Problem: How can you tell if an index is about to reverse—even before the price reflects it?

Answer: Look at what’s happening internally within the index—in other words, analyze market breadth, also called “participation.”

Spotting a Rebound in a Plunging Market

Like most investors, you look to the three major indices—DJIA, S&P 500, and the Nasdaq—to get an immediate glimpse of the market. But when all three are cratering, like most of the sessions we’ve seen this week and last, you often won’t find any early hint of a rebound or reversal from the indices themselves.

Indices can be misleading because they don’t reflect the movement of individual stocks within them. They are market-cap-weighted, meaning a few big stocks can skew the picture, masking broader market trends.

What this means is that, if you’re looking for signs that the market may be turning more bullish amid a wave of selling, you need to look at what’s happening internally. Are all stocks and sectors following the decline, or are some starting to rise—even if their movements aren’t reflected in the index price?

Enter the McClellan Oscillator

The McClellan Oscillator is one of many market breadth indicators that track the internal movements of the stock market and, by extension, the indices that represent them. Breadth indicators can help confirm trends and, more importantly, expose underlying weaknesses in rallies or hidden strengths in declines, helping you spot potential reversals before they appear in price.

Specifically, here’s a nutshell description of how the McClellan Oscillator works:

• It measures market breadth, tracking advancing vs. declining stocks to give a clear picture of overall participation.
• A reading above zero indicates bullish momentum (more advancing than declining stocks).
• A reading below zero suggests bearish momentum (more declining than advancing stocks).
• Crossovers help identify trend reversals. A crossover above or below zero can confirm a shift in market momentum.
• Divergences also suggest potential reversals early on. If the oscillator moves opposite the index, it may signal that a reversal may be underway.

The last two points are what I will focus on in this article. Given the current tariff-fueled plunge, are any of the three indices showing signs of a potential reversal? And, if not, what should you look out for?

Let’s start with the S&P 500 ($SPX). Here’s a daily chart. For a more expansive breadth context, I am including the Bullish Percent Index (BPI) to show yet another angle on market breadth.

FIGURE 1. DAILY CHART OF THE S&P 500. Buyers are jumping in at the key 61.8% Fibonacci Retracement level. But does the overall participation support this reversal thesis?

Anticipating a downside target, I drew a Fibonacci Retracement from the (2024) August low to the December high. Bullish traders anticipating a rebound at the 61.8% level have started to enter their positions.

From a market breadth perspective, it’s too early to tell whether this key support level will signal a reversal. The NYSE McClellan Oscillator (a large portion of S&P 500 stocks trade on the NYSE) shows that declining shares within the index outweigh the advancing shares. The BPI reading, on the other hand, confirms this reading, as fewer than 50% of S&P 500 stocks are generating Point & Figure buy signals, a condition favoring the bears as it also signals technical weakness.

What to look for in the coming sessions: Notice the pink lines on both the chart and the McClellan indicator window signaling divergences. Look for bullish divergences or a crossover above the zero line in the coming sessions. However, don’t treat these as automatic buy signals. Instead, they suggest potential bullish conditions, suggesting you construct an entry setup if one presents itself.

Now, let’s look at a daily chart of the Nasdaq 100 ($NDX).

FIGURE 2. DAILY CHART OF THE NASDAQ 100. Declines are starting to stabilize as buyers enter the market, but it may be too soon to call a reversal.

The Nasdaq 100 shows a similar Fib Retracement reaction as in the S&P 500 example above; namely, buyers are jumping in at the 61.8% level.

The McClellan Oscillator remains bearish, but declines appear to be stabilizing (see pink lines). Notably, communications and healthcare stocks are slowing the drop. While not a bullish reversal signal, this shift could lead to a turnaround depending on how other sectors react in the coming sessions. Meanwhile, the BPI at 35%, tells you that the current price environment continues to favor the bears.

What to look for in the coming sessions. Similar to the previous S&P 500 example, keep an eye on the McClellan Oscillator readings for any bullish divergence or a crossover above the zero line. Remember, these signals indicate improving market breadth and potential upward momentum, but they are not automatic buy signals. Once a positive shift occurs, it’s going to require further confirmation from price action, volume, and other technical indicators before you jump into a trade.

