Correction At Last!
by Carl Swenlin We have been watching prices trend higher for several weeks, even as internal strength trended lower and warned that price weakness could be ahead. Finally, this week prices broke down in a big way, signaling the start of a correction that could last at least a few weeks. Our first chart is of the Participation Index (PI). The PI measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope. Specifically we track the participation of each stock in a given index. A trend needs a strong plurality of participation to be maintained. We can see how UP participation, the number of stocks actually driving the up move expands as the market moves higher, then the PT contracts prior to short-term market tops. A similar thing, but in reverse, is beginning to happen now with DOWN participation now as the market begins its correction. Note the strong down spike accompanying Thursday's sell off. http://www.decisionpoint.com/ChartSpotliteFiles/070608_correct-1.gif
While it is always possible that the correction is complete, it is more likely that it will play out somewhat like the February-March correction which is visible on the chart. In other words, it could take a couple of weeks and several tests of support before the rising trend resumes. The next chart puts the correction in a long-term context. We can see that prices are dropping down from the top of a rising trend channel, and support will be encountered at around 1430. As long as that support holds, no serious technical damage will have occurred. It is reasonable for us to expect that the current selling is temporary and that the up trend will resume. http://www.decisionpoint.com/ChartSpotliteFiles/070608_correct-2.gif
Bottom Line: While we are experiencing a short-term correction, I have no reason to believe that the longer-term rising trend is in jeopardy. While corrections are uncomfortable to ride out, they are healthy and necessary, and we should hope this one builds a strong base for the next rally. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts. http://www.decisionpoint.com/ChartSpotliteFiles/070608_correct-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Bonds Continue To Weaken
by Carl Swenlin On our first chart, a daily bar chart, we can see that bonds have been weakening for several months, with the most dramatic decline occurring in the last month or so. The question that comes to mind is whether this weakness is a correction in a longer-term up trend or the start of a more serious decline? Since the 50-EMA is below the 200-EMA, we have to assume that bonds have entered a long-term down trend. This situation could change fairly quickly, but for now we need to maintain negative assumptions. http://www.decisionpoint.com/ChartSpotliteFiles/070622_bonds-1.gif
The second chart, a monthly bar chart, helps us put the decline into a very long-term context. Note that bond prices have been within a long-term rising trend channel for over 20 years, and that the recent decline has been stopped (so far) by the long-term rising trend line. This offers some hope that the decline may be over. On the negative side there is an ascending wedge that has been forming within the rising trend channel. This is a bearish formation, and the technical expectation is for it to resolve to the down side. This month the price index did break down from the wedge, an event that has negative long-term implications. http://www.decisionpoint.com/ChartSpotliteFiles/070622_bonds-2.gif
Bottom Line: My opinion is that bonds are forming a long-term top and are entering a long-term decline. All the signs are negative except that the long-term rising trend remains intact, no small exception that. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts. http://www.decisionpoint.com/ChartSpotliteFiles/070622_bonds-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
20-Week Cycle Cresting
by Carl Swenlin When performing market analysis it is best to first look at the long-term view of what is happening because it provides us with the relevant context for analysis of shorter-term market action. With this in mind, on the weekly bar chart we can see that the S&P 500 Index is still trending higher inside a rising trend channel. However, at the present time it is moving down after having reached the top of the channel. While this could very well be the last top before a major decline, we are in a bull market and we have to assume any decline will be stopped by the rising trend line. http://www.decisionpoint.com/ChartSpotliteFiles/070706_cycle-1.gif
On the second chart we move in for a closer look, and we can see that prices have been consolidating for more than a month. Will this consolidation resolve as a double or triple top, or is it building a base for another leg upward? After looking at my cycle projections, I can imagine one scenario that we might see. The March low was a 9-Month Cycle trough. The next subordinate cycle within the 9-Month Cycle is the 20-Week Cycle -- there are two of them in a 9-Month Cycle. It appears that the market is now in the process of cresting in preparation for a decline into the next 20-Week Cycle trough, which is projected to arrive at the end of this month. It is important to understand that you cannot set your watch by cycle projections, and we cannot know precisely what kind of price pattern will emerge, but cycle projections provide an intuitive framework for interpreting market action. For now I think we should be looking for a down thrust that may ultimately prove to be the current 20-Week Cycle trough. It could have happened already, or it may not happen for several weeks, but we are in the "window". http://www.decisionpoint.com/ChartSpotliteFiles/070706_cycle-2.gif
What I think may happen is that a decline in the next few weeks will break down through the support at the bottom of the consolidation range, leading very quickly to the cycle trough. Such a breakdown would likely prove to be a bear trap because of the likelihood of an upside reversal out of that trough as the next 20-Week Cycle begins. Bottom Line: Please understand that this is just an educated guess, but a guess nonetheless. There are many other ways this could play out, but my main point is to emphasize that the next 20-Week Cycle trough is more likely to be a buying opportunity than the beginning of a serious decline. I'm not suggesting that you try to pick the bottom, just be alert for the possibility and use your standard entry techniques. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts. http://www.decisionpoint.com/ChartSpotliteFiles/070706_cycle-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Gold: Long-Term Picture Looking Shaky
by Carl Swenlin On Thursday our trend model for gold switched to a buy, which means our medium-term posture is bullish on gold; however, when I looked at a very long-term chart of gold I saw something that gave me a slightly queasy feeling. What I saw was that gold is forming a pattern now that has very similar dynamics to the one that preceded gold's crash in the early 1980s. Note the huge parabolic blowoff top in 1980, followed by a failed rally top, followed by the crash. While the current pattern is not as exaggerated as the earlier one, the dynamics are the same -- a blowoff top, followed by a rally that has so far stalled below the previous top. To be objective, we must acknowledge that the rising trend line is still intact, but the similarity between the two patterns should keep us on edge until the current pattern is resolved. http://www.decisionpoint.com/ChartSpotliteFiles/070720_gold-1.gif
One of the factors that will have a strong influence on the future price of gold is the strength or weakness of the dollar. On the chart below we can see that the U.S. Dollar Index is challenging major long-term support. If it breaks down through that support it will be great news for gold, but, if the dollar rallies off the support, we should expect to see gold break down through its rising trend line. http://www.decisionpoint.com/ChartSpotliteFiles/070720_gold-2.gif
Bottom Line: The outlook on gold is positive at the moment, but there are technical and fundamental issues that could result in a nasty downturn for gold. If this happens, I would expect the support at $500 to be challenged. It appears to me that this situation should be resolved in a matter of weeks. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts. http://www.decisionpoint.com/ChartSpotliteFiles/070720_gold-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Market Oversold and Dangerous
by Carl Swenlin A month ago I wrote an article stating that I thought that the 20-Week Cycle was cresting and that we should expect a decline into the cycle trough that would probably break down through the support provided by the bottom of the trading channel, setting up a bear trap. So far so good. As you can see on the chart below, the S&P 500 has broken down through the horizontal channel support, as well as an important rising trend line. The trend line break is not decisive (at least 3%), but this break down has gone farther than I had expected. http://www.decisionpoint.com/ChartSpotliteFiles/070803_bottom-1.gif
In the process of the recent decline the market has become very oversold, as demonstrated by the next two charts. The first is our OBV suite, which includes the CVI (Climactic Volume Indicator), STVO (ST Volume Oscillator), and VTO (Volume Trend Oscillator). All three of these indicators have hit very oversold levels, levels from which rallies normally emerge. http://www.decisionpoint.com/ChartSpotliteFiles/070803_bottom-2.gif
The same is true for the ITBM (IT Breadth Momentum) and ITVM (IT Volume Momentum) Oscillators, which reflect a substantial internal correction, and tell us that we should start looking for a bottom. http://www.decisionpoint.com/ChartSpotliteFiles/070803_bottom-4.gif
As usual I would caution against trying to pick a bottom. For one thing, our primary timing model switched to neutral on July 31, which I think is a good place to be while the market is still displaying weakness. Another thing to consider is that the bears could be right about new bear market just beginning. If this is the case, oversold readings are extremely dangerous and can actually signal the likelihood of even more severe declines. To reiterate, oversold in a bull market means a bottom is near, but in a bear market it means "look out below!" Bottom Line: The market has become very oversold, and I expect to see a bottom forming over the next several weeks. I am still overall optimistic because of the 20-Week Cycle alignment with the current decline, and because we are still in the beginning of the 4-Year Cycle; however, caution is recommended until our timing model switches back to a buy signal. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts. http://www.decisionpoint.com/ChartSpotliteFiles/070803_bottom-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Looking for a Retest
by Carl Swenlin In my August 3 article, Market Oversold and Dangerous, I pointed out that certain indicators had reached very oversold levels from which rallies normally emerged. I also warned about trying to pick a bottom because oversold conditions can also set up more selling. As it turned out, the market did not bounce out of those oversold lows. Instead, it consolidated for a short period prior to initiating another severe down leg. On Thursday the market experienced extreme panic selling on high volume, but it completed an upside reversal into the close. This set up some positive divergences -- on the chart below note the higher indicator lows compared to lower price lows -- and has gotten sentiment swinging quickly back to the bullish side. http://www.decisionpoint.com/ChartSpotliteFiles/070817_retest-1.gif
The next thing that most people are expecting is a retest of the recent lows, and I happen to agree with that view; however, I am worried by the market's distinctly bearish behavior during the recent decline. By that I mean, instead of a rally, we got a consolidation followed by a decline after the very oversold readings of two weeks ago. Because of this, we should be alert to the possibility that the expected retest will actually be another down leg to much lower lows. While there has been a lot of short-term and medium-term technical damage done, the long-term bullish picture remains intact. Note on the chart below that the S&P 500 remains inside the rising trend channel and above the rising trend line. http://www.decisionpoint.com/ChartSpotliteFiles/070817_retest-4.gif
There are a lot of crazy ways that this situation can play out, and I plan to rely on our Thrust/Trend Model for most of my decision input. On the next chart all the components of the model are displayed. Note that a sell signal was generated when the 20-EMA crossed down through the 50-EMA. This put the model in neutral because the 50-EMA was above the 200-EMA at the time. A new buy signal will be generated when the Percent Buy Index (PBI) crosses above its 32-EMA, AND the PMO (Price Momentum Oscillator) crosses above its 10-EMA. As you can see, this will take a lot of work on the part of the market, but it should be worth the wait, considering the risk we currently face. Also, there is no guarantee that a buy signal will be profitable, but it does give us assurance that market internals have firmed sufficiently to justify optimism. http://www.decisionpoint.com/ChartSpotliteFiles/070817_retest-2.gif
Changing the subject, I want to briefly discuss the recent change in the "up tick rule". Back in the 1930s the S.E.C. established the requirement that a short sale could only occur on an up tick. At the beginning of July this requirement was withdrawn. In my opinion, this rule change is primarily responsible for the increased volatility we have experienced, and probably accounts for the severity of the recent decline. Keep in mind that this is a two-edged sword. While short-sellers can exacerbate a decline by selling into it, this will result in a larger number of short-sellers available to be squeezed when the buyers move back into the market. I think this explains the wild swings we have recently experienced. Whether or not you agree with the rule change, it is now a reality that must be assessed and dealt with. Bottom Line: It is possible for the market to continue to rally without a retest taking place; however, "spike" or "V" bottoms are uncommon, and the most likely outcome will be another decline to test the recent lows. Our Thrust /Trend Model currently has us neutral in all major indexes and sectors we track. We will wait for the model to generate buy signals before re-entering the market. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts. http://www.decisionpoint.com/ChartSpotliteFiles/070817_retest-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Expecting Short-Term Top
by Carl Swenlin In my August 17 article, Looking For A Retest, I speculated that we would get a bounce from the extreme price lows hit in mid-August, but that a retest of those lows needed to occur before we could be reasonably certain that the completion of a solid bottom had been accomplished. As it happened, the bounce was initiated before I posted the article. At this point I think the evidence suggests that the reaction rally has just about run its course, and that we should be expecting a price top to mark the beginning of a decline into the retest of recent lows. The evidence of which I speak can be seen on the chart below (and on many other short-term indicator charts). There are two versions of the Swenlin Trading Oscillator (STO) -- one is calculated from advance-decline breadth (STO-B) and the other from volume (STO-V). On the chart I have outlined two corrective phases -- the February/March correction, and the current correction, which, in my opinion, is not yet complete. http://www.decisionpoint.com/ChartSpotliteFiles/070824_top-1.gif
Note that there were three separate down thrusts in February/March. The first was into the initial price low, which also registered the lowest of the STO readings. The second was the retest of the first price low, which registered a slightly lower price accompanied by higher STO readings. The third move down was a pullback after a breakout. Note that the breakout was accompanied by very high STO readings, indicating an initial impulse for a new rally, and after that third pullback, the price configuration was clearly bullish. The current correction has a more bearish slant. The price decline has been more violent, and the second down thrust has led to a much lower price low. The market has rallied out of that low, but you can see that the STO has reached overbought territory, and we should be expecting a short-term top leading to a retest of the correction low. There is no guarantee that the support will hold, so it is no time to be trying to pick a bottom. Bottom Line: Good arguments are being made by both the bulls and the bears, and the possibilities being presented range from the market being up 22% a year from now to the danger of a 2000 point down day on the Dow. Rather than trying to decide which scenario might materialize, I am comforted by that fact that we are currently 100% neutral in the event the bottom falls out, and I am confident that our primary timing model will pull us into the market in time to catch a good part of any significant up move that occurs. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/070824_top-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Still Looking For A Retest
by Carl Swenlin It is well known that October is the cruelest month on average, but sometimes September beats October to the punch. This may be one of those times. Looking at the chart below we can see that the market has bounced out of the August lows and has formed two short-term tops, the last being higher than the first. Corresponding with those rising tops are two sets of declining tops on the two short-term technical indicators. This is known as a negative divergence, and it is a short-term bearish sign that probably is announcing an impending retest of the August lows. The fact that we are looking for this retest in September, a sometimes cruel month, could mean that the retest will be more scary than most people are expecting. I would not rule out a failed retest that sees prices fall past the August lows and plunges us into a bear market. This is not a prediction, just a possible scenario that ought to be considered. http://www.decisionpoint.com/ChartSpotliteFiles/070907_retest-1.gif
What I really want to see is a successful retest and a resumption of the bull market, but, as we all know, "you don't always get what you want." For one thing the bearish outcome discussed above could be the ultimate outcome, but it could break the other way as well. By that I mean that we may not get the retest that would put our minds at ease and prepare us mentally for the next big rally. Instead the market could already be in the beginning of the next big rally. Bottom Line: The odds favor a retest, and that decline could turn nasty in a hurry. Unless we see more buy signals on the major market indexes, I will be staying out of the market until the retest (or whatever) is complete. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/070907_retest-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
New Buy Signal
