Chad Gassaway, CMT

Technical analysis, quantitative analysis, and behavioral finance. Yahoo! Finance Contributor. Chartered Market Technician and basketball junkie.

[chadgassaway]

Summer Swoon or Boom

Technicals:

The S&P 500 closed just 22 points below all-time highs at 2941.76 on Friday following a shallow pullback earlier in the week resulting from a rejection of the slowly rising trendline connecting the September 2018 and recent May all-time highs.  While the market has struggled to hold onto additional gains on each marginally higher high, each additional time a level of resistance is tested the higher the odds of it being broken as overhead supply decreases.

While price initially rejected higher prices, market internals remained strong during the minor back and fill.  Not only did the $SPX Advance – Decline line not only hold strong, it put in a new uptrend high on Friday. 

Additionally, the S&P is potentially forming a cup and handle pattern that could lead to the next leg of the rally.  A confirmed break above would target 3090 based on using a Fibonacci 161.8% extension to obtain a price objective.

While the trend remains higher and market internals are confirming the price action, one cause for concern is the fact that RSI is showing a bearish divergence.  Any breakout in the index should cause this indicator to clear the downtrend or the increased likelihood of a failed breakout taking place would result.

Sentiment:

While the S&P is near all-time highs, the bullish sentiment of market participants has been slower to follow.

As of Thursday’s close S&P DSI closed at 65 with a 21 day SMA of 55.9.  In recent times the majority of tops took place when the 21 day SMA has found itself in the 80’s.

Source: MBH Commodities (https://www.trade-futures.com/dsireport.php)

In the most recent AAII Sentiment Survey, the number of bullish market participants surveyed was nearly 9% below its’ historical average and 2.5% below the number of market bears.

Source: AAII Sentiment Survey (https://www.aaii.com/sentimentsurvey)

While the Fear & Greed Index is well above recent lows, it too remains neutral and is no cause for concern.

Source: CNN Money (https://money.cnn.com/data/fear-and-greed/)

While sentiment is far above bullish contrarian levels, we remain well below levels that have historically caused concern for the market on a near term basis.

Seasonality:

Despite the historic saying of “sell in May and go away”, July seasonality has been relatively strong in comparison to other summer/early fall months.  Since 2000 it has averaged a return of 0.81% with positive returns 57.89% of the time.

Since 2009 this has vastly improved.  Over this period the month of July has been the highest performing month of the year with average returns of 2.79% and an 80% win rate.

However, the largest gains in July tend to be concentrated towards the beginning of the month, while gains tend to be muted and the larger sessions with losses tend to come towards the end.

The first session of July, in particular, has shown exceptional strength.  Not only has it closed higher the past 9 years but the trend can be seen across a much larger time horizon.

Conclusion:

While markets have been range bound and new highs have been small at best, the market has the opportunity to extend higher over coming weeks.  Not only does market breadth remain strong but a strong short term seasonal tailwind lies ahead.  Based on a combination of technical, sentiment, and seasonality, ES_F traders should continue to hold a bullish bias over the near term but remain cognizant that the most seasonally bearish period lies just ahead as summer concludes.

[chadgassaway]

End of Year Seasonality and the S&P 500

We are quickly entering on of the strongest seasonal period of the year.  The holiday season leads to increased public happiness which has in turned led to higher markets over history.

The three sessions prior to Thanksgiving have been seasonally strong.  This can especially be seen the session prior as it has shown gains of 0.36% on average with a 78.46% win rate since 1950.  This strength has carried over to the session following the holiday which has risen 0.35% on average with a 72.31% win rate.  However, the session two days after the holiday has fallen by -0.31% with a 40% win rate.

Moreover, Monday will mark five trading days until the end of November.  The last five sessions of November have risen 0.83% on average since 1950 versus the historical average of 0.17% over any rolling five day period during the same time frame.

Additionally, Black Friday has been slightly bullish since 1990 with average gains of 0.23% and a 60% win rate.  However, over the past ten years win rates have been 50/50.  Cyber Monday has resulted in these small gains being given back and more.  On Cyber Monday the market has fallen -0.31% on average with a 44% win rate.  With the inception of the internet not gaining widespread use until recent years we must look at more recent time frames on this though.  Over the past ten years performance has been even worse with an average loss of -1.13% and a 20% win rate.

Thanksgiving through the end of the year has shown solid results though.   Since 1990, the market has risen 2.21% and was higher 80% of the time from Thanksgiving through year end. 

However, after the strong seasonal end to November, the period of seasonal strength remains in it’s infancy.

On all the above periods, December has outperformed all other months on not only a win percentage basis but an average return basis as well.

Digging further into the month we can see that since 1950 the S&P 500 has risen through the seventh session prior to moving back to near flat at the close of the eleventh session.  This is where true strength sets in.  From the eleventh session through the end of the month the market grinds higher based on history.

Since 1990 the seasonal pattern has remained similar.  During this time period the market put in a short term high slightly earlier.  The S&P 500 peaked at the third session and gave back early gains through the tenth trading session at which point it bottomed out.  Once again, the market trended higher through the end of the month.

While the SPX has been strong in December it has provided much lower returns than the Russell 2000.

Since the inception of the Russell 2000, December has risen 3.51% on average with a 89.29% win rate.  Similar to the SPX, this is the highest win rate and average return of any month.  Also, the RUT has outperformed the S&P 500 in December by 1.83% on average.