A Two-Step Process

What I just demonstrated was a simple two-step process. Feel free to tweak it according to your preference. When a major selloff is underway…

1. You need a means to forecast downside price targets. I used Fibonacci Retracements to set my downside targets (you can use other indicators to project potential support and resistance levels).
2. Use a breadth indicator like the McClellan Oscillator to gauge how prices react to those downside targets. Namely, divergences and crossovers should alert you to the possibility of a reversal.
3. Add other indicators to confirm the reversal when it happens. Don’t rely solely on one indicator; check price action, volume, and momentum, and have an exit plan in case it doesn’t follow through.

At the Close

Here’s the main point. You can use the McClellan Oscillator to anticipate turns in an index before it tips its hand, so to speak. It reveals shifts in market participation before such shifts become evident in prices. While major indices can be misleading due to their market-cap weighting, the oscillator focuses on breadth and momentum across all stocks and sectors comprising an entire index or market.

As of now, the S&P 500 and Nasdaq 100 show no clear signs of a bullish reversal. However, when a shift does occur, the McClellan Oscillator may be among the breadth indicators to signal it first—so keep an eye on it.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The S&P 500 ($SPX), Nasdaq Composite ($COMPQ), and DJIA ($INDU) are trading below their 200-day simple moving averages. It doesn’t paint an optimistic picture, but the reality is that the stock market’s price action is more unpredictable than usual.

When President Trump imposed an additional 25% tariff on steel and aluminum imports from Canada, the stock market sold off. However, the selloff eased in afternoon trading, when there was a narrative shift in the tariff and Ukraine/Russia tensions front. But that changed towards the end of Tuesday’s close, with the broader indexes closing lower.

Navigating a headline-driven market is challenging. The Cboe Volatility Index ($VIX), the market’s fear gauge, eased a little on Tuesday, but has risen relatively steeply since February 21. All investors should monitor this closely, especially in a market that fluctuates several times on any given trading day.

Percentage Performance

It’s also important not to lose sight of the bigger picture. From a percentage performance point of view, how much damage has been done? To answer this question, it helps to view a PerfChart of the three broader indexes, S&P 500, Nasdaq, and Dow (see chart below).

FIGURE 1. ONE-YEAR PERFORMANCE OF S&P500, DOW JONES INDUSTRIAL AVERAGE, AND NASDAQ COMPOSITE. All three indexes are displaying weakening performance, but are still in positive territory.Chart source: StockCharts.com. For educational purposes.

Over the last year, the performance of the three indexes is in positive territory. The Dow is the weakest of the three, with a 6.87% gain. During the April 2024 low, performance was negative, but during the August low, the Dow skirted the zero level but was able to hang on. Given the trend in the performance of all three indexes is pointing lower, investors should be cautious when it comes to making decisions.

Value Performance

The daily chart of any of the three indexes is bleak. The one that looks the bleakest is probably the tech-heavy Nasdaq. Tech stocks have taken a beating of late, and the Nasdaq has been trading below its 200-day SMA for a few days (see chart below).

The bottom panel displays the percentage of Nasdaq stocks trading below their 200-day SMA. As you can see, it’s below 30%, which indicates an oversold level. There are no signs of reversal on this chart. In August, when the Nasdaq slipped below its 200-day SMA, it quickly recovered.

On Wednesday morning, investors will be tuned in to the February CPI data. Be sure to save the PerfChart in Figure 1 and the chart of the Nasdaq Composite in Figure 2 to your ChartLists. Monitor them closely, since we’re likely to see a seesawing stock market for a while.

Closing Position

Note that when viewing a PerfChart, you can also compare the performance of different sectors or industry groups in addition to the broader indexes. All you have to do is change the symbols on the chart. If you see confirmed signals of a reversal in any asset class or group, it may be time to reevaluate your portfolio allocations.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

In this video, Dave analyzes the bearish rotation in his Market Trend Model, highlighting the S&P 500 breakdown below the 200-day moving average and its downside potential. He also identifies five strong stocks with bullish technical setups despite market weakness. Watch now for key technical analysis insights to navigate this volatile market!

This video originally premiered on March 10, 2025. Watch on StockCharts’ dedicated David Keller page!

Previously recorded videos from Dave are available at this link.

“The trend is your friend, until the end when it bends.”

How often have you heard this adage? More importantly, how often do you follow it?

Chasing stocks, whether it’s one that was texted to you as the next high-flying AI stock, a popular meme stock, or the next hot IPO, can be tempting. If you’re lucky, the price moves in your favor, you get elated, and you throw one heck of a party. Alas, the story doesn’t always end this way. The stock market can catch you off guard. It gives you several opportunities, but also unexpectedly robs them from you. This is especially true during an overextended market.

