The S&P 500: What’s Next After Breaking 5850?

Let’s talk about the big move we’ve been anticipating—the S&P 500 has finally dipped below our “line in the sand” at 5850. And then just as quickly, the SPX popped right back above this key support level! Here’s what stands out as I’m reviewing the chart of the S&P 500.

A Market in Red

As of last Friday, January 10, the market wasn’t exactly painting a pretty picture. The S&P 500 was flirting with lower numbers, and no sector has been spared. Growth favorites like tech? Down. Sturdy value plays like financials, industrials, and healthcare? Also down. Across the board, it was all red.

If you’ve been following along on my market recap show, CHART THIS with Dave Keller, you know we’ve been keeping an eye on the market’s weakening breadth since mid-December. This latest break below 5850 is just another confirmation of what’s been brewing: key sectors are losing steam.

Why the Close Matters

So, after a key breakdown, what happens next? First, we need to confirm that this break below 5850 is the real deal. It’s not just about dipping below that level during the day—it’s about where the market closes. Why? Because closing prices carry more weight when assessing trends.

Source: StockCharts.com

For example, we’ve seen the S&P dip below 5850 a few times recently, only to rally back and close above it. Without a true close below that level, the market has kept the bears at bay. But if we do see a close below 5850, and the market follows through in the days after, that’s when things could start getting interesting.

After inflation data came out this week, we saw the SPX pop back above 5850 as investors considered the possibility of further rate cuts in the coming months. We feel 5850 remains the most important level to watch, because we are one lower high away from confirming a clear bearish trend for stocks.

Setting Downside Targets

If the S&P closes back below 5850 and momentum continues, where could it go? That’s where technical analysis gives us some tools to work with. Here are three ways we can identify potential downside targets:

1. Head and Shoulders Pattern:
   There’s a possible head-and-shoulders top forming on the S&P chart. Even if it’s not textbook-perfect, it’s worth noting. By measuring the distance from the “neckline” of the pattern to the “head” and projecting downward, we land at a target of around 5600.

2. Fibonacci Retracement Levels:
   Taking the August swing low to the December high, the 50% retracement level aligns almost exactly with 5600. This alignment adds another layer of confidence to 5600 as a significant support area.

3. 200-Day Moving Average:
   The 200-day moving average, a long-term trend indicator, hasn’t come into play for a while. Right now, it’s sitting near 5570. By the time a potential decline reaches this level, it could align closer to 5600, further strengthening this target.

When these methods point to the same general area, it’s a signal to pay attention.

The Big Picture

So, what’s the takeaway?

• Keep an eye on how the market closes relative to 5850.

• Watch for follow-through in the days ahead.

• Look for key support around 5600, but stay flexible as market dynamics evolve.

The goal here isn’t to predict exact levels but to stay tuned into the trends and adjust as the story unfolds. And as always, the charts will guide us.

———

Thanks for reading, and don’t forget to check out CHART THIS with Dave Keller, airing weekdays at 5 PM Eastern, for daily market close review. If you’re ready to take your market knowledge to the next level, check out our Market Misbehavior Premium Membership for exclusive access to in-depth analysis, actionable insights, and strategies designed to help you navigate any market condition with confidence. Don’t miss out—let’s keep building your investing edge together. Join Now!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Will the QQQ Sell Off in January 2025? Here's How it Could Happen!

Today, we're diving into an intriguing and highly speculative discussion about the QQQ. Imagine it's January 2025, and the market is standing on the cusp of a new year with many uncertainties hanging in the balance. We're about to explore four potential scenarios that could unfold for the QQQ by the end of January 2025. Let's get right into it.

Understanding the Market Landscape

Before we get into the scenarios, let’s take a step back. The period from now until the end of January 2025 encompasses a fascinating time for the markets. It’s a stretch that includes the year-end rally, often fueled by a seasonal burst of optimism known as the “Santa Claus Rally,” and the infamous January effect, which historically delivers mixed results.

Investors are wrapping up their books for 2024, rebalancing portfolios, and positioning themselves for what lies ahead. Meanwhile, macroeconomic factors such as Federal Reserve policy, inflation data, and earnings expectations all contribute to a complex and dynamic environment. Analyzing the trends, historical performance, and current conditions driving the NASDAQ 100 reveals a lot about what could be in store.

Will the QQQ continue to defy gravity, or could January 2025 mark a turning point? Let’s explore four possible scenarios.

Scenario 1: The Very Bullish Case

Our first scenario is what I like to call the "very bullish" path. Imagine the rally from mid-August 2024 not only sustains but accelerates, pushing the Nasdaq 100 to new all-time highs. For this to happen, several key factors need to align.