In conclusion, seasonality is a strong tailwind through the end of the calendar year.  While this should be only one portion of an investment thesis, this strongly favors a bullish bias into year end.

[chadgassaway]

Technical Analysis of the S&P 500

Technicals:

The S&P has rallied strongly off the 1867 lows and has moved all the way back to the 61.8% retracement.  Yesterday it formed a hanging man candlestick which is being confirmed at the moment though the day has only just begun and could be vastly different by the close.  Furthermore, this is just below the 2040 level that the market broke down from.  A significant amount of supply sits just above and it makes sense for the market to pause here.

Additionally, the market used the region around the rising 100 day SMA as support consistently throughout the year.  It is currently approaching the now declining 100 day SMA.  Until proven otherwise, broken support turns into resistance.

With so much overhead supply, new entries at these levels are not favorable from a reward to risk standpoint.  However, a break above these levels and an end of year performance chase could take place.

Sentiment:

DSI (Daily Sentiment Index) has seen sentiment rise from low single digits to 56 as of yesterday’s close. 

While nowhere near extremes, sentiment is bumping its head on levels that have caused grief.  In 2015, when the S&P 500 sentiment, based on DSI, has reached the 55-60 zone, a pullback has been near.  A break above this zone would be beneficial to the bulls.

Also, eurodollar sentiment is hitting extremes as it has risen to 80.  As there is a positive correlation with the EURUSD and the SPX, any pullback in the currency could lead to back and fill in the averages.

Moreover, strength in the USD Index could also pose a danger to the market as it has a correlation of -0.78.

Ticker Sense has seen bulls rise to 43.48% following the rally and an extreme in the bull - bear spread only a couple weeks ago.  While it has yet to hit bearish extremes, it is a sign that the risk to new entries here is far higher than just a few weeks prior.

Finally, the following chart from Helene Meisler shows that after being net buyers in early October, insiders have turned negative on their stocks.

When viewing sentiment as a whole, while not a significant negative, it does not provided the tailwind that it did just a few weeks ago.  While there are some negatives, we would place this in the neutral category.

Seasonality:

Despite the reputation for October being a rough month, history has shown that it is one of the stronger months.  Since 1990 it has risen 1.51% on average (third best on a percentage basis) with a 68% win rate.  The seasonal strength has not ended here.  In fact, it has just begun and continues to run through May.

As of Monday’s close, the S&P 500 is higher by 5.92% month to date which is far ahead of the typical October return.  Furthermore, should we close here, this would be the best return since October 2011.  Large monthly returns have not been a negative going forward though.  In fact, based on the numbers below, this is a positive.

Additionally, today marks the 14th session of the month.  We are soon approaching the seasonal weak intramonth area that takes place from the 16th through 19th sessions of the month.  I should note that this is a general roadmap as opposed to being 100 percent fact.

Based on seasonality, we could see weakness over coming sessions but the seasonally strong period of the year is only in the early stages.

Conclusion:

In conclusion, seasonality is supportive over the following months while sentiment could use a short term breather.  When only looking at these two components, while not as favorable as just a short while back, there remains more bullish than bearish attributes.

When viewing the technicals, which take priority, there are a few possibilities but the following plan is the one I am looking to follow.  I plan to reduce risk into the overhead supply area.  Between 2034 and 2040 SPX I plan to ladder into some shorts with a tight stop above resistance.  This can be done as a hedge or outright.  A break and hold above resistance and I will look to take stops and add back into existing long positions.  The market is back to a region that it must prove itself.  While I expect the market takes out these levels at some point this year there is a risk of being rejected on the first test before a performance chase takes place.

[chadgassaway]

FOMC Days and Rate Hikes

Since late 2008 the market has been given extremely low interest rates courtesy of the Federal Reserve.  In fact, dating back to 1954, this has not only been the lowest effective rates but also the longest periods that the rate has remained flat.

Heading into tomorrow’s FOMC announcement, few market participants believe that we will see any change to this.  As of now, based on Fed fund futures, there is only a 23% likelihood that this takes place tomorrow.  This rises to 37% odds in October and finally breaches the 50% mark in December with a probability of 62%.

Since the market is expecting no change we will dig into the current cycle’s returns since low rates have been in place.

Since 2010, the day of the FOMC release has seen the market rise by 0.23% on average with a 57.78% win rate.  From the open to close the market has risen by 0.11% with a 50% win rate.  However, the following session the market fell -0.27% on average with a 46.67% win rate.  A week later the market added 0.11% to post FOMC gains with a win rate of 59.09%  Two weeks later this rose to 0.29% with a 55.56% win rate.  A month later returns rose to 1.08% with a 73.33% win rate.

While a lot of credit to the current market rise is given to the Fed, periods following the FOMC release have generally underperformed the average of all periods over this given timeframe.

This year the market has seen a change however.  The day of the FOMC meeting was higher three of five times but average returns were extremely weak.  Looking out three days the market was higher 80% of the time with a 0.42% average return.  This was all given back and more as two weeks later the market fell -0.11% on average with a 20% win rate.  Even worse is that the median return was -0.92% over this period.

However, should the market be in for a surprise and a rate hike takes place we must be prepared.

