August 02, 2008IWM AND QQQQ HIT RESISTANCE By Chip Anderson
Arthur Hill
The Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQQ) were stifled at resistance this week and the bulls are getting a test. After surging above 69, IWM met resistance at broken support and the 62% retracement mark. QQQQ met resistance at 46 in early July and this level held throughout the month. QQQQ shows relative weakness because the July breakout attempts failed. Both ETFs need to break resistance if the broad market rally is to continue.
Short-term momentum remains bullish for now. StochRSI is a nifty indicator that applies the Stochastic Oscillator to RSI. Yes, it is an indicator of an indicator. This makes it more sensitive than normal RSI and better suited for short-term signals. I like to think of it as RSI on Red Bull. On both ETF charts, StochRSI moved above .80 on 16-July and held above .50 since then. The surge above .80 turned short-term momentum bullish and the ability to hold above .50 kept the bulls in favor. For a counter signal that would turn short-term momentum bearish, I am watching for a sharp move below .20 in StochRSI.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b48970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b50970c-pi
There is also a videoversion of the this analysis available at TDTrader.com - Click Here.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
August 02, 2008RALLY LACKS CONVICTION By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f55970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f59970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f5c970b-pi
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.
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
August 02, 2008QUESTIONS FOR THE FUTURE By Chip Anderson
Richard Rhodes
This past July-2008 was a very important month for the capital markets; crude oil peaked and traded lower by -11%. This is rather substantial to be sure, and one would be reasonable to believe that the demand/supply equation coupled with a daily technical oversold condition would push crude prices back higher. Perhaps it shall in the short-term, but we fear any and all rallies are going to be sold and sold rather aggressively to push prices towards $100/barrel by the November election. The reason as to the "why and how" it does so is left to the benefit of time.
We on the other hand, will note perhaps the most bearish of reversal patterns in crude oil - the "monthly key reversal lower." This simply denotes exhaustion of the previous trend as July saw new highs above June's, while new lows printed below June's lows as well...with prices closing virtually on their lows as well. We'll now argue that mean reversion is firmly in place, with a downside target of a meeting with the 50-month moving average currently near $70/barrel. Now given this is a monthly chart, it may take a great deal of time to get there - and perhaps the moving average does move higher to meet prices at some point. That is a question for the future; we are now concerned that crude oil prices are headed lower and what the impact shall be upon the broader stock market. Will it be positive as it "juices" the consumer; or is it part of the de-leveraging process that sends the broader market and all sectors lower? Good questions...and we'll explore those in the days and weeks ahead.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c04970c-pi
Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
August 02, 2008ECONOMISTS ARE LATE AS USUAL By Chip Anderson
John Murphy
In a recent Market Message, I discussed how the stock market is a leading indicator of the economy and why it isn't a good idea to use economic forecasting to trade the stock market. Historically, the market turns down at least six months before the economy. Chart 1 shows the NYSE Advance-Decline Line peaking last June. That suggested a possible recession by December of last year. Chart 2 shows the S&P 500 peaking last October. That puts the odds for a recession somewhere around April of this year. This week's economic reports showed that second quarter growth was below economic forecasts. It probably would have been even worse without a temporary boost from rebate checks. More importantly, GDP growth for the fourth quarter of last year was actually negative. It was reported this morning that the unemployment rate for July rose from 5.5% to 5.7% to the highest level in more than four years. A number of economists were quoted over the last two days saying that the economy was now in recession. Thanks for that late newsflash nearly a year after the stock market started dropping. These are the same folks who accused investors of panicing at the end of last year by using the "fear versus fundamentals" slogan that was flashed on TV screens. With the stock market now in an offical bear market, what are investors supposed to do with the newfound pessimism in the economic community? How many times do we have to repeat this cycle before people realize that the only way to trade the stock market is to study the market itself -- not the economy. The study of the market is what the charting approach is all about. And what Stockcharts.com is all about.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b87970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b89970c-pi
Subscribe to John Murphy's Market Message today!
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
August 02, 2008USING KELTNER CHANNELS By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
Let's start the month of August off right with a good, old-fashioned education article about the modern version of a good, old-fashioned chart overlay, Keltner Channels! Here we go...
Keltner Channels are a set of three lines that are overlaid on top of the price bars of a chart. As with other channel overlays, the outer two lines define a region that generally "contains" the price action and helps you determine if the prices are "too high" or "too low" relative to a specified moving average. Here is an example:
http://stockcharts.com/help/data/media/chart_school/technical_indicators_and_overlays//ibmkeltnerexample.png
In the chart above, the Keltner Channels are the thin blue lines above and below the candlesticks on the chart. The red line corresponds to the 20-day Exponential Moving Average that defines the center of the channel. Notice that the candles generally appear to "bounce" off the blue channel lines are return to the red central line.
HistoryThe original version of Keltner Channels was described by Chester W. Keltner in his 1960 book How to Make Money in Commodities. Keltner called his channel concept the "Ten-Day Moving Average Trading Rule" and defined it as a pair of lines positioned above and below a 10-day simple moving average of the chart's "typical price" - i.e., ( high + low + close ) / 3. The distance between the channel lines and the central line was defined as the 10-day simple moving average of the chart's "range" - i.e., high - low.
This original version of Keltner Channels was relatively easy to calculate in the days before computers and worked pretty well for trading commodities. As time passed, other channel systems - such as Bollinger Bands - became more popular. In the 1980s, Linda Raschke introduced a newer version of Keltner Channels that was based on the Exponential Moving Average and the Average True Range (ATR) indicator. StockCharts.com uses this more modern version of Keltner Channels.
FormulaIn the modern version of Keltner Channels, the central line is (typically) a 20-period Exponential Moving Average. The upper and lower bands are drawn at an equal distance from the central line. The distance is defined as a specified multiple (typically 2x) of the ATR(10) indicator.
In SharpCharts, the Keltner Channels take three parameters. The first one is the period of the central EMA. The second one is the multiplier for the bands. The last one is the period of the ATR indicator. The default parameter values are "20,2.0,10".
In the chart above, we've added the ATR(10) indicator below the price plot. You can see how the Keltner Channel expands as the ATR(10) value rises and contracts when it shrinks.
Note: Sometimes when using Keltner Channels on a log scale chart, the lower band will exceed the price scale and become cut off. To alleviate this, change the scale setting from "log" to "linear."
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
July 19, 2008POOR SENTIMENT, MAX PAIN AND THE BOWLEY TREND By Chip Anderson
Tom Bowley
Tuesday afternoon marked a short-term bottom. In my opinion, we're going to print AT LEAST one more low in time; however, the sentiment had deteriorated on Tuesday to a point where we normally we see a rebound. In addition, there was TONS of net put premium (in-the-money put premium minus in-the-money call premium) and options were set to expire on Friday. We'll discuss sentiment issues shortly, but first take a look at the following closing prices on ETFs as of Tuesday and their respective max pain (the price point at which the premium on in-the-money call options equals the premium on in-the-money put options) prices:
DIA - closed on Tuesday at 109.30 and max pain was near 114.
SPY - closed on Tuesday at 120.99 and max pain was near 128.
QQQQ - closed on Tuesday at 44.24 and max pain was near 48.
XLF - closed on Tuesday at 17.17 and max pain was near 21.
I calculated the value of the net put premium on the QQQQ as of Tuesday and determined it to be approximately $250 million! That's just for one ETF. Imagine the amount of net put premium across all stock, ETF and index options. If the QQQQ's had continued to decline, the net put premium would have risen exponentially. In addition, there were over 1.825 million put option contracts traded on Tuesday, a record since the CBOE has been providing the equity only put call data. Simply put, the bears were a greedy bunch and the rubber band was stretched about as far as it was going to go near-term. As a result, there was a wicked rally on Wednesday and Thursday as prices gravitated much closer to max pain points. The max pain is a figure I calculate every month and it provides yet one more clue as to how the market might react near-term. This time, it was dead on.
