The Bear Market Rally Climbs Additional Risky Levels

Summary

• The Diamonds ETF is the first to be above its 200-day simple moving average at $249.86.
• The Spiders ETF popped above its semiannual pivot at $266.14 on dovish FOMC, but remains below its 200-day SMA at $273.89.
• The QQQs ETF is between my semiannual and annual risky levels at $167.53 and $169.27, but is below its 200-day SMA at $171.48.
• The transports ETF is below its new monthly risky level at $183.46 and its 200-day SMA at $190.35.
• The Russell 2000 ETF tested its monthly and semiannual risky levels at $149.65 and $149.77.

Today, I show the daily charts with their key technical levels.

The Federal Reserve continues to unwind its balance sheet: As of Jan. 30, the balance sheet was marked at $4.040 trillion, down $460 billion since the end of September 2017 when it was $4.5 trillion. The total to date for January is now up to $18 billion and that does not include any unwinding that may have occurred during the last two days of the month. The last day of the month is a maturity date for U.S. treasuries so I will assume that the release for Feb. 6 will be for January, not February.

My call for the FOMC: The Federal Reserve will likely keep the federal funds rate at 2.25% to 2.50% as their revised “normal”. The Fed balance sheet will become a primary monetary policy tool as the unwinding continues, but longer term they could increase the balance sheet without using quantitative easing measures.

How the Bear Market Rally Evolved:

• SPY tested and held its “reversion to the mean” at $234.71 at its Christmas low of $233.76 set on Dec. 26.
• IYT held my semiannual value level at $159.63 on Jan. 3. The close that week was above its “reversion to the mean” at $163.89.
• DIA and SPY had daily “key reversal” days on Dec. 26. Both set their lows on Dec. 26 then closed above their Dec. 24 highs.

Here’s Today’s Scorecard

SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)

Courtesy of MetaStock Xenith

Diamonds have been below a “death cross” since Dec. 19 with DIA above its 50-day and 200-day simple moving average now at $241.79 and $249.96, respectively. Investors following this signal should reduce holdings at the 200-day SMA. DIA set its all-time intraday high of $269.28 on Oct. 3 and is 7% below that level. DIA is 15.4% above its 2018 low of $216.97 set on Dec. 26.

The weekly chart for Diamonds is positive with the ETF above its five-week modified moving average at $244.28. DIA is above its 200-week simple moving average or “reversion to the mean” at $208.45. The 12x3x3 weekly slow stochastic reading ended last week rising to 51.95, up from 43.11 on Jan. 25. Buy weakness to my semiannual pivot at $243.47 and reduce holdings on strength to annual and monthly risky levels at $257.94 and $258.33, respectively.

SPDR S&P 500 Trust ETF (NYSEARCA:SPY)

Courtesy of MetaStock Xenith

The Spiders ETF has been under a “death cross” since Dec. 7 with SPY between its 50-day and 200-day SMAs now at $260.64 and $273.88, respectively. Investors following this signal should reduce holdings on strength to the 200-day SMA. SPY set its all-time intraday high of $293.94 on Sept. 21 and is 8.1% below that level. SPY is 15.5% above its 2018 low of $233.76 set on Dec. 26.

The weekly chart for Spiders is positive with the ETF above its five-week modified moving average at $263.34. SPY is above its 200-week simple moving average or “reversion to the mean” at $236.10 after this average held at $234.71 during the week of Dec. 28. The 12x3x3 weekly slow stochastic reading ended last week rising to 53.40, up from 44.40 on Jan. 25. My semiannual pivot is $266.14. Reduce holdings on strength to my monthly and annual risky levels at $277.44 and $285.86, respectively.

Invesco QQQ ETF (NASDAQ:QQQ)

Courtesy of MetaStock Xenith

QQQ has been below a “death cross” on Dec. 3 with the ETF between its 50-day SMA and 200-day SMA now at $160.73 and $171.48, respectively. Investors following this signal should reduce holdings on strength to the 200-day SMA. QQQ set its all-time intraday high of $187.53 on Oct. 1 and remains in correction territory 10.7% below this level. QQQ is 16.7% above its 2018 low of $143.46 set on Dec. 24.

The weekly chart for QQQ remains positive with the ETF above its five-week modified moving average at $163.08. QQQ is above its 200-week simple moving average or “reversion to the mean” at $135.07. The 12x3x3 weekly slow stochastic reading ended last week rising to 53.34, up from 44.05 on Jan. 25. Investors could have reduced holdings between my semiannual and annual pivots at $167.53 and $169.27, respectively. Reduce holdings on strength to my new monthly risky level at $174.44.

iShares Transportation Average ETF (NYSEARCA:IYT)

Courtesy of MetaStock Xenith

IYT formed a “death cross” on Nov. 26 with the ETF now between its 50-day and 200-day SMAs now at $176.09 and $190.35, respectively. Investors following this signal should reduce holdings on strength to the 200-day SMA. The transports ETF set its all-time intraday high of $209.43 on Sept. 14 and remains in correction territory 13.1% below the high. IYT is 17.2% above its 2018 low of $155.24 set on Dec. 24.