Since 1983 (when my data begins), the FOMC has hiked rates 76 times.  The following month was mixed at best though it slightly favored the bullish side of the trade.  Two months later the market rose 0.61% with a 68.42% win rate.  Three months later this increased to 2.17% and 73.68% respectively.  It continued to rise over the following six months to 5.75% with a 81.58% win rate followed by a 13.03% return a year later with a 84.21% win rate.

If we were to hike tomorrow, it would have been 3,367 calendar days since the last hike and by far the longest over this study period.  Hikes that took place when no hike has preceded it over the prior year have caused the market issues over the following three months.  One month later none were higher and averaged losses of -2.24%.  Three months later the market was still lower by an average of -0.79% with a 25% win rate but did see a slight improvement.  Six months later the market was higher by 7.67% and with a 75% win rate.  A year later the win rate remained consistent but logged gains of 13.11%.

Finally, should a rate hike cycle begin we must ask ourselves where to put our money.  The answer may come as a surprise.

According to data from Allianz Global Investors, commodities have performed the best during rate hike cycles.  Furthermore, EM and global equities have outperformed US equities.  As shown above, the worst performers have been the bonds themselves which should come as no surprise.

Only time will tell but currently investors do not expect a rate hike ahead of tomorrow’s meeting.  Should a surprise take place the market could see weakness over the following couple months.  History does not support the idea that a rate hike is the end of the longer term bull market though.

[chadgassaway]

Pitfalls of Virtual Portfolios

Over the past couple years investment advisory newsletters with virtual portfolios have become the popular thing among investors.  Every day I come across a website or e-mail claiming outlandish returns which led me to this.  Achieving their posted returns may not be as easy as they seem though, or should I say safe.

First and foremost, many of these individuals do not have actual money on the line.  When the money being traded is not real, this takes emotions out of the equation as well as risk management.  Taking emotions out of the equation can be a positive though.  Myself, like every other actual trader, remembers a trade that they let emotions get the best of them which led to bad decisions whether that means not letting a position run or taking one off too early.  Without actual money on the line this is removed and can actually be a positive.  However, there is no need to manage portfolio risk either.  If you lose money in a virtual account you just open a new one and re-load.  This isn’t real life, however.  This led me to create a virtual portfolio for myself to gauge against my real money performance with the purpose of attempting to gain 20%.  

After opening the account on August 24th the portfolio gained nearly 24% in an extremely short period of time.  On the other hand, I could have just as easily lost it all in the virtual account.  While I can not state actual returns online, I can say that in the real world, my returns widely differed.  In the real world I would be ecstatic to post 20% returns in a year, much less a matter of weeks.

Will your actual results be the same the same as your performance in a virtual account?  I highly doubt it.  Be fearful of those promising outsized returns when they have nothing on the line themselves.

Note: The virtual portfolio and trades can be found at https://tradey.com/wildcattrader.  This strategy should never be used within an actual portfolio.

[chadgassaway]

Technicals, Seasonality, and Sentiment in the S&P 500

The S&P 500 fell in recent weeks and found support at the trendline on the non-log charts.  It then formed a hammer candle on the weekly chart but has yet to show any follow through on the bullish candlestick.

After finding support at the above mentioned uptrend line the market has recently begun forming a symmetrical triangle when zooming in on the daily charts.

On most occasions this pattern breaks in the direction of the prevailing trend, which is lower, but is a neutral pattern until the directional break takes place.  A break above 1965 has open air above until the 1988-1994 zone is reached followed by the confluence of the price objective and support turned resistance near 2050-2055.  A break below and the first level of support below comes in at the August lows near 1867.  Furthermore, the final pattern price objective resides at 1847 and is just above the April and October 2014 lows.

Another pattern of note is the ascending triangle in the ES_F (S&P 500 futures contract).  Once again, the uptrend line of the symmetrical triangle in the S&P 500 appears but the futures put more weight on resistance 1 from the chart above as the primary level of resistance.  Once again though, until broken this pattern is neutral and needs confirmation via price breaking above or below.

Price action slightly favors the bears over the bulls due to preceding trend but we lean more towards a neutral bias until the aforementioned price levels are taken out.

Additionally, seasonality shows a number of cross currents as well.  The week of OpEx the S&P 500 has risen by 0.98% since 1990 with a 72% win rate.  Over the past ten years this has risen to 1.58% and 80% respectively.  Following OpEx is where things fall apart.  The following five days have only been higher four of twenty five times (16%) with average returns of -1.26%.  Since the bear market of 2008 and the following bull market began this week has only gotten worse.  Over that seven year span the week returned -1.98% on average with six of seven ending lower.

Moreover, the 37th full week of the trading year (current week) has returned 0.47% on average since 1950 and is the 8th strongest week.  However, the following week is the worst weak for investors on average with returns on average of -0.60%.  This weakness then tends to bleed over into early October.

The period between Rosh Hashanah and Yom Kippur have been especially weak as well.  The period during which this Jewish holiday takes place has returned -0.81% on average since 1990 with a measly 36% win rate.

Based on seasonality alone we could expect near term strength followed by a rollover in the markets.

Finally, the Citi Panic/Euphoria model is showing extreme pessimism.

DSI is showing fear as well with SPX bulls at 21% and Nasdaq bulls at 20%.

This can further be seen by allocations among small speculators.

