foxex: S&P 500 Still Fighting After 10-Year Run

Chart Advisor | Focus on the Price

Tuesday, March 05, 2019

1. GE's bullish run fails on exhaustion

2. S&P 500 10 years after bottoming out at 666

3. Discretionary stocks outperforming staples stocks

Major Moves

General Electric (GE) has been a cautionary tale on Wall Street ever since it was dropped from the Dow Jones Industrial Average on June 19, 2018.

GE was one of the original stocks in the index when it was first created in 1896, but years of under-performance and a lack of managerial vision eventually forced the index overseer's hand, and it ousted the company and replaced it with Walgreens Boots Alliance (WBA).

The stock continued to fall after leaving the Dow, but after reaching a multi-year low of $6.40 on December 11, 2018, GE finally started to right the ship and turn things around.

GE consolidated for a few weeks and eventually formed a cup-with-handle bullish reversal pattern that it completed on January 31 when the stock gapped higher after the company reported better-than-expected earnings.

This "runaway gap" – a gap that forms during an uptrend or a downtrend without getting filled – formed a solid support level that allowed GE to consolidate for nearly a month during February until the stock once again gapped higher.

Many traders were hoping this gap would prove to be another "runaway gap," but unfortunately for the GE bulls, the stock collapsed in mid-day trading today when CEO Larry Culp announced the company's free cash flow will be "in negative territory" this year.

The stock was able to rebound up off of its intra-day lows, but the bearish move filled the gap that formed on February 25th, which officially makes the gap an "exhaustion gap."

Exhaustion gaps often mark the end of bullish moves. If that is the case for GE, the price level just below $11 that served as support in late-September 2018 and as resistance in late-February could prove a difficult level to crack in the short term.

S&P 500

While many traders are frustrated that the S&P 500 is still consolidating and still struggling to break above short-term resistance at 2,816.94 – the high the index reached on October 17, 2018 – I think it is important to acknowledge the longer-term gains the index has made during the past decade.

The S&P 500 bottomed out 10 years ago on March 6, 2009, at 666.79. Today's close of 2,789.65 is 318% higher than that dreadfully low level the index dropped to in the aftermath of the Financial Crisis of 2008.

The fact that the S&P 500 is within spitting distance of the index's all-time high of 2,940.91 (reached on September 21, 2018) is also remarkable considering the S&P 500 officially entered bearish territory last Christmas Eve.

It is important to note that the S&P 500's rise from 666.79 to 2,940.91 wasn't without its hiccups and pullbacks.

The 12 months from early-2015 through early-2106 were a tumultuous time on Wall Street. Many traders were sure the market had put in a top and was ready to collapse back down to retest the 2007 high of 1,576.09 to see if the former resistance level would hold up as a longer-term support level. As you can see, we never found out if that level would hold as support because the market rallied instead of falling.

Seeing this resilience tells us there is still a chance for the S&P 500 to continue on to even higher highs. It will take some strong earnings and economic numbers to push the index higher, but seeing those numbers is still well within the realm of possibility during 2019.

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Risk Indicators - XLY/XLP

I've discussed this before, but one indicator I like to use to gauge trader sentiment on Wall Street is a relative strength comparison chart between the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Consumer Staples Select Sector SPDR ETF (XLP).

The relative strength comparison chart shows which stock, or exchange-traded fund (ETF) in this case, is outperforming and which stock, or ETF, is under-performing.

In this setup, where I am looking at an XLY/XLP relative strength chart, any upward movement in the chart indicates XLY is outperforming XLP and any downward movement in the chart indicates XLY is under-performing XLP.

Watching this chart can help you tease out a better understanding of what current trader sentiment is because Consumer Discretionary stocks tend to outperform Consumer Staples stocks when trader sentiment is bullish. Traders typically look to put their money in more aggressive stocks when they are confident.

Conversely, Consumer Discretionary stocks tend to underperform Consumer Staples stocks when trader sentiment is bearish. Traders typically look to put their money in more conservative stocks when they are less confident.

Looking at the XLY/XLP relative strength chart, you can see that Consumer Discretionary stocks are outperforming Consumer Staples, with the chart confirming the completion of a new bullish flag continuation pattern today.

Positive earnings numbers and bullish expectations for the trade negotiations between the United States and China seem to be driving most of the bullish sentiment.

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Bottom line: Non-bearish is bullish

While it has been frustrating to sit and watch the S&P 500 consolidate below resistance for the past few weeks, it shouldn't be discouraging.

At this point, any non-bearish movement should be considered bullish since we have shaken off the specter of last year's bearish pullback and re-entered a new bullish uptrend.

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