Now back to sentiment. The equity put call ratio finished on Tuesday at .90 and the 5 day moving average of the equity only put call ratio had spiked to .88, the highest level since March 24th. In addition, the VIX spiked above 30. Readings above 30 on the VIX have coincided with recent market bottoms. In my last article, I discussed the lack of poor sentiment readings and indicated that we needed to see a step up in fear. We finally saw that on Tuesday. Now for the bad news. It wasn't fearful enough. The market was already primed to rebound off of oversold conditions, max pain issues and even a few recent positive divergences on intraday charts. That rebound materialized on Wednesday and Thursday. Take a look at Chart 1 below to review the VIX:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b9b970c-pi
The resistance area on the VIX is above 35 - we have plenty of room to ramp up fear. The current uptrend may take us to that level before it breaks. Time will tell. Separately, while the put call ratio has been on the move to the upside and reflecting increased pessimism, it too has more room to go. Check out Chart 2:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ba0970c-pi
While we mentioned earlier that the "equity only" put call ratio approached the March fear levels, the total put call ratio as reflected in the above chart did not.
Historically, we entered on Friday the 2nd worst time period of the year. At Invested Central, we provide a historical perspective ("The Bowley Trend") on each trading day. For instance, consider the following data that relates to trading on the S&P 500 since 1950:
On July 18th, the S&P 500 has advanced 13 times, declined 29 times and has produced an annualized return of -46.48%
July 19th - 19 up days, 22 down days, -16.15%
July 20th - 19 up days, 23 down days, -20.76%
July 21st - 16 up days, 24 down days, -46.18%
July 22nd - 17 up days, 23 down days, -49.24%
July 23rd - 19 up days, 22 down days, -57.19%
Now for the NASDAQ since 1971:
July 18th - 9 up, 18 down, -91.68%
July 19th - 15 up, 13 down, -52.32%
July 20th - 14 up, 13 down, -17.81%
July 21st - 10 up, 16 down, -83.59%
July 22nd - 11 up, 14 down, -71.33%
July 23rd - 12 up, 13 down, -158.68%
July 24th - 12 up, 14 down, +1.49%
If the market advances over the next week, it will be doing it against significant historical headwinds.
Happy trading!
Join Tom and the Invested Central team at www.investedcentral.com. Invested Central provides daily market guidance, intraday stock alerts, annotated stock setups, LIVE member chat sessions, and much, much more.
Posted by Chip Anderson at 4:05 PM in Tom Bowley | Permalink
July 19, 2008BAD NEWS FOR BONDS By Chip Anderson
Arthur Hill
After the Producer Price Index (PPI) surged on Tuesday, it was little surprise to see big gains in the Consumer Price Index (CPI) on Wednesday. Bernanke warned of inflation in his congressional testimony last week and the PPI-CPI figures confirm. The CPI surged 5% year-on-year and 1.1% month-on-month. That 1.1% monthly gain translates into an annual rate much higher than 5%. The 5% year-on-year change was the highest since 1991, while the 1.1% month-on-month change was the highest since 1982. For the sake of argument, let's take the 5% year-on-year change as the annual inflation rate. The 10-Year Note Yield ($TNX) is currently around 4.08%, which means the real yield is actually negative (4.08% less 5% equals -.92%). A negative real yield is bad news for bonds. The first chart below shows the 10-Year Note Yield ($TNX) breaking resistance from its February highs with a surge above 4% (40). TNX pulled back over the last few weeks, but found support around 3.8% (38) and moved higher this week. The second chart shows the iShares 20+ Year Bond ETF (TLT) hitting resistance after retracing 50-62% of the March-June decline. The ETF gapped down on Wednesday as investors reacted to the news on inflation and the negative real yield.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f21970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f28970b-pi
There is also a videoversion of the this analysis available at TDTrader.com - Click Here.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
July 19, 2008DISASTER AVERTED, SO FAR By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590ba4970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590bac970c-pi
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.
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
July 19, 2008RALLY FORTHCOMING IN HOUSING MARKET? By Chip Anderson
Richard Rhodes
Last week may very well have been an important turning point in the US stock market, with the Dow Industrials and the Russell 2000 Small Caps as forming bullish "key reversal" patterns to the upside. This would suggest an increased probability of further strength on the order of several weeks or perhaps even months; however, we would caution that the probability of such a rally isn't as high as it would be normally given the weak advance/decline figures as well as the up/down volume figures - hence we believe it will be nothing more than a countertrend rally apt to fail. We'd like to have seen stronger advance/decline figures to provide some clarity to these bullish formations, but they simply weren't sufficient for our liking.
Be that as it may, we want to bring collective attention to the Housing Index ($HGX), which did manage to form a bullish "key reversal" accompanied by high volume. This would further suggest a rally of some magnitude is forthcoming; but once again we'll not put as high a probability of it developing as we would have if the broader market had printed stronger advance/decline figures. In any case, we wouldn't be surprised to see mean reversion higher materialize towards the declining 50-week exponential moving average at 145.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590cd2970c-pi
Therefore, we would use any declines in either Ryland Homes (RYL) or Toll Bros. (TOL) to put on a long position. We chose those two given they have performed relatively better than the Housing Index, which clearly broke its January lows. RYL and TOL did not; and if we are going to be long, then we want to be long that which is showing relative strength. As for risk...one can risk a break of the recent lows.
Good luck and good trading, Richard Rhodes
Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
July 19, 2008SHORT-TERM SELL SIGNALS GIVEN By Chip Anderson
John Murphy
This week's downturn in crude oil prices has had a depressing effect on the entire commodity group. Chart 1 shows the CRB Index (plotted through Thursday) breaking a three-month up trendline (and its 50-day moving average). The 12-day Rate of Change (ROC) line (top of chart) has fallen to the lowest level in more than three months. And the daily MACD lines (bottom of chart) have turned negative after forming a "double top" between March and July. The minimum downside target is most likely a test of the 400 level which would test a yearlong support line and the early May low. I wouldn't, however, rule out a further drop to the March low at 380. The weekly CRB chart also suggests a very over-extended market in need of a correction.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f32970b-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
July 19, 2008PINNING DOWN YOUR ANNOTATIONS By Chip Anderson
Chip Anderson
IMPORTANT NOTE: On August 1st, we are raising our subscription prices across the board by $5 per month. You can delay the impact of this price increase by renewing your account before the end of July. By renewing now you will also be able to take advantage of our Summer Special which gives long-term subscribers an additional month of service for free. Please see our for more details. Don't wait until it is too late -
Hello Fellow ChartWatchers!
This week I wanted to tell you about a new feature we've just rolled out in our ChartNotes chart annotation tool. It is called "pinning" and it allows you to prevent any of your saved annotations from scrolling to the left over time.
Normally, you want your annotations to scroll to the left because that is what the price bars do. As the price bars move, you want your trendlines and arrows and other annotations to move with them. However, there are certain kinds of annotations that you might not want to move - particularly "High Level" text comments, i.e., comments that describe what the chart is showing, not a specific feature of the current chart. Consider the following example:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590cfa970c-pi
On this chart the blue trendline, the red arrow and the text comment about the trendline break are all directly associated with the price action and we want them to move left with the price bars over time. In other words, we want those annotations to be "unpinned" (which is how things have always worked).
The other annotations at the top of the chart are different. The text that describes the chart and the box that surrounds that text are not directly associated with the current price action and we don't want that text to move over time. To prevent that text from moving, we can now "pin" that text so that it stays put. Text, callout boxes, boxes and circles are now "pinnable" annotations.
To pin an annotation, first click on it with the Selection tool, then click on the blue "pin" icon that appears on the lower left side of the ChartNotes window (see the picture above). That's all there is to it!
Hopefully, you'll find many uses for pinned (and unpinned) annotations. Let us know if you find a particularly useful way to use this new capability.