by Carl Swenlin Ever since the market hit its correction lows in August I have written three articles, each emphasizing that the odds favored a retest of those lows (see Chart Spotlight on our website). As it turns out, we haven't had any decline that I would classify as a retest, and the market has broken out of a triangle formation on high volume. When the breakout happened, it eliminated any reasonable possibility of a retest, in my opinion. Sometimes the low odds take it. One thing I have been cautioning about is to not get too bearish, because many of our key indicators had remained bullish. Another thing I should mention is that we should never get too invested in a forecast. I have watched as many of my bearish colleagues, after being proven wrong by the market, are still tying to justify their being bearish rather than trying to get aligned with the market. The market will eventually prove them right because, because, because . . . Maybe they will be right sooner than we think, but for now the market looks as if it will be moving higher for a while. My bullish stance is due to our S&P 500 timing model having switched from neutral to a buy on September 13, three trading days prior to the Fed-induced market breakout. Also, prior to the breakout, about half of the market and sector indexes that we track with our primary timing model were also on buy signals. On the day of the breakout, the other half switched to buy signals. The chart below shows the two components needed to generate a buy signal -- the Percent Buy Index (PBI) crossed above its 32-EMA, AND the PMO (Price Momentum Oscillator) was above its 10-EMA. Note that the PBI is only at 59%, but it is trending up, which is most important. http://www.decisionpoint.com/ChartSpotliteFiles/070921_newbuy-1.gif
Bottom Line: The long-awaited retest did not materialize, and. in my opinion, the market has begun another leg upward that should challenge and exceed all-time highs for the S&P 500 Index. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/070921_newbuy-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
A Good Time for a Pullback
by Carl Swenlin The market has had a good run since the August lows, but it is challenging all-time highs, and the technical support has been somewhat anemic. With many indicators reaching into overbought territory, and overhead resistance becoming an issue, it looks like a good time for a pullback or consolidation to digest recent gains. As for technical weakness, the first thing that strikes me is the failure of volume to confirm recent price gains. Note on our first chart that most of the volume bars supporting the recent rally are well below the moving average line. http://www.decisionpoint.com/ChartSpotliteFiles/071005_pullback-1.gif
The next chart shows the failure of new 52-week highs to confirm new price highs, and we can observe an uncomfortable level of expanding new lows that accompanied minor pullbacks during the rally. http://www.decisionpoint.com/ChartSpotliteFiles/071005_pullback-2.gif
Finally, we have the Rel-to-52 chart, one of our more unusual indicators. The Relative to 52-Week Hi/Lo (Rel to 52) chart tracks each stock in a given market index and determines the location of its current price in relation to the 52-week high and 52-week low. We express this relationship using a scale of zero (at the 52-week low) to 100 (at the 52-week high). A stock in the middle of its 52-week range would get a "Rel-to-52" value of 50. This chart shows the average "Rel-to-52" value for all the stocks in the S&P 500 Index. Not only is there a negative divergence between the indicator and the price index, but the indicator value is only 60. So while the Rel-to-52 value for the S&P 500 is 100 (it is making new 52-week price highs), the indicator value of 60 shows that the number of stocks participating in making the new price highs is unusually low, probably indicating that prices are being supported by larger-cap stocks. http://www.decisionpoint.com/ChartSpotliteFiles/071005_pullback-4.gif
Bottom Line: While the market is making new highs, technical support is fading and a corrective pullback should be expected within the next week or so. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/071005_pullback-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Correction Underway
by Carl Swenlin Two weeks ago I wrote an article that stated that it was a good time for a pullback. As it turns out the pullback started four trading days later, and it appears now that a full blown correction is in progress. It will probably take at least two or three weeks to complete the correction, and there will probably be something of a bounce before the correction low is found. Friday's down move was quite violent, but it also provided evidence that the market is getting short-term oversold. The following chart shows the Participation Index (PI), which measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope. As you can see, on Friday the Down PI reached an oversold level similar to the down spike last summer. While this kind of selling climax indicates that a short-term bottom is near, it is most likely an initiation climax, meaning that any bounce will most likely be followed by more selling. (See last summer's correction.) http://www.decisionpoint.com/ChartSpotliteFiles/071019_correct-1.gif
Other indicators show that the market is just coming off overbought levels, and that more corrective action is needed to work off the excesses of the last rally. The next chart shows price, breadth, and volume oscillators. Note that they are moving down, but at least a few weeks will be needed to get them to oversold levels. http://www.decisionpoint.com/ChartSpotliteFiles/071019_correct-2.gif
Bottom Line: There may be a few more days of selling, but the market is short-term oversold, and we should expect a bounce in a few days. Since it is October, there is a lot of talk about a market crash. With the usual caveat that "anything can happen," my opinion is that conditions are not typical of what we have seen before major crashes. (See my 12/8/2006 article, Crash Talk is Premature.) That does not mean that selling won't continue for longer than I anticipate based upon the above chart. The 9-Month Cycle projection is for a price top in this time frame, with a cycle low projected for mid-December, so, as usual, I'd caution against trying to pick a bottom. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/071019_correct-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Mixed Market
by Carl Swenlin Two weeks ago I stated that a correction had begun, and that the initial selling had resulted in an initiation climax -- a technical condition that indicated that the initial down pressure was probably near exhaustion, but that signaled the beginning of a new down trend. My expectation was that there was going to be a bounce (reaction rally), but that more selling would follow after that rally was finished. This week the rally ended and the selling resumed. It is still my opinion that the selling will probably continue into mid-December where my 9-Month Cycle projection calls for a price low for the correction. A reasonable price target for that low would be 1375 on the S&P 500 Index, but the market segments are very mixed in terms of strength, and there is not conclusive evidence that the market is just going to fall apart. In spite of the dramatic price moves of the last several weeks, we can see on the chart below that the S&P 500 Index is only about 5% off its all-time high, and strictly speaking a declining trend has not officially been established -- it needs to make a lower low. http://www.decisionpoint.com/ChartSpotliteFiles/071102_mixed-1.gif
While the S&P 500 Index is slipping, the Nasdaq 100 Index remains in a rising trend and fully in the bullish mode. We can see on the chart below that it has recently failed to rise to the top of its rising trend channel, indicating some weakness; however, while a correction is virtually assured, there is no reason to expect this segment of the market to enter a bear market. http://www.decisionpoint.com/ChartSpotliteFiles/071102_mixed-2.gif
There are, however, market sectors that are officially in a bear market -- Consumer Discretionary and Financials to be specific -- and weakness in these sectors is the reason the S&P 500 is struggling.. The chart below is of Financials, but the Consumer Discretionary chart is very similar. Note that a long-term sell signal was generated when the 50-EMA crossed down through the 200-EMA. This signaled the beginning of a bear market for this sector. Once the bear market background had been established, a medium-term sell signal was generated the next time the 20-EMA crossed down through the 50-EMA. http://www.decisionpoint.com/ChartSpotliteFiles/071102_mixed-4.gif
Bottom Line: Technically, the condition of the market is neither overbought or oversold. This leaves room for movement in either direction; however, I am inclined to think that the correction will continue for several more weeks. While there is strength the NDX and in certain sectors, there are a few sectors that are unusually weak. It is not clear which side of the mix is going to prevail. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/071102_mixed-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Market Entering Oversold Range
by Carl Swenlin Two weeks ago I stated that market strength was mixed, and that I thought that the correction had several more weeks to go before it was over. Since then further breakdowns of support have occurred, most notably on the Nasdaq 100 Index chart, which experienced a major break of its rising trend line, eliminating the one area of strength that supported a "mixed" assessment for the overall market. Currently, a correction is in progress that is affecting all major indexes, and my opinion is that it is likely to continue into mid-December. One of the reasons I believe this is that, while the market is approaching oversold levels, it is not as oversold as it needs to be, and more technical work is needed before we can have confidence that a solid bottom has been made. On the first chart below we can see that the three primary indicators of price, breadth, and volume are well below the zero line, but they have not yet hit the bottom of their normal ranges. Even after they hit bottom, a lot of work is needed to put in a solid bottom. I have put a box around previous bottoming actions. Note how several weeks and more than one indicator bottom is normally required to get the work done. http://www.decisionpoint.com/ChartSpotliteFiles/071116_osold-1.gif
Also note how the August bottom differs from the others. It is what we call a "V" bottom, and there was no retest to make the bottom more solid. From a technical viewpoint, I believe that is why the rally ultimately failed. Another reason for my assessment is that the 9-Month Cycle is projected to make a trough around mid-December. As you can see by the cycle chart below, cycle projections are somewhat subjective, and cycle lows don't always appear where we think they should, but current market action and technical factors as described above make me believe we have a good chance of being right about the current cycle projection. http://www.decisionpoint.com/ChartSpotliteFiles/071116_osold-2.gif
Bottom Line: While the market is becoming oversold, I believe that it will take several weeks before the decline is over and a solid bottom is in place. This belief is supported by what we can observe as historical norms for corrections, and by our 9-Month Cycle projection. Any rally that emerges before the proper amount of work is done is likely to fail. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/071116_osold-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Bottoming Process Begins
by Carl Swenlin On Tuesday the market began a rally off the lows for the current correction. On the chart below we can see that the rally has continued and prices have broken out through the top of a descending wedge formation. (Bullish resolution of that formation is what we normally expect.) Volume for the rally has been respectable, and conditions were sufficiently oversold, that we could have reasonably expected a rally. The question remains as to whether or not the rally was just a short-covering rally that will soon fail as sellers move back into the market. My opinion is that the market has begun a bottoming process that will probably take a few weeks to complete. http://www.decisionpoint.com/ChartSpotliteFiles/071130_bottom-2.gif
The next chart of the CVI (Climactic Volume Indicator), which measures extreme OBV (On-Balance Volume) movement within the context of a short-term OBV envelope for each stock in the index, reflects one of the highest ever CVI readings. Because it was accompanied by a price reversal and breakout, the high CVI reading represents an initiation climax, meaning that a new short-term trend (up) has been initiated. Next we need to determine if the new trend might extend into a longer-term time frame. http://www.decisionpoint.com/ChartSpotliteFiles/071130_bottom-1.gif
The next chart gives us a view of three medium-term indicators representing the condition of price, breadth, and volume. As you can see, all three indicators are very oversold, and they have begun rising. In general, this is a very positive situation; however, you can also see that these indicators usually zigzag into a series of bottoms before a price bottom is completed. In other words, while it is possible that the recent price low may prove to be the low for the correction, there is still a high likelihood that low will be retested within a couple of weeks; therefore, we cannot be absolutely certain that a new correction price low will not be made. http://www.decisionpoint.com/ChartSpotliteFiles/071130_bottom-1a.gif
Finally, the weekly-based chart below shows that the S&P 500 has bounced off a long-term rising trend line, which is a very bullish sign. Certainly there is no guarantee that the expected retest will not break through that support, but for the present there is plenty of technical evidence that supports a bullish outcome in the medium-term. http://www.decisionpoint.com/ChartSpotliteFiles/071130_bottom-4.gif
Bottom Line: The market is very oversold and is bouncing off long-term support. We can expect a retest of the lows, but there is a very good chance that a medium-term bottom is in the making. Nevertheless, if the retest fails and the long-term support is violated, it would be strong evidence that the bull market is over. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/071130_bottom-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Retest In Progress
by Carl Swenlin Two weeks ago I stated that the rally off the November lows signaled that a bottoming process had begun, and that, after the short-term rally topped, we should expect a retest of the November lows. Last week the rally was still in progress, and I told Ike Iossif during our interview that I still expected a retest, but that I also feared that the rally would extend j-u-u-u-s-t far enough to trigger a Thrust/Trend Model buy signal before prices reversed downward. As you can see on the chart below, sure enough, the rally topped on Monday (generating a T/TM buy signal), and prices reversed on Tuesday, initiating what ought to be a retest. I say "ought" to be a retest because so far, in spite of a lot of volatility, it isn't much of a retest in terms of magnitude. I would like to see prices drop to the area of 1425 -- at that point I would consider that sufficient technical work has been done to provide a good base for the next rally. Of course we don't always get what we want from the market. http://www.decisionpoint.com/ChartSpotliteFiles/071214_retest-1.gif
The next chart gives us a view of three medium-term indicators representing the condition of price, breadth, and volume. As you can see, all three indicators risen from very oversold levels and are in the neutral zone. While it is possible for the indicators to rise from oversold to overbought in a single, uninterrupted move, it is more usual for them to reverse once or twice as prices put in a bottom. If prices continue lower, we will see these indicators turning back down. http://www.decisionpoint.com/ChartSpotliteFiles/071214_retest-2.gif
Another prominent feature on this chart is the trading range in which prices have been moving for most of this year. This is also called a "continuation pattern" -- a consolidation that takes place before prices continue moving in the same direction they were moving before the consolidation began, in this case, up. On the other hand, others may consider the formation to be a double top, which has bearish implications. While I can see the double top argument, we are still in a long-term bull market, and a new 9-Month Cycle is due to begin, so, at this point in time, I expect a bullish resolution. Bottom Line: Odds are in favor of the retest moving lower, but my guess is that long-term support will hold, and that the retest will be successful. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/071214_retest-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Retest Still In Progress
by Carl Swenlin * * * First an announcement: I am happy to report that in Timer Digest's annual Timer of the Year issue Decision Point was ranked #5 Bond Timer for 2007 and tied for #2 Long-Term Stock Timer (2-years) for 2007. * * * Currently, the stock market is still in the process of retesting the November lows. This process needs to end now or some serious technical damage will be done, specifically the long-term rising trend line is in danger of being decisively violated. On the chart below you can see the long-term rising trend line is being tested, and a decisive violation would be a decline to about 1375, where coincidentally there is another support line. Unfortunately, that doesn't give me much comfort because that line looks a lot like the neckline of a rounded or double top, and considering that a decline to 1375 will generate long-term moving average sell signals, my guess is that the chances of the neckline holding or surviving a retest would be slim to none. http://www.decisionpoint.com/ChartSpotliteFiles/080104_top-1.gif
The next chart gives us a view of the S&P 500 on an equal-weighted basis, and the picture is not pretty. Normally, an equal-weighted index will out-perform it's capitalization-weighted counterpart because the index is boosted by the smaller-cap components. However, in recent months the equal-weighted index has been under-performing the S&P 500 Index to the extent that the 50-EMA has already crossed down through the 200-EMA, a long-term sell signal. What this tells us is that money is focusing on the large-cap stocks the S&P 500 Index is being supported by fewer and fewer stocks. http://www.decisionpoint.com/ChartSpotliteFiles/080104_top-2.gif
If you are wondering if the 9-Month Cycle has made a low, so am I. I have tentatively identified the trough as being in mid-December, but, since prices have fallen below the mid-December level, I'll have to rethink that after things have shaken out. This is not a satisfying conclusion, but this is often the way it is -- cycle projections are good for a longer-term estimate, but it is hard to nail down the exact trough until after the fact. Bottom Line: It is not impossible for the market to complete a sucessful retest and for the bull market to continue, but the tecnicals are worse than they have been since the last bear market ended, and it is difficult to be optimistic at this point. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080104_top-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Bear Market Rules Apply
by Carl Swenlin
January 18, 2008 On January 8 the 50-EMA crossed down through the 200-EMA on the S&P 500 daily chart, generating a long-term sell signal and declaring that we are now in a bear market. This was confirmed this week when the weekly 17-EMA crossed down through the 43-EMA. Let me say that these signals are not 100% reliable, but there is a ton of additional supporting evidence, such as the decisive violation of the long-term rising trend line, and the violation of the double top neckline, seen on the chart below. http://www.decisionpoint.com/ChartSpotliteFiles/080118_bear-1.gif
The next chart presents a long-term view, which makes it more clear how serious the situation is. http://www.decisionpoint.com/ChartSpotliteFiles/080118_bear-2.gif
An important point is that this long-term sell signal is not so much an action signal as it is an information signal. What this means is that we need to begin interpreting charts and indicators in the context of a bear market template. For example: * Oversold conditions should be viewed as extremely dangerous. Whereas in bull markets oversold lows usually present buying opportunities, in bear markets they can often resolve into more heavy selling. * Overbought conditions in a bear market are most likely to signal that a trading top is at hand. * While bear market rallies present great profit opportunities, long positions should be managed as short-term only.