The above chart from Jason Goepfert (@sentimentrader, sentimentrader.com) shows a record $6 billion short position in the index futures.  Based on the above data, it is hard to argue that investors are anything less than pessimistic about the market.

In conclusion, nothing matters more than price and at the moment price action is neutral until proven otherwise.  Due to the proximity to the apex of the symmetrical triangle, a large move can take place any day at which point the market will tell technicians whether the move will be bullish or bearish.  Additionally, sentiment leans towards the bullish argument while seasonality, though over the following week is bullish, hints at a bearish resolution which only adds more confusion.  If both sentiment and seasonality aligned we would prepare for a breakout in the direction that they favor.  As they do not, we must show patience and allow the market to prove itself over coming days.  When there is so much conflicting data, decreasing size and the number of trades is always advisable.

[chadgassaway]

September Seasonality Breakdown

As we quickly approach the end of a rough August we must look ahead and see what September has brought about seasonally from a historic perspective.

September has historically been an extremely weak month.  Since 1950 it has shown to be the worst performing month on both an average return and win percentage basis.  September has fallen by -0.48% on average with a win rate of 45.31%.  Moreover, when negative, it has averaged the third lowest returns in comparison to other months, only to be beaten by August and January.

The past ten years though have fared far better though with average returns of 0.67% and a 70% win rate.  One thing to note is the years that were negative tended to be extremely negative.

Digging further, since 1990 the first half of the month tends to be relatively strong before falling off in the later half as can be seen above in the chart of returns based on individual sessions.

This can be further broken down into pre and post OpEx.  The week of OpEx the S&P 500 has risen by 0.98% since 1990 with a 72% win rate.  Over the past ten years this has risen to 1.58% and 80% respectively.  Following OpEx is where things fall apart.  The following five days have only been higher four of twenty five times (16%) with average returns of -1.26%.  Since the bear market of 2008 and the following bull market began this week has only gotten worse.  Over that seven year span the week returned -1.98% on average with six of seven ending lower.

Furthermore, as of yesterday’s closing prices, the S&P 500 was down greater than 10% for the month of August though this could drastically change before month end.  The only other time since 1950 this took place was in 1998 and resulted in a 6.24% bounce in September.  However, there have been ten occasions that greater than 5% losses took place.  This led to negative returns in August 7 of 10 times.  Only 30% of the time was the month positive with average returns of -3.30%.

In conclusion, September has been extremely rocky.  Particularly in the back half of the month.  Also, a negative August has shown to be a precursor to further losses in September more often than not.  While seasonality is only one factor in an investment approach, this is a significantly negative headwind for the market.

[chadgassaway]

Internals of the S&P 500 Hitting Extremes

The S&P 500 closed lower by 2.11% today to 2035.73.  In fact, based on the data below from Ryan Detrick, CMT, this is the worst loss of 2015.

Losses of greater than 2% have tended not to be the bottom though.  In fact, since 2012, 23 of 27 (85.19%) times a lower low was put in on an intraday basis over the following week.  Moreover, 66% led to a lower close over the same timeframe.

There are some positives though.  One of these is the VIX closes higher than the VXV.  When the VIX:VXV ratio has risen above 1.00 this has been a bullish sign over recent history.  Today this indicator closed at 1.016.

Since 2010 the market closed higher two weeks later 83.33% of the time by an average of 1.23%.  This increased to 88.89% with returns of 2.13% a month later.  Since 2012 this has improved even more.  Two weeks later the market rose 2.48% while a month later this improved to 4.30% with 100% win rates during both periods.

Furthermore, only 14% of the S&P sits above it’s 10 day SMA.  Over the past three years the market was higher two weeks later 86% of the time with average returns of 2.61%.

Additionally, DSI readings are showing a reading of 5 for the S&P 500 while the Nasdaq is even lower at 4.  This is the lowest level for the SPX DSI since 10/15/14 when it was at 5 as well.

All the above mentioned data points towards a strong bounce in the future.  However, this is where problems arise.  The candle on the weekly chart has broken well below support and could be pointing towards a change in trend.

Near term the market appears to be setting up for a strong upside bounce.  For the first time in years though, longer term technical damage has been done.  Sadly, this could be showing us that bounces in the future may be setups to sell the rip instead of buy the dip.

[chadgassaway]

Is a Bottom in the S&P Near?

The S&P 500 is currently lower by -1.13% to 2060.64 and is nearing the lower end of the range formed since the beginning of March which is attributed to the drop in the Chinese Yuan by headline writers.

While off the lows, on an intraday basis the bounce felt more like an oversold bounce than a true reversal though.  Therefore, taking out the current lows would come as no surprise.  However, the market traded down to 2052.09 which was only 6 points above the 2040-2046 zone.  Any continuation lower could take us to these levels fairly easily.  This is where the market  gets interesting.

This lower end of the current range also happens to coincide with the 50% retracement of the current years range.

Furthermore, we are once again at the lower bollinger band that has been supportive of the market in 2015.

Moreover, the SPY is nearing the year to date value area low where buyers have shown up in the past.

Until this zone of support breaks it must be viewed as such.  The more times a level is tested the more likely it is to break but similar to numerous attempts to break out of the range to the upside, levels of support and resistance can last indefinitely.

Additionally, sentiment is showing that investors have grown bearish after the pullback.  The CNN Fear and Greed Index currently registers a reading of 6 and has been supportive when it has reached these levels in the past, though not to the exact day.