First, the "Magnificent Seven" — the tech giants like Meta, Alphabet, and Broadcom that have driven much of the market's gains in recent months — would need to maintain their breakout momentum. Picture Nvidia shattering resistance levels, Apple unveiling yet another blockbuster product, or Microsoft capitalizing on its AI dominance. Such moves would embolden bullish sentiment and drive significant capital inflows.

Second, breadth conditions—a measure of how many stocks are participating in the market rally—would need to improve. Currently, the Nasdaq 100's strength is concentrated in a handful of mega-cap names. If mid- and small-cap stocks join the party, the rally could gain even more traction.

Finally, macroeconomic data would need to support the narrative. A soft landing for the economy, coupled with further interest rate cuts by the Fed, could fuel optimism and propel the index higher. Under this scenario, the QQQ could easily soar into the 550, 560, or even 570 range, turning January 2025 into a bullish bonanza.

Scenario 2: The Steady Climb

Next, we have the second scenario: the "measured bullish" path. Unlike the first scenario, this outlook foresees a more tempered advance. The Nasdaq 100 continues higher, but at a slower and steadier pace.

In this case, the Magnificent Seven may still lead the charge, but their gains would likely be less dramatic. Instead of Nvidia breaking out, it might consolidate and grind higher. Apple and Amazon could post modest gains without the fireworks of a full-blown breakout.

On the macroeconomic front, this scenario could play out if inflation moderates but doesn’t completely vanish as a concern. Perhaps the Federal Reserve cuts rates cautiously, leaving some uncertainty in the air. The market's advance would reflect a balance between optimism and caution, with investors treading carefully but steadily buying into strength.

In this "steady climb" scenario, the QQQ could end January 2025 modestly above its current levels, signaling continued growth but without the dramatic flair of our very bullish case.

Scenario 3: The Mildly Bearish Path

Now we shift gears into bearish territory. The third scenario, the "mildly bearish" path, envisions a scenario where optimism begins to wane.

Perhaps the Magnificent Seven, which have been the market’s darlings, start to lose steam. Nvidia could fail to hold key support levels, while Meta faces headwinds from regulatory scrutiny or competitive pressures. Even minor setbacks in these bellwethers could spook investors and lead to a broader pullback.

Meanwhile, macroeconomic concerns could resurface. Inflation could remain sticky, prompting the Federal Reserve to signal fewer rate cuts than the market anticipated. Earnings expectations might also come under pressure, with companies warning of slowing growth in 2025. While some sectors like financials or energy could perform well, their relatively small weight in the QQQ might limit their ability to offset the drag from tech.

In this "mildly bearish" scenario, the Nasdaq sees a pullback but avoids a full-scale sell-off. By the end of January 2025, the index might find itself below current levels but still above major support zones, signaling caution rather than panic.

Scenario 4: The Doomsday Scenario

Finally, there’s the doomsday scenario—our most bearish outlook. This projection paints a grim picture, with market sentiment souring dramatically as we turn the calendar to January 2025.

In this scenario, the Magnificent Seven lead the decline, with sharp pullbacks in these mega-cap names dragging down the broader index. Nvidia might break below critical support levels, triggering widespread selling. Apple and Microsoft could face challenges from weak demand or disappointing guidance, compounding the downward pressure.

Defensive sectors like utilities and consumer staples might start outperforming, signaling a flight to safety by institutional investors. This shift in leadership often indicates a broader risk-off environment, where investors prioritize capital preservation over growth.

Technical indicators would also flash warning signs. The Nasdaq 100 might undercut the 500 level—a key threshold marked by past peaks and lows. Such a move would likely accelerate selling, as traders and investors react to the breach of a critical support zone.

By the end of January 2025, in this "doomsday" scenario, the QQQ could be testing support levels around the 450 mark, marking a significant and sobering reversal from its recent highs.

What's Your Take?

There you have it—four distinct scenarios for the Nasdaq over the next few weeks. Each path offers valuable insights into the factors driving market behavior and the potential risks and rewards facing investors.

So, what do you think? Will the market continue to climb higher, defying skeptics and reaching new heights? Will we see a tempered ascent that reflects cautious optimism? Or are we on the brink of a pullback or even a more severe downturn?

I’d love to hear your thoughts on which scenario you find most plausible and why. Drop a comment below with your vote and your reasoning. Remember, the goal of this exercise isn’t just to predict the future—it’s to broaden your perspective and challenge your biases through probabilistic analysis.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Is the Fourth Quarter of 2024 Mirroring 2021? Hindenburg Omen Alert!

As we approach the end of 2024, an intriguing question arises: Is the fourth quarter of 2024 shaping up to be very similar to that of 2021? Today, we’ll explore the current market conditions and draw parallels to those experienced at the close of 2021. Back then, we witnessed a steady low-volatility bull market that peaked dramatically, leading to a significant downturn in 2022. Let’s delve into the present market landscape, compare it to 2021, and identify key indicators to watch as we move toward year-end.