The questions remain as to how far down prices will go and how long the bear market will last? In the shorter term we have a minimum downside projection from the double top neckline of about 1160 on the S&P 500 Index. That could mark a medium-term low from which a bear market rally could rise. For the longer-term, let's look at the 4-Year Cycle chart below. As you can see, the last cycle low was in mid-2006, so the next projected low is in mid-2010. Assuming that the cycle low and bear market low will be the same, we have a long, bloody road ahead. The most obvious downside target is the support at the 2002 lows, about 750 on the S&P 500. http://www.decisionpoint.com/ChartSpotliteFiles/080118_bear-4.gif
I think the basis for my conclusions is fairly easy to see and understand, but please keep in mind that these are educated guesses -- somewhat better than wild guesses -- and they are subject to radical revisions as reality unfolds. If it actually turns out that way, no one will be more surprised than I. Bottom Line: Probability is very high that the bull market top arrived in October 2007 and that we are now in a bear market that will continue for another year or more, possibly until mid-2010. Until we have evidence to the contrary, remember that bear market rules apply. The next thing to expect is a reaction rally back toward the recently violated neckline support, which is now overhead resistence. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080118_bear-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Resistance Threatens Rally
by Carl Swenlin
February 1, 2008 In my January 18 article I asserted that we had entered a bear market based upon long-term sell signals generated by downside moving average crossovers on the daily and weekly charts of the S&P 500. My bottom line summary was as follows: "Probability is very high that the bull market top arrived in October 2007 and that we are now in a bear market that will continue for another year or more, possibly until mid-2010. Until we have evidence to the contrary, remember that bear market rules apply. The next thing to expect is a reaction rally back toward the recently violated neckline support, which is now overhead resistance." Just a few days later the expected rally began, and the neckline resistance has been penetrated, albeit not decisively. While the market's recent performance has been good for bulls, you can see on the chart below that strong overhead resistance in the form of the long-term rising trend line lies dead ahead. http://www.decisionpoint.com/ChartSpotliteFiles/080201_bear-1.gif
The next chart shows the S&P 500 on a weekly basis. Note that the weekly PMO (Price Momentum Oscillator) has dropped below the zero line for the first time since the bull market began. Observe also that the recent moving average downside crossover is the first since the last bear market began. http://www.decisionpoint.com/ChartSpotliteFiles/080201_bear-2.gif
Not only is there a lot of resistance to overcome, our short-term indicators show that the market is becoming overbought. Two of my favorites, the CVI and STVO, are shown on the chart below. Both are well into the overbought side of their range, and we should be expecting a short-term price top very soon. Once that top is in place we should expect the recent lows to be retested. Since we are in a bear market, the retest is likely to fail. http://www.decisionpoint.com/ChartSpotliteFiles/080201_bear-4.gif
Bottom Line: We are in a bear market, and we should expect that most situations will resolve negatively. The recent rally has pushed into a heavy resistance area, and short-term internals are becoming overbought. It is likely that the market will top soon, and that a retest of the recent lows will commence. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080201_bear-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Bottom Still Not Resolved
by Carl Swenlin
February 15, 2008 When the market began to rally this week, it looked as if a successful retest of last month's lows had occurred and that another up leg had begun; however, what looked like the start of a new rising trend, has now morphed into a triangle formation with the price index trying to break through the bottom of the triangle. While the triangle itself is a neutral formation, we are in a bear market, so the odds favor a break down from the triangle and another retest move on the January lows. http://www.decisionpoint.com/ChartSpotliteFiles/080215_bottom-1.gif
The next chart, a weekly-based chart of the S&P 500 Index, continues to confirm that we are in a bear market. There has been a moving average downside crossover, and the moving averages and PMO (Price Momentum Oscillator) continue to move downward. http://www.decisionpoint.com/ChartSpotliteFiles/080215_bottom-2.gif
The following chart illustrates how oversold conditions in a bear market do not provide the degree of internal compression we normally see in bull markets. Note how the two most recent oversold lows on the price, breadth, and volume indicators failed to produce the kind of price gains that we see from the August 2007 lows. You can also see other examples of bull market reactions to oversold conditions on the chart. http://www.decisionpoint.com/ChartSpotliteFiles/080215_bottom-4.gif
Bottom Line: Whereas the charts had begun to look as though we had a short-term bottom in place, we are now faced with an unresolved triangle pattern in a down trend. Odds favor a downside resolution, but, even if it resolves to the upside, it is doubtful that there will be enough steam behind the rally to overcome bear market drag and penetrate major overhead resistance. Regardless of my personal opinion, we rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have added the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080215_bottom-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Whipsaw!
by Carl Swenlin
February 29, 2008 All mechanical models have weaknesses, and our Thrust/Trend Model is no exception -- it is vulnerable to whipsaw. Whipsaw occurs when the market moves just enough in one direction to trip the signal triggers in the model, then it reverses direction and moves just far enough to trigger a reverse signal. This results in a loss on the previous signal. This has happened a number of times in the last several months. Our model is designed to capture intermediate-term trends and to ride out the zigzag movements and minor corrections that occur as the market trends up or down; however, when the market is in the process of forming a top or bottom, the associated chop can be sufficient to whipsaw the model a lot. Also, bear market rallies can be quite violent and often exceed normal expectations, so whipsaw is quite common then. Looking at the chart below, you can clearly see the numerous 20/50-EMA crossovers that have occurred in the last year, something that would not happen if the market were in a solid trend. More important, let's look at what is probably the most recent whipsaw. The Thrust/Trend Model (T/TM) generates a buy signal any time the PMO (Price Momentum Oscillator) and the PBI (Percent Buy Index) have both crossed up through their moving averages. This is a relatively short-term event, and the signal should be considered short-term until the 20-EMA of price crosses up through the 50-EMA. This action confirms or "locks in" the buy signal, and the PMO and PBI become irrelevant. Next a sell or neutral signal would be generated when the 20-EMA crosses back down through the 50-EMA. Getting back to the current buy signal, notice that I have marked with green arrows the moving average crossovers that generated it. At this point, it is highly likely that this signal will prove to be a fakeout, because the 20-EMA is a long way from managing an upside crossover of the 50-EMA. The next most likely event will probably be the PMO or PBI crossing down through a moving average, which will generate a sell signal. http://www.decisionpoint.com/ChartSpotliteFiles/080229_whipsaw-1.gif
It is important to remember that T/TM buy signals, particularly in a bear market, are short-term events, and discretionary decisions are necessary to avoid the losses whipsaw can cause. How do we know we are in a bear market? Again, when the 50-EMA crosses down through the 200-EMA on the daily chart, we assume a bear market is in force. On the next chart, a weekly-based chart of the S&P 500 Index, we use the 17/43-EMA crossover as a bear market signal. Clearly, the total picture on this chart is pretty grim. http://www.decisionpoint.com/ChartSpotliteFiles/080229_whipsaw-2.gif
Bottom Line: Oversold market conditions and a fair amount of manipulation from the sidelines has not been sufficient to move the market out of the consolidation range of the last several weeks. This should not be a surprise because we are in a bear market, and in a bear market we should expect negative outcomes. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080229_whipsaw-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Get A Long-Term Perspective
by Carl Swenlin
March 14, 2008 One of the reasons that Decision Point has spent so much time and money to create dozens of long-term historical chart series is that we must often compare current price and indicator behavior to prior periods where market action has been similar. For example, we are currently in a bear market, so, if we describe indicators as being oversold enough to hint that THE bottom is nearly in place, we need to look at prior bear markets to verify that assertion. Currently, many analysts are claiming that deeply oversold long-term indicators are solid evidence that the bear market is nearly over. A good example is the chart of the Percent Buy Index (PBI) below. Clearly the PBI has reached its lowest level in three years, and the PMO (Price Momentum Oscillator) is also deeply oversold. Often a three-year history would be sufficient to make historical comparisons, but in this case it is woefully inadequate. http://www.decisionpoint.com/ChartSpotliteFiles/080314_lt-1.gif
The next chart shows an eight-year history of the same indicators, encompassing the progress of the last bear market. Note that during that bear market the PBI first reached current levels at about the half-way point in the decline, and it reached the same or lower levels three more times before the bear market was finally over. Also, while the current PMO is very oversold compared to other low readings during the recent bull market, it has only gone half the distance to the lows set in 2001 and 2002. http://www.decisionpoint.com/ChartSpotliteFiles/080314_lt-2.gif
Bottom Line: Oversold conditions in a bear market can mean that the trouble is far from being over. In fact, when the PBI reached current levels in September 2001, it was 18 months before the new bull market began. It is a virtual certainty that the current bear market will not play out the same way as the last one did, but comparing today's market action to past bear markets gives us a genuine long-term perspective, and allows us to put today's market activity in the proper context. Don't be short-sighted when performing your chart research. Bear market rules apply! The odds are that support levels will be violated, and, if against those odds the market manages to rally off support, odds are that the rally will fail before it can change the long-term trend. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080314_lt-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
The Bear Stearns Bear Market
by Carl Swenlin
March 28, 2008 In many of my recent articles I have been emphasizing that we are now in a bear market, based primarily upon the fact that the S&P 500 Index 50-EMA has crossed down through the 200-EMA. This is a simple and effective way to evaluate the long-term trend of the market. In fact, it is a method that can be applied to any price index, because technical indicators don't know anything fundamental about the price index to which they are applied. Indicators simply interpret price movement. Stocks and/or indexes don't necessarily trend together, so it is usual to have a few stocks or sector indexes trending in a different direction than a broad market index like the S&P 500. For example, Bear Stearns (BSC) topped out -- began its own private bear market -- in January 2007 at about $159 and generated a long-term sell signal about six months later (see chart below) at about $130. The S&P 500 didn't top out until 10 months later. http://www.decisionpoint.com/ChartSpotliteFiles/080328_bsc-1.gif
When the BSC 50/200-EMA downside crossover took place, it confirmed that a bear market for BSC was in progress, and virtually the only choices were to sell the stock or hedge 100%. The only way to have been long BSC during this down trend would have been on a very short-term basis with tight stops, but that would only have applied to short-term traders. Investors should have been out of the stock. Following this simple rule would have saved investors about $120, or about 75% of the all-time high price of $159. The next chart is an update of the S&P 500, which shows all the important relationships involved -- long-term rising trend line (resistance, should prices rally that high), and the large spread between the 50/200-EMAs (which will take a lot of work to reverse). We have had some magnificent rallies recently, and quite a few medium-term buy signals have been generated; however, I'm afraid that this is just more whipsaw. The chart helps give the rallies and buy signals the proper perspective within the longer-term down trend. http://www.decisionpoint.com/ChartSpotliteFiles/080328_bsc-2.gif
Bottom Line: Using 50/200-EMA crossovers is a simple way to manage long-term positions in stocks. This is not a technique that works 100% of the time, but it will keep you out of trouble more often than not. When you see these long-term sell signals, remember what I wrote in my last article: Bear market rules apply! The odds are that support levels will be violated, and, if against those odds the market manages to rally off support, odds are that the rally will fail before it can change the long-term trend. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080328_bsc-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Looking at (Cough, Cough) Fundamentals
by Carl Swenlin
April 4, 2008 As a technician I rarely look at fundamentals, primarily because they are not directly useful in making trading decisions; however, while fundamentals are not primary timing tools, they can be useful in establishing a broader context within which technical indicators can be interpreted. For example, one of the reports the Decision Point publishes daily is The Overview of Market Fundamentals. The following is an edited excerpt from that report. First, notice that, in spite of a substantial market decline, the current P/E is 20.7, which is slightly above the overbought limit of the historical range. Notice also that GAAP earnings are projected to drop to 55.15 by the end of 2008 Q2. Compare that to earnings of 84.92 at the end of 2007 Q3. In spite of the fairy tale projections of "operating" earnings, real earnings are crashing. ************ S&P 500 FUNDAMENTALS ************The real P/E for the S&P 500 is based on "as reported" or GAAP earnings(calculated using Generally Accepted Accounting Principals), and it is thestandard for historical earnings comparisons. The normal range for the GAAPP/E ratio is between 10 (undervalued) to 20 (overvalued).Market cheerleaders invariably use "pro forma" or "operating earnings,"which exclude some expenses and are deceptively optimistic. They areuseless and should be ignored.The following are the most recently reported and projected twelve-monthtrailing (TMT) earnings and price/earnings ratios (P/Es) according toStandard and Poors. Est Est Est 2007 Q4 2008 Q1 2008 Q2 2008 Q3TMT P/E Ratio (GAAP).......: 20.7 22.5 24.8 23.6TMT P/E Ratio (Operating)..: 16.6 16.9 16.9 16.1TMT Earnings (GAAP)........: 66.18 60.95 55.15 57.92TMT Earnings (Operating)...: 82.54 81.08 81.17 85.20For a more thorough discussion of earnings and other fundamentalsclick here.Based upon the latest GAAP earnings the following would be the approximateS&P 500 values at the cardinal points of the normal historical value range.They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20:Undervalued (SPX if P/E = 10): 662Fair Value(SPX if P/E = 15): 993Overvalued(SPX if P/E = 20): 1324********************************The following chart helps put current events into an historical perspective, showing the earnings crash that accompanied the last bear market, as well as the current earings decline. I don't know how anyone could be optimistic about this picture. http://www.decisionpoint.com/ChartSpotliteFiles/080404_fun-1.gif
Now let's turn to the technical market picture. The chart below shows that the long-term sell signal is still in force; however, a nice looking bottom has formed and could be a solid base for a medium-term rally. As I write this the market is still open on April 4 and the S&P 500 is trying to break out of a three-month trading range. Also, most of our medium-term indicators (not shown) have reached very oversold levels and have formed positive divergences. Finally, we have medium-term buy signals on most of the indexes and sectors we track. Evidence is pretty strong that we are beginning a rally that will challenge important overhead resistance, possibly around the area of 1450 on the S&P 500. http://www.decisionpoint.com/ChartSpotliteFiles/080404_fun-2.gif