DSI is another sentiment indicator nearing extremes.  The indicator closed at 14 based on yesterday’s close for the S&P 500.  Based on today’s price action I would guestimate that it would be in the 5-7 range should we close here.  Once again, not a sign of an exact bottom but has led to poor reward to risk ratios for shorts.

Finally, since 1990, the S&P 500 has found a seasonal bottom on day nine (currently on trading session eight) before trading higher through the 18th trading session of the month.  While there is nothing magical about the ninth session we look for general periods of seasonal strength which is nearing.

Do we find a bottom today or tomorrow?  I can’t answer that.  However, until primary support breaks it must be viewed as such and can be bought with stops below.

[chadgassaway]

Weekly Technical Outlook of the S&P 500

The S&P 500 closed at 2103.84, which was a lower close on the day but resulted in gains of 1.16% for the week and 1.97% on the month of July.  The weekly chart continues to remain within the rising uptrend channel that we have mentioned on numerous occasions.  For the sake of those who have followed this work, we will not go over this again as little has changed.  For those who have not, the most recent information on the weekly trend can be located here.

On the daily charts, the S&P 500 continues to remain within the sideways channel that has been forming since late February.  RSI also confirms the price action and refuses to break above or below.  There is no doubt this market is wearing on both the bulls and the bears.

The lackluster price action resulted in the rolling 6 month range of the S&P 500 moving below 6% on Friday’s close.  This lack of volatility and market range has been seen very few times over history.

While many have made this out to be a sign of a top, history does not show that to be true.  While extremely rare, since 1960, the market was higher a month later 66.67% of the time with average returns of 0.49% and median returns of 1.29%.  A year later the market was higher by 2.87% on average with a win rate of 66.67%.  While these numbers do not show returns or win rates that extremely high, they still do favor the bullish case but severely under-perform historic norms.  The one issue that can be seen when looking at the returns on an individual basis is that returns have been muted on both the downside and upside.  For those who have already been bored to death by this market, this does not bode well.

After what felt like a kick off rally to challenge highs, the S&P 500 lost momentum at the 61.8% retracement and formed a hanging man candlestick on Thursday.  Friday’s price action confirmed the prior candle as it engulfed the real body of the prior session.  Additionally, the 50 day SMA has begun to roll over.  On a brighter note, all other long terms moving averages with that exception continue to trend higher, although are flattening.  In addition, the Russell 2000 closed the session with a shooting star candlestick which hints that risk assets could once again struggle after the recent bounce.

Moreover, the VIX closed down near the $12 level that has caused the market grief over the past year as shown above.  On a couple of occasions the market continued slightly higher but reward to risk ratios were negative on all occurrences.

Furthermore, after trading lower for five consecutive sessions the market has shown a tendency to bounce higher over the following week which would end on Monday.  A good portion of gains were soon given back between the end of week one and week two as shown on the chart above though.  Should this hold true, we could see weakness in the week ahead.

Though the intermediate term trend has been choppy and lacking momentum, the long term trend undoubtedly remains to the upside so we must assume that the trend remains higher.  However, over the short term, the bounce felt convictionless and appears to be more of an oversold bounce than an attempt at highs.  This caused us to sharply decrease exposure.  Short term bears will want to see the high of Friday’s bearish engulfing hold while bulls must break above this level in order to re-test highs.  A re-test of the recent swing lows could be in the cards otherwise.

Therefore, support sits below at 2063, 2040-2045, and 1990.  Levels of resistance above reside at 2114 and 2125-2130.

Monday marks the first trading day of August.  Seasonality in August has been challenging in the past and has acted as a headwind to stocks.

Since 1950 the S&P 500 has shown a tendency to meander without much seasonal bias.

Beginning in 1990 this began to change.  While the first session of the month continued to hold a slightly bullish bias, it has soon been followed by weakness.  The second through eight trading sessions have all shown negative average returns over the past 25 years before a rebound through the thirteenth session.  A mid month roller coaster has then set in prior to weakness creeping in once again towards month end.

Since 1990, August has been the weakest month on an average return basis.  While the win rate is slightly above fifty percent the average positive return has been the second lowest and when negative has shown to be the poorest performing month.

Sentiment on the other had continues to favor the bullish side of the trade though as of recent when it has hit an extreme it has led to bounces but no sustainable rally.

Are we going to see a correction?  I see little to no signs that this is in the cards.  A deeper pullback would not come as a surprise though.  There are a number of technical signs that point towards this being the time period one could take place but the question is whether the bears can capitalize on it.  Seasonality supports the idea that a short term pullback could be around the corner as well.  While we remain bullish over the longer term as the trend remains higher, over the short and intermediate term there are a number of things to be concerned about.  Is it time to put a bear suit on?  So long as we hold below Friday’s highs the bears have a defined level to trade against.

Follow on Twitter at @WildcatTrader and on Stocktwits at @ChadGassaway.

Bear image courtesy of adweek.com.

[chadgassaway]

Technicals, Breadth, and Sentiment of the S&P 500

The S&P 500 closed the week lower by -2.21% to end at 2079.65 and gave back nearly all the gains from the prior week.  It continues to remain within the well established long term uptrend that began in August 2011 but recently has struggled to lift off of the lower trendline support.  In addition the weekly chart formed a bearish engulfing candlestick.