Drawing Comparisons: 2024 vs. 2021

To start, it’s essential to understand why comparing 2024 to 2021 is relevant. Both periods exhibit striking similarities in market behavior. In 2021, the market enjoyed a phase of low volatility and consistent upward trends, supported by strong performance across major indices. Fast forward to 2024, and we’re observing a comparable pattern. Prices are consistently above upward-sloping moving averages, particularly the 5, 13, 21, and 34-week exponential moving averages. These averages have been trending upward throughout 2024, much like they did in 2021, signaling a stable and fairly predictable market environment.

Understanding the Hindenburg Omen

A critical tool in our analysis is the Hindenburg Omen, an indicator designed to identify potential market tops. Although we discussed this indicator earlier in the year, it’s signaling again, warranting a closer look. The Hindenburg Omen requires specific criteria to be met at least twice within a month to suggest a likely major market peak. Currently, we’re seeing initial signals, but we’re awaiting confirmation to ensure accuracy.

To validate the Hindenburg Omen sell signal, creating a pattern very similar to what we saw in December 2021 before the great bear market of 2022, we would need to see an expansion in new 52-week lows. The creator of the Hindenburg Omen, Jim Miekka, found that at major tops there were often a healthy number of new 52-week lows AND new 52-week highs, and that this bifurcation of market performance was a tell-take sign of a likely market top.

Market Trend Model Insights

Let’s take a closer look at the S&P 500’s weekly chart, part of what I refer to as my “market trend model.” This model employs multiple time frames and exponential moving averages on a weekly basis to provide a comprehensive analysis. Visually, 2024 mirrors 2021 closely. The upward trends across the 5, 13, 21, and 34-week exponential moving averages indicate a low-volatility, consistent uptrend in both years. This pattern is highly recognizable to market analysts and investors alike.

Technical Comparisons and Future Outlook

Technically speaking, 2024 aligns closely with 2021. Long-term trend indicators remain bullish, reflecting similar patterns in both medium-term and short-term models. However, the critical aspect to monitor is the potential for a trend reversal. In 2021, despite the strong close, we began to see signs of reversal early in 2022, leading to a significant market downturn.

As we stand in late November 2024, the Hindenburg Omen is flashing an initial sell signal. It’s crucial to watch for a second confirmatory signal between now and December. Should the trend reverse, we might see a cascade starting with the short-term model turning negative, followed by impacts on the medium-term and eventually the long-term models.

Join the Conversation

In summary, 2024 is unfolding similarly to 2021, with potential indicators suggesting we might be nearing a major market top. As we move towards the end of the year, keep an eye out for additional Hindenburg Omen signals to confirm this trend. What are your thoughts on the Hindenburg Omen signaling a sell as we approach the end of November 2024? Are you optimistic about the S&P and NASDAQ’s performance for the year, or do you believe we should exercise greater caution? Share your insights in the comments below—I’d love to hear your perspective!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Charting the Path: November 2024's Top 10 Charts to Watch

We’re just getting into November, and I’m excited to walk you through the top 10 charts to keep on your radar. But before we get into what lies ahead, let’s take a moment to reflect on October’s takeaways. October offered some valuable lessons on the dynamics of breakouts, trend-following, and the importance of strategic entry and exit points. By understanding what worked, what didn’t, and why, we set a stronger foundation for navigating November’s market opportunities with a sharper perspective.

A Month In Review

In October, we tracked stocks like Baidu (BIDU) and Dentsply (XRAY). Baidu, which fell over 18%, is a great example of why we emphasize risk management. It looked promising when it broke above the 200-day, but resistance near $115 threw up a caution flag. October reminded us that breakouts need more than just optimism—they need well-planned entries and exits.

On the other hand, stocks like Spotify showed the value of sticking with trends until they signal otherwise. It’s a good reminder to stay nimble and let charts guide us along the way.

Now, let’s see what’s lined up for November!

• AT&T (T): Carried over from October, AT&T catches our eye with a solid 5% dividend yield and price strength. But don’t ignore signs of bearish divergence—it’s held up well so far, but let’s stay alert.

• Comcast (CMCSA): Comcast’s earnings sparked some ups and downs, but the uptrend remains intact. Key level to watch: the resistance around $47.

• Stifel Financial (SF): 2024’s been kind to Stifel, with higher highs and lows. After an overbought spell, look for pullbacks toward support for a possible entry point.

• Texas Roadhouse (TXRH): A breakout darling that’s now testing support levels. It’s worth following to see if it holds above the pivot point.

• Parker Hannifin (PH): PH is showing a classic setup—pulling back to its 50-day moving average within an uptrend. Watch for a rally off this supportive level.

• Fastenal (FAST): Showing off a textbook cup-and-handle pattern. Let’s see if it can break above resistance for a confirmation.

