BREAKOUTS TO ALL-TIME HIGHS ARE SUPPORTIVE; FALSE BREAKOUTS ARE NOT!

 

The S&P 500 (SPX/2985.03) may trade in a choppy fashion (exhibit upside and downside volatility) due to near-term resistance (solid and dashed red lines on chart below). But unless the SPX closes under the recent topside breakout area in and around 2950 (support) and a “false breakout” occurs, the SPX’s trend is supportive of higher prices. A false breakout would create a near-term headwind for the SPX, in my opinion. If that happens and support in and around 2950 is violated, the SPX may be vulnerable to further downside probing. At that point, I would focus on the next layer of support between 2918 and 2874 because a violation of this area would reverse the near-term uptrend. A close below support between 2750 and 2728 would forge a lower trough and reverse the current, non-trading uptrend.

However, I would view it positively as long as the SPX holds above the first area of support, in and around 2950. This would especially be the case as Wall Street contends with earnings, recalibrated Fed expectations, the Mueller testimony (7/24/19), Purchasing Managers Index reports (7/24/19), a decision from the European Central Bank (7/25/19), and never-ending “trade tweets” and political bickering, for starters.

S&P 500 Large Cap Index. First support: in and around 2950 (previous breakout range).

On the opposite side of the ledger, the Small Cap arena, which I discussed during last week’s webinar, continues to underperform. I have been watching this area closely for months in anticipation of some improvement in relative strength. The cartoon below accurately depicts the condition of the tape action since last autumn of and my current opinion about the Russell 2000 Small Cap Index (RUT/1544.78).

Russell 2000 or RUT Cartoon.

An argument can be made that the RUT has not made any topside progress since as recently as November 2018 (red dashed line at ~1586 resistance) and even as far back as January 2018. Strong resistance between 1600 and 1618 (red rectangle) is a major hurdle that needs to be overcome before any serious topside outperformance versus the SPX can begin, in my view. Until then, please monitor initial support in and around 1520 because the next support level is down around 1460, the early June low, as depicted in green below.

Russell 2000 Small Cap Index.

→ Please know the reporting days of the companies you own, or at least of your major holding.

Case in point: Netflix, Inc. (NFLX/$310.62). While I love the company and product, the stock is another issue. Following a lengthy period of underperformance versus the S&P 500 (top frame in chart below), NFLX experienced a sharp decline last week following a loss of subscribers in the U.S. The stock broke down below the lower end of a lengthy trading range pattern. This isn’t good, as a lot of overhanging selling pressure has now been established. My interpretation of the current chart configuration suggests a further period of underperformance. As Bespoke Investment Group observed:

  • The stock has historically taken an average of 351 days to recover earnings losses like the one experienced last week, and it has taken 111 days to hit its maximum decline following the report.

  • Even stocks as strong as NFLX still have rough earnings reports from time to time. In the past, the stock has managed to recover, even if it takes some time.

Netflix Inc Nasdaq. NFLX: Lengthy period of under performing the S&P 500.

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— Written 07.22.2019. Chart sources: StockCharts.  

PDF Copy of Article: Day Hagan Tech Talk July 23, 2019 (PDF)

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