The market has entered the second wave of what we might call the coronavirus correction.
The first wave occurred in late January. On Jan. 31 the SPDR Dow Jones Industrial Average ETF (DIA) - Get SPDR Dow Jones Industrial Average ETF Trust Report traded as low as $281.61 and the SPDR S&P 500 ETF Trust (SPY) - Get SPDR S&P 500 ETF Trust Report traded as low as $320.73. On Jan. 27 the Invesco QQQ Trust Series 1 ETF (QQQ) - Get Invesco QQQ Trust Report traded as low as $217.18.
On Feb. 19 Spiders and QQQs set all-time highs of $339.08 and $237.47.
Then came the coronavirus headlines that began the second leg lower for stocks.
Diamonds opened Monday as low as $280.04, below the Jan. 31 low with its quarterly value level at $273.94.
Spiders opened as low as $322.86, above the Jan. 31 low with its quarterly value level at $308.92.
And QQQs opened as low as $220.26, above its Jan. 27 low with its annual pivot at $215.71. The low held its 50-day simple moving average at $220.61.
In sum, the major equity ETFs have bent - but they have not broken below key levels.
Quarterly value levels are the downside risk at $273.94 for Diamonds, $308.92 for Spiders and $211.41 for QQQs.
The Weekly Chart for Diamonds
Courtesy of Refinitiv XENITH
The weekly chart for Diamonds will be downgraded to negative, given a close this week below its five-week modified moving average at $287.14.
DIA is well above its 200-week simple moving average, or reversion to the mean, at $235.55.
The 12x3x3 weekly slow stochastic reading is projected to decline to 74.58 this week from 80.68 on Feb. 21.
In mid-January this reading was above the 90 threshold, which put Diamonds in an inflating parabolic bubble formation. Weakness during the last week of January caused by the coronavirus resulted in this negative divergence.
Trading Strategy: Reduce holdings on strength to its annual and semiannual risky levels at $299.53 and $303.59, respectively. Buy weakness to its quarterly value level at $273.94.
The Weekly Chart for Spiders
Courtesy of Refinitiv XENITH
The weekly chart for Spiders will be downgraded to neutral this week, given a weekly close below its five-week modified moving average at $327.67.
SPY is well above its 200-week simple moving average, or reversion to the mean, at $263.06. This average held at $234.71 during the week of Dec. 28, 2018.
The 12x3x3 weekly slow stochastic reading is projected to slip to 83.29 this week from 86.79 on Feb. 21.
This reading is above the overbought threshold of 80 but is below 90, so Spiders are no longer in an inflating parabolic bubble formation.
Trading Strategy: Investors had the opportunity to reduce holdings at its monthly risky level at $336.86 last week. SPY is now below its semiannual pivot at $329.37. Buy on weakness to its quarterly value level at $308.92.
The Weekly Chart for QQQs
Courtesy of Refinitiv XENITH
The weekly chart for QQQ is trading back and forth around its around its five-week modified moving average at $223.28. This is a key level to hold for this last week of February.
QQQ is well above its 200-week simple moving average, or reversion to the mean, at $159.25.
The 12x3x3 weekly slow stochastic reading is projected to slip to 88.31 this week from 92.15 on Feb. 21, so the weekly chart could stay positive.
A close below $223.28 this week will downgrade this chart to neutral.
Trading Strategy: Reduce holdings on strength to its monthly pivot at $227.64. Buy weakness to its annual, semiannual and quarterly pivots at $215.71, $211.98 and $211.41, respectively.
How to use my value levels and risky levels:
The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.
Monthly levels for February were established based upon the Jan. 31 closes.
New weekly levels are calculated after the end of each week.
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 past 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.