Any negative news headlines make investors nervous, leading them to make irrational decisions. To avoid falling into the trap of buying and selling stocks at the wrong time, take the smart approach and set some basic rules to follow.

Rule 1: Determine the Market’s Long-term Trend

You want to trade in the direction of the long-term trend—buy when the trend is up and sell when it is down. Buying stocks when the overall trend is declining can be like catching a falling knife, while selling stocks when the trend is rising could mean missing sizable moves. To determine the overall direction of the stock market’s long-term trend, look at a chart of a benchmark index, such as the S&P 500 ($SPX), that covers at least one year.

We’ll examine the weekly chart of the S&P 500 (see below). Overall, the index has trended higher for the last five years, but there have been pullbacks, some longer and more severe than others (pink shaded areas). The index is going through a pullback now, although we won’t know the magnitude of it until it’s over.

FIGURE 1. WEEKLY CHART OF THE S&P 500. Overall, the trend in the benchmark has been bullish, although there have been periods of declines and pullbacks. The index is going through a decline.Chart source: StockCharts.com. For educational purposes.

From January 2022 to October 2022, the S&P 500 declined over 20%. Many Wall Street analysts expected the decline to continue, but the S&P 500 recovered, ending 2023 with a 26.3% gain and 2024 with a 23.31% gain. There were a few minor pullbacks along the way, some more pronounced than others (end of 2023 and July to August 2024).

Nobody knows what the market will do, but, when you see a pullback forming—and it looks like one is forming—don’t plan on opening long positions. If you’re not convinced the market is pulling back, view a daily chart of the S&P 500 to see if it aligns with the weekly chart’s trend. If both indicate a downtrend or the two don’t align, you need to dig deeper.

Rule 2: Is Market Breadth Expanding or Contracting?

Market breadth is an effective method to uncover the percentage of stocks participating in the uptrend. The Bullish Percent Index (BPI) is one of several breadth indicators available in StockCharts and is available for indexes, sectors, and industry groups.

The chart below displays the BPI for the S&P 500 in the upper panel ($BPSPX) against the daily chart of the S&P 500 in the lower panel. When the BPI is above 50%, it indicates the bulls have an edge. When it’s below 50%, the bears have an edge.

FIGURE 2. DAILY CHART OF S&P 500 BULLISH PERCENT INDEX VS. S&P 500. Note the uptrends in the S&P 500 coincide with a BPI greater than 50. The downtrend in the S&P 500 coincides with an S&P 500 BPI of less than 50.Chart source: StockCharts.com. For educational purposes.

In the last year, besides the pullback periods in the S&P 500, the bulls have had the upper hand. If you wanted to invest in an S&P 500 stock when the bulls were in control, your first task is to find one that aligns with the bullish move.

Rule 3: Buy on Up Days, Sell on Down Days

Let’s focus on the period between August 9, 2024, and December 18, 2024, to coincide with the period when the BPI was greater than 50 and examine a hollow candlestick chart of Apple, Inc. (AAPL), one of the top cap-weighted stocks in the S&P 500.

FIGURE 3. DAILY CHART OF APPLE STOCK. From August 9 to December 18, 2024, which coincides with the S&P 500 BPI > 50, the stock price trended higher, displaying a series of hollow green candles at the front and tail end of the period.Chart source: StockCharts.com. For educational purposes.

Hollow candlestick charts are visually interesting and have the advantage of identifying a trend quickly. The upward movement began a few days before August 9, when there was a significant gap down in AAPL’s price. Even though it was a down day, the bar was hollow, which means the close was higher than the open.

Looking at all three charts, August 9 presented an opportune buy signal. It aligned with the bullish BPI and the long-term trend in the weekly and daily charts.

If you had hypothetically opened a long position, you could have exited your position on December 18, when the BPI turned bearish and made a decent return. You could have held on for a few more days, but the stock sold off quickly, so your exit would depend on how well your sell order got filled.

Regardless, you should have exited the position during the series of down days that started on December 27. If you hadn’t closed your position then and were still holding on to it, you would have been caught in the downward spiral that started when the S&P 500 BPI fell below 50 on February 27.

StockCharts Tip

Hollow candlestick charts differ from the traditional filled candlestick charts. To apply hollow candle charts, click the Hollow Candles button under Chart Attributes.