• Home Depot (HD): With its recent dip to the 50-day moving average, Home Depot’s a balancing act to watch—can it hold and push higher?

• AMD (AMD): A miss on earnings sent AMD down, breaking below support. This one’s key to watch for overall market sentiment.

• Alphabet (GOOGL): GOOGL recently completed an inverted head-and-shoulders pattern but struggled after earnings. Support around 168 will be a telling level.

• Celestica (CLS): Rounding out our list, Celestica’s shown strength with its gap-and-run pattern. Staying above breakout levels is the test here.

November Forecasting

These charts are about spotting patterns—they’re about getting a feel for the market’s mood. Whether you’re thinking about holding onto your gains or looking for fresh opportunities, there’s plenty to dig into with November’s lineup.

Happy charting, folks, and here’s to November!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

What’s Next for the S&P 500? October 2024 Update!

What’s your take on the S&P 500 as we wrap up 2024? Are you bullish, anticipating the index surging past 6000 before year’s end? Or do the recent signs of elevated volatility, breadth divergences, and other red flags have you more cautious, thinking Q4 might bring a downturn? Let’s explore the possibilities.

First, we’re here to stretch our thinking beyond biases by considering a range of scenarios for the S&P 500. By doing so, we open ourselves to the full spectrum of outcomes—whether extremely bullish or bearish. Second, I’ll guide you in deciding which scenario aligns most with your view, so you can prepare your portfolio accordingly. But remember: staying flexible is key, as any of these scenarios could become reality.

Our Game Plan and market context

I’ll lay out four potential scenarios for the S&P 500, each with specific conditions, key levels, and signals to watch. Think about these scenarios, and be sure to drop a comment below to share which one you think is most likely and why!

Let’s start with a quick look back. Over the past year, the S&P 500 has remained in an almost relentless uptrend with minimal pullbacks. The biggest drawdown, from the July peak to an early August low, was less than 10%! Since hitting that low in August, we’ve observed three straight months of strength into October. So, what’s next? Let’s review these four potential scenarios.

Scenario One: The Super Bullish Case

This scenario envisions a steady continuation of the trend off the August low, with the S&P climbing higher into December. If this pace holds, we could break above 6000 by early December, potentially setting new all-time highs. This would echo the low-volatility, consistent gains we experienced in Q1. Key signals to watch include a series of higher highs and lows and sustained momentum.

Scenario Two: The Mildly Bullish Case

In the mildly bullish scenario, the S&P 500 edges higher, but struggles to cross the 6000 threshold. We may see resistance due to psychological price barriers, valuation concerns, or underwhelming earnings reports. This scenario would likely see the S&P hovering around 5900-5950, with market breadth indicators possibly weakening—a signal that could set the stage for a more pronounced correction heading into year-end.

Source: StockCharts.com

Scenario Three: The Mildly Bearish Case

Here, the market loses momentum without breaking down entirely. In this scenario, the S&P pulls back slightly but holds above the critical 5650 level and stays above the 200-day moving average. This would imply continued long-term strength, even as short-term caution creeps in. But if the Magnificent 7 names experience any sort of drawdown into November, a scenario like this becomes much more likely.

Scenario Four: The Super Bearish Case

In the most bearish outcome, we see a significant downturn reminiscent of late 2018, with a powerful downtrend emerging in Q4. This scenario would mean a break below both 5650 and the 200-day moving average. As institutions pivot to defensive plays, sectors like utilities, real estate, and consumer staples might start to lead the market.

As we look to early December, earnings reports, the U.S. elections, Federal Reserve announcements, economic data, and global events will all shape the S&P’s path.

So, where do you stand? Do you see a super bullish rally continuing? A mild move up or down? Or a more bearish turn for Q4? Drop your thoughts below with your reasoning—what indicator or driver do you think will trigger your chosen scenario?

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

One Volume Chart You Can't Ignore

Volume analysis in the stock market is crucial. Understanding the flow of volume provides insights into market dynamics that price alone can't reveal. While I don't utilize volume analysis often in my daily routine, there's one volume indicator that has consistently proven its worth: the Chaikin Money Flow (CMF).

Before we get to CMF, it's important to understand how volume analysis has evolved. When I was getting started in the early 2000s, volume analysis made sense because the trading environment was different. Traditional volume indicators were effective in a market less influenced by dark pools and electronic trading. But as these advancements have changed the landscape, traditional volume indicators seem to have lost some of their edge.

S&P 500 with Chaikin Money Flow.  Source: StockCharts

Having said that, I actually do use some volume analysis in my work, mostly in the form of volume-based indicators that look for volume trends. Legendary market strategist Joe Granville made great strides when we created On-Balance Volume (OBV) in the 1970s. This was revolutionary for its time, measuring volume based on whether the day ended higher or lower than the previous day. Think of it as a cumulative advance-decline line for volume. However, it had its limitations—it treated an entire day's volume as either bullish or bearish, which isn't ideal.