Bottom Line: The earnings picture is abysmal, and there is a solid long-term sell signal in progress. Playing the long side looks promising, but keep a tight reign on long positions because we are in a bear market until proven otherwise. Remember: "Bear market rules apply! The odds are that support levels will be violated, and, if against those odds the market manages to rally off support, odds are that the rally will fail before it can change the long-term trend." We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080404_fun-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Suspicious Gaps
by Carl Swenlin
April 18, 2008 On Wednesday and Friday of this week the market opened up with large gaps from the previous closing price, and I think this activity is suspicious, possibly contrived. It is, after all, options expiration week, and weird market action can be expected. This week it is likely that the big money wanted to stick it to the bears and put holders, as usual, and they did so quite skillfully. These large up gaps can be contrived by heavy buying of S&P futures just before the market opens. There is usually a bullish cover story available to use as justification for the initial buying spree. When the market opens, many bears are forced to cover in order to limit losses, so the price advance is supported by real buying. Next, the reluctant bulls are sucked into the move as they begin chasing the market. http://www.decisionpoint.com/ChartSpotliteFiles/080418_gap-1.gif
While I tend to believe that price action speaks for itself, we are in a bear market, and I expect that volume should confirm such enthusiastic price moves. In these two cases, I don't think it does. As you can see on the chart below, volume is only average, not explosive like price movement. So what we have is a breakout on modest volume, and strong overhead resistance dead ahead in the form of the 200-EMA, the declining tops line, and the long-term rising trend line. http://www.decisionpoint.com/ChartSpotliteFiles/080418_gap-2.gif
Bottom Line: We are in a bear market, and the 6-month period of negative seasonality begins at the end of this month, so we should expect bearish outcomes. In this case, the rally should fail before it penetrates the 1450 level. Having said that, you will note that all but one of the 27 market and sector indexes are on intermediate-term buy signals. That is because our primary model is designed to enter rallies relatively early. Because the long-term model is still on a sell, we should expect that the intermediate-term signals will fail in a short time. When the PMOs (Price Momentum Oscillators) begin to reverse downward, that would be a good time to consider closing long positions. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080418_gap-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Six-Month Unfavorable Seasonality Period Begins
by Carl Swenlin
May 2, 2008 Something you will be hearing a lot about for a while is that for the next six months the market will be carrying extra drag caused by negative seasonality. Research published by Yale Hirsch in the "Trader's Almanac" shows that the market year is broken into two different six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher. Back testing of a timing model using the beginning of these periods as entry and exit points shows that being invested only during the favorable period (and being in cash during the unfavorable period) finishes way ahead of buy and hold. As I recall, the opposite strategy actually loses money. (See Sy Harding's book "Riding the Bear" for a full discussion of this subject. Seriously, I really, really recommend this book.) While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds. Below is a chart that begins on May 1, 2007 and ends on April 30, 2008. The left half of the chart shows the unfavorable May through October period and the right half shows the favorable November through April period. As you can see, the seasonality periods performed exactly opposite of the statistical average. The point to be made is that, regardless of how the market performs on average, every year is different and presents its own challenges, and there is no guarantee that any given period will conform to the average. http://www.decisionpoint.com/ChartSpotliteFiles/080502_6mo-1.gif
Whether or not you find the seasonality strategy compelling enough to use, the statistics tell us that the next six months are apt to be dangerous, and that is something to keep in mind when evaluating the overall context of the market. The fact that this negative seasonality period is taking place during a bear market, makes it even more dangerous. Bottom Line: We are in a bear market, and the 6-month period of negative seasonality has begun. Expect price reversals when the market gets overbought. When the PMOs (Price Momentum Oscillators) begin to reverse downward, that would be a good time to consider tightening stops and/or closing long positions. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080502_6mo-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Looking Bullish but Overbought
by Carl Swenlin
May 16, 2008 Our long-term model remains on a sell signal, so we have to assume that we are still in a bear market; however, the rally from the March lows has taken prices far enough to cause important bullish signs to appear: (1) The intermediate-term model for the S&P 500 is on a buy signal and has a gain of +5.6%; (2) all but one of the 27 sectors and indexes we track are on buy signals with an average gain of +6.6%; (3) prices have moved above the declining tops line drawn from the October top; and (4) the weekly PMO has bounced from oversold levels and generated a buy signal by crossing above its 10-EMA. I can put up a pretty good argument for the bullish case, but the long-term sell signal stands in the way of excessive optimism -- it takes a lot of negative energy to generate the sell signal, and it will take a lot of positive energy to reverse it. Fortunately, our medium-term model lets us be cautiously long early in the rally just in case a new bull market really has started. While things are looking pretty positive, a few negatives are beginning to appear. One is an ascending wedge formation that you can see has formed since the March low. I have observed that this formation is one of the most reliable there is -- it most often resolves to the downside. Another negative is that the market is getting overbought. Note that the daily PMO is in the overbought zone. http://www.decisionpoint.com/ChartSpotliteFiles/080516_obought-1.gif
More evidence of the market's overbought condition is the OBV (on-Balance Volume) suite of indicators on the chart below. Note that the CVI has topped and the STVO has reached the top of its range. Combine this with the ascending wedge price formation, and the overbought PMO, and I think the market is setting up for a short-term pull back at the very least. http://www.decisionpoint.com/ChartSpotliteFiles/080516_obought-2.gif
Bottom Line: The market is showing many positive signs, but it is getting somewhat overbought and we should be looking for at least a short-term correction. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080516_obought-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Three Market Views
by Carl Swenlin
June 6, 2008 There are three market indexes that capture the most attention: The Dow Jones Industrial Average (DJIA), the S&P 500 Index (SPX), and the Nasdaq 100 Index (NDX). Together they represent about 80% of the total U.S. market capitalization. While they are normally more or less in sync with one another, this is not always the case, and now is one of those times where they don't look a lot alike. Currently, the DJIA is the weakest of the two. It is on a long-term sell signal (the 50-EMA is below the 200-EMA), as well as an intermediate-term sell signal generated by our primary timing model. Looking at the chart we can see that the price index had broken above horizontal resistance and an important declining tops line that defined the bear market. Unfortunately, this breakout was a fakeout, and prices dropped below the support, leaving the DJIA in an unambiguous bear market configuration. The DJIA has only 30 stocks, but it has the most psychological impact on the public. http://www.decisionpoint.com/ChartSpotliteFiles/080606_3mark-1.gif
The broadest of the three markets is the SPX. Consisting of 500 stocks, it is the least likely to be distorted by individual stocks or sectors. The SPX is also on a long-term sell signal, but the intermediate-term signal is a buy. It has managed to break above the declining tops line, but is struggling the resistance of the 200-EMA and, as I write this, it is making a strong effort to break down again. http://www.decisionpoint.com/ChartSpotliteFiles/080606_3mark-2.gif
The NDX presents the most positive picture of the three. It switched back to a long-term buy signal about three weeks ago, and it has a nice profit on an intermediate-term buy signal. While I will treat the NDX strength at face value, I will also acknowledge that it is the odd-ball. http://www.decisionpoint.com/ChartSpotliteFiles/080606_3mark-4.gif
Bottom Line: Rather than being in agreement, the three major indexes we follow present different pictures. The DJIA and SPX present similar pictures, but one is negative and the other is still slightly positive. The NDX, on the other hand, is strongly positive. Will it lead the rest of the market higher? I have my doubts. The problem the market faces at this time is that the rally from the March lows is in the process of being corrected, a process that will probably take several more weeks. The DJIA has already succumbed and turned negative, and the SPX is not far behind. And while the NDX has rallied faster than the broad market, it will probably move faster in reverse, turning negative in the end. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080606_3mark-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
It's Still a Bear & The Oil Bubble
by Carl Swenlin
June 20, 2008 Discussions about the price of oil are in the news every day, but my observation is that, for the most part, these discussions serve only to confuse the public more. Most popular are the conspiracy theories, blaming the high prices on shadowy behind-the-scenes manipulators. These theories have one purpose, which is to keep the public stirred up and in the dark. (Remember how mushrooms are grown.) Most people don't understand the futures market at all. I am by no means an expert, but I have gleaned enough information recently that I think I can enlighten some of my readers. Futures markets exist primarily to serve the producers and consumers of commodities, who use futures contracts to hedge future prices of a given commodity. The producer wants to lock in a price that will ensure he covers his costs and makes a good profit. The consumer wants the same thing, and the object of both is to facilitate their business planning by having advance knowledge for what the price of the commodity will be when it is delivered in the future. Those evil speculators, are actually necessary participants in the market who serve the purpose of market makers, and they take risks to do it. While fundamentals play an important role in futures prices, human emotions are also a big part of the mix. Occasionally, like now, irrationality rules the day and a price bubble forms. The easiest way to tell that a bubble exists is to check the monthly-based chart for a parabolic formation. This is were prices move higher in an accelerating curve that eventually becomes vertical. On the chart below, you can see that this is the case with crude oil. This is a sure sign that prices are no longer connected to reality. You will notice that just eighteen months ago oil was at $50/bbl. Now it is nearly three times that price. Have fundamentals changed so radically during that time? Of course not. The same kind of irrationally is at work in the oil market as we currently have in the housing bubble, and as we had in stocks in 2000. http://www.decisionpoint.com/ChartSpotliteFiles/080620_oil-1.gif
The expansion in the number of oil mutual funds and ETFs has also placed a lot of demand for oil futures contracts. While this has helped drive prices higher, remember, it is a two-way street. When the parabolic finally breaks, there will be a stampede for the exits. I can't guess how high oil prices will go, but eventually there will be a catalyst of some sort, and prices will fall almost vertically, quickly bringing oil prices back in to the realm of reality. The most obvious catalyst would be if congress lifted the ban on domestic drilling. While that doesn't sound likely now, the rising price of gasoline may eventually turn the screws enough to change some minds. * * * As for the stock market, the bear market clearly remains in effect. Our long-term sell signal has never wavered during the recent rally, but there were certainly plenty of plenty of positive signs (see my June 6 article) that suggested the bulls were about to take charge. One of the strongest signs was the price breakout above the declining tops line drawn from the bull market top. Obviously, this was a fakeout because prices failed to remain above support and are now headed for a retest of the March lows. Fakeout breakouts are common in bear markets -- I have identified two that occurred in 2001-2002. http://www.decisionpoint.com/ChartSpotliteFiles/080620_oil-2.gif
The next chart shows our primary intermediate-term price, breadth, and volume indicators, which we use to determine the condition of the market. All are becoming oversold, but not so much so that there isn't room for further price decline. And, remember, in a bear market oversold conditions can mark the threshold for further price declines. http://www.decisionpoint.com/ChartSpotliteFiles/080620_oil-4.gif
Bottom Line: Current high oil prices cannot and will not be sustained. Bubbles eventually burst, destroying all the foolish logic that said that prices would never go down again. I personally believe that, if congress lifts the drilling ban, oil prices will drop by about 50% within a few months of that action. The stock market's bullish breakout has failed and prices are headed for a retest of the March lows. Bear market rules apply! We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080620_oil-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Very Dangerous Market
by Carl Swenlin
July 3, 2008 A bullish take on the stock market would be that (1) market indicators are very oversold, (2) there is a triple bottom setup on the S&P 100 Index, and (3) sentiment polls show a lot of bearishness. I agree that those conditions exist, but we are in a bear market and these conditions can easily see price movement transition into a crash. The reason, as I have said many times before, is that bullish setups don't always work so well in bear markets, and an oversold market can very quickly become significantly more oversold. Let me be clear, I am not predicting a crash. If the market does crash, I will not claim to have "called" it, because that is not what I am trying to do. I want my readers to be aware of the danger and not try to pick the exact bottom of this decline. That bottom could be very far away. Our first chart contains three indicators (one each for price, breadth, and volume), and you can see that they are all very oversold. You can also see the triple bottom setup. This oversold condition is repeated on most of our other indicator charts. http://www.decisionpoint.com/ChartSpotliteFiles/080703_danger-1.gif
The next chart looks more closely at how prices have been behaving in response to short-term oversold conditions. Note how during the recent decline that oversold indicator readings have not resulted in anything but tiny advances that were quickly followed by continued price declines. This is typical bear market behavior, and it implies that medium-term oversold readings may be just as soft. http://www.decisionpoint.com/ChartSpotliteFiles/080703_danger-2.gif
Our final chart gives us a view of just how much complacency exists, in spite of widely negative sentiment readings. The Volatility Index (VIX) is derived from prices on near-term SPX put and call options. Higher readings reflect a high level of fear among options traders, and lower readings complacency. Note the upside spikes on the VIX at the January and March lows. Now note how the VIX is currently about mid-range, even though prices are making new lows. This shows a surprising lack of fear, considering what prices are doing. (Thanks to Ike Iossif for bringing this to my attention.) http://www.decisionpoint.com/ChartSpotliteFiles/080703_danger-4.gif
Bottom Line: We are in a bear market, and it is suicide to try to take positions anticipating the next rally merely on the evidence that the market is very oversold. Conditions are such that a sharp decline could materialize at any moment. This is not a prediction -- I don't suggest placing bets on it -- just something that traders should consider. Bear markets are dangerous. Wait for solid evidence that a rally has begun before sticking your neck out. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080703_danger-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Disaster Averted, So Far
by Carl Swenlin