The Bottom Line

Given the erratic nature of the stock market, especially an over-extended one, a smart approach to investing requires following a set of rules. It doesn’t have to be complicated.

Identifying the long-term trend, checking the market’s breadth, and ensuring the trend of a stock you want to buy aligns with the overall market is a simple approach, but applying it successfully in real time takes practice. Practice applying the rules using a simulated account. There’s no better teacher than yourself.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The market sell-off continued in earnest after a brief respite on Friday. Uncertainty of geopolitical tensions and tariff talk has spooked the market and given the weakness of mega-cap stocks, we are likely to see more downside before a snapback rally.

Carl was off today so Erin had the controls! She started off the trading room with a review of the DP Signal Tables to get a sense of market strength and weakness. She then analyzed indicator charts on the SPY and finished with a look at key areas of the market: Bitcoin, Dollar, Gold, Gold Miners, Yields, Bonds and Crude Oil.

After the market review Erin took a look at the Magnificent Seven daily and weekly charts. Not one of them were showing strength. Most had lost key support levels and were heading lower.

Erin then walked us through sector rotation. It is clear that the defensive sectors of the market are leading the way with the exception of Utilities which have been in a declining trend. Erin dove into the Energy sector, looking under the hood to determine if the current rally will continue.

She finished the trading room with a review of viewer symbol requests that included: PAYC, VLO and LLY among others.

Don’t forget that you can join us live in the trading room by registering once at this link: https://zoom.us/webinar/register/WN_D6iAp-C1S6SebVpQIYcC6g#/registration

We love doing the trading room, but we do have to make a living! Come try out any of our subscriptions for two weeks free with our trial coupon code: DPTRIAL2. You’ll find our subscriptions here: https://www.decisionpoint.com/products.html

01:21 DP Signal Tables

04:44 Market Analysis

18:05 Questions

21:47 Magnificent Seven

32:39 Sector Rotation

38:08 Symbol Requests

The DP Alert: Your First Stop to a Great Trade!

Before you trade any stock or ETF, you need to know the trend and condition of the market. The DP Alert gives you all you need to know with an executive summary of the market’s current trend and condition. It not only covers the market! We look at Bitcoin, Yields, Bonds, Gold, the Dollar, Gold Miners and Crude Oil! Only $50/month! Or, use our free trial to try it out for two weeks using coupon code: DPTRIAL2. Click HERE to subscribe NOW!

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Technical Analysis is a windsock, not a crystal ball. –Carl Swenlin

(c) Copyright 2025 DecisionPoint.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

DecisionPoint is not a registered investment advisor. Investment and trading decisions are solely your responsibility. DecisionPoint newsletters, blogs or website materials should NOT be interpreted as a recommendation or solicitation to buy or sell any security or to take any specific action.

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Bear Market Rules

Sector Shake-Up: Defensive Moves and Tech’s Tumble

Last week’s market volatility stirred up the sector rankings, with six out of 11 sectors changing positions. While the top three remain steady, we see a clear rotation from cyclical to more defensive sectors. Let’s dive into the details and see what the charts tell us.

The weekly sector ranking has undergone some significant changes:

Communication Services (XLC) are holding firm. Financials (XLF) maintain their position. Consumer discretionary remains steady but is showing weakness. Consumer Staples (XLP) is the new entrant to the top 5, while Utilities (XLU) Holds its ground at #5.

The big story here is the rise of defensive sectors. Health Care (XLV) made a notable jump from 10th to 6th place, while Technology (XLK) took a nosedive from 4th to 10th. This shift is characteristic of the broader shift from cyclical to defensive plays.

The New Sector Lineup

1. (1) Communication Services – (XLC)
2. (2) Financials – (XLF)
3. (3) Consumer Discretionary – (XLY)
4. (6) Consumer Staples – (XLP)*
5. (5) Utilities – (XLU)
6. (10) Healthcare – (XLV)*
7. (9) Real-Estate – (XLRE)*
8. (7) Industrials – (XLI)*
9. (8) Energy – (XLE)*
10. (4) Technology – (XLK)*
11. (11) Materials – (XLB)

Weekly RRG: A Tale of Two Sides

The weekly Relative Rotation Graph (RRG), printed above, paints an interesting picture. We see only three sectors on the right-hand side of the graph, with the rest clustered on the left. But their movements are telling:

• XLC is in the leading quadrant, moving northeast — a positive sign.
• XLF has turned back up into the leading quadrant, reinforcing its #2 spot.
• XLY is in the weakening quadrant with a long tail, heading towards lagging — a potential red flag

On the left side:

• XLK’s rotation is clearly weak, pushing further into the lagging quadrant.
• Meanwhile, XLP and XLU show strength, moving with positive RRG headings in the improving quadrant.

