December 16, 2014
With all the pessimism over the past few days, it’s hard to see past the gloomy winter skies. But signs are starting to emerge that lead us to believe the Santa Rally is on its way… and soon.
S&P 500 (SPX) – The Wedge. We’ve been watching this chart for what seems like forever. And it’s continued to work well. The two converging trend lines are crucially important, and were only breached on one occasion (at the peak of the correction this October). Further, the 34 week moving average has been a significant support/resistance level.
S&P 500 (SPY) – Support. Looking more closely at the SPY, there’s strong support at the $198 level – just $1.50 below the current level. Further, the RSI is hitting oversold levels that have historically acted as solid buying opportunities. While many are worried of a straight drop similar to October 1987, the SPY created a higher high (in fact, the highest high) just last week. Before a more significant correction, all probabilities point to seeing a lower high develop, i.e. a re-test of the $206-$208 level.
VOLATILITY (VIX) – Topping Out. This chart has been a profitable one to follow. When the $VIX hits the 70 RSI level and jumps out of the top BBand, it has acted as strong support for the SPY. It is essentially signaling that capitulation is taking place and investors are dumping shares in fear of a steeper correction. Even in those instances it has “failed” (red arrows along the bottom), an investable bottom has been found within just a few SPY points. We believe the $198-$199 level will see strong support. If we do get down to that level tomorrow and the VIX continues to spike, we’ll likely be taking advantage of that early holiday gift.
TREASURIES (TLT) – Topping Out. Similar to the VIX, the treasury ETF (TLT) tends to act inversely to the equity market. As fear rises in the equity markets, investors flee to the safety of treasury bonds. The TLT has formed a really well-defined rising channel over the past 18 months. Shares of TLT recently breached the channel; it has also hit an RSI level that has historically led to pullbacks in the past. It’s likely topping out at this level, which means that investor fear will fall and equity markets should bounce.
APPLE (AAPL). Shares of AAPL have formed a well-defined rising channel. Each hit of the top trend line has preceded a pullback; likewise, each touch of the bottom trend has led to a bounce. In a previous post two weeks ago, we argued that AAPL was topping in the 116-120 area (and sold calls at that level). The risk/reward has now shifted. We believe the $103 area will be strong support right at the bottom trend line, and it also coincides with the top of the two month triangle formed in Aug-Oct. While there is likely $5 of downside risk, there’s roughly $12-$15 of upside risk back to the top of the channel and all-time highs. Wouldn’t be surprised to see a bounce off the 50 DMA right around currently levels.
AAPL has also formed a bullish falling wedge pattern. We saw a false breakdown today with shares dropping below $107.50, but they recovered and closed back within the wedge. This type of action often precedes a breakout in the opposite direction. With every piece of news around Apple being very strong for long-term fundamentals, wouldn’t be at all surprised to see a re-test of the highs going into its earnings in just a few weeks.
ENERGY SELECT ETF (XLE). We posted the chart below several weeks ago, just as the XLE was bottoming in October. Based on historical comparisons, we expected shares to see a Fibonacci retracement of between 38.2%-50% within six weeks (which we exactly saw) followed by a re-test of the lows (which we’re seeing now). Each time the shares have seen a mid-teens RSI, it has followed the same pattern. At this point, we expect shares to rebound to the previous consolidation area ($84-$86) within several weeks.
EXXON MOBIL (XOM). Shares of XOM have formed a crystal clear, well-defined head and shoulders pattern. In fact, it’s one of the sharpest H&S patterns we’ve seen in a long time. A perfect neckline that has acted as strong support, shoulders around the same level that lasted the same length of time. Picture perfect. However, it’s our expectation that this is a bear trap. With the broader markets, and the energy sector more specifically, showing signs of bottoming, this is likely a good opportunity to pick up XOM near the year’s lows with a well defined exit point.
CORN. Shares of CORN have formed another well-defined inverse head and shoulders pattern. It looks like this has at least $3-$4 to the upside over the next few months.