That's where Mark Chaikin made a leap forward with the Chaikin Money Flow. This indicator evaluates the closing price relative to its high-low range and quantifies the daily volume's bullish or bearish nature. If we close near the day's high, it suggests bullish volume; near the low, it's bearish. The indicator tracks this daily volume reading over time, providing a nuanced view of volume trends.

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When examining the S&P 500 using CMF, two main applications stand out. First, volume trends over time reveal accumulation and distribution patterns. Understanding whether the market is being accumulated or distributed can offer powerful insights into future price movements. For instance, the CMF was exceptional at identifying key turning points in August, March, and July of 2024.

The second crucial application is spotting divergences. A bearish divergence, where the market price keeps climbing but CMF starts trending downward, is a red flag. This discrepancy suggests that while prices are rising, there's an underlying sell-off—indicating that some investors are offloading their holdings despite the bullish price action. We saw this clearly before significant downturns in previous months and should watch for it moving forward.

As of October 2024, we haven't yet seen a bearish divergence, but staying vigilant is key. The current bullish trend might still be robust, but watching for CMF to turn lower could signal that we're nearing a market top. Recognizing these signs early—before the broader market catches on—can be incredibly advantageous.

So, what do you think about the Chaikin Money Flow? Does it offer valuable insights that align with your trading strategies? Drop a comment, and let's discuss. And remember, it's always a good time to own good charts.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Market Breadth ALERT! What's Happening Now?

I want to take a look at a critical question: Does the market have bad breadth? Spoiler alert – not quite yet, but we may be getting close. We’ll break down three market breadth indicators, explain how they're still holding up, and discuss what would tell us we’re in trouble. Let’s dig into the charts.

The Question of Breadth

Does the market have bad breadth? As of early October 2024, the answer is “not yet.” The overall market breadth still looks okay, but some signs suggest we may be reaching an exhaustion point. Let’s go through three key breadth indicators and see what they’re telling us right now.

1. New 52-Week Highs and Lows: The Divergence to Watch

First up, let’s talk about new 52-week highs and lows. This indicator is a great way to gauge the strength of a market. When the market is in a healthy bull phase, you’ll see lots of stocks making new highs. That makes sense, right? When the S&P 500 or the Nasdaq is hitting all-time highs, you’d expect the individual stocks within those indexes to follow suit.

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Looking at the chart, the green bars represent new 52-week highs, and the red bars represent new 52-week lows. In a bull market, you won’t see many new lows because most stocks are riding the overall upward momentum. But here’s where things get interesting: toward the end of a bull market, we often see a divergence. The market keeps making new highs, but fewer and fewer individual stocks are hitting new 52-week highs. Instead, some stocks are starting to make new lows. This divergence can be an early warning sign that the market is running out of steam.

Right now, in early October, as the S&P 500 closed above 5700 for the first time, we’re seeing fewer new highs and even a few new lows sneaking in. It’s not time to hit the panic button, but it’s something to keep an eye on. If new lows start to consistently outnumber new highs, that’s when I’d start to worry about a more serious market pullback.

Source: StockCharts.com

2. Percentage of Stocks Above Key Moving Averages: Long-Term vs. Short-Term Signals

Next, let’s look at the percentage of stocks above their key moving averages. This is one of my favorite breadth indicators because it gives us both a long-term and a short-term view.

In the top panel of this chart, you’ll see the S&P 500 over the past two years. Below that, I’ve plotted two key breadth indicators: the percentage of S&P 500 stocks above their 200-day moving average (currently about 76%) and the percentage above their 50-day moving average (about 75%).

The 200-day moving average is a long-term indicator. I like to use the 50% level as a key threshold—when more than half of stocks are above their 200-day moving average, it suggests the long-term trend is still intact. Right now, we're well above that level, which tells me the long-term breadth is still positive. The last time we dipped below 50% was back in September 2023, which coincided with a pullback in the broader market.

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Now, the 50-day moving average gives us a short-term view. I’ve drawn horizontal lines at 75% and 25% on this chart, and we’re currently just below the 75% mark. Historically, when we drop below 75%, it suggests a short-term pullback may be coming. We saw this happen in late August during the most recent pullback, and it’s something we should be prepared for now as well.

But, remember, this indicator isn’t foolproof. Earlier this year, in January, the “Magnificent Seven” stocks were so strong that they kept pushing the indexes higher even though the breadth was weakening. We could see a similar scenario play out now, so while the short-term breadth is a little shaky, the long-term picture still looks solid.