.- Chip
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
July 06, 2008PANIC AND FEAR? NO SIGNS JUST YET By Chip Anderson
Tom Bowley
I'm the conservative type. I'm also nervous. I never like to see the market fall precipitously while market participants yawn. In a nutshell, that's what we've been seeing. Yes, the talking heads will say the sky is falling, but unfortunately for bulls, that's not the case amongst those actually trading the market. I've provided in previous articles how the put call ratio correlates to market tops and bottoms. I won't go into the details again. However, everyone needs to understand that market participants are not panicking yet. That is a very big clue to me that we've got more work to the downside before we can declare a bottom. It doesn't mean we can't bounce and I'll provide an argument below that suggests a near-term bounce is imminent. But it will likely be just that - a bounce.
First, let's talk sentiment. Thursday, the put call ratio printed a closing reading of 1.21. Finally! It was the 3rd highest end of day reading since the mid-March lows. That's the good news. The bad news is that one day of negative sentiment doesn't mark a bottom. Below is a favorite chart of mine, measuring the 5 day moving average of the put call ratio against the 60 day moving average. It simply plots the short-term pessimism against the longer-term pessimism, and provides us with a measure of relative pessimism. I like to see the short-term 20%-30% higher to begin to mark bottoms (and 20%-30% lower to mark tops). From Chart 1, you'll see we're simply not there yet so strap on your helmets and buckle your seatbelts.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b94970c-pi
We could continue lower, the pessimism could build, and a significant bottom could form in the near-term. Given the severely oversold conditions though, I expect to see a bounce first and that will likely return the 5 day put call ratio down closer to the 60 day moving average, possibly even below the 60 day. Furthering my belief of a short-term bounce is the positive divergence that has printed on the 60 minute charts. The major indices have put in new lows the last 3 days, and with each new low has come a higher MACD reading on the 60 minute chart. Take a look at the NASDAQ below in Chart 2.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b9d970c-pi
I'll leave you with one more chart to ponder. Normally when the market sells off, the Dow outperforms the NASDAQ. That makes perfect sense as investors flock to high quality, "safer" investments. From Chart 3 below, you can see that the ratio between the Dow and the NASDAQ moved much higher during the summer of 2006 and again in fall of 2007 into the first quarter of 2008 as the market sold off hard. Any time this ratio moves up, it indicates relative outperformance by the Dow. A declining ratio suggests relative outperformance by the NASDAQ. Here's the interesting part: Since the May 19th top, this ratio has actually declined. We just suffered through the worst June in several decades, yet the money did not gravitate towards the Dow - interesting indeed. Is this a short-term phenomenon that will rectify itself in due time? I say yes. I've highlighted the recent move up in the ratio and believe that the move above the recent high is technically significant.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ba6970c-pi
We'll find out in time. In the meantime....
Happy trading!
Posted by Chip Anderson at 4:06 PM in Tom Bowley | Permalink
July 06, 2008BEAR MARKET EXPANDS! By Chip Anderson
Arthur Hill
Sector performance in May and June shows the bear extending its grip into other key sectors. The Financials SPDR (XLF) and the Consumer Discretionary SPDR (XLY) woke up the bear with dismal performances in May. The first PerfChart shows sector performance from 1-May until 2-June, which is basically the month of May. XLF and XLY led the way lower in May. Notice that the Industrials SPDR (XLI), Materials SPDR (XLB) and Technology SPDR (XLK) held up relatively well in May. In fact, selling pressure in May was pretty much limited to the financial and consumer discretionary sectors.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f80970b-pi
The second PerfChart shows sector performance from 3-June to 1-July, which is basically the month of June. There are two items worth noting here. First, the Technology SPDR, Industrials SPDR and Materials SPDR declined rather sharply in June. These three held up in May, but fell apart in June as selling pressure expanded among the sectors. Second, the Utilities SPDR (XLU), Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) held up the best in June. Well, outside of the Energy SPDR (XLE) that is.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f85970b-pi
Utilities, healthcare and consumer staples represent the defensive sectors. No matter what happens in the economy, we still need electricity (XLU), toothpaste (XLP) and medicine (XLV). While the S&P 500 moved lower in May and June, XLU edged higher both months and showed relative strength. XLV and XLP are down over the last two months, but less than the S&P 500 and this shows less weakness, which can also be interpreted as relative strength. Fund managers that are required to be fully-invested in stocks are no doubt watching these relative performance numbers and looking for the sectors that are holding up the best.
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
July 06, 2008VERY DANGEROUS MARKET By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590b34970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590b3d970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590b43970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590b4c970c-pi
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
July 06, 2008SITE NEWS: "UNIVERSAL LOGIN" NOW WORKING By Chip Anderson
Site News
"UNIVERSAL LOGIN" NOW WORKING - We've finally, finally, finally fixed something that has been bugging lots of people for a long time. In the past, we had two very different ways to log into our website. People who subscribed to our Extra or Basic charting service logged in using the boxes on our homepage. People who subscribed to John Murphy's Market Message logged in by clicking the "John Murphy" tab and then entering their information in the popup box that appeared. People that subscribed to both services had to enter their information in both places (ugh!). WELL NO LONGER! Now, everyone can use the boxes on our homepage to login regardless of their subscription type and "combo" subscribers can move between the charting sections and the Market Message area without getting harassed a second time. Finally!
Posted by Chip Anderson at 4:02 PM in Site News | Permalink
July 06, 2008SECTOR ROTATION SAYS BEARISH By Chip Anderson
John Murphy
SECTOR ROTATION MODEL... One of our readers asked where we are in the Sector Rotation Model. That model shows the normal sector rotation that takes place at various stages in the business cycle. The chart shows that basic materials and energy are market leaders at a market peak. As the economy starts to slow, money starts to rotate out of those two inflation-sensitive groups. Basic materials peak first and energy last. This week's downturn in basic material stocks suggests that the topping process is moving even further along. Energy may be the next to roll over. As the economy slows, money flows into consumer staples, healthcare services, and utilities. That's where we appear to be right now. One way we can tell that a bottom is near is when money starts to flow into financial and consumer discretionary stocks. So far, there's no sign of that happening. That leaves us in the midst of a bear market with money flowing toward staples, healthcare, and utilities.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f70970b-pi
STOCKS LEAD THE ECONOMY... Everytime I show the Sector Rotation Model, I feel the need to point out that the stock market (red line) peaks well before the economy (green line). Although most of us are aware that the stock market is a leading indicator of the economy, that point keeps getting lost on Wall Street and the media. Ever since the market peaked last fall, the media has presented a parade of economists arguing that the economy was still on sound footing. I remember seeing a headline "fear versus fundamentals" back in January (that was repeated again this week on CNBC). The implication being that the market was falling on "fear" instead of "fundamentals". With the stock market having had one of the worst first halfs in decades, we're now starting to get confirmation that the economy is in bad shape. It's a little late for that to do anybody any good. That's why we study the market and pretty much ignore the media, economists, and Wall Street suits.
NOTE: John will be on vacation next week.
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
July 06, 2008UNAVOIDABLE BAD NEWS (AND HOW TO AVOID IT) By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
This week's edition of ChartWatchers is full of important information including a lively debate about the health of the market - Tom Bowley is actually optimistic (well... somewhat), Arthur Hill not so much. But first, I have several items that are super important for our members:
BAD NEWS: WE'RE GOING TO RAISE OUR PRICES BY US$5 PER MONTH
Behind the scenes here at StockCharts, the sad fact is that the data vendors have been continually increasing the price they charge for their data. We have been protecting our subscribers from those price increases for as long as we can. In fact, we have NEVER raised prices going all the way back to when we started the website back in 1999. (How many other things do you know of that are the same price as they were back then?) This is a first for us and we are not happy about it.
Starting August 1, 2008, the price of all of our services will go up by US$5 per month. One month of Basic will be US$14.95, one month of Extra will be $24.95, and one month of ExtraRT will be US$34.90. Longer term subscriptions will also be going up at the fixed rate of US$5 per month.
We know that with the price of gas putting the squeeze on everyone these days the timing of this increase couldn't be worse, but we hope that everyone will consider the fact that we've keep prices as low as we could for as long as we could when considering renewing. Oh, and by the way...