Daily RRG: Confirming the Weekly Story

When we look at the daily RRG, we get some additional context:

• XLC has curled up in the weakening quadrant, supporting its positive weekly rotation
• XLF is confirming its positive move in the leading quadrant
• XLY is the outlier — its short tail in the lagging quadrant doesn’t bode well for maintaining its #3 position
• XLP shows the strongest RS ratio reading on the daily chart, complementing its positive weekly movement.
• XLU has lost some relative momentum over the last day, but nothing too concerning at this point.

The Top Five Charts

Communication Services – XLC

XLC is playing around with its old resistance line, now expected to act as support.

Monday’s price action shows a slight revival, but it’s too early to call.

The relative strength remains robust, with a clear series of higher highs and higher lows on the raw RS line.

Financials – XLF

XLF has broken its rising support line and completed a topish formation.

We’re now eyeing the next support level, around $47.25.

Despite this, XLF’s relative performance remains strong, with both RRG lines moving higher.

Consumer Discretionary – XLY

After completing a top formation, XLY is now testing support around 200.

It appears to be moving back into its old rising channel — and if my rule holds true, we might see it test the lower boundary.

This suggests significant downside risk for the sector.

Consumer Staples – XLP

XLP, the newcomer to the top 5, is pushing against overhead resistance in the $83.50-84 area. A break here could give the sector a significant boost.

The improvement in relative strength is already evident, pulling both RRG lines higher.

Utilities – XLU

XLU remains in a sideways pattern, potentially settling into a narrower range between $75.50 and $80.50.

Its relative strength is also range-bound but still pulling both RRG lines up — enough to keep it in the top 5.

Portfolio Performance Update

The technology position was exited and swapped for the consumer staples position against Monday’s opening prices.

As of about 45 minutes after opening, the portfolio performance stands at -3.19% since inception, compared to the SPY benchmark at -3.39%. We’re about 20 basis points ahead — not making a big dent, but keeping pace with the S&P 500 for now.

Going forward, I’ll be including both the performance table and the list of open positions in these articles for better tracking.

Summary

The market’s rotation towards defensive sectors is becoming increasingly evident. Consumer discretionary looks vulnerable, while consumer staples and utilities show strength.

#StayAlert, –Julius

The next step in the stock market will be very interesting. I’ve been discussing a potential Q1 correction since our MarketVision event the first week of January and it’s here. The NASDAQ 100 ($NDX), from its high on February 19th (22222.61) to its low on Friday (19736.81), fell 11.19% before rallying Friday. The NASDAQ 100’s correction has been reached. The small cap Russell 2000 ETF (IWM) hit a high of 244.25 on November 25th. Its low Friday was 201.73. That’s a 17.41% tumble, which is approaching bear market territory.

S&P 500 – Head & Shoulders Pattern?

So what about the benchmark S&P 500? Well, there’s plenty to consider, but I’ll give you my thoughts on what could happen here:

Looking at the above chart, here are several thoughts I have:

• The July price high should provide at least short-term support and it did on Friday as we saw a rally as soon as the S&P 500 touched this prior high/current support.
• Volume has accelerated on this most recent selling.
• We have potentially formed a down-sloping neckline in a topping head & shoulders pattern.
• Price momentum (PPO) is as weak as it was in early August.
• RSI has broken 40 support, which is usually a key in remaining in an uptrend.
• Selling thus far has taken the S&P 500 down 7.83% at Friday’s low, a bit shy of a 10% correction.
• If we bounce into a potential right shoulder, it’ll be important to see how money rotates; if the current downtrend remains in play, then I doubt we’ll see the S&P 500 clear 5900 on a bounce, especially if leadership on that bounce is poor.
• A VERY EARLY head & shoulders projection would suggest a possible move on the S&P 500 to 5225 or so.

