Bear Flags Wave Over Stocks To Begin 2016

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Will January Surprise the Charts?

The last two days of 2015 ended on a down note, which had a profound effect on the technical outlook for the beginning of 2016.

Over the last two weeks of the year, the major equity indexes struggled to reclaim the bullish side of their 50 and/or 200-day moving average. In the end, the last two days of 2015 put a very “bearish flag” look on the charts.

If a bearish flag requires a bearish trend, then IWM looks like a classic. As for the other three indexes, SPY, DIA, and QQQ, they are not in bearish trends. However they have the very distinctly bearish look of a retracement to major moving averages that has now begun to roll over.

Despite the bearish chart patterns, don’t assume the market is heading lower because…

It’s January.

January has a way of changing the trend, and the mood of the market for no apparent reason. In fact, it has several patterns of its own. You can learn more about why January is different and full of its own unique opportunities in this recent post in our Trades & Tutorial blog.

For the purposes of this analysis you should consider the fact that January often picks a direction of its own regardless of the charts or popular opinion. Don’t ignore it.

Of course not all the charts are so obviously bearish, and January will not necessarily push all areas of the market in the same direction.

S&P 500 (SPY) Thursday’s low of 203.90 was important before Thursday and will continue to be a pivotal price. 202.20 and 199.80 are the key areas to look for support if the market falls. The first sign of a bullish move would be to break over Thursday’s high area of 206.

Russell 2000 (IWM) This is the index that has led the market down and until it clears 116 should be considered bearish. It’s likely to find resistance on any rally up to 114. On the downside look for support at 111.40 and 110.30

Dow (DIA) This isn’t driving the direction of the market but could serve to confirm it. Significant levels to break on the upside are 177.25 then 179. On the downside look for support at 172.25 and 170.90.

Nasdaq (QQQ) This is the one to watch if the market is going to move higher. The first step to a move up is to break Thursday’s high and then 114.60. If it holds above 111.50, the “bearish flags” may not resolve to the downside. On the downside, look for support at 111,109.50 and 109.

XLF (Financials) This has an ominous bearish flag that has its top at both the 50 and 200-day moving average so that level is the level to clear before looking up (24.30). A break below Thursday’s low could set the down move in motion. Look for support at 23.25.

KRE (Regional Banks) It looks negative below 41.80, but it’s really just consolidating between 41 and 43.40

SMH (Semiconductors) The last 2 days of 2015 put a very bearish look to this market. A move below Thursday’s low breaks a significant level, but the big level to hold is the 52.96 low.

IYT (Transportation) Ironically, it’s in one of the weakest trends but one of the few sector ETFs to close higher than it opened on Thursday. The key areas of support are 59.50 (near the Thursday’s low), and 58.75. If January surprises to the upside look for a break over 61 as the first real sign of strength.

IBB (Biotechnology) If the market moves higher this group could lead. It needs to close for several days over 341. As long as it holds over 335 it’s consolidating in a healthy way.

XRT (Retail) The down trend is still firmly in place. It needs to close convincingly over 44.30 to be considered on the long side unless you want to try to pick a bottom between 42.50 and 42.

IYR (Real Estate) Held up well in the last two days, but it’s basically consolidating between 74.30 and 76.20.

ITB (US Home Construction) Just consolidating until it break over 27.90 or under 26.50.

GLD (Gold Trust) Looks like it’s trying to bottom but the key level to break to move higher is 104.

USO (US Oil Fund) Trying to bottom, look for a move higher if it clears 11.40 and main support is 10.80

OIH (Oil Services) If it holds 26, it may bottom but needs to close over 27 and then follow through higher to confirm a turn higher. If it breaks under 59.50 the next major support is 25.40.

XLE (Energy) If it holds 59.50, it may bottom but needs to close over 61 and then follow through higher to confirm a turn higher. If it breaks under 59.50 the next major support is 58.75.