Friday's action made it tough to set aside thoughts of Monday's reaction. Many have forgotten what a pullback feels like and some haven't experienced much outside of 2011.
We've only seen four red candles on the quarterly chart of the SPDR S&P (SPY) since April 2009. The current quarter is reminiscent of the big pullback in 2011. That pullback broke a support trendline as well, but the quarter after saw a big bounce. Six months later and we were already higher again. So that bounce now serves as the support for our trendline, which, again, is being threatened. We temporarily dropped below the trendline in late 2014, but managed to get a quarterly close over it. Will the same happen this time?
The SPY has five weeks to recover, so there is plenty of time and the bounce needed is only around 4%. Four percent in five weeks is a solid effort, but with volatility in high gear, we could get half of that in a single day. The challenge here is trouble bubbling beneath the surface of price. I've noted the MACD in the past. I even left my note on the chart that waiting for the bearish MACD crossover has been better than anticipating. Well, we look like we're set up to have that bearish crossover this quarter. Furthermore, we could see the Full Stochastics and Relative Strength Index (RSI) both exit overbought territory. Losing price is one thing as we can quickly bounce back, but in the last two decades, when we've seen the MACD crossover plus the Full Stochastics and RSI exit overbought territory all occur together, we've seen some pretty nasty drops over the next two to three years. We're not there yet, but we're real close.
Just for added measure, let's look at the Russell 2000 iShares (IWM). Again, we see the bearish MACD crossover already in place, but IWM has already lost the overbought levels for the RSI and the Full stochastics is set to close just on the edge. Price does have some support at $110, but the 2009 trendline is broken at the moment. I believe the SPY will lead the way here, but it is worth noting the similar setup in the IWM currently.
Every weekend deserves a little bullish optimism, so how about Heron Therapeutics (HRTX). For those still looking for a bullish name to trade, how about something that was strong on Thursday and Friday? There are only a handful of charts out there that aren't inverse ETFs, which looked good after Friday's close, but Heron fits the bill. I'm watching the $36 level here for a breakout. Support sits at $32 and any pullback that bounces off, but now through, $32 would also be buyable. The longer period RSI has pushed above resistance while the much longer term MACD just went bullish.
The last time we saw a MACD crossover coupled with a price and RSI breakout good things happened. The Commodity Channel Index (CCI) is picking up here as well. The only yellow flag is while this is the same setup we saw in the late May big breakout, it is also the same setup we saw in late July which failed. I would simply use a break of the 10=day moving average as a stop after a long entry.
The markets have given us lots to think about here. Quarterly charts are impossible to use for day to day decision making, but keep them in mind when making decisions about longer term portfolio holdings and where you want to be in terms of risk over the next two to five years.