July 18, 2008 In my July 3 article I warned that the market was oversold, dangerous, and vulnerable to a crash. On Tuesday of this week, the S&P 500 opened down, breaking significant support, and kept moving lower. I thought to myself, "This is it. Crash in progress." Then subtle buying began, the decline was stopped in its tracks, and an advance began that lasted three days. My sense of the events was that the Crash Prevention Team had acted, but that is pure speculation about an urban myth. Certainly there were fundamental events later in the week that assisted the rally -- the president's lifting the executive prohibition of off-shore drilling, and oil prices dropping to $130 -- but the price reversal during the first hour on Tuesday seemed magical to say the least. At this point the advance has hit the overhead resistance of a declining tops line. If that is decisively penetrated, I would conclude that the rally will continue, although, there is another declining tops line dead ahead. http://www.decisionpoint.com/ChartSpotliteFiles/080718_da-1.gif
While the volume for the rally has been convincing, and medium-term indicators are very oversold, I am not so impressed with two key short-term indicators shown on the next chart. The Climactic Volume Indicator (CVI) and the UP Participation Index (PI) are where I look for evidence of an initiation climax, which would confirm that an advance is receiving broad participation from both volume and price. (An initiation climax demonstrates that the initial surge of the rally has sufficient internal strength to support and extend an apparent price reversal.) So far the CVI and PI levels are far short of the overbought levels needed to reflect that an initiation climax has occurred; although, this deficiency could be remedied next week. At any rate, I recommend keeping an eye on these indicators as (if) the rally continues. http://www.decisionpoint.com/ChartSpotliteFiles/080718_da-2.gif
Bottom Line: A crash was averted this week, and the potential for a new medium-term rally has developed. There are plenty of reasons to believe in this rally, but be advised that important short-term evidence has not yet materialized. If prices head back down for a retest, the danger meter will be redlined. If the rally does indeed continue, there will be wide-spread belief that the bear market is over. In my opinion, that conclusion will eventually be proved wrong. Participation in the rally, if it develops, should be managed on a short-term basis and on the assumption that it is only a bear market rally. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080718_da-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** NEW ELDER BOOK: SELL & SELL SHORT This is not a paid ad. Dr. Alexander Elder has been a friend of Decision Point for many years, and, when he asked me to give some coverage of his new book, Sell & Sell Short, I was happy to do it, not only because of our long relationship, but because he is one of the foremost writers and teachers in the field of trading. Sell & Sell Short gives excellent coverage on a subject that many traders shy away from. And, since we are in a bear market, the subject is especially timely. If you are an old Elder fan, my recommendation is not needed. If Elder is new to you, then I do recommend this book to you, as well as his earlier works, all of which you can find on elder.com. **** ****
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Rally Lacks Conviction
by Carl Swenlin
August 1, 2008 The rally that began nearly three weeks ago, out of the jaws of a potential crash, has become rather unimpressive in the last two weeks. As I said in my last article, the rally seemed to be contrived from the beginning, and support for the rally has faded rather than grown, as we normally see in bull market rallies. At this point (about an hour before the close on Friday), the technical chops seem to be lacking for the rally for the market to power upward to the primary declining tops line (in the area of 1375). One of the things that is lacking is volume. As you can see on the chart below, initial volume was pretty good, but recent volume is substandard. http://www.decisionpoint.com/ChartSpotliteFiles/080801_rally-1.gif
The next chart is one that always has my primary focus. The CVI (Climactic Volume Indicator) measures extreme OBV (On-Balance Volume) movement within the context of a short-term OBV envelope for each stock in the index. When a rally is launched from the deeply oversold conditions we have seen recently on virtually all our medium-term indicators, we expect to see the CVI move upwards to at least +50, and preferably to the +75 range. This kind of upward spike presents evidence of a broadly-based initiation climax, which indicates that most on the stocks in the index are participating in the new rally. As you can see, over the last several weeks, the CVI has remained in a fairly narrow range, neither getting severely overbought or severely oversold (which would be a good bottom sign in these circumstances). It is clear from the chart that CVI overbought spikes do not always result in extended rallies; however, I am certainly not confident in any rally that does not have such a spike. http://www.decisionpoint.com/ChartSpotliteFiles/080801_rally-2.gif
Finally, the chart below has three medium-term indicators -- one for price, breadth, and volume. It is typical of most of our medium-term indicators, reflecting extremely oversold conditions at the July low. While we normally expect these conditions to result in a pretty vigorous rally, so far the oversold condition is being cleared with a not very inspiring price advance. This indicates that there was not much compression associated with the oversold conditions, compression which would be needed to power prices significantly higher. Another way to say it is that there was no build up of buying pressure, even though selling pressure seemed to have become exhausted. http://www.decisionpoint.com/ChartSpotliteFiles/080801_rally-4.gif
Bottom Line: If we keep the fact that we are in a bear market foremost in our mind, it will help us maintain our guard, and temper our enthusiasm for positive market action. If the rally continues, more buy signals will be generated by our primary timing model, but I suspect that these will result in whipsaw. Long positions should be managed on a short-term basis. We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080801_rally-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** NEW ELDER BOOK: SELL & SELL SHORT This is not a paid ad. Dr. Alexander Elder has been a friend of Decision Point for many years, and, when he asked me to give some coverage of his new book, Sell & Sell Short, I was happy to do it, not only because of our long relationship, but because he is one of the foremost writers and teachers in the field of trading. Sell & Sell Short gives excellent coverage on a subject that many traders shy away from. And, since we are in a bear market, the subject is especially timely. If you are an old Elder fan, my recommendation is not needed. If Elder is new to you, then I do recommend this book to you, as well as his earlier works, all of which you can find on elder.com.
Ascending Wedge Implies Correction Imminent
by Carl Swenlin
August 15, 2008 The rally that began off the July lows has not demonstrated the kind of strength we normally expect from the deeply oversold conditions that were present at its beginning. Instead, the meager price advance has served only relieve oversold compression and advance internal indicators to moderately overbought levels. In the process, as the chart shows, the price pattern has morphed into an ascending wedge formation, a bearish formation that usually breaks to the downside. Since we are in a bear market (the primary trend is down), odds of the negative outcome are increased. http://www.decisionpoint.com/ChartSpotliteFiles/080815_wedge-1.gif
The next chart shows our On-Balance Volume (OBV) Indicator Set. The Climactic Volume Indicator (CVI) measures extreme OBV movement within the context of a short-term OBV envelope for each stock in the index. The Short-Term Volume Oscillator (STVO) is a 5-day moving average of the CVI. The Volume Trend Oscillator (VTO) summarizes rising and falling OBV trends. These charts tell us if the index is overbought or oversold based upon volume in three different time frames. All three are giving us useful information at present. The CVI shows that upside volume climaxes have been quite mediocre, certainly well below the levels that we see when significant rallies are launched. The STVO and VTO show that the oversold conditions that existed at the July low have been cleared, and that the market is beginning to become overbought. With overbought internals and a bearish chart formation, we should be expecting a correction very soon. http://www.decisionpoint.com/ChartSpotliteFiles/080815_wedge-2.gif
A correction would not necessarily be a bad thing. The July low needs to be retested on a medium-term basis, and a successful retest would set up a broad double bottom, suitable to support a decent rally; however, in my estimation, prices will need to go a lot lower than they were in July before internals will be sufficiently oversold to fuel a healthy advance. A bullish take on current conditions would emphasize that the subject ascending wedge is a short-term condition, and any downside resolution is likely to be short-term as well, meaning that a very short correction could result in a higher low that keeps the rising trend intact, albeit at a less accelerated angle. There could even be an upside breakout from the formation, but that is a long shot. Bottom Line: While our trend-following model has us on an intermediate-term buy signal, my opinion is that we should expect a correction which, at the very least, will retest the July lows. Since we are in a bear market, there is also a strong possibility that any correction could be the start of the next leg down. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080815_wedge-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** NEW ELDER BOOK: SELL & SELL SHORT This is not a paid ad. Dr. Alexander Elder has been a friend of Decision Point for many years, and, when he asked me to give some coverage of his new book, Sell & Sell Short, I was happy to do it, not only because of our long relationship, but because he is one of the foremost writers and teachers in the field of trading. Sell & Sell Short gives excellent coverage on a subject that many traders shy away from. And, since we are in a bear market, the subject is especially timely. If you are an old Elder fan, my recommendation is not needed. If Elder is new to you, then I do recommend this book to you, as well as his earlier works, all of which you can find on elder.com. **** ****
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Breakdown Points to Lower Prices
by Carl Swenlin
September 5, 2008 On August 15 I wrote an article pointing out that an ascending wedge had formed on the S&P 500 chart. I noted that this is a bearish formation, and that the most likely resolution would be a breakdown from the wedge followed by a price correction. The breakdown did in fact occur two days after I made my comments, but the correction did not immediately follow. Instead prices moved sideways for about two weeks before finally breaking down again on Thursday, belatedly fulfilling the expectation of a correction. Now we must ask if this is the beginning of a deeper correction or if it will merely end as a successful retest of the July lows. The first evidence to consider is that we are still firmly in a bear market, and the down trend is clearly visible on the chart below. Another worrisome sign is that the PMO (Price Momentum Oscillator) has topped below the zero line, which should always be viewed with apprehension, particularly when it occurs at the end of a rally. http://www.decisionpoint.com/ChartSpotliteFiles/080905_break-1.gif
The next chart shows our On-Balance Volume (OBV) Indicator Set. The Climactic Volume Indicator (CVI) measures extreme OBV movement within the context of a short-term OBV envelope for each stock in the index. The Short-Term Volume Oscillator (STVO) is a 5-day moving average of the CVI. The Volume Trend Oscillator (VTO) summarizes rising and falling OBV trends. These charts tell us if the index is overbought or oversold based upon volume in three different time frames. All three are giving us useful information at present. The CVI recently hit a climactic top just before the price break forced a climactic CVI low. Since this CVI low occurred in conjunction with a price trend change, I assume that it is an initiation climax that will lead prices lower. The STVO supports this conclusion because it is topping in overbought territory. The VTO, is not particularly overbought, but you can see that it is topping at the same level as it did at previous price tops. http://www.decisionpoint.com/ChartSpotliteFiles/080905_break-2.gif
It is also worth mentioning that September is historically one of the worst months of the year, and the market is entering this dangerous period in a very weak condition. A crash is not out of the question, although, that is not a prediction, just a caution to not get too anxious to pick a bottom. Bottom Line: While positive outcomes can and do happen during bear markets, the odds are strongly against them. Another decline has emerged out of a short, weak rally, and I think that a continued decline is more likely than a simple retest of the July lows. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080905_break-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** NEW ELDER BOOK: SELL & SELL SHORT This is not a paid ad. Dr. Alexander Elder has been a friend of Decision Point for many years, and, when he asked me to give some coverage of his new book, Sell & Sell Short, I was happy to do it, not only because of our long relationship, but because he is one of the foremost writers and teachers in the field of trading. Sell & Sell Short gives excellent coverage on a subject that many traders shy away from. And, since we are in a bear market, the subject is especially timely. If you are an old Elder fan, my recommendation is not needed. If Elder is new to you, then I do recommend this book to you, as well as his earlier works, all of which you can find on elder.com. **** ****
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Finally A Bottom?
by Carl Swenlin
September 19, 2008 In my September 5 article I said that I thought is more likely that we would see a continued decline, rather than a retest of the July lows. This week the market blew out the July lows and was very near to crashing on Thursday. Then prices blasted up out of the lows in a dramatic upside reversal. There was good follow through on Friday, and now we must ponder if a significant bottom has been made. With historic levels of fundamental turmoil in the financial markets, and unbelievable volatility in prices, it is extremely difficult to keep a level head and keep focused on technical basics. I am reminded of my flying days and the primary directives for emergency procedures. - Maintain aircraft control (don't panic and crash for no good reason). - Analyze the situation, and take corrective action. I have always thought of these rules as being appropriate for handling all of life's problems, and they especially apply to the current problems in the stock market. No matter what your current situation, you can't go back and start over. You are stuck with what you've got, so do your best to work through it. Getting back to the charts, we can see below that prices are still in a long-term declining trend channel, which currently defines the bear market. The rally is approaching a declining tops line, and it will probably penetrate that resistance and head higher, possibly to test the bear market declining tops line. The most interesting feature is the positive divergence between the PMO and the price index -- while price made a lower low, the PMO made a higher low. http://www.decisionpoint.com/ChartSpotliteFiles/080919_bottom-1.gif
There are also positive divergences on our primary breadth and volume indicators shown on the next chart. These positive divergences are bullish. http://www.decisionpoint.com/ChartSpotliteFiles/080919_bottom-2.gif
Our indicators and price action suggest strongly that we are beginning a rally that should last at least a couple of weeks. I also think that this week's deep low needs to be retested, and I am not convinced that a retest will be successful. My cycle work projects that a 9-Month Cycle low is due at the end of October -- about the time a retest would take place -- and cycle forces could take us to a new price low. It is worth mentioning that the unprecedented avalanche of failures and bailouts is likely to get worse before it gets better, and we must wonder if a meltdown is over the horizon. Bottom Line: While we continued to be buffeted by one crisis after another, the best thing we can do is "stay on instruments" (keep our eyes on the charts). At present, the charts say the rally is likely to continue, albeit not at the current rate of climb. At the end of the day, we are still in a bear market, and we should expect that the rally will fail before prices can break out of the major declining trend channel. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/080919_bottom-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Buying Opportunity?