GOOD NEWS: YOU CAN AVOID THE PRICE INCREASE BY RENEWING IN JULY!
Notice how I said "Starting August 1, 2008" above? That means that you can avoid (or at least significantly delay) the price increase by adding a long-term renewal to your subscription during the month of July. Even if you renewed recently, you can re-renew and we will simply add more time to your expiration date. By renewing now, YOU can determine when the price increase will actually start to affect you. Oh, and by the way...
GREAT NEWS: THE SUMMER SPECIAL IS NOW ON!!!
Just like in the past, we are running a special during the month of July: If you renew for 6 months, we'll give you 1 month free. If you renew for 12 months, we'll give you 2 months free. This is the best deal on our prices and, with the looming price increase in August, this is the last time you'll have a chance to get this deal ever.
So...
My strong advice to current members is to renew your account today for 12 months. You'll get 2 additional months for free AND you won't have to pay our increased prices until at least November of 2009. Seems like a no-brainer to me.
If you aren't a member but are thinking of joining, now is really the time. If you delay until August, it will cost you - it's just that simple.
To get started, simply click this link and follow the instructions.
Again, we're just as unhappy as everyone else about rising prices and we will continue to do our best to make sure you get the most value for your money here at StockCharts.
- Chip
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
June 22, 2008FINANCIALS LENDING NO SUPPORT By Chip Anderson
Tom Bowley
On May 19th, I discussed what appeared to be a topping market. Since that time, the Dow has lost 8.82%. The S&P 500 has lost 7.51%. The NASDAQ has lost 4.86%. The SOX has lost 9.24%. The XLF (an ETF that tracks financials) has lost 16.67%. The bank index has lost 22.32%. The XLY (an ETF that tracks consumer discretionary stocks) has lost 10.65%. These are ONE MONTH returns, folks. The number that really jumps out though is the 22% loss in the bank index in one month. While the major indices appear to be heading to test March lows, the bank index has already blown right through those lows - see the chart below.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b70970c-pi
The technicals are suggesting that the news in coming months is only going to get worse, not better. Cutting dividends, raising capital and mounting losses are the three news items most closely associated with financials these days. Don't expect it to change anytime soon. Yes, the sector is very oversold so a bounce is quite likely in the near-term. However, shorts are likely to get aggressive again on any oversold bounce.
I don't believe we've seen a bottom in this downtrend yet. Negative sentiment is elevating, but we need extreme readings to mark a bottom. We have a Fed that has its hands tied, a struggling economy, and a teetering consumer. Lower equity prices will only exacerbate the problem. I maintain a positive outlook for equities over the long-term, but expect the short- to intermediate-term to be volatile at best. Take a look at the long-term chart of the NASDAQ to appreciate the possible short-term weakness in price while still remaining in its long-term uptrend.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b78970c-pi
I would remain cautious near-term.
Happy trading!
Join Tom and the Invested Central team at . Invested Central provides daily market guidance, intraday stock alerts, annotated stock setups, LIVE member chat sessions, and much, much more.
Posted by Chip Anderson at 4:05 PM in Tom Bowley | Permalink
[ 本帖最后由 hefeiddd 于 2009-4-2 16:20 编辑 ]
June 22, 2008A LITTLE DANDRUFF FOR IWM By Chip Anderson
Arthur Hill
Despite a big decline in the S&P 500 ETF (SPY) over the last five weeks, the Russell 2000 ETF (IWM) has been holding up pretty well. However, a bearish reversal pattern and weakening momentum suggest that IWM will ultimately follow its big brother lower.
On the price chart, IWM formed a small head-and-shoulders pattern over the last six weeks. Neckline support resides just below 72 and a break below the June low would confirm this pattern. Once confirmed, the initial downside projection would be to around 68. The height of the pattern (roughly, 76 - 72) is subtracted from the neckline break for a target (72 - 4 = 68). There is also support around 68 from the late March and mid April lows.
Signs of weakness are starting to appear in the Commodity Channel Index (CCI). This indicator surged from oversold levels in early March to overbought levels in early April. This surge started the bull run. Notice that CCI never became oversold during the advance and dips below zero provided nice buying opportunities (green arrows). CCI declined to oversold levels in early June and this shows a reversal in momentum. Instead of support and buying opportunities around the zero line, we can now expect resistance and selling opportunities. Notice how CCI surged above zero, met resistance and then declined this week (red arrow).
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590aac970c-pi
There is also a videoversion of the this analysis available at TDTrader.com - Click Here.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
June 22, 2008IT'S STILL A BEAR & THE OIL BUBBLE By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590a9f970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590aa4970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590aaa970c-pi
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!
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
June 22, 2008FOCUSING ON S&P ENERGY/FINANCIALS By Chip Anderson
Richard Rhodes
As the world stock markets have embarked on what arguably is another "leg lower"; we are left to wonder aloud what the relative rotation beneath the surface of this decline will look like in terms of tactical allocation. Our focus has been upon the S&P Energy / S&P Financials Ratio (XLE: XLF) as of late, for there is quite a bit of pent-up leverage extant in this chart as the world's hedge and mutual funds are very clearly very long energy and clearly very short financials. At some point, the leverage of reversing this position by being short energy and being long financials will produce enormous gains to one's portfolio. Clearly, it shall make one's trading year or perhaps even one's trading lifetime when it materializes. The question is one of "when" and not "if" in our minds.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c08970c-pi
Taking a technical look at the ratio chart, it clearly illustrates the parabolic move began in earnest at the beginning of 2007 from the 1.50. Now, we all know that parabolic moves end badly and in a "trail of tears", with this one highly likely to do so as well. Currently, the ratio trades at 3.87, with a majority of this move occurring since the beginning of 2008. We're mean reversionists at TRR; hence we're looking for a mean reversion exercise towards the 40-week moving average given the ratio stands +33% above this level - a historical record indeed. Moreover, the stochastic indicator has moved back into overbought levels...that in the past have provided for a "top" once it turns lower. In other words, the balance of risks is pointed downward, which when combined with the absolute "love fest" shown energy stocks and absolute "disdain" accorded the financials...are the conditions such that can a reversal lower not be far off?
Good luck and good trading, Richard Rhodes Capital
Want more of Richard's award-winning advice? Check out his Web site:
Advertisement:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c0f970c-pi
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
June 22, 2008FED'S IN A BOX, AND BEAR FUNDS ARE RISING By Chip Anderson
John Murphy
THE FED'S IN A BOX ... I've written recently about the Fed turning its attention away from the economy and back to inflation. Unfortunately, this week's market downturn is going to make its job a lot harder. The Fed apparently concluded that its easing program since last September would be enough to stabilize the stock market and the economy. This week's stock drubbing calls that analysis into question. How can the Fed raise rates to fight inflation with stocks tumbling? It can't. That should keep the dollar from rallying much further and could give a boost to gold. Money moving out of stocks and into bonds is also keeping long-term rates from moving up any further. Here's the problem. The market can't expect anymore help from the Fed. To lower rates again would give inflation another leg up which is a big part of the problem. Rising inflation and a weak economy make for stagflation which we haven't seen since the 1970s. One of our readers asked if "cash was trash" in an inflationary environment. Right now, cash looks better than stocks.
BEAR FUNDS ARE RISING ... Outside of bonds, the only other markets that gained ground today were bear funds. We've shown these two bear funds before, but here they are again. Chart 1 shows the Short S&P 500 ProShares Fund (SH) reaching a three-month high. Chart 2 shows the ProShares Ultra Short Dow 30 (DXD) acting even stronger.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c48970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c51970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
June 22, 2008CHARTNOTES IMPROVEMENTS By Chip Anderson
Chip Anderson
This weekend we've updated our ChartNotes chart annotation tool. On the surface everything looks the same, but for frequent ChartNotes users that are willing to remember a couple of new keyboard/mouse combinations, things should be much better. We've also thrown in some extra Fibonacci Lines for good measure.
