Update for the Big Three: SPY, QQQ and IWM

This is an update for the big three major index ETFs: SPY, QQQ and IWM. Stocks started strong on Tuesday, but ran into selling pressure and bearish candlestick patterns formed. SPY and IWM are in long-term downtrends and showing signs of weakness near key retracements. QQQ remains stronger, but I still think the big surge is a counter-trend bounce.

SPY Stalls below Falling 200-day

The chart below shows SPY forming an outside reversal and a bearish engulfing on Tuesday. A bearish engulfing means SPY opened above the prior close, moved lower during the day and closed below the prior open. An outside reversal means Tuesday’s high is above the prior high and Tuesday’s low is below the prior low. It is an outside reversal because price action reversed course during the day. Bearish engulfing patterns are based on opens and closes, while outside reversals are based on highs and lows.

There is still a slight upward trajectory since mid April, but SPY did not exceed the 29-April high and is virtually unchanged since April 17th (17 days ago). Thus, this upward trajectory is weakening, and at a critical juncture. SPY remains below the 200-day SMA, which is slightly falling, and the ETF is trading in a potential reversal zone as it retraced around 61.8% of the prior decline. See this commentary and video from May 2nd for examples of bear market bounces.

The middle indicator window shows RSI(14) moving above 50 on April 8th and remaining above 50 as the short-term uptrend worked its way higher. RSI turned down on Tuesday, but remains above 50. However, the next indicator window shows StochRSI moving below .20 for the first time since February 24th. StochRSI is the Stochastic Oscillator applied to RSI, which makes it the momentum of momentum. This is the early sign of a downturn. The bottom window shows S&P 500 %Above 20-day EMA (!GT20SPX) failing to get back above 80% this week and turning down. The lower high shows less upside participation on last week’s bounce.

20-day High-Low Percent Signals

Now let’s turn to an Optuma chart and look at short-term High-Low Percent, which is a custom breadth indicator that I created. 20-day High-Low Percent shows the percentage of 20-day highs less the percentage of 20-day lows. 20 days covers 4 weeks and this is a short-term trend indicator with signal lines at +10 and -10%. The area turns green when the indicator moves above +10% for a bullish signal, and turns white when the indicator moves below -10% for a bearish signal. The indicator turned bullish on April 7th and remains bullish.

The bottom windows show 20-day high and 20-day low percent separately. 20-day highs got above 10% the last four days, but the readings were slightly lower the last two days. 20-day lows moved above 10 percent last week and this week. Thus, 20-day lows are starting to creep higher.

QQQ Forms Bearish Engulfing

The next two charts show the strongest of the major index ETFs (QQQ), and the weakest (IWM). SPY is caught in the middle.  I usually do not show six month candlestick charts, and instead prefer 1 year bar charts to capture the bigger trends and patterns at work. However, let’s face it, price action in 2020 is the only price action that counts right now.

The first chart shows QQQ also forming a bearish engulfing and outside reversal. I am sure these were seen around the world by all the arm-chair chartists. Nevertheless, it is an intraday reversal and QQQ is also ripe for a rest after a 30+ percent advance. What makes this a bear market bounce? Despite an advance that was sharper and bigger than the December-January advance, RSI(14) did not exceed 70. The ability to exceed 70 and become “overbought” is a sign of strength (strong upside momentum). The inability to become overbought suggests that this is indeed one heck of a counter-trend bounce. Also note that QQQ forged a 52-week low in March and has yet to exceed the February high.

The same three indicators are shown. RSI(14) moved above 50 a day earlier than SPY and remains above 50. The momentum cup, while not exactly bullish, is half full as long as 50 holds. StochRSI surged above .80 on March 24th and has yet to break below .20, which would suggest a downside momentum thrust. Nasdaq 100 %Above 20-day EMA (!GT20NDX) has not been below 50% since April 3rd and also remains half full.

IWM is the Weakest of the Three

The last chart shows IWM barely exceeding the 50% retracement with a rising channel/wedge. The pattern and retracement amount are typical for counter-trend bounces. The ETF is well below the falling 200-day SMA and the long-term trend is clearly down. IWM also formed a bearish engulfing and looks vulnerable to a breakdown here.

RSI(14) is just above 50, but StochRSI plunged below .20 for the first time since March 16th. S&P 600 %Above 20-day EMA did not make it back above 80% on last week’s bounce and turned sharply lower with a move below 40%. Small-caps are clearly weaker than large-caps.

The S&P 500 SPDR certainly looks primed for at least a pullback, if not a continuation of the bigger downtrend. QQQ and IWM will follow SPY’s lead. Given relative weakness in IWM and the Regional Bank ETF (KRE), I would expect them to lead lower if SPY turns. Keep in mind that the Fed and Congress will fight the bear market and this could result in choppy trading.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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