by Carl Swenlin
October 3, 2008 In my September 19 article I said: "Our indicators and price action suggest strongly that we are beginning a rally that should last at least a couple of weeks. I also think that this week's deep low needs to be retested, and I am not convinced that a retest will be successful." As it turned out, there was no rally and the expected retest and failure encompassed one of the worst one-day declines in history. From top to bottom the S&P 500 Index has dropped nearly 30%, but as usual we can't turn on financial news without hearing somebody assert that this is now the "buying opportunity of a lifetime". I wish it were, but in my opinion it is not. For it to be that great a buying opportunity stocks would have to have extraordinary fundamental value, and that kind of condition has not existed for over 20 years. Based upon 2008 Q2 GAAP earnings the P/E of the S&P 500 is about 21, which puts it slightly above the normal P/E range of 10 to 20, meaning that stocks are very overvalued (the exact opposite of being a bargain). To demonstrate, the chart below displays the S&P 500 in relation to its normal P/E range going back to 1925. The S&P 500 is the heavy black line, the red line shows where the S&P 500 would be if it had a P/E of 20 (overvalued), the blue line is if the P/E were 15 (fair value), and the green line represents a P/E of 10 (undervalued). I have applied red arrows to identify the periods where stocks were truly undervalued, sometimes mouth-wateringly so -- truly buying opportunities of a lifetime. As you can see, current prices are very overvalued, and possibly near the selling opportunity of a lifetime. To those who think this is the time to buy, I must ask, based upon what? Clearly, prices can rise even when stocks are overvalued, but current economic fundamentals makes that outcome a long shot. http://www.decisionpoint.com/ChartSpotliteFiles/081003_value-1.gif
As for our market outlook, the next chart puts the decline in perspective. Prices are deeply oversold, as are many of our technical indicators, so it is reasonable to expect a rally to clear this condition; however, we are in a bear market, and I have no reason to believe that the recent lows are the final bear market lows. There is a 9-Month Cycle trough due around October 22, and it is possible that it arrived early at the recent lows. Otherwise, we should probably look for a bounce followed by a retest of the lows in late-October. http://www.decisionpoint.com/ChartSpotliteFiles/081003_value-2.gif
My view of the financial crisis is that it is going to last a long time, and that there will be no easy fix, even if we had some really smart people trying to solve the problem, which we do not. Three weeks ago most congress persons had no more awareness of the problems we are facing than the man on the street. How much confidence do you have that the very people who caused the problem are suddenly going to become smart enough to fix it? In my opinion, they are only going to make it worse. Bottom Line: Stocks are way overvalued and the economic outlook is dismal. The only long exposure that should be considered is on a short-term basis when the inevitable bear market rallies occur. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081003_value-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Very Oversold Market
by Carl Swenlin
October 17, 2008 To say that the market is very oversold is not exactly breaking news because it has been oversold for at least a few weeks; however, the oversold condition has been steadily getting worse over that time, and we have perhaps reached the limit of how oversold the indicators will get without the market taking some time to clear the condition. Keep in mind that the condition can be cleared if the market merely drifts sideways while indicators drift higher toward neutral territory, but, considering the kind of volatility we have been experiencing, it seems that a rally is more likely. Let's look at the chart below, which has some major points of interest. First, the PMO (Price Momentum Oscillator) and the Percentage of Stocks Above Their 200-EMA have reached their lowest points since the July 2002, which was the beginning of the end of the 2000-2002 Bear Market. Note that it took nearly nine months for this bottoming process to take place in the form of a triple bottom. Also, current prices have dropped into the support zone provided by that previous bear market bottom. This all looks like a pretty good setup for at least a bear market rally of some substance. The first thing that has to happen is a rally the lasts more than two days, and we need to see if the bottom will be a "V" spike or a double bottom with at least several weeks between each bottom. The latter would be preferable because, the more work put into the bottom, the longer the rally is likely to last. A "V" bottom would beg for a retest. http://www.decisionpoint.com/ChartSpotliteFiles/081017_os-1.gif
Any rally that begins now should be viewed and played as a short-term event, because we have seen how quickly they have been running out of steam. The first indication that a rally may develop into something longer term will be if the Thrust/Trend Model generates a buy signal. On the chart below I have highlighted the two components of the T/TM that we need to watch -- the PMO (Price Momentum Oscillator) and the Percent Buy Index (PBI). When both these indicators have passed up through their moving averages, a new buy signal will be generated. Even though this is a medium-term signal, it should also be worked as a short-term event, because of the whipsaw we have experienced during this bear market. (The rally last long enough to trigger a buy signal, then fails.) http://www.decisionpoint.com/ChartSpotliteFiles/081017_os-2.gif
Finally, I am compelled to show you a chart of the 9-Month Cycles. My current projection for the next cycle low is October 22. As you can see, it is highly likely that the cycle low is already in as of last week, although we can never be sure except in hindsight. Nevertheless, the cycle chart is one more piece of evidence that we could be getting a sustainable rally at any time. http://www.decisionpoint.com/ChartSpotliteFiles/081017_os-4.gif
Bottom Line: The market is extremely oversold, and we have plenty of evidence that a rally is due. I do not for one minute believe the bear market is over, but it does not seem reasonable that the vertical descent will continue unabated. Reasonable? Perhaps that is not the best word to use in these circumstances. Let's just say that the technicals are screaming for a good sized bounce. Having said that, I will leave you with a reminder that we are playing by bear market rules. Oversold conditions are extremely dangerous and do not always present opportunities on the long side. Be careful! We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081017_os-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Chasing Gold
by Carl Swenlin
October 24, 2008 When stocks started falling out of the sky, there were many analysts who urged people to buy gold. While this seemed to be good advice for about one or two weeks, gold's longer-term problems reasserted themselves, and prices began falling once again. The longer-term problems can be clearly seen on the chart below. Like many commodities, gold had been rising in a parabolic pattern that had become near-vertical, and parabolic rises almost always end in grief. As you can see, gold has already violated the top two rising trend lines, and is almost certainly headed for much lower prices. I do not rule out $300 as a downside target. http://www.decisionpoint.com/ChartSpotliteFiles/081024_gold-1.gif
When so many were recommending gold during the initial market panic, a look at the gold charts would have provided sufficient evidence to prevent acting in haste. The next chart, which we just added to our "Gold Sentiment" page, can also help to alert you to when sentiment in gold is getting too bullish. Central Gold Trust (GTU) is a closed-end mutual fund, which means that it trades like a stock on the NYSE. The fund owns only gold -- the metal, not stocks. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding gold. Note how recently people were paying a premium of over 20% for GTU. That means that for the share price and the NAV to become equal, the price of gold had to rise 20% or GTU shares had to drop about 20%. Unfortunately, as you can see, it was the latter scenario that evolved. Combined with a drop in the price of gold, GTU shares dropped about 29% to bring the share price and NAV back to parity. It is certain that many who buy GTU do not understand the basic principals at work on the price, and that buying when the premium is high is not such a great idea. http://www.decisionpoint.com/ChartSpotliteFiles/081024_gold-2.gif
* * * A quick look at the stock market shows that we are going nowhere in an interesting way; however, that is not likely to continue, because a descending triangle pattern has evolved and a breakout or breakdown should be forced soon. Last week I said that the market was very oversold and that a sustained rally was likely. The fact that this hasn't happened yet is bad news. The fact that the October 10 lows have not been violated is good news, but that support forms the bottom of the triangle, and the technical expectation is that prices will break down through that support. (The horizontal side of the triangle is the weakest.) http://www.decisionpoint.com/ChartSpotliteFiles/081024_gold-4.gif
Bottom Line: A few weeks ago I stated that I was not predicting deflation, but I see now I was not thinking clearly (at all?). We are already experiencing severe deflation in stocks, housing, and commodities. What more evidence do we need that deflation is the dominating force in the economy? The oversold market conditions make it unwise to open short positions, but it is also a bad idea to position for a rally before prices break higher in a convincing way (whatever that means). In any case, if we get a good bottom around here, I will assert that it most assuredly is not the end of the bear market. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081024_gold-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Changing With The Market
by Carl Swenlin
October 31, 2008 When the market changes, we must change our tactics, strategies, and analysis techniques to accommodate the new market conditions. This is not a new idea, but it is one that is not very widely recognized, particularly when applied to the long-term. In recent writings I have emphasized that we are in a bear market, and that we must play by bear market rules. Overbought conditions will usually signal a price tops, and oversold conditions can often see prices slip lower to even more oversold conditions. When making these comments, my focus has been on the cyclical bull and bear markets. What I want to address in this article are the secular forces of which we must be aware. On the chart below I have identified the five secular trends that have occurred in the last 80-plus years. First is the 1929-1932 Bear Market, which, although it was short, saw the market decline 90%. Next was a secular bull market that lasted from 1932 to 1966, which overlaps with the consolidation of the 1960s an 1970s. In the early 1980s another secular bull market began which peaked in 2000 (basis the S&P 500). Finally, we seem to have entered another consolidation phase that could last another 10 to 15 years. http://www.decisionpoint.com/ChartSpotliteFiles/081031_lt-1.gif
I began my market studies in the early 1980s, before the big bull market took off, and I learned from the guys who learned all they knew from the market action of the 1960s and 1970s. Applying those rules to the new bull market was confusing, frustrating, and unprofitable. While I didn't participate in those markets, it is easy to imagine the bewilderment of those who, educated in the bull market of the 1920s, took the elevator all the way down to the basement starting in 1929. The long bull market after the 1932 bottom was missed by most of those traumatized by the crash, but it trained a whole new group of analysts who learned that the market always goes up . . . until everything they knew was proven wrong by a 20-year consolidation. Finally, the battle cry of the 1980s and 1990s bull, "this time it's different," was learned well by those who ultimately ate the 50% decline of 2000-2002. Unfortunately, it takes time to unlearn the lessons of the heady 1980s and 1990s, and we can still observe people using bogus valuation models that only work in bull markets. We still see people trying to pick bottoms, and we still see people who think that a stock is under valued because it is down 70%. By the time this current secular market phase is over, people will have learned all new rules, that will not apply to the next 20 years. Whether or not I have correctly identified the current secular market phase as a consolidation remains to be seen, but I am certain that we are no longer operating on the rules of the last secular bull market. * * * Since last week the stock market has made a little progress toward putting in a bottom by breaking out of the descending triangle formation. Unfortunately, volume associated with this move has been tepid, and there has not been any follow through. This tells me that advances are primarily being driven by short covering, and that investors are still fearful and on the sidelines. Maybe a bottom is forming, but I'm not willing to assert that with any confidence. http://www.decisionpoint.com/ChartSpotliteFiles/081031_lt-2.gif
Bottom Line: The secular forces driving the market change from generation to generation, and it behooves us to be aware of when changes in these secular forces have taken place, and when it's no longer your father's stock market. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081031_lt-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Bottom or Continuation Pattern?
by Carl Swenlin
November 7, 2008 There has been, and continues to be, considerable speculation regarding whether or not the market is forming an important bottom. It is still possible that bottom formation is taking place, but I am beginning to see evidence that maybe it is a continuation pattern instead. A continuation pattern is a consolidation phase that takes place before the market "continues" in the direction it was headed before the consolidation began. In this case the direction is down. The S&P 500 rallied over 26% from the October low to the high that occurred a mere three days later. An initial impulse of that magnitude should have resulted in prices moving higher after a short pull back; however, nearly all that gain was given back within two days and the sideways trading range began to evolve. The trading range is about 20% wide. http://www.decisionpoint.com/ChartSpotliteFiles/081107_cp-1.gif
Another problem I am seeing on the chart below (and in other medium-term indicators) is that the sideways churning is helping to clear the severe oversold conditions that should have helped fuel prices moving higher. In other words, the implied internal compression of oversold readings is being absorbed by the churning rather than being applied to driving a rally. More bad news, while the indicators are still well below the zero line, the bear market has depressed the overbought side of the range to the extent that the current readings should be considered neutral, not oversold, and, as the indicators approach the zero line, they will be overbought again. http://www.decisionpoint.com/ChartSpotliteFiles/081107_cp-2.gif
A problem that the 20% trading range has caused is some whipsaw in our mechanical models, so some discretionary analysis and decision making need to be applied. For example, a buy signal was generated for the Financial SPDR (XLF) on November 4. On November 6 it switched back to sell, and a reader asked me how to evaluate the signals in order to avoid the whipsaw. In most cases, reference to the Straight Shots menu would be appropriate. There we have links to a unique set of indicator charts for each of the 25 indexes and sectors we track, so that you can see precisely what the technicals are for that specific index. In the case of XLF we can see on the chart below that one set of short-term indicators derived from that index were very overbought on the day the buy signal was generated. During a bear market, when overbought conditions exist, it is the least favorable time to open long positions. http://www.decisionpoint.com/ChartSpotliteFiles/081107_cp-4.gif
Bottom Line: The bottom of the market's consolidation range has not been violated yet, so it is still possible that prices may break to the upside; however, if my conclusion that we are seeing a continuation pattern is correct, the technical expectation is that prices will eventually break to the downside. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081107_cp-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association
Rydex Ratios Diverge
by Carl Swenlin
November 14, 2008 Decision Point charts a couple of indicators that are useful in determining investor sentiment based on actual deployment of cash into Rydex mutual funds. The Rydex Asset Ratio is calculated by dividing total assets in Bear plus Money Market funds by total assets in Bull funds. The Rydex Cash Flow Ratio is calculated by dividing Cumulative Cash Flow into Bear plus Money Market funds by Cumulative Cash Flow into Bull funds. (A thorough discussion of these ratios can be found in the Glossary section of our website.) When total assets in a given fund increase/decrease, the cause is an advance or decline in the fund's shares; however, there is also a component of the amount of cash moving into and out of the fund. This is why we have the two indicators. On the Assets Ratio chart below, we can see that the Ratio is deeply oversold, implying that sentiment is very bearish, and that an important price bottom is being formed. This oversold reading is a direct result of the severe market decline depressing bull fund prices and inflating bear fund prices. The next chart shows a completely different picture. http://www.decisionpoint.com/ChartSpotliteFiles/081114_rr-1.gif
While the Asset Ratio is oversold and bullish, the Cash Flow Ratio below is overbought and bearish. It is telling us that investors are quite bullish, and that a decline should be expected. That the two Ratios have diverged so severely is a very unusual situation, so let's take a closer look at what happened. http://www.decisionpoint.com/ChartSpotliteFiles/081114_rr-2.gif
The next chart shows that, when the market began to consolidate, cash flowed out of bear funds and into bull funds. I can think of no other reason except that Rydex investors were anticipating a rally and trying to pick a bottom. This is bearish. I should emphasize, however, that the Ratios reflect the activity of a relatively small percentage of total market participants. Nevertheless, these indicators have a good performance record and are useful tools. http://www.decisionpoint.com/ChartSpotliteFiles/081114_rr-4.gif
