The S&P 500 opened at 5903, down 37 points on Monday, but then rallied to close higher at 5963. The averages moved lower for the rest of the week with the S&P 500 closing at 5802, 2.8% from the highs. The selling on Wednesday was the heaviest as at least 90% of the S&P 500 stocks as well as the Nasdaq 100 stocks declined.
After Wednesday’s decline, there was some trader concern over the health of the rally from the April lows. There was an increase in the Put/Cal ratios to above 1.00 indicating more puts than calls were traded.
The market review indicates it was a rough week for the markets led by a 4.1% decline in the Dow Jones Transportation Average while the iShares Russell 2000 declined 3.5%. On a year-to-date basis, these are two of the weakest down 8.6% and 8.1% respectively.
The S&P 500 was down 2.6% last week followed by a 2.5% decline in the Dow Jones Industrial Average (INDU) and the Nasdaq 100 (NDX) was down 2.4%. On a year-to-date basis, the S&P and INDU are down over 2% but not the NDX as it was only 0.5% lower.
On the plus side, the Spyder Gold Shares (GLD) were up 5.3% for the week and are up 27.9% YTD. In my analysis last week I noted that GLD appeared to be completing its corrective pattern. Having studied thousands of charts over the years I immediately noticed a familiar pattern as after a February high at $317.63 (A), GLD dropped to a low of $295.32 (B).
This is a pattern that typically fools traders who buy a day or so after the low (B) and are feeling optimistic after the high at $315.62 (C). Often they are stopped out when a stop under the low (B) is hit. The equality target for this formation is determined by calculating the decline from B to C ($317.63-$295.320 or $22.31, Then you subtract this value from the high at C so $315.62- $22.31 gives you $293.31 which is the downside or equality target.
GLD had a low on May 14th of $293.75 and at $291.78 on May 16th. The gap higher on Monday, May 19th was a sign that the correction was over as the OBV moved back above its WMA as it had been negative since the April high. This allowed for an entry on May 20th before GLD moved sharply higher for the rest of the week. Using the decline from the high at A to the eventual low at $291.78, the 1.272 Fibonacci target is at $324.46 with the 1.618 at $333.34.
So should last week’s decline change your outlook for the stock market? Since the end of April, I have been discussing the technical improvement in the outlook for the stock market including the April 24th bullish Zweig Breadth Thrust (ZBT).
The ZBT signal has been 100% accurate since WWI with the S&P 500 higher 6- and -12 months later every single time as noted in a recent Business Insider article. I have been writing about these signals for many years and there were two in 2023 when most were expecting a recession. The stock market action in 2024 was the validation of the ZBT signals.
The weekly chart of the Spyder Trust (SPY) shows last week’s lower close but it is well above the now-rising 20-week EMA at $569.08. The weekly starc+ band is at $620.37. The still-rising 20-day EMA at $574.42 has almost been reached and it is often a good buy level once there is some positive momentum to indicate that the correction is over.
The weekly S&P 500 Advance/Decline line turned lower last week but just made a new high a week ago as the resistance at line c, was overcome. The completion of the weekly trading range that goes back to last September has positive implications for the intermediate term. The daily S&P 500 A/D line (not shown) did close below its WMA last week but still shows a positive trend.
The latest AAII survey reported 37.7% bullish and 36.7% bearish so the bull %-bear% rose to 1% as there were now more investors who thought that the S&P 500 would be higher over the next six months than those who thought it would be lower. This difference dropped below -30 it late February and just a few weeks ago was at -41. This was a sign that the bullish sentiment was too low and the bearish sentiment was too high. Similar extreme readings in late 2022 led to the market rally in 2023 and 2024.
The Invesco QQQ Trust (QQQ) has had a strong month up 7.1% so far even large-cap tech stocks were not recommended by most analysts or were held by hedge funds over the past few months. The Friday close at $509.24 was well above the yearly pivot at $480.12. The all-time high at $540 is expected to be overcome based on the leading action of the Nasdaq 100 Advance/Decline line. The weekly starc+ band is now at $546.86 with the yearly R1 at $572.72. The rising 20-week EMA at $490.30 should provide good support.
The Nasdaq 100 Advance/Decline line tested its EMA at the April lows before turning higher. It shows a pattern of higher lows and higher highs going back to 2023. The A/D line moved to a new high four weeks ago which was a very positive development for the stock market. The A/D line has turned lower but is well above its rising EMA after making a conclusive new high.
The relative performance (RS) strongly moved back above its WMA in April indicating that QQQ was again leading the SPY. So far in May SPY is up 4.4% while QQQ has gained 7.1%. The RS is now moving above long-term resistance at line c, which indicates the outperformance trend could last for a while.
One negative factor on the horizon is the action of interest rates which moved higher last week. The poor reaction to the 20-year T-Bond auction triggered the stock market’s sharp decline on Wednesday as the selling was heavy with over 90% of the stocks in the major averages declining.
The weekly chart of the 30-year T-Bond yield shows the close above the resistance at 4.975% which goes back to the end of 2023. The potential upside targets from the chart formation are quite worrisome as 5.60% is an initial target but hopefully, the folks in DC will come to their senses. I will be watching for a move in the 10-year T-Note yield above 4.840% to confirm the breakout in the 30-year yield.
Many of the widely followed ETFs have dropped back to support at their 20-day EMAs which is part of my buy the dip strategy but be sure to use stops and manage your risk.
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