Additional Fibonacci LevelsFirst, let's look at how to get those additional Fibonacci Lines onto a chart. Normally, ChartNotes will add lines at the 5 most common Fibonacci levels: 0%, 38.2%, 50%, 61,8% and 100%. The new version of ChartNotes allows you to add two addition Fibo levels: 23.6% and 161.8%. To get these additional levels to appear simply hold down the "Control" key on your keyboard before starting to draw your new Fibo Lines. That's all there is to it!
Perfect Circles and SquaresYou can now create correctly sized circles and squares by holding down the "Shift" key while dragging the handles on any oval or box on your chart.
Filled/Hollow Ovals and BoxesAs before, if you press and hold the "Control" key and then drag out a new oval or box it will be filled with the selected color. What's new is that you can now also hold down "Control" and then click on the edges of an oval or box to toggle its filled/hollow status.
Instant SelectAnother handy change lets you easily select any item even if your mouse isn't near the "Select" button. Now, holding the "Shift" key down instantly puts you into "Select" mode so that you can then click and select whatever is near your mouse.
Tab Key SelectingSometime several items are very close together making it hard to select the one you want with your mouse. Now you can use the Tab key to move the selection handles to any object on your chart.
"Ctrl-D" DuplicationPressing "Ctrl-D" will instantly duplicate the currently selected Line, Box, Oval, or Arrow. The new item will appear just above and to the right of the original item.
"Ctrl-Drag" DuplicationThe other way to duplication items is to hold down the "Control" key, move your mouse over the original item, and then click and drag the duplicate to it new position. This is great for quickly creating trendline channels.
We're continuing to work on improvements to ChartNotes. Feel free to useto let us know what you think of these changes and what other changes you'd like to see.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
June 08, 2008RESISTANCE HOLDING, BAD NEWS FOR BULLS By Chip Anderson
Tom Bowley
Let's focus first on one of the strongest indices, the NASDAQ. Technology stocks have been performing quite well and there's been a challenge for the tech-heavy NASDAQ to pierce price resistance at 2541. Thursday's close of 2549 was enticing, but volume was just moderate and the Friday jobs report was in the on-deck circle. I wasn't buying into it, actually removing a QLD play Thursday afternoon rather than play stock market roulette on Friday morning. It's always better to preserve capital, lock in profits and be safe rather than sorry, especially when mired in an intermediate-term downtrend with price action trying to negotiate resistance. The jobs report Friday was shocking as the unemployment rate jumped from 5.0% to 5.5% rather unexpectedly. The bears grabbed control of the action at the opening bell and would not let go. Below in Chart 1, you can clearly see the current trading range for the NASDAQ:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c86970c-pi
Notice on the latest price high on the NASDAQ that a long-term negative divergence has formed on the MACD. This suggests to me that we'll see a pullback continue to test the 50 day SMA and the bottom of the recent trading range. Look for 2425-2441 as a target on the current move down. If that support area is lost, the market could have much further to drop. Continue to play the trading range, but beware of changing conditions. The market has recently enjoyed outperformance by the NASDAQ 100, or NDX. Chart 2 is a "flight to safety" chart that compares price action between the Dow Jones and the NDX. When equity prices are under pressure and downtrending, the "flight to safety" ratio generally moves higher as money rotates from the high-growth, high PE NDX stocks to the more stable and secure blue chip companies. However, a strengthening equity market normally results in a decreasing "flight to safety" ratio. Should the current downtrend in this ratio be broken, it would be yet another sign of further weakness to come in the equity markets.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c90970c-pi
Next up is the S&P 500. I had identified 1370 as fairly strong short-term price support. That support level was lost on Friday's close, as was the 50 day SMA. The S&P 500 joined the Dow in losing their respective 50 day SMAs. Below is the current chart on the S&P 500:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c98970c-pi
Losing price support on the S&P 500 was ominous enough. However, watching the MACD cross the centerline on the S&P 500 has put us in a very cautious mode. Think capital preservation.
Happy trading!
Join Tom and the Invested Central team at . Invested Central provides daily market guidance, intraday stock alerts, annotated stock setups, LIVE member chat sessions, and much, much more.
Posted by Chip Anderson at 4:05 PM in Tom Bowley | Permalink
June 08, 2008SMACK DOWN AT RESISTANCE By Chip Anderson
Arthur Hill
Even though techs and small-caps have been showing relative strength the last several weeks, the Nasdaq and the Russell 2000 are running into stiff resistance of their own. Their charts show similar setups that point to a medium-term peak.
First, let's look at the reasons for resistance. Both indices declined sharply from October to March and then rallied from mid March to early June. These rallies retraced 50-62% of the October-March declines and carried both indices back to their 200-day moving averages. In addition, broken support around 2550 turns into resistance for the Nasdaq. The yellow areas reflect these resistance zones on both charts.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590d04970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590d0a970c-pi
Friday's sharp decline reinforces these resistance zones and increases the chances of a trend reversal. Both indices have been moving higher since mid March and remain in 10-12 week uptrends. The late May lows and 50-day moving averages mark support for these uptrends. A break below these support levels would forge a lower low and reverse the uptrends.
There is also a videoversion of the this analysis available at TDTrader.com - Click Here.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
« Previous | Next »
June 08, 2008THREE MARKET VIEWS By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e80970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e84970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e88970b-pi
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.
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
June 08, 2008LOOKING TOWARDS THE HORIZON By Chip Anderson
Richard Rhodes
When markets become as volatile as they have in the past week; it is best to stand back and take a look at the longer-term time horizon. We like to use the S&P 500 as our proxy; and as week look at the monthly chart - we find the S&P having broken down through several critical long-term support levels. This suggests the probability has increased substantially that a bear market has indeed begun - with further significant damage to be wrought in the months ahead.
Quite simply, the 1980-2002 bull market trendline was violated; the importance of which can't be underestimated. The last time a trendline of this magnitude was violated, the S&P fell roughly -27% from the breakdown level. If that were to occur once again - then it would argue for a lower target of 985 from its current 1360 level. This has significant implications towards tactical trading to be sure. Moreover, confirming this major breakdown, the 20-month moving average was violated and is now turning lower - a circumstance last seen at the end of 2001. We all know the subsequent damage done thereafter.
Therefore, taking the long-term perspective and perhaps positing that last Thursday's rally was in essence the end of the countertrend rally off the March lows, while Friday's plunge the beginning of the next leg lower - one should certainly consider becoming more defensive and/or putting on short positions.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590cdc970c-pi
Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
June 08, 2008BEARISH FORCES RETAKE THE MARKET By Chip Anderson
John Murphy
There have been two consistent themes that myself and Arthur Hill have been stressing in recent Market Messages. One has been that the rally from mid-March is a bear market rally. The other has been that the rally has probably ended. That dual reality was brought into sharper focus on Friday when a combination of intermarket forces sealed the fate of bullish hopes. A huge jump in the unemployment number, a big drop in the U.S. Dollar, and a record surge in oil prices sunk the stock market in a big way. Charts 1 and 2 show the Dow Industrials and the S&P 500 hitting two-month lows on heavy volume. That's after failing at their 200-day moving averages in mid-May. Rather than repeating ourselves, I refer you to last Monday's Message headlined: "It still looks like the bear market rally is ending -- Short-Term ROC lines have turned negative -- Long-Term ROC shows market still in bear market -- VIX jumps 10% -- Nasdaq fails at 200-day average for second time". All of those bearish factors are still in play. Chart 3 shows the Nasdaq ending the week back below its 200-day line after a brief pop over that major resistance line on Thursday.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f39970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f3d970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f41970b-pi
\
Subscribe to John Murphy's Market Message today!
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
June 08, 2008TIME INDEPENDENT CHARTS REDUCE EMOTIONAL INVESTING By Chip Anderson
Chip Anderson
StockCharts now has four different "time independent" forms of charting. I thought I'd take some time this week to introduce you to all four.