Bottom Line: The current divergence of the Rydex Ratios leaves us in a predicament as to which we should believe. In my opinion, the Cash Flow Ratio shows what is happening beneath the surface of asset totals, and it should be the first to be believed. The market is still struggling with the trading range I discussed in my November 7 article. I have not changed my outlook regarding how that situation will resolve. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081114_rr-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Be Wary of New Buy Signals
by Carl Swenlin
November 21, 2008 The Thrust/Trend Model (T/TM) is on a sell signal for nearly all of the indexes and sectors tracked in the Decision Point Alert Daily Report, but when a rally begins, the T/TM will begin generating buy signals pretty quickly. Nevertheless, because of the extreme market activity we are experiencing, I want to urge those who follow and act on these mechanical signals to apply a little discretionary analysis to new buy signals that emerge. A new buy signal will be generated when the two thrust components of the T/TM cross up through their moving averages. The PMO (Price Momentum Oscillator) responds more quickly to price movement, and is usually the first component to experience the upside crossover. The PBI (Percent Buy Index) moves more slowly and is designed to keep the T/TM from reacting too quickly. Note on the chart below how it prevented a buy signal at the beginning of November, a most fortunate circumstance. Unfortunately, the PBI has a finite range (zero to 100). This is normally not a problem, but prices have been beaten down so far that most PBIs are hovering near the low end of the range. Assuming that severe selling pressure continues and PBIs stay near zero, the 32-EMA will continue to drift lower until it intercepts the PBI. At that point it will only require a minor upward twitch of the PBI to generate a buy signal (assuming that the PMO is above its 10-EMA). I would be reluctant to act on such a signal unless there was other confirming evidence. The strongest buy signal is when the PBI moves smartly upward. http://www.decisionpoint.com/ChartSpotliteFiles/081121_bs-1.gif
While we scrutinize the T/TM on one hand, the more immediate problem is that the selling pressure has not abated in the least, and we wonder where the market may finally find support. The next chart shows that the S&P 500 has broken the major support of the 2002 lows. It is not too late for that support to assert itself, but assuming that the failure is permanent, the next obvious support I see is at 600 and 480. From a fundamental standpoint these targets do not seem unreasonable. Based upon S&P 500 Q3 GAAP earnings (96% of companies reporting) the P/E is 16.3. For the S&P 500 to have an undervalued P/E of 10, prices would have to drop to 514. http://www.decisionpoint.com/ChartSpotliteFiles/081121_bs-2.gif
Bottom Line: Extreme selling pressures are causing our T/TM to become more sensitive to rallies than we would like. Beware of new buy signals that are not driven by strong price moves. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081121_bs-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Bullish Descending Wedge Forms
by Carl Swenlin
December 5, 2008 In my November 7 article I featured an horizontal trading range (continuation pattern), and asserted that a breakdown from that pattern would signal another leg down. There was, in fact, a breakdown, but it was a bear trap, and prices quickly reversed upward back into the trading range. Price action since has caused the chart pattern to morph into a descending wedge pattern, which is bullish and implies that an upside breakout would provide the start for a new up trend. I want to emphasize that, while an upside breakout is expected from the wedge, it only has short-term implications. Nevertheless, we do have a fair to good setup to get the ball rolling for a sustained rally. http://www.decisionpoint.com/ChartSpotliteFiles/081205_wedge-1.gif
There are, however, things not to like in the technical picture. First, volume has been weak, although, we can write that off to holiday trading volume, which is always low. The other problem is that important short-term indicators (shown below) are quite overbought. Note that the CVI and STVO are both at overbought levels that typically accompany price tops in a bear market. If prices are able to overcome this internal drag, it would be a very bullish sign. While bear market forces weigh heavily against this outcome, some bullish outcomes are inevitable. This may be one. http://www.decisionpoint.com/ChartSpotliteFiles/081205_wedge-2.gif
Bottom Line: We are deep into one of the worst bear markets in history, but bear market rallies are usual and to be expected. An upside breakout from the current descending wedge chart pattern may provide the trigger that starts a new rally; however, I do not believe that the November low will be the final low for the bear market. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081205_wedge-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Time Running Out On Rally
by Carl Swenlin
December 12, 2008 Last week we looked at a descending wedge pattern on the S&P 500 chart that could have sparked a rally had it resolved to the upside. Prices actually did break upward, but volume was poor, and the up move stalled immediately. Now there is an ascending wedge pattern inside a declining trend channel. The technical expectation is for the wedge to resolve to the downside, but I should emphasize that it would only have short-term implications. http://www.decisionpoint.com/ChartSpotliteFiles/081212_time-1.gif
I am becoming more concerned with the medium-term prospects for the stock market. In late-October the market became extremely oversold by virtually every measure. This was a signal for us to start looking for an important rally. Since then, the oversold readings have been getting worked off as the market has been grinding sideways and lower. As you can see on the chart below, three of our medium-term indicators for price, breadth, and volume have been moving up and are relatively overbought (relative to their recent trading ranges). http://www.decisionpoint.com/ChartSpotliteFiles/081212_time-2.gif
On the chart of our OBV suite of indicators below, note that the medium-term VTO (bottom panel) is at overbought levels. The short-term CVI and STVO have also peaked in overbought territory. http://www.decisionpoint.com/ChartSpotliteFiles/081212_time-4.gif
Bottom Line: There has been a small rally out of the November lows, but volume has been weak. Deeply oversold readings have so far failed to deliver a rally of the strength and duration we would normally expect, and, with internals now becoming overbought, time is running out. The problem, I suspect, is that the only buyers are nervous short sellers. Once the shorts have covered, new buyers needed to continue the rally fail to materialize because nobody wants to buy this market. It is possible that a bailout of the auto industry will provide a momentary jolt that can suck new buyers into the market; however, I would keep in mind that there is not going to be any quick, easy, and painless way out of this economic mess we've gotten ourselves into. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/081212_time-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
How Overbought Is It?
by Carl Swenlin
January 2, 2009 For the last few weeks the stock market has been drifting higher on low volume, and there is no doubt in my mind that the Fed/Treasury has been the invisible hand that has quickly moved in to squelch any selling that started. Under these conditions, I find it difficult to draw any solid conclusions from indicators that have been fed a diet of questionable market activity. Nevertheless, we must work with the information we have and accept it at face value until more normal market action increases our confidence in our conclusions. Looking at the chart below we can see pretty much all there is to see in the medium-term picture. Breadth and volume indicators are clearly in the overbought side of the trading range. Based upon the range we have seen during the bear market, internals are very overbought, but, relative to the normal indicator ranges, the indicators have a long way to go up if the rally continues. The PMO (Price Momentum Oscillator) is still below the zero line, but it is recovering from the lowest reading since the 1987 Crash, and, relatively speaking, it too is overbought. However, there is still plenty of room before a continued rally will move the PMO to normal overbought levels. Looking at the price index, we can see the S&P 500 is coming out of a "V" bottom, and there is plenty of room for it to rally before it hits serious overhead resistance. A rally up to that resisitance would convince most people that the bear market was over, but it wouldn't be. And by then the market would be seriously overbought by any standard. http://www.decisionpoint.com/ChartSpotliteFiles/090102_ob-1.gif
In the short-term the market is very overbought, as demonstrated by the CVI (Climactic Volume Indicator) chart below; however, CVI readings this high can also be an initial impulse that initiates a rally. http://www.decisionpoint.com/ChartSpotliteFiles/090102_ob-2.gif
Bottom Line: By bear market standards the market is overbought and due for a correction, but there is plenty of room for prices and indicators to expand upward. The low volume associated with the rally dampens my enthusiasm for the positive signs that exist, and I wonder if investors are ready to forget the fear that has been generated by the severe beating they have been dealt by the economy and falling markets. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/090102_ob-3.gif
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Gold Showing Strength
by Carl Swenlin
January 9, 2009 All things being equal, the price of gold will move in the opposite direction of the dollar by the same percentage. In other words, when the dollar rises, the price of gold will decline, and vice versa. To clarify, fluctuations in the price of gold do not affect the dollar. However, the condition of "all things being equal", does not always exist. Gold can be trading with an intrinsic strength or weakness that is not easily visible at first glance. To help detect such conditions, we can use the GolDollar Index. GolDollar Index was invented by Tom McClellan (www.mcoscillator.com), and is calculated by multiplying the price of gold by the U.S. Dollar Index. (We divide the result by 10 to keep the numbers from getting too big.) Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold. On the chart below we can see that the dollar has rallied strongly, and the price of gold has drifted downward in response, but it doesn't appear to be a reciprocal move. By looking at the GolDollar Index, we can see that it has been moving sideways, clearly illustrating that gold has been bucking the trend of the dollar, indicating that sentiment for gold is very bullish. http://www.decisionpoint.com/ChartSpotliteFiles/090109_gold-1.png
Another gold sentiment indicator is Central Gold Trust (GTU). It is a closed-end mutual fund, which means that it trades like a stock on the NYSE. The fund owns only gold -- the metal, not stocks. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding gold. As you can see, demand for GTU has reached irrational levels, with buyers willing to pay a premium of as much as 25%. That's nutty, considering that you can buy gold or the gold ETF without paying any premium at all. It does, nevertheless, reflect the very bullish sentiment for gold that is causing the price of gold to resist the undermining effect of the dollar's strength. http://www.decisionpoint.com/ChartSpotliteFiles/090109_gold-2.png
It is not out of the question that gold could actually move higher regardless of what the dollar does. That would be highly unusual, and not something that I would normally expect, especially given the current chart picture for gold. The current intrinsic strength of gold has to do with gold being an asset that has become very attractive as the value of other assets has been evaporating. But the price of gold, like anything else, is not guaranteed not to decline, something to keep in mind when evaluating those radio and TV commercials extolling the invulnerability of gold. Bottom Line: As long as the dollar remains strong, the price of gold is most likely to decline. While there is strong bullish sentiment for gold, I expect it is only temporary, and not likely to grow to the extent that currency trends are irrelevant. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/090109_gold-3.png
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * FINAL 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #4 Bond Timer (*TD Index: 112.32) #5 Gold Timer (TD Index: 126.33) #9 Long-Term Timer Stocks (TD Index: 132.35) *All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the index indicates the gain or loss for the year. **** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Rally Failure
by Carl Swenlin
January 16, 2009 In my January 2 article I pointed out that the stock market was overbought by bear market standards, but that the rally had plenty of internal room for prices to expand upward if bullish forces were to persist. There was a brief rally and a small breakout, but then the rally failed, breaking down from an ascending wedge formation. I wasn't really expecting a bullish resolution, but one must keep an open mind when appropriate conditions appear. On the chart below you can see the short-term declining tops line through which the breakout occurred. Instead of a buying opportunity, it was a bull trap. At this point we must assume that the November low will be tested. Note also that the PMO has crossed down through its 10-EMA, generating a sell signal. http://www.decisionpoint.com/ChartSpotliteFiles/090116_rf-1.png
The weekly chart below gives a better perspective, I think. It shows how aggressive the current down move is compared to the price activity that precedes it. Also, the PMO has topped below its moving average, a bearish sign. Prices are once again approaching the long-term support drawn from the 2002 lows. A successful retest could set up a double bottom from which another intermediate-term rally could launch, but in a bear market we shouldn't bet on that outcome. http://www.decisionpoint.com/ChartSpotliteFiles/090116_rf-2.png
For many months I have been emphasizing that our analysis should be biased toward bearish outcomes because we are operating in the longer-term context of a bear market. The tide is going out and it is foolish to try to swim against it. In a much broader context, we are in the midst of a global debt collapse that is only in the beginning stages. I find it impossible to imagine economic circumstances in the immediate future that would be even remotely favorable to stocks. Bottom Line: In a bull market overbought conditions most often result in small corrections, consolidations, or deceleration of the up trend. In a bear market overbought conditions are usually a sign that a price top is at hand. Because the most recent overbought event has resulted in a price top, I think we can safely assume that the bear has not retreated. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/090116_rf-3.png
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * FINAL 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #4 Bond Timer (*TD Index: 112.32) #5 Gold Timer (TD Index: 126.33) #9 Long-Term Timer Stocks (TD Index: 132.35) *All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the index indicates the gain or loss for the year. **** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Decline In Progress
by Carl Swenlin
January 23, 2009 Since the price top earlier this month the S&P 500 Index has declined about 13%. This has generated a PMO sell signal (PMO crossing down through its 10-EMA), and caused the 20-EMA to turn back down decisively before it was able to cross up through the 50-EMA. The PMO was overbought, so the crossover indicates that there is probably more downside ahead of us. It appears that a short-term bottom is currently forming from which a short reaction rally could launch. This is a common result of PMO crossovers, and the rally normally pulls the PMO back up toward its 10-EMA. On the chart you can see a similar occurrence in September. After these brief bounces, the price decline usually continues. http://www.decisionpoint.com/ChartSpotliteFiles/090123_dec-1.png
The next chart shows how our medium-term price, breadth, and volume indicators have made overbought tops, and are now headed toward the oversold side of the range. The definite impression that I get is that there is a lot more price decline ahead of us. http://www.decisionpoint.com/ChartSpotliteFiles/090123_dec-2.png
Bottom Line: While the bulls currently appear to be putting up a pretty good fight against a further price decline, and may even be able to spark a rally, decisive tops have been established, both in price and internals. A brief rally is possible, but following that, I expect that the November lows will be challenged. **** **** **** **** **** * FINAL 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #4 Bond Timer (*TD Index: 112.32) #5 Gold Timer (TD Index: 126.33) #9 Long-Term Timer Stocks (TD Index: 132.35) *All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. **** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Decline Continues
by Carl Swenlin
January 30, 2009 Last week I wrote: "While the bulls currently appear to be putting up a pretty good fight against a further price decline, and may even be able to spark a rally, decisive tops have been established, both in price and internals. A brief rally is possible, but following that, I expect that the November lows will be challenged." Additional expectations from Last week: "It appears that a short-term bottom is currently forming from which a short reaction rally could launch. This is a common result of PMO crossovers, and the rally normally pulls the PMO back up toward its 10-EMA." So far the market has been following that scenario to a "t" (although we're still waiting for the big decline to kick in). There was a small breakout, which pulled the PMO up toward its 10-EMA. Then prices broke downward, causing the PMO to top below its 10-EMA. This is a perfect setup for a continued price decline. Please keep in mind that "perfect setup" does not mean "guaranteed result". There is still a short-term rising trend line that needs to be penetrated. http://www.decisionpoint.com/ChartSpotliteFiles/090130_dec-1.png
The next chart shows that our medium-term price, breadth, and volume indicators are still in a down trend and have plenty of distance to go down before they reach oversold levels, so the internals still allow for continued price decline in the intermediate-term. http://www.decisionpoint.com/ChartSpotliteFiles/090130_dec-2.png
Bottom Line: The market hasn't exactly been falling apart because (I believe) the Fed and/or Treasury continue to provide support buying when prices fall too freely; however, the only rallies that have materialized are driven by short-covering, and they fizzle quickly. I still believe that the November lows will be tested soon. **** **** **** **** **** * 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #4 Bond Timer (*TD Index: 112.32) #5 Gold Timer (TD Index: 126.33) #9 Long-Term Timer Stocks (TD Index: 132.35) *All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. **** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
