Percent to cross below -20% or SPY to break short-term support. Most stocks follow the S&P 500 so a correction in SPY would make trading difficult.
Bull Market Sequence
Long-term, the weight of the evidence remains bullish. The chart below shows the bullish sequence starting with the Zweig Breadth Thrust on November 3rd. See the ZBT1500 Thrust in the middle window and the green arrows on the price chart. SPY broke out of its falling channel (red trendlines) a week later and also moved above the upper Keltner Channel for a volatility breakout (blue arrow). The Composite Breadth Model (bottom window) then turned bullish on December 7th with a move to +1. This sets the long-term bias, but there can still be corrections and pullbacks long the way.
Links: Zweig Breadth Thrust [7] and Composite Breadth Model [3]
From Correction Watch to Correction 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 59.24% 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 is weak from mid February to mid March (red shading) and this argues for a correction watch
SPY and QQQ Establish Short-term Supports
The S&P 500 SPDR (SPY) remains in a short-term uptrend. SPY hit a new high last Monday (12-Feb) and then fell 1.4% with a sharp decline the next day. The ETF rebounded the next two days and this reaction low establishes short-term support at 490. This is where buyers appeared and pushed the ETF back towards Monday’s high. Buyers defended the low 490 area and this needs to hold. A break below 490 would signal an increase in selling pressure and reverse the short-term uptrend. Such a break could start the correction process.
QQQ hit an intraday high last Monday (12-Feb) and also fell sharply the following day. This tech-dominated ETF rebounded on Wednesday and Thursday, and then fell .9% on Friday. QQQ established support at 425 and this level holds the key to the short-term uptrend. A break here would reverse the uptrend and argue for a correction.
Chart Analysis, Setups and Trading Ideas
An Island Reversal for XLK
The Technology SPDR (XLK) is looking vulnerable after an island reversal and weak bounce last Tuesday. The chart below shows XLK with a market leading surge (+30%) to new highs. More recently, XLK surged in early February and gapped up with a 1.3% gain on February 9th. This gain did not hold as XLK gapped down on February 13th to forge an island reversal. The gap down is also a breakaway bearish gap as long as it remains unfilled. There was a bounce after the gap, but this bounce lasted just one day and XLK fell .9% on Friday. Last week’s low marks first support and a break here would argue for a correction. A normal 33-50 percent retracement would extend to the 185-192 area. Keep in mind that Technology is by far the biggest sector in the S&P 500 and accounts for 29.5% of the index
Watching Short-term Support for CIBR, SMH and IGV
The next charts shows the Cybersecurity ETF (CIBR), Semiconductor ETF (SMH) and Software ETF (IGV). CIBR and IGV surged some 36% from late October to mid February. SMH led the way with a 52% surge. All three are in short-term uptrends, but quite extended after these moves. The green lines mark short-term support levels based on last Tuesday’s low. Breaks here would reverse the short-term uptrends and argue for a correction. The blue shadings mark target zones for corrections, should they unfold. A correction typically retraces between one third (33%) and two thirds (67%) of the prior advance.
The first chart shows SMH with a support-reversal zone in the 185 area. The early February low marks support and this area also marks a 33% retracement of the prior advance. Note that Nvidia (NVDA) reports after the close on Wednesday.
The next chart shows IGV with support marked at 420. Note that Microsoft (MSFT) fell 4% last week and Adobe (ADBE) got clobbered with a 14% decline.
The next chart shows CIBR with support marked at 57. Cybersecurity stocks have been on fire since October with Zscaler (ZS), Crowdstrike (CRWD) and Palo Alto (PANW) gaining 50 to 80 percent. Cybersecurity is the future, but these stocks are some of the most extended in the market.
IBB Goes for a Breakout
Before looking at the daily chart, I would like to review the weekly chart for the Biotech ETF (IBB). The ETF fell from January to October 2023 with a falling channel. IBB then surged with the broader market and broke out of this channel. The ETF hit resistance from the highs in December 2022 and January 2023 (red shading). IBB pulled back with a falling wedge on the daily chart and this looks more like a pennant on the weekly chart. The pattern name is not that important because these patterns are pretty much the same: bullish continuation patterns.
The next chart shows daily candlesticks for more granularity. IBB was featured last week with a falling wedge that retraced 25-33% of the prior advance. I viewed this as a correction after the big advance. IBB surged on Wednesday-Thursday and broke wedge resistance. Even though the ETF fell back on Friday, this breakout is bullish and it is time to set a re-evaluation level. Last week’s closing low is at 132.3 and I am setting the initial ATR Trailing Stop just below this low (132.10).
L3Harris Breaks out of Pennant
The next chart shows weekly candlesticks for L3Harris (LHX). This stock is part of the Aerospace & Defense ETF (PPA), which represents one of the strongest groups in the market right now. LHX surged 28% from early October to early January and then consolidated with a pennant. This pennant represents a rest or short correction after the big move. It is a bullish continuation pattern and the stock is breaking out. This breakout signals a continuation of the big advance and targets a move to the 250 area. A close below 203 would call for a re-evaluation.
The next chart shows daily candlesticks for more granularity. LHX broke out of a triangle and first support is set at 203. Note that LHX was first featured on February 6th. [8]
MDY, IPAY and IOT Follow Up
The S&P MidCap 400 SPDR (MDY) and Mobile Payments ETF (IPAY) were featured on February 8th [9] with short-term bullish patterns. Both broke out and continued higher. As noted last week, I like to close half of a position after an initial pop and then set a trailing stop for the remainder. Both charts show updated ATR Trailing Stops.
Samsara (IOT) was featured on February 6th [8] with a triangle. The stock broke out at 34 and price action turned quite volatile. This is a high-beta stock that will likely move twice as much as SPY. If SPY moves 1%, IOT will likely move 2% or more.