A "Time Independent" chart is a chart that doesn't have a consistent horizontal axis. On a typical price chart - a standard Bar Chart for example - each time period on the chart occupies one vertical column of space, even if the stock doesn't trade during that time period. So, one week of time occupies the same amount of horizontal space regardless of the ticker symbol you are charting. On a "Time Independent" chart, each time period may or MAY NOT result in vertical columns of space being added to the chart - it depends on the price action during that period of time.
You are probably familiar with Point and Figure charts - the ones with the X's and the O's. We've had P&F charts on StockCharts almost from day one. They are the most common example of Time Independent charting on our site. On a P&F chart, new X's or O's only appear if the price "fills" the next box in the current column. New columns appear only if the price reverses direction by a large enough margin. (Click here for the gory details.)
In addition to Point & Figure charts, StockCharts.com now supports Three-Line Break charts, Kagi Charts, and Renko Charts - the four most popular time independent charting styles out there. Here's what all of those charts look like:
Point & Figure Chart
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c5f970c-pi
Three-Line Break Chart
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c6a970c-pi
Kagi Chart
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c6f970c-pi
Renko Chart
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c72970c-pi
(Click on each chart to see how it was constructed.)
As you can see, each kind of charting has its advantages and disadvantages. For example, the P&F Chart clearly shows the recent Double Bottom Breakdown that occurred at the end of May. The Three-Line Break chart shows the Head & Shoulder top that appeared on the chart at the end of last year. The Kagi chart makes it easier to spot support/resistance levels such as the one around 12750 that was recently broken. Finally, the Renko chart clearly shows when the Dow was trending up and down.
You can read more about P&F Charts, Kagi Charts and Renko Charts in our ChartSchool's Chart Analysis area now. (We'll have a Three-Line Break article up soon.)
The key reason to use Time Independent charts like these is that they filter out all of the "insignificant" price moves and give you a better view of the "big picture." Make sure to add these important tools to your charting arsenal.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
May 17, 2008LOOKING A LITTLE TOPPY By Chip Anderson
Tom Bowley
I've been bullish since my earlier bottom call in January. There were several reasons for the call, but in particular there were contrarian indicators moving off the charts in the bearish direction. That suggested that the next move in the market would be higher - and it was. After a retest in March with an incredibly bearish put call ratio in place, the market soared. There have been many positive technical developments since that time, with perhaps the most notable being the relative outperformance that the semiconductors have enjoyed. Below in Chart 1, I'm highlighting the relative strength of that group. Nearly every bullish move in the semiconductor group has lifted the overall market and this time has been no different. In fact, the semiconductors have been the reason for the outperformance of the NASDAQ and NDX over the last several weeks. At Invested Central, we were in the minority in calling a market bottom, but that's exactly where we prefer being - in the minority. Take a look at the relative strength of the semiconductors. It will be very important to follow this group in the weeks ahead for clues as to the direction of the market.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e71970b-pi
I mentioned above the put call ratio. This very important sentiment indicator is checked every trading day and I follow the 5 day and 21 day moving averages as a gauge of investor sentiment. When I see extreme readings in either direction, it sends up red flags that a directional change is approaching. We're nearing one of those times right now. After having been very bullish for weeks, I've moved more to a neutral or even bearish stance in the near-term. It's too early to make any long-term calls based on current developments, but clearly the bullishness that we've recently enjoyed could be waning. Why? Well, here's a couple of reasons. First, the "equity only" put call ratio (which ignores index options) hit 1.35 on March 17th, the highest reading at the CBOE since the equity only reading was broken out. That marked extreme bearishness on the part of individuals and VOILA! a bottom was in place. We're now on the opposite side of investor sentiment. On Friday, the equity only put call ratio printed its third consecutive daily reading below .60. There have only been 8 such readings during all of 2008. Obviously, options traders are beginning to think the water is safe again. That bothers me. You may recall Chart 2 below as it demonstrates the importance of tracking investor sentiment via the put call ratio (the numbers on the chart represent the 5 day moving average of the "equity only" put call ratio). Note the readings at significant tops and bottoms and then check out the current 5 day moving average. There is no denying that we've seen a HUGE swing in investor sentiment in the last 8-9 weeks. We may not be exactly at a top, but we're getting close.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e77970b-pi
Finally, let's review the VIX. The VIX is designed to measure the implied volatility of S&P 500 index options. As fear ramps up, the VIX normally rises indicating that volatility will be picking up as well. A rising VIX is synonomous with a falling equity market. A falling VIX is synonomous with a rising equity market. As the VIX falls too far, complacency becomes an issue. On the flip side, as the VIX skyrockets, fear is elevated and a panic bottom generally forms. When the VIX lost its rising trendline in late March/early April, it was further evidence that the market was going higher. Currently, the VIX has reached a support level. A bounce off of this support level would likely coincide with a drop in the stock market. We have to respect that support area until it's lost. Check out Chart 3 below.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e79970b-pi
I would definitely stay away from the underperforming groups like financials and consumer discretionary stocks. Another bout of selling would likely take a toll on both of those groups. Put insurance or adding the Ultra Short ETFs that track the various indices would not be a bad strategy to hedge during this period of uncertainty.
Happy trading!
Posted by Chip Anderson at 4:05 PM in Tom Bowley | Permalink
May 17, 2008FINANCE AND HEALTHCARE LAG By Chip Anderson
Arthur Hill
Money may be moving into Technology, but it is avoiding Finance and Healthcare. While the Dow Industrials ETF and S&P 500 ETF both touched their 200-day moving averages in May, the Finance SPDR (XLF) and the Healthcare SPDR (XLV) fell well short of their 200-day lines. The inability to keep pace with the broader market shows relative weakness.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b3b970c-pi
On the price chart, the Finance SPDR (XLF) broke down last week and then stalled this week. With a slight rise over the last 6 days, a mini-flag formed with support at 26. Support here is also reinforced with the 50-day moving average. A break below 26 would end this rise and call for a continuation of the early May decline.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b45970c-pi
The Healthcare SPDR (XLV) is in even worse shape than XLF. After a bounce on 18-March with the rest of the market, XLV traded flat the last two months and went nowhere. In the process, a rising wedge formed with support just above 31. A move below the May lows would break wedge support and signal a continuation lower.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
May 17, 2008LOOKING BULLISH BUT OVERBOUGHT By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f51970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f57970b-pi
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.
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
May 17, 2008COMMODITY COUNTRIES HIT NEW HIGHS By Chip Anderson
John Murphy
On Monday, I wrote about three foreign stock markets that were at or close to new record highs. Those three markets are Brazil, Canada, and Russia. What all three have in common was that they are producers and exporters of commodities. By the end of the week, all three markets had hit new records. Chart 1 and 2 show Brazil iShares (EWZ) and the Market Vectors Russia ETF (RSX) hitting new highs. Both cash indexes have done the same. Chart 3 shows the Toronto Composite Index (TSE) hitting a new record high as well. Canada iShares (bottom of Chart 3) have not reached new highs yet. As I explained on Monday, a flat Canadian Dollar is causing the iShares to lag behind Canadian stocks. Not surprisingly, the top sector in the Canadian market is basic materials. That's also true in the U.S. as commodity markets have a strong day.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f13970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f16970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f1d970b-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
May 17, 2008ON THE DANGERS OF WEB ACCELERATORS By Chip Anderson
Chip Anderson
Last week, we started getting disturbing reports from several users about seeing the wrong name at the top of the page after they logged in to StockCharts.com. That set off HUGE RED WARNING LIGHTS here. We have numerous safeguards in place to make sure that people only see their own information. And yet here were credible reports showing that somehow those safeguards weren't working. Yikes!
After scratching our heads for a while, we set us some "sniffing computers" on our network that recorded ALL of the "Welcome..." messages that our site was sending out. These "sniffers" were positioned to record that information at the point immediately before the data was handed over to the Internet. If we were sending the wrong information to the wrong users, these "sniffers" would show us exactly what was going on.