However ominous bearish engulfing candlesticks sound, history has been mixed at best.  During the current bull market the following week has seen continued weakness prior to rebounding and being higher a month later 88.89% of the time.  When you look at the period from 2000 to 2009, oddly enough the market has bounced the week following bearish engulfing candlesticks only to move lower in the future.  It appears that in bull markets you see another week of weakness while in bear markets it is followed by a rebound.  While we consider this to be more negative than positive, it appears to be highly inconsistent.

When zooming in on the weekly chart, a sideways channel can be seen forming.  As the trend remains higher on this timeframe we must assume this is a bull flag until the longer term trendline is broken.  One benefit is that since we are so close to the lower trendline of the rising channel, the defined level of risk on this timeframe allows for tight stops.

When lowering timeframes down to the daily charts, we are approaching the zone between the 150 and 200 day SMA.  With the exception of last October this range has been a strong level of support.  Additionally, both moving averages are rising though the trajectory of the rise is decreasing which is a sign of decreasing momentum.

While the market has frustrated investors, including myself, the range continues to tighten which means we are closer to a sized move.  Which way we break is yet to be seen but until otherwise proven we must assume that it is in the direction of the trend.  The first level of support sits below at the lower bounds of the ascending triangle at 2067 while support 2 (balance lows) can be found at 2044.  The 2044 also coincides with the monthly lows and weekly trendline support level and is our primary level to keep an eye on.

While never a fan of attempting to predict where price moves, holding here has the possibility to form a broadening pattern (would not be called an inverse head and shoulders as it was not preceded by a decline).

The 60 day/60 minute chart is supportive of this scenario though.  Each time RSI has reached these depths, the market has quickly rebounded.

Moreover, the market is now backtesting the prior balance lows and 61.8% retracement level.  For bulls, this is the last line in the sand before breaking down to 2044.

The index is also putting in the fourth consecutive session lower.  While on many occasions since 2012 it has been followed by a fifth session, three days later it rose 1.20% on average with a 82.35% win rate.  Over the following week it had at least one higher close 94.12% of the time.  Three weeks later it was higher by 2.04% on average with a 88.24% win rate.  Additionally, the SPX has lost > .75% on a Friday four times in 2015.  The past three all gained the following session (+1.30%, +0.39%, +0.93% respectively).

Sentiment:

Bearish investors have  argued that bullish sentiment is too high and we are approaching a crash.  With the exception of the Investors Intelligence survey, it is truly hard to argue this point when looking at the facts.  The CNN Fear and Greed Index has once again fallen to extreme lows after giving back only a portion of prior gains.

AAII bulls are not showing extreme optimism either.  In fact, they are at the extreme low end of the range based on an 8 week moving average of the survey based on data from Ryan Detrick, CMT.

Also, DSI shows that bulls fell 22% over the course of the week to close at 31.  While this is not an extreme, it is a sign that there are far more bears than bulls.

The following chart from Urban Carmel (@ukarlewitz) shows that the 21 day CPCE has risen to a two and a half year high.  This is a sign that options traders are showing pessimism.

Breadth:

As has been mentioned by a number of financial commentators, breadth has been downright horrible.  Divergences have also preceded a number of market collapses and this has been spoken about ad nauseam.  One issue with this is the fact that for every one that has preceded a large drop there have been ten that have led to no significant outcome or rising prices (this is not scientific but more of an estimate based on the eye test).

The McClellan Oscillator is a popular measure of breadth.  Over the past 10 years I count seven times it fell and only once did the market fall.  Something to worry about?  Yes, but isn’t there always something to worry about?

One example of bad breath that has actually been a bullish factor is stocks below the 5 day SMA.  When it has reached such levels it has actually led to market rebounds.

In fact, buying when this has crossed below 25% has outperformed the S&P 500 consistently in recent history as shown below.

While I could look at breadth metrics a number of different ways, we will save this for a later date.  The point is that bad breadth can result in market collapses but on the other hand it may not.  In fact, more often that not, bad breadth has been a bullish sign when within the context of a bull market.

In conclusion, the market continues to move higher on longer term timeframes but has acted erratic as of late.  This should result in traders moving to higher or shorter timeframes that don’t include as much chop trade.  A number of red flags are showing up but they may or may not matter.  Based on recent history, the arguments used by the bears may actually result in higher prices.  Should we close below the weekly trendline on the S&P 500, which is just below, I will change my tune but until that point I remain in the bull camp.

[chadgassaway]

Technical Analysis Update on the S&P 500

The S&P is trading lower by -0.55% to 2102.57 and currently putting in a third consecutive negative session.  After some expected back and fill that was previously mentioned here, the S&P is nearing the end of the period of seasonal weakness.

Today marks the 16th trading session of July and is the final session of the seasonally weak period during the month.  There is a tendency to trade higher from here through the end of the month based on data from SentimenTrader.

Moreover, a confluence of support levels sit just below these levels.  The 50 day SMA currently resides at 2102.67.  Additionally, the long bodied marubozu candle high and 38.2% retracement sits at the psychologically important 2100 level.  Should this level not hold, an air pocket sits below down to 2080-2085.

Furthermore, the 60 day/60 minute charts show RSI at levels that have led to short term bottoms.

For swing traders looking to put some additional risk back on the books, from a reward to risk ratio perspective, this appears to be a good location with stops placed just below the aforementioned levels of support.

