S&P 1500 ETF FORMS BULLISH CONTINUATION PATTERN -- WATCHING SMALL-CAP BREADTH INDICATORS FOR A BREAKOUT -- TECH AND CONSUMER DISCRETIONARY BPIS TURN UP -- GOOGLE TRIGGERS P&F BREAKOUT -- FACEBOOK REMAINS ON SELL SIGNAL
S&P 1500 ETF FORMS BULLISH CONTINUATION PATTERN... Link for today's video. The head-and-shoulders pattern can be a reversal pattern or a continuation pattern. The difference depends on the price movement preceding the pattern. There are two types of head-and-shoulders patterns: normal and inverse. The direction of the prior trend determines the pattern type. An inverse head-and-shoulders after a long decline is a bullish reversal pattern, while an inverse head-and-shoulders after an advance is a bullish continuation pattern. A normal head-and-shoulders pattern after a long advance is a bearish reversal pattern, while a normal head-and-shoulders pattern after a decline is a bearish continuation pattern. Notice any similarities? The inverse head-and-shoulders pattern has a bullish bias in both instances. It either reverses a downtrend or signals the continuation of an uptrend. The normal head-and-shoulders has a bearish bias in both instances. It either reverses an uptrend or signals the continuation of a downtrend.
Chart 1 shows the Equal-Weight S&P 500 ETF (RSP) with an inverse head-and-shoulders pattern forming within an uptrend. The prior move was clearly up because the ETF surged from early February to early March. This inverse head-and-shoulders pattern represents a consolidation within an uptrend. RSP was overbought after a 10% surge and needed to digest these gains. The red zone marks neckline resistance and a break above the April-May highs would signal a continuation higher. Chartists looking for volume confirmation should note that the Accumulation Distribution Line (ACDL) and On Balance Volume (OBV) indicators are in clear uptrends. The Accum-Dist Line hit a new high last week and OBV hit a new high in mid May. New highs in these volume indicators suggest that buying pressure has been strong throughout the consolidation period.
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Chart 1
It is also important to note that chartists should allow some flexibility on pattern interpretation. Yes, I know the late April high did not make it to the early April high. And, the early March high does not align with the early April high either. Nevertheless, I think the "essence" of the pattern is there. The right shoulder represents a consolidation, the head represents a dip-recovery and the right shoulder represents a consolidation. Chart 2 shows the S&P 1500 ETF (ITOT) breaking above its April-May highs to signal a continuation higher.
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Chart 2
WATCHING SMALL-CAP BREADTH INDICATORS FOR A BREAKOUT... The AD Lines for the S&P 500, S&P MidCap 400 ($MID) and S&P 600 Small-Cap 600 ($SML) are mixed up at the moment. The S&P 500 AD Line is strong with a new high, the S&P Small-Cap AD Line remains in a downtrend and the S&P 400 Mid-Cap AD Line is caught in the middle. Chartists should keep an eye on these three breadth indicators for directional clues over the next few weeks. The bulls currently have the edge because the S&P 500 AD Line and S&P MidCap AD Line hit new highs this month.
Chart 3 shows the S&P 500 AD Line ($SPXADP) hitting new highs in mid April, mid May and late May. This breadth metric remains in a clear uptrend and there are no signs of weakness. The lows extending back to late April mark the first support zone to watch for signs of weakness. I see no reason to be negative on the S&P 500 as long as this support zone holds.
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Chart 3
Chart 4 shows the S&P Mid-Cap AD Line ($MIDADP) hitting new highs in April and mid May. The indicator surged over the last three days and is very close to another new high. Overall, mid-cap breadth shows more strength than weakness because the AD Line is close to a new high. The lows extending back to late April mark support. The indicator window shows the S&P MidCap Index trading flat since early March. Despite this flat performance, I would not become bearish unless the AD Line breaks below the support zone.
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Chart 4
Chart 5 shows the S&P Small-Cap AD Line ($SMLADP) peaking in mid March and zigzagging lower the last few months. Both the index and the indicator recorded new lows in mid March and remain in downtrends. The May highs combine to mark resistance zones for the index and the AD Line. Both need breakouts to reverse their downtrends and suggest that small-caps are on the rebound.
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Chart 5
TECH AND CONSUMER DISCRETIONARY BPIS TURN UP... John Murphy noted the new high in the Technology SPDR in his weekend Market Message and Greg Schnell showed the Consumer Discretionary SPDR bouncing off a trend line support zone on Thursday. The Bullish Percent Indices for these sectors are also improving and suggest that more stocks are participating in this upturn. Note that the Bullish Percent Index is a breadth indicator and every stock is weighted equally. This means a P&F signal in Apple (market cap: $529 billion) counts as much as a P&F signal in Jabil Circuit (market cap: $3.76 billion). XLK and the other sector SPDRs are weighted by market cap, which means the largest stocks carry much more weight. Chart 6 shows the Technology BPI ($BPTECH) turning down in early March and breaking its 10-day EMA. The BPI fell the next two months and declined below 60. With strength over the last two weeks, the BPI broke back above its 10-day EMA and is rising again, which means more and more stocks are triggering P&F buy signals. Overall, the BPI remains well above 50% and has been above this median since late 2012. In general, a bullish bias is present when above 50% and a bearish bias when below 50%.
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Chart 6
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Chart 7
Chart 7 shows the Consumer Discretionary BPI ($BPDISC) moving back above 50% in early May and back above its 10-day EMA last week. This means the BPI is back on the rise and more P&F buy signals are occurring. Overall, notice that the BPI dipped below 50% in February and April, but quickly rebounded each time. This can be a volatile area because the 50% level defines the overall bias. I sometimes add a buffer to reduce whipsaws and further quantify signals. Using a 5% buffer, a break below 45% would be considered bearish and a break above 55% bullish. This means the indicator has a bullish bias after a move above 55% and remains with this bias until there is a break below 45%. With two bounces off 45% this year, this level is clearly a key level to watch going forward.
FACEBOOK REMAINS ON SELL SIGNAL... As its name implies, the Bullish Percent Index measures the percentage of stocks on a P&F buy signal, which is a double top breakout. Stocks not on a buy signal are on a P&F sell signal, which is a double bottom break down. A stock is either on a buy signal or a sell signal. Period. There is no ambiguity here. Chart 8 shows Facebook (FB) triggering a P&F sell signal with the break below the March low (red 3). This O-Column broke below the low of the prior O-Column, and this sell signal remains in force until countered with a buy signal. This would require the current X-Column to break above the high of the prior X-Column.
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Chart 8
GOOGLE TRIGGERS P&F BREAKOUT ... Chart 9 shows Google (GOOG) reversing its P&F sell signal with a buy signal this month. Notice how the current X-Column broke above the prior X-Column. This move also triggered a triple top breakout (20-May-2014).