Source: StockCharts.com

3. Bullish Percent Index: Point and Figure Charts Tell the Story

The third indicator I want to highlight is the Bullish Percent Index (BPI). This is a breadth indicator based on point and figure charts, which are a bit different from the more traditional line or bar charts we usually look at. The BPI tracks how many stocks in the S&P 500 are giving a buy signal based on point and figure patterns.

I like to focus on the 70% level here—when more than 70% of stocks are on buy signals, it usually means we’re in the later stages of a bull market. Right now, we’re sitting around 78-79%, so the market is still in pretty good shape. But, just like with the other indicators, I’m watching for when we drop below that 70% level. When that happens, it’s often a sign that the bull run is losing steam.

If you look back over the last couple of years, you’ll notice that whenever the BPI drops below 70%, we tend to see a pullback shortly after. This happened in January, though the “Magnificent Seven” kept the market artificially strong for a while. But in most other instances, a break below 70% has been a reliable signal that the market is transitioning from a bullish to a more cautious phase.

Source: StockCharts.com

What These Indicators Are Telling Us

So, what’s the takeaway here? Overall, the market breadth indicators are still pointing to a relatively healthy market, but there are definitely some cracks forming. The new 52-week highs are drying up, fewer stocks are holding above their 50-day moving averages, and we’re nearing a critical level on the Bullish Percent Index.

None of these indicators are flashing “sell” signals just yet, but they’re all telling us to be cautious. As we move further into Q4, keep an eye on these charts. If new lows start to outnumber new highs, or if we see the percentage of stocks above their 200-day moving averages drop below 50%, that’s when I’d start to be more concerned about a potential market downturn.

So, does the market have bad breadth? Not quite yet. But the warning signs are there, and it’s always better to be prepared than caught off guard. As always, I recommend keeping a close eye on these indicators, doing your own due diligence, and staying informed.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Top Ten Charts for October 2024: What I'm Watching and Why You Should Too

I’m going to walk you through my top ten charts to watch for October 2024. We’re covering a mix of sectors, investment ideas, and chart patterns—all of which, I believe, present compelling opportunities this month. Make sure you hit the video below for all the beautiful charts to support the discussion! Grab a coffee, settle in, and let’s explore some charts together.

1. Comcast (CMCSA): A Rounded Bottom Worth Watching

Starting with Comcast, which, to be frank, has been a "nothing burger" for much of the past six months. (Yes, that’s a technical term.) However, recently, this chart has started to look a lot more promising. Comcast is showing signs of forming a rounded bottom, meaning it’s transitioning out of a downtrend and stabilizing.

For several months now, it’s been hovering around $37, bouncing every time it tested that level. The big move recently was when the stock broke above its 200-day moving average. A sustained move above $41.50 would confirm that buyers are truly stepping in. If that happens, Comcast might finally be ready to start climbing.

2. AT&T (T): Consistent Uptrend

Next, we have AT&T—a chart that has made my top ten list consistently. AT&T is a classic example of a steady uptrend: higher highs, higher lows, and consistent performance. With a dividend yield of around 5%, it also offers income potential, which can be particularly attractive in a choppy October market.

The price remains above two upward-sloping moving averages, a good sign for continued growth. For anyone looking for stability, AT&T has been an excellent candidate, providing a strong backbone to portfolios during uncertain times.

3. Baidu (BIDU): A Revival with Chinese Internet Stocks

Baidu is next, and it’s a particularly interesting one given the recent policy changes out of China. With the Chinese government implementing easing measures, many Chinese internet stocks, including Baidu, have experienced an impressive rally. Baidu recently broke above its 200-day moving average—a significant event, as it had struggled to do this for over a year.

When the Relative Strength Index (RSI) moves above 80, we call it "the good overbought"—an indicator that the trend is still in play. Baidu is giving off those signals now. If it manages to hold above $100, this could continue to be a solid opportunity moving forward.

4. Spotify (SPOT): Riding the Uptrend

Spotify is another chart worth your attention. Unlike many other big names, Spotify has largely ignored broader market volatility and maintained a strong uptrend throughout 2024. It consistently bounced from its 50-day moving average, making it a great candidate for a "buy the dip" strategy.

If we see a pullback into the $320–$340 range, it might present an appealing entry point. Spotify’s chart resembles that of a bouncing ball—every dip is met with renewed buying enthusiasm, reinforcing its steady trend.

5. Meta Platforms (META): Assessing a Breakout

Meta Platforms is an important chart to monitor this month, especially considering its position within the broader "Magnificent Seven" tech names. After months of resistance around $540, Meta finally broke above this level, making a new all-time high.

Now, the real question is whether it can sustain that breakout. Holding above $540 will be key for continued gains. If it does, the uptrend could very well continue. However, if it falls back below this level, it could indicate a failed breakout, requiring a reassessment.