[chadgassaway]

Apple Earnings Suggest an Upside Move

Apple will release earnings after the bell today with expectations of $1.80 EPS and $49.26 B in revenues.  The company has shown a strong track record in recent history, beating expectations over the past ten consecutive quarters.  Also, options are pricing in a 4-5% move after earnings.

The stock remains within a well established uptrend on the weekly charts while RSI has formed a level of resistance turned support at the 50 level and continues to hold well within bull market range.  Additionally, the stock recently bounced off of the lower trendline with a hammer that was followed by a confirmation candle that gives a defined level of risk.  Moreover, all key moving averages are in upward sloping trends.

On the daily chart a rectangle has formed since late February with a $12 range ($133 on the high end down to $121 on the low end).  More often than not, rectangles act as continuation patterns.  A break above the high end of the range targets the $145 level while a break below targets the $109 level.

Since 2009, AAPL has gapped up the day after earnings 73.08% of the time meaning that more than 7 of 10 times it has resolved to the upside the following day.  More recently, the past five have all gapped higher by an average of 4.29%.  However, after the initial gap higher it has had a tendency to fade intraday.  Apple has given back -0.84% on average from the open to the close the day following earnings with an extremely low win rate of 26.92%.  Gains over the following month remained strong but win rates remained below 70% during this period (we are fans of odds greater than 70%).  However, two months later the stock was higher by 7.61% on average with a 73.08% win rate.  Three months later this rose to 12.21% with a 84.00% win rate.

When this took place within 2% of all time highs since 2000, the odds of a gap higher increased to 75%.  Once again though, there was a tendency to fade the initial gap.  If the stock gapped higher off the open it gave back 1.27% on average with an open to close win rate of 33.33%.  Once again, the following month is mixed at best but does lead to strong results over the intermediate term.  Three months later the stock rose 7.49% on average with a 85.71% win rate.

Finally, performance following the second quarter earnings showed even more strength.  Over the past 10 years the stock gapped higher 80% of the time by an average of 3.05%.  One month later it was higher 90% of the time by an average of 8.88%.  Win rates remained the same two and three months later but average returns rose to 13.34% and 16.61% respectively.

Note: the last chart was added after the initial publication.

In conclusion, if recent history is any indication, we can expect a gap higher post earnings.  The daily and weekly charts back this idea up on a move over $133.  Though history has shown the odds of a gap to the upside outweigh a move lower, if an upward gap does take place, intraday traders can test shorts as the stock tends to give back some gains.  As with all earnings trades, the use of protection is a must.

Follow @wildcattrader on Twitter or @chadgassaway on Stocktwits.

[chadgassaway]

Decreasing Reward to Risk Ratios Over the Short Term

The trend of the S&P 500 continues higher on the weekly charts but the daily is now nearing a confluence of levels of resistance following a 70 point rally from lows.  From a risk management perspective, just slightly above is not a bad place to trim positions and trail stops as we once again re-test levels that have caused the markets grief in the past.

The S&P is now nearing the level that the false breakout occurred in mid-May.  The more times a levels is tested the higher the likelihood the level breaks, which in this case would be to the upside.  However, we must be cognizant that trapped sellers will likely exit positions as they near their break even levels which poses a short term risk. 

Moreover, we are also approaching the descending trendline of the broadening pattern that has been forming since mid-May.  This trendline intersects that of the aforementioned horizontal trendline shown above near the 2120 or 2125 SPX level depending on whether wicks or closing levels are used.

Furthermore, we are entering a period of July that has been seasonally weak during the past.  The period from the tenth to sixteenth trading session of the month has been seasonally soft based on data from SentimenTrader.  We are currently in this period as today marks the tenth trading session of July and aligns with us bumping into trendline resistance above.

Finally, the most up to date sentiment indicator shows that bullishness has greatly increased since the last survey and is no longer the tailwind it once was.  The spread between bulls and bears can still widen but we are no longer showing bears at levels that are contrarian signals.

The results of the Greek parliament vote may give the market just what it needs to hit these levels.  At the moment there is an approximate 7 point spread between the cash and futures markets.  A move to 2113 to 2118 during globex or, even better, during the cash session would leave the market sitting at resistance.

While the trend remains to the upside, reward to risk ratios are now becoming negatively skewed or near the 1:1 level depending on price objectives.  We always assume that the market will continue in the direction of the trend but feel that this is a time to decrease net long positions and roll up stops, though not the time to short until the market proves otherwise.  Over the near term we suspect the market sees some back and fill from the 2120-2125 range before higher and short term traders can trade against the defined levels of resistance above.  Intermediate term traders should gauge the strength of the market by the depth of any ensuing pullbacks that lie ahead.  Do we hit new all time highs?  I suspect we do but risk management comes before everything else.

[chadgassaway]

The Market Has Work To Do

The S&P 500 has once again rallied off the lower trendline of the rising channel we have mentioned on a number of occasions.  It did so while putting in a hammer candlestick on the weekly chart which is a bullish reversal pattern and at the moment is being confirmed by a move higher, though this could change as the week has only just begun.

While we remain constructive the market on longer term timeframes the market has some work to do in the shorter term.

Currently the S&P 500 is bumping into the first level of trendline resistance that is a confluence level with the 100 day SMA.  Moreover, just above we have the 50 day SMA at the psychologically important 2100 level.  A short term pause before breaking above here would not come as a surprise.