Fundamental news the next two weeks, along with the market’s reaction and rotation, will likely determine our path over the next month or so. Here are the critical economic releases/events to put on your calendar:

• Consumer Price Index (CPI) – Wednesday, March 12th, 8:30am ET
• Producer Price Index (PPI) – Thursday, March 13th, 8:30am ET
• Fed (FOMC) Meeting – Tuesday, March 18th – Wednesday, March 19th (policy statement at 2:00pm ET)

Listen, this recent selloff has been widely expected, if you follow market rotation and sentiment, and keep a healthy dose of perspective handy. Everyone likes to use fundamental arguments and their perception of the market environment to call bear markets……nearly every year. Few pay attention when the warning signs are out there, but everyone becomes an expert after the market begins to tumble.

I absolutely remain long-term bullish and believe that, once the current bearish phase ends, the S&P 500 will rally back to all-time highs. We may have to endure further pain first though. I doubt we’ve seen the ultimate 2025 bottom. We’ll need some very good news on CPI, PPI, and from the Fed meeting. I’d give that a 20-25% chance at this point.

Sentiment

For awhile, the 5-day SMA of the equity only put call ratio suggested that traders had grown way too bullish in the near-term and this is a contrarian indicator, meaning that the stock market usually moves opposite of sentiment, especially if the bullish or bearish sentiment extends too long. Take a look at the CPCE 5-day SMA over the past year:

I use the .55 level as the level at which options traders are growing too bullish and it signals a potential short-term top. On the above 1-year chart, you can see how effective 5-day SMA readings were in marking multiple short-term tops (red-dotted vertical lines). However, over the past 4-5 months, the 5-day SMA reading nearly lived at .55 or below (big red circle). That’s an extended period of bullishness and you can see that the S&P 500 really struggled to print higher highs (black curved line), despite all of the optimism and bullishness among options traders.

The 5-day SMA of the CPCE at .75 also has a tendency to suggest a short-term market bottom as options traders grow overly pessimistic. Look at where we are now. Despite a near bear market in small caps, a correction on the NDX, and a near-correction on the S&P 500, the 5-day SMA of the CPCE remains WELL BELOW .75 and even fell last week! This simply suggests that optimism remains and that could lead to further selling in the weeks ahead.

It’s EB Education Week!

Given the prior warning signs and the recent increased market volatility, we’ve encouraged members over the past couple months to be careful and that cash is absolutely a position to consider. It also is a GREAT time to think about ways to better your trading success. I know many of you have followed me over the years, so I thought it would be an awesome time to discuss much of our research and how we do things at EarningsBeats.com. So for one week only, we are going to show exactly how we put together all of our ChartLists on the StockCharts.com platform.

These are intended to be brief “classes” this week, all starting at 5:30pm ET and lasting 45 minutes or so each. If you can’t attend any (or all) of these events live, no worries at all. We’ll record them and make sure all that register receive a copy of the recording.

To learn more, register, and save yourself a spot, sign up here. It’s time to gear up now, during this market weakness, for a better market and rally ahead. Join us and learn to trade smarter!

Happy trading!

Tom

In this exclusive StockCharts video, Julius analyzes sector rotation in US markets, assessing recent damage and potential downside risks. He examines the Equal Weight RSP vs. Cap-Weighted SPX ratio and the stocks vs. bonds relationship to identify key market trends. Don’t miss this deep dive into market rotation and what it means for the next move!

This video was originally published on March 7, 2025. Click on the icon above to view on our dedicated page for Julius.

Past videos from Julius can be found here.

#StayAlert, -Julius

Things heated up this week on my daily market recap show, with support levels being busted without delay across the growth sectors.  Despite a decent up day on Friday for the S&P 500 and Nasdaq 100, the damage through most of the week brought both indexes face-to-face with the ultimate long-term trend barometer, the 200-day moving average.

It Started With a Break of Our Line in the Sand

While we’ve been tracking the signs of internal deterioration for months, from a confirmed Hindenburg Omen signal in December to weakening breadth and momentum signals for leading stocks.  But until the S&P 500 broke below our “line in the sand” of 5850, there didn’t seem much to be concerned.  That all changed over the last week.

Why was 5850 so important?  This price level represents a pivot point, or a level which has been tested as both support and resistance.  And until and unless the S&P 500 breaks below a confirmed level of support, then the building signs of bearishness just weren’t resulting in enough price deterioration to get us very concerned.

Don’t miss the latest episodes of our Market Misbehavior podcast, featuring interviews with Kristina Hooper of Invesco, Keith Fitz-Gerald of The Fitz-Gerald Group, and Jordan Kimmel of Magnet Investing Insights!