6. VF Corp (VFC): A Transition from Weakness to Strength

VF Corp is a compelling story of turnaround—a textbook example of moving from a distribution phase (decline) to an accumulation phase (buying). For much of the year, the stock was in a downtrend, but after hitting a low in April, we started seeing higher highs and higher lows. The breakout above the 200-day moving average and the subsequent strength have signaled a potential long-term accumulation phase. VF Corp is now innocent until proven guilty; as long as it remains in an uptrend, it deserves a spot on the watchlist.

7. Lennar (LEN): A Strong Case

Lennar represents an entire group that’s interesting to watch—the homebuilders. Lower interest rates are generally good for homebuilders, and Lennar is no exception. After a notable decline in 2022, Lennar has rebounded and maintained an impressive uptrend, bouncing from its 200-day moving average multiple times.

Recently, we’ve seen Lennar hit new highs above $170 and then use that level as support—a classic case of resistance becoming support. This sector might benefit further if interest rates continue to decrease, making Lennar a notable chart to watch in October.

8. Dentsply Sirona (XRAY): Bullish Divergence

Dentsply Sirona presents an example of a bullish momentum divergence, which is essentially a fancy way of saying that even though price was falling, momentum indicators were improving. This divergence often signals an impending reversal, much like when you try to hold a beach ball underwater—it eventually pops back up.

The stock has now moved back above its 50-day moving average and looks poised for further gains. The next step is to see if it can break above its July highs and its 200-day moving average, which would confirm a strong trend reversal.

9. Freeport-McMoRan (FCX): A Reversal After a Head and Shoulders Top

Freeport-McMoRan recently completed a classic head and shoulders top pattern, which initially suggested a decline—and that’s exactly what happened. The stock hit a target near $40, then rebounded. It’s now making higher highs and higher lows, indicating the potential for a new uptrend.

This is one of those textbook rotations that trend followers love to see. If we get a pullback and then a continuation higher, it could present a great entry opportunity.

10. Gold Miners (GDX): A Reliable Hedge

The last chart to discuss is GDX, the gold miners ETF. Gold has been a go-to hedge in times of uncertainty, and gold miners often perform well when the metal itself is in an uptrend. GDX has repeatedly found support at its 50-day moving average, making each pullback a buying opportunity.

If October proves as unpredictable as it often can be, GDX might be a great place to allocate some capital. As long as the uptrend remains intact, gold miners look like a solid bet.

Final Thoughts

These charts include a mix of long-term trends, potential breakouts, and interesting turnarounds, each offering unique opportunities depending on your risk appetite and investment approach.

One thing to keep in mind is that trend-following is all about observing where the momentum is and riding that wave for as long as it lasts. Like my mentor always said: "In an uptrend, you know we’re going up—just make sure we make a higher low." It’s about staying nimble, managing risk, and letting the charts tell the story.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

The Relationship Between Rate Cuts, Yield Curves, and Stock Prices

The Federal Open Market Committee (FOMC), commonly known as the Fed, made headlines last week with a 50 basis point cut to their target rate. This marked the first rate cut in several years and sparked one central question: is this move good or bad for stocks?

To be clear, it's a bit of both, depending primarily on your investment timeframe. Let's delve into historical trends, patterns, and the broader implications of such a rate cut on stock performance.

Understanding Historical Context and Market Reactions

First off, it’s essential to acknowledge that rate cut cycles are rare, happening only four times in the past 25 years. This rarity alone makes each cycle a significant event worth scrutinizing. These cycles correspond to prolonged economic periods and are secular in nature, rather than cyclical or tactical reactions. For long-term investors and institutions with extended timelines, understanding these patterns becomes crucial. So, what happens after the Fed's initial rate cut?

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Looking at past data, the S&P 500's response to initial rate cuts shows a mixed bag. In the long run, markets often rally, but the short-term scenario frequently portrays volatility. For instance, after the first rate cut in July 2019, the market continued its upward trend despite some turbulence and the subsequent chaos brought by the COVID-19 pandemic. This pandemic period was exceptional and disrupted many typical financial patterns, making it an unreliable reference for drawing long-term conclusions.

Earlier instances provide a clearer picture. Take the Great Financial Crisis of 2007-2009, for example. The initial rate cut in September 2007 signaled the start of a downturn that saw significant market weakening until the March 2009 low. Similarly, the tech bubble burst in early 2000 followed a different script. After the first rate cut in January 2001, the market held relatively stable initially. Still, subsequent rate cuts hinted at a deeper downturn, exacerbated by events such as 9/11, leading to an October 2002 low. These examples underline that while rate cuts might bode well for long-term growth, they often bring short-term instability.

Another critical factor in this equation is the yield curve. A normalized yield curve, where long-term yields exceed short-term ones, signals robust economic health. In contrast, an inversion (where short-term yields surpass long-term yields) indicates skepticism about future growth. Interestingly, the transition from an inverted to a normalized yield curve often precedes market sell-offs and potential recessions, as seen in 2001, 2007, and briefly in 2019.