But then something really strange happened. Several users reported the problem again but the sniffers didn't record any problems! That meant that something else was sitting between our website and the users' computers and mixing things up! But that was impossible - wasn't it?
It turns out that there is one category of program that does exactly that. So called "Web Accelerators" work by intercepting requests from a user's browser, sending us the request via a high-speed link, and the storing the results in their own servers and then sending the results back to the original user. They store the results locally so that, if they see the same request from a different user later, they can send the stored results instead.
Some more checking on our end revealed that, sure enough, the "Google Web Accelerator" was being used by all of the users that were reporting problems.
Some more checking revealed that the Google Web Accelerator was mistakenly saving the "Members" page for anyone that had it installed and then sending that saved version to the next people that had the Google Web Accelerator installed.
So who's at fault for this problem?
1.) Google maintains that their Web Accelerator adheres to several published standards for "caching" content. We (along with several other web sites that have been bit by this) don't agree. The "standard" that they point to is vague on several points and they make some questionable assumptions about what to do in those cases.
2.) Google also maintains that their Web Accelerator is still in "Beta" and that there may be bugs. We consider this to be a significant one.
3.) Users that installed the Google Web Accelerator are cautioned during the installation process that some data sharing might occur - but that warning is buried in a chunk of text that is rarely read.
Once we understood what was happening, we were able to come up with a fix that prevents Google's Web Accelerator from storing the "Welcome" page. After more testing, we are now confident that people using Google Web Accelerator won't see other people's information again.
So, problem solved right? WRONG!
People who are using Web Accelerators, regardless of who wrote them, need to be aware that their personal data can leak from those programs. Web Accelerator software makes several assumptions about how web sites protect private data and those assumptions are NOT universally correct. Just because we've fixed this problem with the Google Web Accelerator, that doesn't mean that other web sites out there don't have similar problems. It also doesn't mean that other non-Google Web Accelerators will work correctly.
Based on our findings, we strongly recommend that people avoid these programs - or at least understand that using them may unintentionally expose your private information to other people.
For more information on Web Accelerators, see this article from Wikipedia: http://en.wikipedia.org/wiki/Web_accelerator
Sorry for not talking about charting or the stock market this week, but I wanted to make sure everyone was aware of this important issue.
Be safe out there,
Chip
Note: It is always very risky talking about these kind of issues publicly. People may turn this around and say "StockCharts isn't safe." It's not a black/white situation. We decided to tell everyone about this issue because we feel it is important and the danger is real. If it helps our users become safer netizens then the risk of talking about this issue was worth it.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
May 04, 2008SEMICONDUCTORS AND FINANCIALS HELPING TO LEAD TURNAROUND By Chip Anderson
Tom Bowley
It's been a long time since we've spoken about semiconductors or financials in a positive light. But times have changed and so have the charts for these two influential groups. Semiconductors are showing clear relative outperformance, but have now reached a critical resistance area. Check out Chart 1 below to see how the recent rally in semis have left them vulnerable as key resistance is tested. A break above would be quite bullish, but we'll need to see it first.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ce2970c-pi
Once the SOX broke through 380, there was very little resistance until the 404 level. We tested that on Friday and are now watching to see if this group can gain additional momentum by taking out key price resistance and the long-term downtrend line.
Financials are not quite as strong as semiconductors on a relative basis, but we are seeing signs of technical strength from that group. On Thursday, the XLF cleared 27.00 after battling resistance there on several occasions. Chart 2 shows the technical significance of this move.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ce6970c-pi
The XLF first broke downtrend resistance and finally took out price resistance at 27.00. Based on the chart, it appears that the XLF won't run into serious resistance until the 29.60 area. 26.90-27.00 should act as solid support on pullbacks during consolidation.
Financials and technology shares were leaders as the major indices broke above key resistance areas. Below in Chart 3 is a snapshot of the NASDAQ as it broke not only critical price resistance, but also the multi-month downtrend line that had been difficult for the bulls to conquer during prior attempts.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ced970c-pi
We remain optimistic and bullish until technicals suggest otherwise. Ignore the CNBC noise and follow the money.
Happy trading!
Posted by Chip Anderson at 4:05 PM in Tom Bowley | Permalink
May 04, 2008U.S. DOLLAR INDEX GETS A BOUNCE By Chip Anderson
Arthur Hill
The U.S. Dollar Index ($USD) remains in a long-term downtrend, but the index is showing signs of strength with a consolidation breakout this week. After becoming oversold in March, the index firmed for 6-7 weeks and surged above its mid March highs this week. StochRSI moved below .20 in late February, firmed a few weeks and then broke above its mid point (.50). These breakouts opens the door to an oversold bounce that could extend to the 75-78 area.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b18970c-pi
There are a number of factors pointing to resistance around 75-78. First, the trendline extending down from January-February 2007 comes in around 78. Second, the December 2007 high marks resistance around 78. Third, the falling 40-week moving average marks resistance just above 76. And finally, the January-February consolidation can also act as resistance around 76. Taken together, I am marking a resistance zone around 75-78 for the upside target.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
May 04, 2008SIX-MONTH UNFAVORABLE SEASONALITY PERIOD BEGINS By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590ae4970c-pi
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.
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
May 04, 2008"ROLLING CORRECTIONS" BENEATH THE SURFACE By Chip Anderson
Richard Rhodes
It is rather clear there are ongoing "rolling corrections" beneath the surface in today's markets. In terms of performance, whether one is bullish or bearish on the broader market hasn't made as much of a difference as we would have thought. But understanding where the 'funds' currently stand and where they are likely to 'move' makes a great deal of sense in terms of trading allocation.
To that end, we want to look at the "long in the tooth" and very profitable pairs trade of Long Energy/Short Financials. In recent weeks, we have begun to see a topping process take place in spread as the 14-week stochastic and 12-week rate-of-change are trading at near overbought levels and more importantly - showing signs of negative divergences - indicating a loss of momentum. Hence, we would posit that this mean reversion trend towards lower prices have quite a bit of downside left in front of it. At a minimum, we expect a test of the 40-week moving average - and at most a test of the 200-week moving average. Or, we can target the 50%-62% retracement box in between. In any case - there remains substantial downside remaining. In our portfolio - we currently have the trade currently on; and are looking to add more.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f25970b-pi
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
May 04, 2008CRUDE AND NATURAL GAS LOOK OVERBOUGHT By Chip Anderson
John Murphy
When only one commodity group is hitting new highs, that's usually a sign that it's out of step with the others. That seems to be the case with energy. I still believe that the energy complex is due for some profit-taking. Chart 1 shows the United States Oil Fund still in an uptrend. The 14-day RSI line, however, (top of chart) is backing off from overbought territory over 70. The daily MACD lines (bottom of chart) may be stalling at their March high. That's not a lot to go on. Add in the fact that energy shares are among the day's biggest losers, however, and we see a market group ripe for profit-taking. Chart 2 shows a negative divergence between the 14-day RSI (solid line) and the United States Natural Gas Fund. That's another sign that the recent energy runup is on weak technical footing.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b1e970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b20970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
May 04, 2008CLOUDS GATHERING ON THE HORIZON By Chip Anderson
Chip Anderson
Clouds are gathering on your charting radar - can you see them? No, no - I'm not talking about the recent bad news on the US economy or the price of oil or any of that stuff. I'm talking about another new kind of chart that StockCharts.com will soon be offering to all our users - Ichimoku Cloud Charts!
Ichimoku charts are similar to traditional candlestick charts but with several additional lines added to them as well as the unique "cloud" area. Here's an example of what one looks like:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590afa970c-pi
(Note: These are not available yet! We are putting the finishing touches on them this week. Watch for an announcement in the "What's New" section of the site later this week.)
In the example chart above, the shaded area is called the "the Cloud". It serves as a dynamic support/resistance zone that prices tend to bounce off of. The thickness of the cloud is an indication of its "strength" - prices are more likely to break through thin cloud areas, than thick ones. The Cloud also can "trap" prices for a period of time - for instance from mid-March to mid-April. Finally, the thick green line that ends in late March is called the "Chikou Line" ("Lagging Line") and right now it is looking bullish since there is nothing above it (no clouds, no candlesticks, etc.).
