Stocks Take Hit But Don’t Turn Too Bearish

Stocks took a turn for the worse last week increasing correction fears by investors and traders. Some were suggesting that a more significant top was being formed and that was before the weekend missile and drone attack by Iran on Israel. In an early reaction to the news, Bitcoin BTC had the largest slide since 2023 as it lost 7.7% on Saturday.

The analysis of the advance/decline data at the end of March was positive for the S&P 500 the fact that it had exceeded its monthly starc+ band in both February and March that was a sign that the market risk was now higher on the long side of the market.

For those who are not familiar with starc bands, they were developed in the mid-1980s by the late Manning Stoller who was an old friend and colleague. Starc stands for the "Stoller Average Range Channel," and by far, these are my favorite banding or channel techniques. It should be noted that they are interpreted much differently than Bollinger Bands.

The bands were constructed so that roughly 92% of the price action will be contained within the bands therefore if prices are near either of the bands they are likely closer to an extreme high or low. For example, when prices are at or above the monthly starc+ bands they are more extended than they would be if they were above the weekly or daily bands. These bands project a price range for the next period.

The chart on the left is the current monthly chart of the S&P 500 which is down 2.5% so far in April after five positive months in a row. At the end of February, the monthly starc+ band for March was 5160 and the high in March 2024 was 5264.

Neither the monthly starc+ nor starc- bands are exceeded very often. The monthly starc- band was exceeded in June 2022, also in March 2020 and December 2018 as the S&P 500 was making extreme lows.

On the right is a chart of the S&P 500 from late 2019 and early 2020. The monthly starc+ band projection for January 2018 was 2716 and the high was 2872. This set the stage for a nine-day decline in the S&P 500 that dropped 11.8% from high to low.

This decline was enough to reverse the bullish sentiment as the bullish % reading from the American Association of Individual Investors (AAII ) dropped from 59.75% on January 4, 2018, to 37% on February 7, 2018. Some even thought that this could be the start of a new bear market but I viewed the decline as a correction that would eventually create a buying opportunity in May.

It was a concern on April 4^th when the SPY PY SPY and QQQ QQQ both formed key reversals on April 4^th (see arrow) in reaction to comments from a Fed Governor regarding rate cuts. On July 27, 2023, a key reversal set the market tone for most of the next three months as it confirmed a market correction.

It was another week where the small-cap iShares Russell 2000 (IWM IWM ) dropped the most down 2.8% just a bit more than the 2.7% decline in the Dow Jones Transportation Average. The Dow Jones Industrials were down 2.4% and is now just barely higher year-to-date (YTD).

The Dow Jones Utility Average was down 1.7% just a bit more than the S&P 500 which declined 1.6% for the week. The smaller decline in the Nasdaq 100 Index of just 0.6% was a surprise for many and it will have my focus in the week ahead. Only the SPDR Gold Shares were higher for the week up 0.8% with a 13.45% gain YTD.

The Spyder Trust (SPY) dropped below the April 5^th key reversal low at $512.75 this week (see arrow). The rising 50-day MA is at $508.80 with the monthly pivot R2 at $509.41. The 2^nd Quarter pivot is at $504.70 with the 100-day MA and chart support at $488.25.

Last week all of the daily advance/decline lines turned negative as the S&P 500 Advance/Decline line dropped below its flattening EMA and the prior lows (see arrow). There is good support at line b which may be tested if not exceeded before the correction is over.

Both the NYSE Stocks Only A/D and the NYSE All A/D line show similar formations but the NYSE All is the only one that has broken its uptrend, line d. There is next good support at the early December high.

Some were surprised that the Invesco QQQ Trust (QQQ) held above the reversal low at $435.11. The uptrend, line b, is now in the $432 area with the February low at $421. There is much stronger support now in the $412 area, line a, which is 5.9% below Friday’s close.

The Nasdaq 100 A/D line tried to overcome its declining EMA last week before it turned lower. The A/D line had previously broken the uptrend, line c, which warned of a correction.

The relative performance (RS) helped identify QQQ as a market leader in early November of 2023 but then started to diverge from prices in early February, line d. The drop below the support (line e) was a reason to reduce exposure to tech stocks and ETFs like XLK XLK .

Now the RS is trying to bottom as it has moved above its EMA which has also turned higher. A strong move above the downtrend in the RS, line d, will be a sign that QQQ is again starting to lead SPY. This would be a surprise to the markets as many see the tech stocks as more vulnerable in a market correction.

Since the middle of March, I have been watching the New High and New Low data as the number of stocks making New Highs had been declining, line b. In late 2021 this analysis helped to confirm a top in the tech stocks and the bear market in 2022.

The New Lows for the Nasdaq Composite are now closer to giving a negative signal as I am watching for a move above 224 New low and last Friday there were 212. A new pattern of a rising number of stocks making New Lows will be consistent with further correction. A similar signal has already been generated from my analysis of the VIX and VXN.

So what type of correction? The correction from the July 2023 high to the late October low lasted longer than I expected but the A/D line analysis did a good job of turning positive at the right time. If the bearish sentiment continues to build quickly then I think a sharp but brief correction is more likely.