Yield Curve Dynamics: A Double-Edged Sword

Is a normalized yield curve purely positive? Historical data suggests otherwise, at least in the short term. Each time the yield curve has normalized post-inversion, it has been followed by market downturns before economic stabilization. For instance, in 2001, the yield curve normalized only to see stocks sell off and a recession to follow. The same pattern occurred in 2007, and even in 2019, the brief normalization period preceded a market downturn driven by the pandemic.

So, normalization of the yield curve may seem bullish, but it often signals an impending turbulent period for the market. While long-term outlooks remain positive, with stabilization and growth expected after the recessionary phases, the short term is characterized by volatility and uncertainty.

An Eye on Long-Term Performance

So, whether Fed rate cuts are bullish or bearish for stocks is a nuanced issue, highly dependent on the investment horizon. Long-term portfolios stand to gain from a low-rate environment that fuels growth and profitability. However, the near-term outlook is much more complicated. Historical patterns suggest that the short-term may face volatility driven by economic projections and yield curve adjustments, implying a period fraught with risk and uncertainty.

Understanding the complex relationship between Fed rate cuts, yield curve dynamics, and stock performance equips investors better to navigate these uncertain waters. As we analyze historical data and patterns, it's clear that while the long-term effects of rate cuts can be positive, short-term volatility is almost an expected fallout. The Fed's decision is but one puzzle piece in the intricate market dynamics.

So, what’s your take on this analysis? Drop a comment below to share your insights or questions.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Dow Theory and Market Momentum: What Recent Charts Reveal

It was a tough end to the week for risk assets as the major equity indexes finished lower on Friday. Before we look at the charts, it's crucial to understand the broader context influencing these movements. September has historically been a weak month for equities, a period often characterized by inflection points and heightened volatility. Today, we are reviewing three specific charts signaling potential market tops: the S&P 500 on weakening momentum, the surge in volatility, and key insights from Dow Theory.

Chart 1: S&P 500's Weakening Momentum

To kick things off, let’s take a look at the S&P 500. The index finished about 4.25% lower for the week. This decline reinforces the idea that the late-August peak was a failed attempt to reach new all-time highs. Revisiting the foundational work of Charles Dow from the early 1900s, his insights on trend following and the behavior of market peaks and valleys remain invaluable. The S&P closed below the 50-day moving average for the first time since late July. What's concerning here is the momentum picture.

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In mid-July, as we approached 5650, the RSI indicator showed momentum over 80. Fast forward to late August, and the RSI stalled around 60, indicating a bearish momentum divergence. Characteristically, for a robust bull market, we want the market to move higher on increasing momentum. However, the recent momentum signals reveal weaker conditions, not supporting a move to new highs.

Chart 2: Rise in Volatility (The VIX)

Next, let's look at volatility, a critical data point that has been particularly telling. The VIX, often dubbed the "fear gauge," finished above 38 on a closing basis, reaching an intraday peak above 65—one of the highest readings historically. A VIX below 20 generally indicates low volatility and constructive conditions. Conversely, a VIX above 20 signals elevated uncertainty and potential drawdowns in equity prices. What's perplexing is how quickly the VIX tumbled to the mid-teens soon after its spike, only to surge back above 20 this week.

This rapid fluctuation in the VIX underscores the elevated uncertainty in the market. Each day the VIX remains above 20, the likelihood of further market volatility and drawdowns increases. This volatility is a significant red flag for risk assets, making it a critical element to watch going forward.

Chart 3: New Dow Theory

Finally, we evaluate the new Dow Theory. Charles Dow's original work on indexing and market behavior remains foundational. Traditionally, Dow theory compares the Dow Industrials and Dow Transports. However, I lean towards a more modern take, comparing the equal-weighted S&P 500 with the equal-weighted Nasdaq 100. Recently, the S&P reached a new all-time high in late August, whereas the Nasdaq 100 did not achieve a new high, resulting in a bearish non-confirmation.

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This divergence suggests a market inflection point. Typically, market tops are characterized by such non-confirmations—one segment of the market breaking out while another lags. Currently, industrials, financials, healthcare, and materials are leading, whereas growth sectors like technology and communication services are lagging.

Forward Momentum

In this seasonally weak period, these charts should be front of mind for making informed decisions. For those seeking a deeper dive, my premium members at Market Misbehavior benefit from a closer look at these signals, tracking market moves in real-time. Members get actionable insights to navigate this volatile landscape.

These three charts—the S&P’s weakening momentum, the elevated VIX, and the new Dow theory divergence—are flashing warning signs. While September often brings challenges, it also offers unique opportunities for those prepared to act. For a more detailed exploration, including macro indicators like the Hindenburg Omen, check out our Premium Memberships.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.