Triple Top in the SPDR S&P Midcap (MDY) is Troubling

January through April were strong months for the stock market.  However, May so far is a different story after the major averages completed their worst weekly loss this year.   Corporate earnings were suddenly no longer the focus of investors.  Instead, news about the absence of a trade deal between the U.S. and China was front and center, nerve-wracking for investors. Buying turned into substantial selling.  However, with the decline, short-term technical indicators are no longer overbought.  Market sentiment has improved dramatically in the short term, no longer showing high optimism (a contrary indicator).  On the other hand, there is some technical damage that occurred on an intermediate basis with the May decline that is concerning.  It’s a little early to know for sure if the correction that started on 5/6 is over.  However, I do know an all-clear signal that the correction is complete is not in place.

Watch the SPDR S&P MidCap (MDY) ETF for guidance.

Figure: The SPDR S&P MidCap 400 (MDY) Weekly

The chart above is the weekly SPDR S&P Mid-Cap 400 (MDY) *** ETF and its weekly (intermediate-term) price channel (black lines) with a 50-week Moving Average (MA). A moving average (MA) is a technical indicator that smooths out price fluctuations which is useful for trend direction and to help determine support and resistance levels.

The MDY went through the middle-channel (purple circle on left) in November 2016. The MDY reached its upper channel objective 1/22/18 at 363.70 (red circle on left). Then the MDY fell 11.6%, finding support after it penetrated its 50-week moving average (MA) at 321.61 on 2/5/18 (first blue circle on left). The MDY rallied for several weeks before falling again in April testing the February low. The MDY declined to its 50-week MA, acting as support, making a low on 4/2 at 330.91 (second blue circle). The MDY rallied making a high on 8/28/18 at 374.09. Unable to generate any kind of momentum after penetrating the upper channel, the MDY fell sharply and fell below its 50-week MA (orange circle on the right). By the time the decline was completed the MDY was down 24% from its peak before finally bottoming in December at 284.45.

A monster rally occurred during the first two months of 2019 followed by a pullback of almost 6% before another rally to its high on April 22 this year of 361.52. However, the MDY failed to take out the previous high and was unable to reach the upper channel. This was a sign of weakness.   The MDY has been whipsawing above and below the 50-week MA this year. In February, the MDY traded above, in March it traded below, in April above, and now in May as of this writing, it’s below its 50-week MA. This whippy action is worrisome. It’s concerning that on 5/6 the MDY broke its weekly uptrend from 12/24 and remains below (light blue line). The intermediate trend has turned down which will make it harder to make money going forward.

Although the MDY had a strong rally the first four months in 2019, the MDY has not made a new all-time high like the S&P 500 and the Nasdaq. A triple top beginning on January 18 has formed. This is one of the most bearish formations in technical analysis and bears watching closely now. Key support is at 335.00, the March low. A weekly close below 335.00 is likely to trip the sell stops and a more serious decline could begin, accelerating quickly to the downside toward the middle channel at 305.00.   A weekly close above the April high of 361.52 will negate this formation.

The lower portion of the chart is MACD, a technical indicator that measures momentum. MACD recently broke its downtrend from January 2018 (orange line) suggesting a breakout in the Midcap SPDR (MDY) is possible. However, there was no follow through to the upside in MDY. MACD is now turning down, close to giving a sell. With the price of MDY failing to make a new high and not reaching the upper channel, this shows signs of weakening momentum and bears watching. If a sell signal were to occur in MACD, this would be concerning. A similar negative pattern has formed in the Russell 2000 (IWM) and the Transportation Average (IYT). Therefore, if you are overly exposed to equities, I recommend a more cautious stance now. This may be a good time to reduce your investments.

Figure: Weekly SPDR S&P MidCap 400 (MDY)/ (SPY) S&P 500 Index Ratio

The top part of the chart is the weekly SPDR S&P MidCap 400 / S&P 500 Index Ratio (MDY/SPY). A rising line means the MDY is stronger, and if falling, the SPY is stronger. The MDY/SPY ratio peaked in 12/2016 (red circle on left). The next highest peak was in June 2018 (pink circle) after mid-caps were gaining strength. However, since June 2018, the MDY/SPY ratio has made lower highs (green and blue circles), forming a clear downtrend (purple line).

A sign that the MDY is gaining leadership compared to the S&P 500 would be if the line turns up and can break the downtrend. This would imply the triple top formation discussed above is likely to be negated, the stock market rally will broaden, and more gains are likely.   If you are heavily weighted in the SPDR S&P MidCap 400 (MDY) in your portfolio, now may be a good time to shift part of your assets to the SPY. If the market were to continue falling the SPY is likely to fall less.

Summing Up:

The first four months of 2019 have been profitable. However, May is off to a rocky start. Technical chart patterns are not as favorable as they were at the beginning of the year. During the May decline, the intermediate uptrend of the S&P Midcap 400 SPDR (MDY) from the December 2018 low has been broken. A triple top has formed (as well as other market averages) that is worrisome.   Key support is at 335.00, the March low. A weekly close below support at 335.00 on the MDY would suggest the decline could accelerate.   A weekly close above the April high of 361.52 would suggest the advance has more upside to follow in the coming months.

Drop me a line! I’d love to hear from you. Please call me at 516-829-6444 or email at bgortler@signalert.com to share your thoughts or ask me any questions you might have.

*** The SPDR S&P MidCap 400 Index Trust ETF (MDY) tracks a market-cap-weighted index of mid-cap U.S. companies, made up of 400 stocks in a broad mix of major industry groups without either a growth or value bias. As of 5/14/19, the top 5 sectors in the S&P Mid-Cap 400 Index are Financials 25.37%, Industrials 16.67%, Consumer Cyclicals 14.30%, Technology 14.05%, and Healthcare 8.10% totaling 78.49%. Source: //www.etf.com/MDY#overview

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******Article published in Systems and Forecasts by Bonnie Gortler May 16, 2019

Disclaimer: Although the information is made with a sincere effort for accuracy, it is not guaranteed that the information provided is a statement of fact. Nor can we guarantee the results of following any of the recommendations made herein. Readers are encouraged to meet with their own advisors to consider the suitability of investments for their own particular situations and for determination of their own risk levels. Past performance does not guarantee any future results.

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Bonnie S. Gortler

Bonnie Gortler, Consultant, Coach, and Author specializing in Wealth and Well-Being, is a successful stock market expert who has been instrumental in managing multi-million-dollar client portfolios within a top-rated investment firm during her over 35-year corporate career. As the author of “Journey to Wealth,” Bonnie has made it her mission to share the importance of risk management and how to enjoy real financial well-being by applying the technical and mental sides of investing. Bonnie has an M.B.A. and is a certified life coach. It is through her love of coaching, consulting, blogging, and social media that she creates change in the lives of many and inspires people from around the world. Bonnie is fully committed to your personal growth and development as she shares her winning spirit and powerful techniques with you. Visit BonnieGortler.com to gain tips and insights about investing, personal development, and inspiration through her articles on Wealth and Well-Being.
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