SPY Moves from Caution Zone to Danger Zone

Today we will review the long-term trend evidence for SPY and the recent uptick in volatility with a new twist on the Average True Range (ATR). I will then show a custom breadth indicator measuring 20-day highs and lows in the S&P 500 and finishing with the danger zone for SPY. This post also includes a PDF file with charts for the 11 sector SPDRs.

The chart below captures the long-term downtrend in SPY using the Keltner Channels and two volatility indicators. On the price chart, the green line is the 125-day EMA and the Keltner channels are set three 125-day Average True Range values above and below. As with Standard Deviation, ATR measures volatility and the channels widen when volatility expands. Keltner channels tell us when there is an “outsized” move that is significant. For example, a move below the lower channel line shows an outsized decline that signals a trend reversal. Such moves occurred on October 11th and February 27th.

The chart above was created with Optuma.

The indicator windows show two volatility measures based on the Average True Range (ATR). The sharp increase in volatility in late February was negative and volatility has not yet returned to normal levels. This is needed for a return to a bull market environment. The first window shows normalized ATR, which is ATR(22) divided by the 22-day SMA of the closing price. This indicator turned up in late February and hit a 12-month high in early March. The lower window shows a binary signal for volatility. The indicator hits 1 when ATR(25) exceeds ATR(125) and 0 when ATR(25) is below ATR(125).

20-day Highs Contract

The next chart shows SPY with 20-day highs and 20-day lows in the indicator windows. Note that these are custom breadth indicators created in Optuma. These indicators foreshadowed the peak in late February as 20-day highs tailed off from mid January to mid February and 20-day lows surged on February 24th. Most recently, 20-day highs tailed off on Tuesday, even as SPY hit a 20-day high with a 2.95% gain. Some  45% of stocks in the S&P 500 hit 20-day highs on Friday and only 25.35% hit 20-day highs on Tuesday. Participation waned as fewer stocks took part in Tuesday’s surge. StockCharts does not carry this indicator so there is no link in the chart.

SPY Enters the Danger Zone

In last Friday’s commentary, I showed how SPY was trading on the border between caution and danger, along with RSI(10) and S&P 500 %Above 20-day EMA (!GT20SPX), which was above 80. I am more tuned into bearish setups because the trend evidence is bearish for SPY, the Index Breadth Model is bearish and the Sector Breadth Model is bearish. The path of least resistance is down at worst and flat/choppy at best.

The indicator windows show RSI(10) and StochRSI(10) for short-term signals. In an uptrend, a move below 40 activates a bullish mean-reversion setup. This setup triggers with a move back above 40 or a StochRSI move above 80 (green lines). Take your pick! The opposite is true in a bear market. A move above 60 activates a bearish mean-reversion setup. This setup triggers with a move back below 60 or StochRSI move below 20.

S&P 500 futures are down around 50 points (1.7%) as I write and volatility (risk) remains high on both sides (long and short). Fed policy and the fiscal response may have put a floor under the stock market, but I do not think they lifted the ceiling. Also note that the Fed, government response and news cycle are making for a wild ride.

And finally, the SPY retracement and rising wedge are the bearish setups seen around the world. Everybody and their dog is on it. This setup is so classic, so obvious and so mentioned, that I have my doubts on its viability. What’s the last thing you expect? Better get ready for it.

Leading, Lagging and Danger Zone Sectors

Link for Sector Chart PDF. This PDF file contains charts for the 11 sector SPDRs. Each shows the Keltner Channels, RSI(10) and StochRSI. Note that all 11 sectors broke below their lower Keltner Channel and are in long-term downtrends. Not one sector has moved back above the upper Keltner Channel. XLV, XLK and XLP are the closest because they had the strongest bounces over the last 15 days. XLF, XLI, XLC and XLE had the weakest bounces because they did not exceed their 50% retracement lines, which are shown on all charts. RSI(10) is just above 60 for XLK, XLV, XLY, XLP, XLRE and XLB.

Thanks for tuning in and stay safe!

-Arthur Hill, CMT
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