A Failure Swing for QQQ, a dud
for SPY and a Wedge for RSP

Some ominous chart patterns are taking shape in the Nasdaq 100 ETF, S&P 500 SPDR and S&P 500 EW ETF. QQQ remains in a clear uptrend with a new high this week. SPY did not exceed its early June high this week and is lagging QQQ. RSP is lagging SPY because it is back below its 200-day SMA with a bearish wedge taking shape. Today I will focus on some short-term bearish patterns in QQQ, a follow through failure in SPY and an ugly chart for the Russell 2000 ETF.

Programming Note: All work and no play makes Jack a dull boy. Thus, I am taking a long week off from July 3rd to July 11th. There will be no reports or updates that week because I will be spending some quality time with family. I will update the breadth models on return and post an update on Monday, July 13th.

Programming Note 2: The ETF ranking and grouping report will be posted before the open today.

QQQ Hits New High, but Failure Swing Looms

The Nasdaq 100 ETF (QQQ) hit a new high with a gap up on Wednesday, but fell back on Thursday. This three-day reversal captures the essence of an evening doji star and marks the second such reversal this month. QQQ is still in an uptrend and still leading, but two candlestick reversals in one month increase the odds of a correction. Keep in mind that QQQ is up some 46% since late March.

A bearish failure swing is also taking shape in RSI. According to Welles Wilder, the bearish failure swing is independent of price action. Yes, a bearish divergence is also taking shape, but I do not use divergences for signals. The bearish failure swing forms when RSI moves above 70, pulls back below 70, bounces, fails to exceed 70 and then breaks its prior low. RSI has yet to break its prior low, but the failure swing is working and would be confirmed with a move below the mid June low.

20-day High-Low Percent Triggers Bearish

Signs of a breakdown are starting to appear in the S&P 500 SPDR (SPY). The first chart shows 20-day High-Low Percent moving below -10% on Thursday to reverse a bullish signal from May 18th, when it moved above +10%. Notice that SPY is still above 300 and above its 15-June low. SPY has yet to record a 20-day low, but we are seeing an expansion in 20-day lows within the index and this shows internal weakness.

Bottle Rocket Candlestick Looks like a Dud

The next chart shows SPY forming a long white candlestick and reversal day on June 15th. The ETF surged the next day with the “bottle rocket” candlestick, but there was NO follow through. SPY stalled for five days and then turned down on Thursday with a sharp decline (-2.55%). I think we have all seen what happens to dud bottle rockets and this one looks headed back towards the ground.

A Paranormal Counter-Trend Bounce for RSP

The Nasdaq 100 ETF (QQQ) and Technology SPDR (XLK) have been the true leaders from late March to mid June. As far as the “average” stock in the S&P 500, the advance from late March to early June can still be classified as a classic bear market bounce. RSP plunged to a new low and then returned to test its 200-day SMA.

Actually, this was a classic drug-induced bounce back to the 200-day. The chart above shows the S&P 500 EW ETF (RSP) surging above its 200-day SMA the first week of June and moving right back below the second week of June. The drugs of choice are monetary, fiscal and vaccine stimulus. Drug-induced behavior is usually erratic with euphoric highs and depressive lows. Consider this. RSP was up 28% from May 14th to June 8th and down 12% the last 12 days. Thus, we have seen a bull market and deep correction in less than two months.

Weekly Charts Just Get Uglier

The next chart shows weekly prices for RSP, the S&P MidCap 400 SPDR (MDY) and the Russell 2000 ETF (IWM). These are ugly charts that get uglier as we move down in market cap. All three recorded 52-week lows in March, rebounded to their 200-day SMAs, formed outside reversals three weeks ago and fell back below their 200-day SMAs. Thus, it looks like lower highs are taking shape and the bigger downtrend is resuming.

While I can understand tempering bearishness because of monetary and fiscal stimulus, I do not think we are in a bull market environment when the three charts above look as ugly as they do. In addition, note that all three are below their January 2018 highs. At best, RSP has gone nowhere in two and a half years. At worst, IWM formed a lower high in January 2020 and is in a long-term downtrend.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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