The weekly chart for IYT remains positive with the ETF above its five-week modified moving average at $177.35. The ETF is above its 200-week simple moving average or “reversion to the mean” at $164.28. The 12x3x3 weekly slow stochastic reading rose to 42.06 last week, up from 34.70 on Jan. 18. Buy weakness to my semiannual value level at $159.63 and reduce holdings on strength to my monthly, quarterly and annual risky levels at $183.46, $195.81 and $196.35, respectively.

iShares Russell 2000 ETF (NYSEARCA:IWM)

Courtesy of MetaStock Xenith

IWM has been below a “death cross” since Nov. 13 with the ETF now between its 50-day and 200-day SMAs now at $142.78 and $158.01, respectively. Investors following this signal should reduce holdings on strength to the 200-day SMA. This ETF set its all-time intraday high of $173.39 on Aug. 31 and remains in correction territory 14% below the high. IWM is 18.6% above its 2018 low of $125.81 set on Dec. 26.

The weekly chart for IWM remains positive with the ETF above its five-week modified moving average at $145.11. The ETF is above its 200-week SMA or “reversion to the mean” at $135.14. The 12x3x3 weekly slow stochastic reading rose to 51.98 last week, up from 42.02 on Jan. 25. Investors reduced holdings between my monthly and semiannual pivots at $149.65 and $149.77, respectively. Reduce holdings on strength to my annual and quarterly risky levels at $157.49 and $160.93, respectively.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[brainleft]

the markets were about to price in a recession because Powell was hiking us into 1. Hopefully the fed slowed down soon enough, something they've proven inept at, but we can't know yet as the December hike takes 6 months to 1 year to tighten. Yes I realize the market sets the actual rates but the fed steers the banks.

[huskers123]

You got Brain, the Fed was about to send us into a recession at warp speed. Now we have to wait and see if they went too far. We most likely will see some back filling. Not in a bear market. Technically S&P came .20% short of 20%.

[Richard Suttmeier]

S&P High: 2,940.91 on Sept. 21
S&P Low: 2,346.58 on Dec. 26

THIS IS A DECLINE OF 20.2%

[astro24102]

Appreciate the info....and your hard work.

[schizoidmantoo]

"should reduce holdings on strength to the 200-day SMA"
Does this mean sell when the price goes above the line? Does it mean any stock or just ETF that generated the curve?

I am a little nervous about the market because of all the talk of impeachment now that the Democrats control the House of Representatives. Historically, gridlock in DC has been good for the market, but I have never seen one party so antagonistic toward the other that people are being thrown out of restaurants, harassed at their homes, and even some politicians encouraging people to do more of it.

[Investor since ‘73]

Those of us who see what’s actually happening in both our economy and the worlds, as well as the political typhoon about to engulf the acting president, have built cash reserves and we will enjoy the bargain prices that will present themselves later this year. I am excited by the impending opportunity!

[Steven Jon Kaplan]

Thank you for this excellent article!

[Richard Suttmeier]

Enjoy the bear market rally for what it is. Longer-term I do not see all five ETFs setting new highs in 2019. At best we have a wide volatile trading range which means trade but do not invest for the long term. Remember that it is difficult to buy at the exact low or sell at the exact high. Trade the levels and don't be greedy..

[User 49693794]

@William, yes, I was being serious. No need to be defensive, my post was not intended to insult or offend the author or anyone else.

[User 49693794]

I don't think we are in a bear market anymore… The jobs report came in extremely strong, so that means there is no recession in sight. Also, Jerome Powell's Fed is in an accommodative mode.....so noninterest rate increase any time soon, and the balance sheet reductions may even be reduced.

I would say thumbs up!

[William Darusmont]

Seriously? One month of non-farm payrolls? Rich is the best technician I have ever known. He is not saying its going to happen but to buy (sell?) some insurance at the 200 day. Ask yourself this: is there enough good news vs the bad news to cause a further rally and breakout? What you think...or I think...is of no consequence. In a market loaded with algo's and ETF's, do you honestly believe that makes for a strong market?...let alone a strong economy. Check back in a month...time will tell...always does!

[BBDividendAndIndexer]

But as Jack Bogle would say, even Rich knows nothing in the long run.

[Investor since ‘73]

Previous month jobs were revised DOWN by 80,000, wages went up a whole 1/10th of one percent, most of the new jobs were McJobs that don’t pay a living wage. 78% of Americans can’t afford to miss a SINGLE paycheck. Great economy? If you’re already rich but the former middle class is now drowning in debt, millions have lost access to health care in the past 2 years, on and on go the FACTS. The effects of Tariff Man’s trade wars are only now about to be felt, ask the 10,000 workers at GM how well that’s impacting them and there will be many more in the same position very soon as the worlds economies cool too. It’s not all about charts, sometimes real economic factors matter too. Or not, hey, stay long, deny the facts. Wait until the bottom drops out before you panic and sell. I’ll be looking for bargains with most of my cash off the table now.