A break above the aforementioned levels sets the market up for a move to the falling downtrend line of the broadening pattern forming since mid-May at 2120.  This also coincides with a level that causes us grief during February, March, and April which eventually led to a false breakout in May.

In conclusion, the weekly chart continues to show a market that is in an uptrend (we have mentioned multiple times that the weekly holds more weight than the daily).  When viewed on shorter term charts the market continues to have work ahead of itself though.

[chadgassaway]

A Look At The S&P 500

The daily chart of the S&P 500 shows a failed ascending triangle pattern.  Following the failure, a backtest of the broken trendline rejected the market and we have now put in lower lows which places the short term trend lower.  Levels of support below rest at 2040 and then 1975-1985.  One bright note to mention is that an RSI bullish divergence is appearing although this could change by the close as well as the ability to continue to hold RSI bull market range.

This is also leaving us with 31 sessions (assuming we do not close at one today) without an all time high on a closing basis being recorded.   While not the record, since the new all time highs were put in place in 2013, this is one of the most prolonged periods.

Additionally, as of writing this the S&P is set to close below the 200 day SMA for the first time since last October.  Since 2012 this has been a short lived phenomenon as there have only been 3 periods which the S&P closed below this level.  All were buying opportunites with a maximum of 7 sessions below.  Is this time different?  Only time will tell.

The weekly chart, which we find to be the most important, remains within the uptrend channel but is nearing the lower extremities.  There is a level of confluence support between the rising trendline and the March lows at 2039-2040 SPX.

The one saving grace of the market is sentiment.  Bulls are far and few between.  As shown on the chart below, the S&P DSI is at levels that have coincided with prior market lows.

A number of other markets are showing DSI extremes as well (we use below 15 as extreme levels).

The CNN Fear and Greed Index is showing pessimism as well.

Also, bloggers are extremely bearish and at levels of extremes.

Finally, the 5 day put/call average is hitting extremes that have preceded market bottoms in the past as well.

In conclusion, the short term trend is to the down side while the intermediate term trend remains higher but is nearing levels that could result in a change of trend.  So long as 2040 holds we remain in the bullish camp but below these levels and our tune will change.  Sentiment could be what helps this level hold but below and all bets are off.

Follow @Wildcattrader on Twitter or ChadGassaway on Stocktwits.

[chadgassaway]

Backtests on a Bearish Day

As of writing this the S&P 500 is trading lower by 1.33% to 2073.62 following surprise headlines out of Greece over the weekend.

A lower close, which is all but assured, would lead to the fourth consecutive lower close.  Since 2012 this would the the sixteenth time this has taken place.  The following session only closed higher 43.75% of the time with average losses of -0.11%.  In 2015, this led to a lower close on the fifth session two out of three times.  This is where weakness has ended though.  Three days later the market was higher by 1.22% on average with a 81.25% win rate.  Three weeks later the market rose 1.98% with a high 87.50% win rate.  Gains continued to add up out one month with returns on average of 2.44% with a 81.25% win rate.  Two months later the S&P 500 racked up gains of 3.26% but win rates fell to 75%.  Finally, a three months later win rates once again rose to 87.50% with returns of 4.80%.  In fact, all eight occurrences since October 2012 have been higher three months later with returns of 5.51% on average.

Furthermore, the VIX:VXV ratio has risen to 1.01.  This is a sign of fear by market participants as they reach for safety.  When this has taken place in the past, this has been near the bottom of short term pullbacks.  Since 2012, the following session closed higher only 40% of the time with average returns of -0.16%.  Since 2014 this has worsened to only 1 out of 6 closing higher the next session.  Two and three days later returns and win rates continued to remain subdued.  However, five days later the market was higher by 1.09% with a 70% win rate.  Two weeks later the market rose 2.48% on average with a 100% win rate.  Win rates remained at 100% three weeks and a month later with average returns of 3.51% and 4.48% respectively.  Three months later the S&P was higher by 6.73% on average with a perfect track record.

Moreover, the SPX is currently putting in a distribution day.  When this has happened in the past it has been near a bottom but not the ultimate bottom.  As shown above, the following week continues to be weak.  It has shown a tendency to bottom and close higher two weeks later though with returns of 1.27% and a 69.23% win rate.  Three weeks later win rates improved to 92.31% with a 2.59% return.  A month later the market was higher 84.62% of the time with average returns of 2.64%.  Two and three months later showed strong returns of 3.25% and 4.94% respectively.

Finally, the S&P 500 is currently on the 26th session without an all time closing high.  Since the 1375 day streak ended in 2013, this is one of the longer streaks during this period.  As always, we like to give credit where credit is due and should note that this idea was initially presented by Ryan Detrick, CMT.

When all is said and done, the following sessions are a gamble at best but over the following weeks history has shown that we have a bias for higher prices.  Additionally, this is something to keep an eye on to see if the composure of the markets is changing.  It should be noted that while not broken, the market is bent and at risk of breaking trendlines below and ultimately only price pays.  Until the pattern of holding breaks we must assume that it continues to remain.  However, should we not see a bottom form over the coming week or longer term trendlines begin to break, this would be a cause for concern.

Disclosure: The author is long the ES_F (September) contract at the time of writing this.