Gap Ups and The Week Ahead


December 21, 2014 (7:00 pm)

I think it’s instructive to take a quick read through our last post from Tuesday night, entitled “Is Santa on His Way?“. We laid out our rationale for expecting a bottom to form around the SPY 198 level and to see a significant near-term bounce and rally into year-end. Just when it seemed the rest of the investing community got most fearful, we were adding near- and intermediate-term bullish positions expecting a strong run into year-end. The technical action led the way.

As a quick aside, I want to recommend two very informative articles written by Steve Burns (@SJosephBurns). Nice job on these, Steve… simple to follow and solid analysis.

S&P 500 (SPY) Strong Support. We’re going to spend a lot of time looking at SPY on a variety of time frames. Early in the week, we detailed the strong support illustrated in the SPY chart below (what had been $198 support is now $197 support post dividend). It hit that support level as well as the 30 RSI level and skyrocketed from there… 10 points in three days.

SPY 2

S&P 500 (SPY) Short-Term Double Bottom. On Wednesday night, the SPY was showing a potential double bottom and we tweeted out the chart below (which obviously didn’t include the Thurs/Fri action at that point). Was very surprised to see the 100% measured move hit just the following day, but clearly the shorts wanted out. We took profits on half our SPY position mid-day on Thursday as it hit the 61.8% Fib extension level… whoops. Should have waited to be stopped out instead. But we need to remind ourselves from time to time, “I made all my money by selling too early”. The SPY has since hit its dividend-adjusted all time high.

SPY

S&P 500 (SPY) – October Comparison. The chart below simplifies itself the longer you analyze it. The first piece to note is the consistency in the RSI action… lows around 30 followed by highs around 70. That is a signal to us that the SPY has further to run. The second piece is the MACD action at the bottom. While we haven’t yet seen the MACD cross, it is likely coming. Over the last few months, this has signaled just the early stages of a multi-week rally.

The interesting comparison to October is based on those big gaps. It started with (1) a break through resistance, signified by the 200MA in October and the 50MA in December. The following day, a large gap was created as bears wanted out and bulls had no reason to sell. After the gap was created, the SPY consolidated at the next resistance level (2), which was the 50MA in October and the ATH in December. Just to continue the comparison, if action mimics the October rally, shares will consolidate for a short time before moving up to the top of that ridiculous bar formed on Thursday.

SPY 4

S&P 500 (SPY) – A Closer Look at October. There were three trends that were established throughout the October rally. The first was a strong uptrend (1), which brought the MACD up to an unsustainable level. We’ve seen the same action thus far in December. The second was a more moderate rally that lasted three weeks (2), and the last was a slight uptrend that solidified the negative divergence on the MACD and RSI. With the next two weeks being short holiday trading weeks, wouldn’t be surprised to see this recent rally moderate a bit… but we do expect the uptrend to continue.

SPY 3

VOLATILITY (VIX) Smash. The chart below has been a fantastic resource over the past several years. The 70 RSI level has acted as a signal that investor fear has reached capitulation levels, leading to a bottom in the equity markets. The VIX hasn’t simply pulled back after these events, it tends to absolutely crater back down to the 11-13 levels.

VIX

VOLATILITY (VIX) – October Comparison. The equity markets tend to bottom as VIX reaches “capitulation highs” (signified by the shaded areas below). As mentioned earlier, the VIX doesn’t simply decline, it falls off a cliff. In the near-term, the VIX has formed a descending triangle, which bodes well for a continuation equity market rally.

VIX

RUSSELL 2000 (IWM) – Breakout. The IWM broke out (just barely) of its six month consolidation area. It also looks like an inverse head and shoulders has formed with the August and December lows. If this does hold the breakout point, a 100% measured move could move it +14 points (104 low / 118 neckline) through next spring.

IWM

RUSSELL 2000 (IWM) – Long-Term Perspective. As a follow-up to a chart we’ve posted many times, we’re at an important inflection point in the longer IWM time frame. Shares formed a very well-defined uptrend since 2009 that was breached by the recent October lows; IWM has been consolidating under this trend line ever since. If it’s able to continue to power through the $120 level, it will be very bullish. However, if it fails, we’re going to be very cautious entering any longer-term investment opportunities.

IWM 2

APPLE (AAPL) – Bullish Into Earnings. We’re bullish on AAPL into its January earnings. During the market lows last week, shares hit the bottom of a multi-month rising channel, which also happened to be the 50% Fib retracement level from its post-earnings rally. Further, it has broken out of a falling wedge (one of our favorite patterns) on strong volume. It just so happens that the top of the rising channel meets it’s ATH just prior to the earnings call. Who doesn’t enjoy coincidences in technical analysis…

AAPL

APPLE (AAPL) – Another Look. This is a longer-term view of AAPL. As you can see, it has formed a well-defined, multi-year rising channel. The recent price action looks a lot like mid-Sept 2013. Shares hit the top of the channel with an 80+ RSI. It fell back to the 50MA, which it pierced for a matter of 2-3 days, and MACD fell below zero before it again trended higher. The recent breakout from the down trend is also visible here, with MACD turning up.

AAPL 2

EXXON MOBIL (XOM) – Bear Trap. We explained in previous posts why we expected the massive XOM head and shoulders to be a bear trap. It has proven to be a profitable thesis thus far.

XOM

YAHOO (YHOO) – Bull Flag Breakout. Shares of YHOO recently broke out of a month-long bull flag. MACD is starting to turn up as well, and the RSI has a lot of room to run.

YHOO

ALIBABA (BABA) – Bull Flag Breakout. Just as shares of YHOO are breaking out, it’s not totally surprising to see the true source of its value also breaking out. BABA has formed a well-defined falling channel / bear flag. It likely has a lot of room to run from here.

BABA

THE WEEKS AHEAD. We’d expect the market to continue up from here, since investors really don’t have much of a reason to sell here. Bears and those with short positions will continue to exit in order to harvest tax losses. Another melt-up has likely begun. That’s not to say that every day will be up. But the uptrend should continue. My own personal expectation is that the algo’s tipped their hand with the SPY 112 print… but that’s just one opinion (and we all know what happens to opinion’s in the equity markets).