The stock market has been under pressure as news that the coronavirus was spreading. Over the weekend we learned that number of cases was accelerating. This will affect the global economy and hence put downward pressure on the stock market.
The SPDR Dow Jones Industrial Average ETF (DIA) - Get Report, the SPDR S&P 500 ETF Trust and the PowerShares QQQ Trust ETF Series 1 represent the Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100.
The Dow ETF is known as Diamonds; the S&P ETF is known Spiders. The Nasdaq 100 ETF is known as QQQ.
I show downside risk to their first-quarter value levels at $273.97 for Diamonds, $308.92 Spiders and $211.41 for QQQ.
The Dow Jones Industrial Average set its all-time intraday high of 29,373.62 on Jan. 17, as Diamonds traded as high at $293.61. Both stayed below their annual and semiannual risky levels.
The S&P 500 set its all-time intraday high of 3,337.77 on Jan. 22, as Spiders set its all-time intraday high at $332.95. Both were above their semiannual risky levels but below their annual risky levels.
The Nasdaq 100 set its all-time intraday high of 9,272.37 on Jan. 24, as QQQ set its all-time intraday high of $225.88. Both are still above their semiannual and annual pivots.
Here are the weekly charts and key levels to track as up and down volatility continues.
The Weekly Chart for Diamonds
Courtesy of Refinitiv XENITH
The weekly chart for Diamonds will be downgraded to neutral if this week’s close is below its 5-week modified moving average at $285.79.
DIA is well above its 200-week simple moving average or “reversion to the mean” at $233.34
The 12x3x3 weekly slow stochastic reading ended last week at 92.33 still above the overbought threshold of 80.00 and above 90.00 putting Diamonds in an “inflating parabolic bubble” formation. This week it will likely decline to 88.37.
The weekly chart becomes negative with closes below the 5-week MMA with the weekly slow stochastic reading declining below 80.00 which could occur as early as next week. This would target the quarterly value level at $273.97.
The Weekly Chart for Spiders
The weekly chart for Spiders is positive but overbought with the ETF given a close this week above its 5-week modified moving average at $322.61.
SPY is well above its 200-week simple moving average or “reversion to the mean” at $260.56. This average held at $234.71 during the week of Dec. 28, 2018.
The downside risk is to the 200-week SMA if its quarterly value level fails to hold at $308.92. This is the lower of two horizontal lines on the chart.
The upper horizontal line is the semiannual pivot at $329.37 which failed to hold at Friday’s close of $328.77. The annual risky level is above the chart at $345.73.
The 12x3x3 weekly slow stochastic reading ended last week at 94.29 well above the overbought threshold of 80.00 and above 90.00 putting Spiders in an “inflating parabolic bubble” formation. This reading is projected to decline to 90.36 this week, still above the bubble threshold.
The Weekly Chart for QQQs
Courtesy of Refinitiv XENITH
The weekly chart for QQQ is positive but extremely overbought with the ETF above its 5-week modified moving average at $215.06.
QQQ is well above its 200-week simple moving average or “reversion to the mean” at $156.82.
QQQ is above its annual and semiannual pivots at $215.71 and $211.98 which are the two lower horizontal lines. The quarterly value level at $211.41 is just below these lines. This week’s risky level is the higher horizontal line at $225.77.
The 12x3x3 weekly slow stochastic reading ended last week at 95.23 still well above the overbought threshold of 80.00 and above 90.00 putting QQQ’s in an “inflating parabolic bubble” formation. This reading is projected to be 92.97 this week.
A weekly close below the five-week MMA at $215.06 indicates risk to the first quarter value level at $211.41.
How to use my value levels and risky levels:
The closes on Dec. 31, 2019 were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons.
New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.
A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.
A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.