Now that 5850 has been clearly violated to the downside, it’s all about the 200-day moving average, which both the S&P 500 and Nasdaq 100 tested this week.  Friday’s rally kept the SPX just above its 200-day moving average, which means next week we’ll be looking for a potential break below this important trend-following mechanism.

Fibonacci Retracements Suggests Downside to 5500

What if we apply a Fibonacci framework to the last big upswing during the previous bull phase?  Using the August 2024 low and December 2024 high, that results in a 38.2% retracement level at 5722, almost precisely at the 200-day moving average.  So now we have a “confluence of support” right at this week’s price range. 

If next week sees the S&P 500 push below the 5700 level, that would mean a violation of moving average and Fibonacci support, and suggest much further downside potential for the equity benchmarks.  Using that same Fibonacci framework, I’m looking at the 61.8% retracement level around 5500 as a reasonable downside target.  With the limited pullbacks over the last two years, most finding support no more than 10% below the previous high, a breakdown of this magnitude would feel like a true bear market rotation for many investors.

Supporting Evidence from Newer Dow Theory

So despite rotating to more defensive positioning in anticipation of a breakdown, what other tools and techniques can we use to validate a new bear phase in the days and weeks to come?  An updated version of Charles Dow’s foundational work, what I call “Newer Dow Theory”, could serve as a confirmation of a negative outcome for stocks.

Charles Dow used the Dow Industrials and Dow Railroads to define the trends for the two main pillars of the US economy, the producers of goods and the distributors of goods.  For our modern service-oriented economy, I like to use the equal-weighted S&P 500 to represent the “old economy” stocks and the equal-weighted Nasdaq 100 to gauge the “new economy” names.

We can see a clear bearish non-confirmation last month, with the QQQE breaking to a new 52-week high while the RSP failed to do so.  This often occurs toward the end of a bullish phase, and can represent an exhaustion point for buyers.  Now we see both ETFs testing their swing lows from January.  If both of these prices break to a new 2025 low in the weeks to come, that would generate a confirmed bearish signal from Newer Dow Theory, and imply that the bearish targets outlined above are most likely to be reached.

Many investors are treating this recent drawdown as yet another garden variety pullback within a bull market phase.  And while we would be as happy as ever to declare a full recovery for the S&P 500, its failure to hold the 200-day moving average next week could be a nail in the coffin for the great bull market of 2024.

RR#6,

Dave

PS- Ready to upgrade your investment process?  Check out my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Research LLC

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.  

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

2025 is off to a rough start for stocks, but there are still some pockets of strength in the market. Year-to-date, SPY is down 1.73%, QQQ is down around 4% and the S&P SmallCap 600 SPDR (IJR) is down over 6%. ETFs with smaller losses show relative strength (less weakness), but ETFs with year-to-date gains show relative, and more importantly, absolute strength. This is where we should focus.

The table below shows some of the best performing equity ETFs. Three themes are clear. First, commodity-related stocks are performing well with gains in Gold Miners (GDX), Copper Miners (COPX), Materials (XLB) and Energy (XLE). Second, defensive groups are performing well with gains in Healthcare (XLV), Consumer Staples (XLP), Telecom (IYZ) and Insurance (KIE). Third, two groups within the healthcare sector are also performing well: Medical Devices (IHI) and Biotech (IBB).

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Among the 2025 leaders, the Biotech ETF (IBB) caught my attention because it is in a long-term uptrend and recently broke out of a falling wedge. The chart below shows weekly candlesticks with resistance breaks (higher highs) in December 2023 and July 2024. We also see higher lows in April 2024 and December 2024 (gray arrows). IBB also tagged a 52-week high in September 2024. Price action may be choppy, but there is an uptrend in play with higher highs, higher lows and a 52-week high.

After tagging a new high, IBB plunged in November on news of the RFK Jr. appointment (long black candlestick). A falling wedge ultimately formed and I view this as a correction after the April-September advance. Why? Because the bigger trend is up and IBB held well above the April low. The wedge breakout signaled an end to this correction and a resumption of the bigger uptrend. Short-term, there are two levels to watch as the ETF consolidated around the breakout zone in the 137.5 area. A close below 132 (blue line) would negate the breakout and call for a re-evaluation. A breakout at 141 (pink line) would solidify the breakout and keep the uptrend alive.

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