CHANNEL LINE MARKS UPSIDE TARGET FOR THE S&P 500 -- COMBINING THE MACD-HISTOGRAM AND THE SIX MONTH CYCLE -- WHY IS THE S&P 500 ETF ALREADY ABOVE ITS 2007 HIGH? -- S&P MIDCAP 400 IS THE ONE TRUE LEADER -- RUSSELL 2000 IS SECOND
CHANNEL LINE MARKS UPSIDE TARGET FOR THE S&P 500 ... Link for todays video. There is certainly much ado about the S&P 500 and the 2007 highs these days. In the words of Mickey Blue Eyes, I say fuhgeddaboudit. Thats mob speak for forget about it. Why? Because the S&P 500 is late to the party, way late. First, lets take a look at the long-term picture for the S&P 500. Chart 1 shows the index moving above 1550 for the first time since 2007. After the 2009 surge, the index started zigzagging higher with a higher low in August 2011 and now a higher high in 2013. Using the channel trend lines, the index may hit long-term resistance soon because the upper line comes into play in the 1600 area the next two months. A rising channel also formed after the 2003 surge. This channel was smaller and the index moved above the upper trend line in 2007. A little euphoria could produce another overextension in 2013, which means this rally could extend to 1650 should a melt-up take shape. The indicator window shows the 20-month Commodity Channel Index (CCI). There have been four big moves since 2000 and CCI captured with these trends pretty well. The long-term trend favors the bulls when CCI is positive and the bears when negative. There was a whipsaw from August to October 2011 because of historic volatility in the markets during that timeframe.
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Chart 1
COMBINING THE MACD-HISTOGRAM AND THE SIX MONTH CYCLE... May is not here yet, but April is two weeks away and the six month cycle could usher in the long awaited correction. Discovered by Yale Hirsch, founder of the Stock Trader's Almanac, the six month cycle defines a bullish cycle running from November to April and a bearish cycle running from May to October. This is where the phrase "sell in May and go away" comes from. While this cycle is certainly not infallible, statistics confirm that the stock market performs much better during the bullish six-month period and much worse during the bearish six-month period. Over the past 50 years, the average gain for the Dow was less than 1% from May to October. In contrast, the average gain was more than 7% from November to April.
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Chart 2
Cycles are one thing. Timing is another. Sy Harding made some minor adjustments to the six month cycle and added MACD as a timing mechanism. First, Harding started the bullish cycle on October 16th, which is two weeks earlier. Starting the cycle a little earlier makes sense because there have been several October bottoms in the S&P 500. Second, Harding started the bearish cycle on April 20th, which is almost three week's later. Third, Harding added MACD to time signals near these cycle dates. According to Hardings research, adding this MACD filter significantly improved the results.
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Chart 3
Chart 3 shows the S&P 500 using weekly bars and the MACD-Histogram. The yellow area marks April and the red dotted lines signal when the histogram moved below its signal line. The MACD-Histogram turns negative when MACD moves below its signal line. First, note that the S&P 500 peaked in April 2010, May 2011 and April 2012. These peaks coincide quite well with the six month cycle. Second, note that the MACD-Histogram turned negative after the 2010 and 2012 peaks. The MACD-Histogram turned negative before the 2011 peak and broke further into negative territory in late May. These three signals did a pretty good job of calling the corrections and I will be watching the MACD-Histogram as we head into April.
WHY IS THE S&P 500 ETF ALREADY ABOVE ITS 2007 HIGH?... The top window in chart 4 shows the S&P 500 ETF (SPY) breaking above its 2007 high in 2012. Meanwhile, the S&P 500 is still short of a breakout. Why? Short answer: dividends. Long answer: dividend adjusted data. StockCharts.com adjusts data for dividends. This means the dividends are added back into the stock price to reflect total return. After all, a dividend is part of the return. This may not matter for short-term charts and swing traders, but dividends are important to long-term returns and investors. The bottom window shows unadjusted data for the S&P 500 ETF (_SPY). This chart looks just like the S&P 500 chart. Notice the deeper dip below the 2002 lows and the failure to break the 2007 highs. Users can access unadjusted data by putting an underscore before the symbol (_SPY instead of SPY).
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Chart 4
S&P MIDCAP 400 IS THE ONE TRUE LEADER... The Dow and S&P 500 may garner the headlines and the CNBC countdowns, but the S&P MidCap 400 ($MID) and the Russell 2000 ($RUT) are the real leaders in the stock market. Chart 5 shows $MID breaking above its 2007 high in January 2011. Talk about an early adopter! The index went on to form a bullish cup-with-handle pattern over the next two years and broke rim resistance in January 2013. Popularized by William ONeil of IBD, cup-with-handle targets are found by adding the height of the cup to rim resistance. With a cup extending around 250 points and rim resistance around 1000, the upside target here is around 1250, which is another 100 points higher. Anything is possible. Stocks, however, are quite overbought right now and the bearish six month cycle is approaching. This means we could get a correction. Broken resistance turns into support in the 1000 area and a throwback to this level would alleviate overbought conditions. Chart 6 shows the Russell 2000 ($RUT) breaking above its 2007 highs this year. Notice that a huge cup-with-handle formed over the last six years. I am not even going to bother putting an upside target on this one.
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Chart 5