January Forecasts A Down Year
by Carl Swenlin
February 6, 2009 Research published by Yale Hirsch in the "Trader's Almanac" shows that market performance during the month of January often predicts performance for the entire year. The "barometer" predictions since 1920 have been 79% correct (as of 12/31/2008). Up predictions were 83% correct, and down prediction were 70% correct. As usual we think you should view charts of actual market movement before making decisions based on reported average performance. For example, in 1987 the January Barometer forecast an up year. Well, it was an up year, but what a wild ride! http://www.decisionpoint.com/ChartSpotliteFiles/090206_jan-1.png
As usual we think you should view charts of actual market movement before making decisions based on reported average performance. For example, in 1987 the January Barometer forecast an up year. Well, it was an up year, but what a wild ride! On our website we have an extensive series of these charts going back to 1920. It is worth studying the charts so that you have an educated opinion of how this forecast device really works. http://www.decisionpoint.com/ChartSpotliteFiles/090206_jan-2.png
Bottom Line: The January barometer predicts that 2009 will be a down year. Regardless of what the barometer says, I think it is wishful thinking to believe that 2009 will be a winner. Consumers, which are 70% of our economy, are scared to death for their jobs. Until unemployment stops rising I think investor risk aversion will remain high. We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/090206_jan-3.png
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * http://www.decisionpoint.com/images/TimerDigestCover.png 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT #40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT #11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
**** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Earnings Are Crashing
by Carl Swenlin
February 13, 2009 The real P/E for the S&P 500 is based on "as reported" or GAAP earnings (calculated using Generally Accepted Accounting Principals), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued). Market cheerleaders invariably use "pro forma" or "operating earnings," which exclude some expenses and are deceptively optimistic. They are useless and should be ignored. The following are the most recently reported and projected twelve-month trailing (TMT) earnings and price/earnings ratios (P/Es) according to Standard and Poors. I have highlighted GAAP earnings. Note that projected earnings for 2009 Q2 are $15.90. Keep in mind that the last earnings peak of $84.92 was for 2007 Q3. That's a drop of over 80%! http://www.decisionpoint.com/ChartSpotliteFiles/090213_earn-1.png
Based upon projected GAAP earnings the following would be the approximate S&P 500 values at the cardinal points of the normal historical value range. They are calculated simply by multiplying the GAAP EPS by 10, 15, and 20. I have highlighted the overvalued values. The charts on our website are still based upon 2008 Q3, which is wildly optimistic compared to 2008 Q4 earnings, which are still being reported (85% completed) and won't be completed until the end of this month. Note that the S&P would have to drop to 554 just to be overvalued based on 2008 Q4 earnings projections. The outlook by 2009 Q2 is much worse. http://www.decisionpoint.com/ChartSpotliteFiles/090213_earn-2.png
Of course, the market doesn't always follow these projections, but they are reasonable targets based upon the best fundamental estimates we have available. * * * Taking a quick look at the stock market, we see it is still going nowhere -- Arthur Hill recently observed that the market has gone nowhere since October. Since we are in a 6-month period of positive seasonality, that is not very encouraging. I had interpreted the price action following the January top as the start of the next down leg, but the movement of the last two weeks has kept the price index inside the months-old triangle formation, ending the decline for the time being. http://www.decisionpoint.com/ChartSpotliteFiles/090213_earn-4.png
Bottom Line: Market fundamentals are abysmal. The current estimated quarterly earnings for the S&P for 2008 Q4 is -$10.44. The S&P has never in history reported negative earnings for a quarter. Market action is neutral. This could be interpreted as "the market waiting for passage of the stimulus package"; however, there is no way to keep the stimulus package from passing, so it is likely to be a case of "sell on the news". In my opinion, the bear market is far from over. Whether or not there is a substantial rally, I believe there is another 50% decline coming. That would be a downside target of about 350 on the S&P.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * http://www.decisionpoint.com/images/TimerDigestCover.png 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT #40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT #11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
**** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association
Retest
by Carl Swenlin
February 20, 2009 The long-awaited retest of the November lows has finally arrived. The S&P 500 is still slightly above that support, but the Dow has penetrated it. Even though every rally since November has been greeted with intense hope of a new advance that would end the bear market, the market gradually rolled over into a declining trend after the January top. The November bottom was also a 9-Month Cycle bottom. In a bull market we would expect the market to rally for several months. The fact that the rally failed so quickly, is a very bearish sign. http://www.decisionpoint.com/ChartSpotliteFiles/090220_retest-1.png
The longer-term view shows that the 2002 bear market lows are also being tested again, so the market is at a very critical point. Many people who are still holding equities (at a 50% loss) are counting on being bailed out by a big rally. If prices fall significantly below long-term support, we are likely to see another selling stampede. http://www.decisionpoint.com/ChartSpotliteFiles/090220_retest-2.png
The long-term condition of the market is deeply oversold, as demonstrated by the Percent of Stocks Above Their 200-EMA. This indicator has never been at these low levels for such an extended period of time. Normally, a rally is in the cards as soon as these levels are reached, but the market is flat on its back, and it is hard to say when it will recover. It is important not to get too anxious to get back in. We are in a bear market, and negative outcomes are much more likely than positive ones. Also, remember that oversold conditions in a bear market are extremely dangerous. If the current support zone fails, a market crash could quickly follow. http://www.decisionpoint.com/ChartSpotliteFiles/090220_retest-4.png
The medium-term condition of the market is neutral. Note that the ITBM and ITVM charts below are mid-range and falling. This is not a level from which we would expect a powerful rally to be launched. http://www.decisionpoint.com/ChartSpotliteFiles/090220_retest-5.png
Bottom Line: The market is in the midst of a retest of very important support. Since we are in a bear market, I expect that the support will fail. . . . . MAIL Hi Carl, I was hoping you could mention to your clients something about the following. After being extremely careful for the past year and a half, mostly in treasuries and hedged on what longs I have had, I had my account frozen at the _redacted_. Sure, everyone will say oh you didn't do enough DD, had you, you would have found enough suspicious stuff to not go with them, but my money manager who I have trusted for 20 years moved there a few months ago. I am mostly in treasuries. That acct got frozen Tuesday without a clue when the SEC might release it from _redacted_. I am diversified, have funds in various places so I will be Ok as this sorts itself out. However,some people have their money all in one place and in this environment, I think that is taking big risks. It would be great if you could say something to your subscribers about diversification. I feel pretty stupid this has happened for me, but the truth is we are in extremely challenging times and we all need to protect ourselves as best as we can. It has made me heartsick whats happening in our marketss and world. I think its totally unsafe to have all of ones money in one place and if you can tell clients that I think that would be great. I certainly didn't expect this by any stretch of the imagination (being in treasuries and frozen). I think the best we can do in these times is watch out for each other and that is my intention of sending this letter to various people that are in influential positions in the financial world. Thanks Carl.
ANSWER: I have redacted the names of the firms involved because I can't easily verify the statements. The main point is to not keep all your eggs in one basket. I personally am stumped as to where to put money except in a safe deposit box. Something else worth mentioning is that brokerage account insurance is not as safe as many think. The Securities Investor Protection Corporation (SIPC) insures most broker accounts against loss to certain limits if the broker firm fails. The problem is in the small print. Cash is only insured if it is in the account for the purpose of buying securities. The SIPC gets to decide what you intended to do with your cash in the event that an insurance payout is necessary. To me that means that cash in your account may or may not actually be insured. Carl . . . .
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * http://www.decisionpoint.com/images/TimerDigestCover.png 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT #40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT #11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
**** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
S&P November Lows Tested
by Carl Swenlin
February 27, 2009 Last week the Dow penetrated the November lows and it remained below them this week. During a week or tedious market action the S&P 500 tested its November lows on Monday and Friday, and each time the support held. This is somewhat encouraging, but you will notice that Friday's decline broke down from the short consolidation (reverse flag) formed the first four days of the week. This implies that the decline is not completed yet. Presently, the SPX has formed a double bottom. It is wide spaced and an excellent base from which to launch a medium-term rally; however, as far as we know the decline is not over yet. To paraphrase Moms Mabley, don't fall in love until the purse is open and the money showing. http://www.decisionpoint.com/ChartSpotliteFiles/090227_lows-1.png
I think it is time to take a look at gold. Like other commodities, it broke down from a parabolic top in 2008. Unlike other commodities, it found a bottom in October and has rallied through an important declining tops line, back to just below the level of all-time highs. It is so strong that it has decoupled from the dollar, meaning that it rallies even as the dollar advances. On the daily- and monthly-based charts I can make the case that gold could turn bearish very soon; however, gold is in a bull market, and we should expect bullish outcomes. There is also an unusually high demand for gold during this time of economic meltdown, and demand should increase if stock prices continue to erode. http://www.decisionpoint.com/ChartSpotliteFiles/090227_lows-2.png
Bottom Line: The S&P 500 has dropped below its 2002 lows for the second time since November. While the November lows are still holding, the 2002 lows are long-term in nature, and therefore more significant. I remain bearish until other evidence presents. Our timing model for gold is bullish, but because to the significant overhead resistance, my gut feels neutral. . . . . MAIL Hi Carl, I really enjoy your service and have for about nine years. Thank you for all your hard work and dedication. I was wondering if you could tell me the potential technical "bottom" numbers for the Dow, S&P 500, and Nasdaq? Thank you very much.
ANSWER: I don't follow the Nasdaq. I have rough targets of Dow 3000 and SPX 300 around late-2010. I wouldn't exactly call these "technical" targets -- I am guestimating a total decline of about 80%, using the 1929-1932 bear market 90% decline as a guide. The timing is based on the estimate for the next 4-Year Cycle low, which is due mid-to-late 2010. While I can't swear by these estimates, I don't think I'm sticking my neck out too far. Carl . . . .
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * http://www.decisionpoint.com/images/TimerDigestCover.png 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT #40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT #11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
**** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Breakdown!
by Carl Swenlin
March 6, 2009 At the end of last week the S&P 500 had declined to and had settled on the support created by the November lows. It was poised to either rally and lock in a double bottom, or break down. On Monday prices broke down through support, and by Thursday's close it could be said that the breakdown was "decisive". When a breakdown is classified as decisive (greater than 3%), it means that chances are very high that the market will not be able to gather enough strength to rally back above the recently violated support. Reaction rallies back toward the support are possible, but not guaranteed. http://www.decisionpoint.com/ChartSpotliteFiles/090306_break-1.png
The monthly-based chart below provides a better perspective of the seriousness of the breakdown, and we can also see the location of future support levels. The next support is at 600, at the low of the medium-term correction in 1996. I do not consider this an important support level. The first important support I see is the line drawn across the 1994 consolidation lows -- around 450 on the S&P 500. http://www.decisionpoint.com/ChartSpotliteFiles/090306_break-2.png
The market is now very oversold in the medium-term and long-term, but in a secular bear market this is not a cause for rejoicing. Bear markets can crash out of oversold conditions. Bottom Line: The S&P 500 has decisively violated important support, and the most likely consequence is that prices will continue to decline, with 600 on the S&P being the most obvious level for us to see a bounce of any significance. While we could see a bounce before then, I think we should be more concerned that the decline will accelerate into a crash. There are still investors who have endured the decline from the bull market top and who were hoping that the 2002 bear market lows would mark the end of the current bear market. Now that long-term support has been clearly broken, another round of panic selling could be just around the corner. . . . . MAIL Carl, I'm sure there is an obvious answer, but why did the S&P 400 Mid-cap Index neutral posture instead of sell on 7/1/08? Just an oversight?
ANSWER: We use the mechanical Trend Model on the S&P 600. For full understanding you should read the Trend Model article in the Glossary. On the day the 20-EMA crossed down through the 50-EMA (a sell signal) the 50-EMA was still above the 200-EMA (still LT bullish), so the model turned to neutral. The model is designed this way to avoid whipsaw during bull market corrections. To get a sell signal, we need a 20/50-EMA downside crossover when the 50-EMA is below the 200-EMA. Carl . . . . We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure. http://www.decisionpoint.com/ChartSpotliteFiles/090306_break-3.png
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * http://www.decisionpoint.com/images/TimerDigestCover.png 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT #40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT #11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
**** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
Bounce!
by Carl Swenlin
March 13, 2009 After the market blew down through important long-term support last week, this week we have gotten a nice oversold bounce back into the resistance (formerly support) zone. This rally is most probably driven by short covering, and we have to wonder how much more of that demand will be triggered to keep the rally going. One problem now is the heavy resistance barrier, formed by a convergence of trend and resistance lines, easily seen on the chart. http://www.decisionpoint.com/ChartSpotliteFiles/090313_bounce-1.png
Another problem is that the market is short-term overbought. Note how the CVI (Climactic Volume Indicator) is once again in overbought territory and at levels that coincide other price tops. There is still room for the CVI to move higher, but bear market conditions require the assumption that the ultimate outcome of this short-term overbought situation will be negative. That is not guaranteed, but the odds heavily favor it. One positive thing we should recognize is that the market didn't completely fall apart after last week's breakdown. http://www.decisionpoint.com/ChartSpotliteFiles/090313_bounce-2.png
Bottom Line: As I write this, the market has been flat all day and has another hour before it closes. At this point, my assumption is that the advance is over, and that prices will be down next week. If prices can slice through the resistance, I would be inclined to believe that we were finally getting the rally everyone has been expecting. . . . . A CLOSER LOOK AT EARNINGS Since I wrote the article a while back about the dismal earnings picture, a reader suggested that it would be useful to also look at earnings on a quarterly basis, rather than just twelve-month trailing (TMT) earnings. I agree because 2008 Q4 is going to be an incredible drag on TMT earnings until it is dropped in 2009 Q4. For example, P/E ratios will be huge through the next three quarters, topping 195 in 2009 Q3. Unless earnings continue to come in at large negative numbers, the traditional P/E calculation will be of little use in determining true stock valuations. http://www.decisionpoint.com/ChartSpotliteFiles/090313_bounce-4.png
Assuming that 2009 earings come in close to the estimates, valuations will still not be so great (estimating a P/E of 23.2 in 2009 Q4), but I am not inclined to put much faith in the estimates. There is still so much bad news in the economic pipeline, it is hard to imagine what earnings will look like a year from now.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change. **** **** **** **** **** * http://www.decisionpoint.com/images/TimerDigestCover.png 2008 TIMER DIGEST RANKINGS FOR DECISION POINT #17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT #40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT #11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year. Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
**** **** **** **** **** *
BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.