There are lots of other aspects to interpreting Ichimoku charts which I can't get into in this article. Look for our ChartSchool to include a detailed article on the topic soon. Until then here are two resources you may want to look into to:
Here is a link to a nice article on FXWords.com about Ichimoku charts. And here is a link to a great book on the topic which we sell in our online bookstore.
Again, we hope to have live Ichimoku charts on our website in the next week or so. Stay tuned...
Chip Anderson
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
April 19, 2008THE GAME HAS CHANGED By Chip Anderson
Tom Bowley
In the February 3rd edition of ChartWatchers, I made a bold prediction that the market had bottomed with the January lows. I did so because of the extreme pessimism in the options world. If you go back to 1995, the year that the Chicago Board Options Exchange began providing investors with historical put call readings, and average the daily put call readings, you'll find that 0.75 is the "norm". That's been the average end of day reading over the past 12-13 years. A .75 reading on the put call ratio means that for every 3 puts bought, 4 calls are bought. 3 divided by 4 = .75. When the ratio moves above 1.0, it indicates that more puts are being bought than calls. Now let's take it one step further - let's looks at the "equity-only" put call ratio. This strips out the index options used as part of more complex trading strategies employed by portfolio and hedge fund managers, and other investment professionals. The "equity only" put call ratio gives us much more of a sense of the individual traders' psyche.
Since October 2003 - the CBOE began breaking out equity options vs. index options at that time - the "equity only" put call ratio has hit or topped 1.0 on just 16 occasions. 3 of those occasions came on consecutive days from August 14-16, 2007. That marked a very significant bottom in the market. Then a month or so ago, it happened again. The retail investor couldn't take the pain any longer and jumped in on the "sure-fire" bet that the market would fall into oblivion. The "equity only" put call ratio spiked to 1.35 on March 17, 2008. That was the highest reading ever recorded at the CBOE since it began providing the "equity only" data. The 5 day moving average of the "equity only" put call ratio hit 1.01 that same day, also the first time we've seen that.
Would you like to take a guess as to which day the Dow Jones, S&P 500, NASDAQ, NDX, Russell 2000, and SOX all mysteriously hit their lows to launch the recent bullishness?
March 17th.
The chart below reflects the 5 times since 2003 that the 5 day moving average of the "equity only" put call ratio has exceeded .90. In every single case, that bearishness by the retail investor marked a very significant bottom.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6ef1970b-pi
And in the event you're wondering what happens when the "equity only" put call ratio declines to an extremely bullish level, check out the market's reaction in 2007 when the 5 day moving average of the "equity only" put call ratio hit its two lowest levels:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6ef3970b-pi
Clearly, the market has a renewed sense of bullishness as we've entered spring. The season has changed and so has the game. There's a reason the market is so resilient. The economy hasn't magically improved. We've simply run out of sellers.
Happy trading!
Join Tom and the Invested Central team at www.investedcentral.com. Invested Central provides daily market guidance, intraday stock alerts, annotated stock setups, LIVE member chat sessions, and much, much more. Also, listen to Tom throughout the trading week on The Invested Central Financial Hour, a business talk radio show focused on technical analysis of the stock market. The shows can be heard LIVE or archived at www.washingtonbusinessradio.com.
Posted by Chip Anderson at 4:05 PM in Tom Bowley | Permalink
April 19, 2008IMW VENTURES INTO RESISTANCE ZONE By Chip Anderson
Arthur Hill
Despite a big advance over the last few weeks, the Russell 2000 ETF (IWM) entered a resistance zone and has become overbought. There are two reasons to expect resistance around 72. First, the three February highs mark resistance in this area. Second, a 50% retracement of the December-January decline would extend to around 72. Corrective rallies normally retrace 38-62% of the prior decline. 50% marks the mid point and a good area to start expecting resistance.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590be5970c-pi
As far as oversold conditions, the Commodity Channel Index (CCI) moved above 100 for the second time this month. IWM remains both overbought AND strong as long as CCI holds above 100. I drew a trendline extending up from the March lows. A move below this trendline would signal trouble and a break into negative territory would be bearish for momentum.
Overall, a rising price channel is taking shape in IWM since mid March. As with the CCI indicator, this advance is in good shape as long as the lower trendline holds. I am marking key support at 68 from the late March and mid April lows. A move below the channel trendline and key support would reverse the uptrend that has been in place since mid March. Until such breaks, the bulls have the edge.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
April 19, 2008SUSPICIOUS GAPS By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fcd970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fd1970b-pi
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.
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
April 19, 2008STORM ON THE HORIZON By Chip Anderson
Richard Rhodes
The intermediate-term broader market technical condition is improving; however, we believe that this "improvement" is nothing more than a respite before the larger storm develops. First, let’s note that the Wilshire 5000 has broken its bull market trendline off its 2003-2006 lows, and remains on the defensive below its 70-week moving average. Secondly, a countertrend improvement has developed from the longer-term 200-week moving average, which did indeed provide support back in 2004 in tandem with the 70-week moving average. We would posit - and perhaps it is too early to do so, but we certainly want to keep all options on the table - that the current improvement is nothing more than a "right shoulder" forming of a larger "head & shoulders" topping pattern. Obviously overhead resistance at the 2007 previous low at 14,100 and the 70-week moving average at 14600 must prove its merit with lower prices - and break below neckline support. If this is the case, then we could very well see prices falter sharply as low as 10,000.
Certainly one must be concerned with the credit crisis/contagion to be sure, for it is the "great unwinding" that took years to put in place - and we would be rather naïve to believe that it is to be solved in a matter of 6-8 months. If this bear market is over, then it would be the second shallowest on record - and given the largest debt bubble in history is unwinding - then we remain very skeptical the decline is over. Moreover, unprecedented stresses in the money markets have developed this past week; stresses which the stock market is ignoring at is own peril. This is our roadmap; we short sellers of rallies.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590cb2970c-pi
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
April 19, 2008PENDULUM SWINGS BACK TO STOCKS By Chip Anderson
John Murphy
This week's market action has been characterized by stock buying and bond selling. The change in the relationship between those two markets is shown in the chart below which plots a ratio of the 7-10 Year Treasury Bond Fund (IEF) by the S&P 500 SPDRS (SPY). The falling ratio since October shows that investors have favored bond prices over the last six months. Since mid-March, however, the ratio has turned up. That means that investors are rotating out of bonds and back to stocks. The rise in the ratio isn't enough to signal a major trend change between the two asset classes. But it does show that investors are feeling a bit more optimistic. Rising bond yields gave a boost to the dollar today and caused heavy profit-taking in gold.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590bbd970c-pi
Subscribe to John Murphy's Market Message today!
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
April 19, 2008KAGI AND RENKO CHARTS COME TO TOWN By Chip Anderson
Chip Anderson
StockCharts.com is pleased to announce that we have just added Kagi and Renko charting formats to our site. Go. Check em out.
Hmmm... Why are you still here? Oh, right. Not everyone knows what Kagi and Renko charts are. Well, lemme show you what a Kagi chart looks like first:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b49970c-pi
Pretty different eh? It's actually more like a P&F chart than a OHLC or Candlestick chart. For one thing, notice that the horizontal time axis isn't uniform. Just like a P&F column of X's, the thicker lines will go up until a reversal occurs. Similarly, thin lines go down until prices move up again significantly. Notice how the Kagi display makes the support/resistance level clearer on the chart above?
Renko is similar only instead of vertical lines going up and down, boxes are filled at a 45-degree angle during each uptrend and downtrend. Here's the same chart in Renko format:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b4e970c-pi
We are still working on creating detailed ChartSchool articles for Kagi and Renko charts. Until those are done, you can refer to these great discussions on Investopedia.com - one for Kagi and one for Renko.
What? You're still still here? Go play with Kagi and Renko like everyone else! Oh, right. I forget to tell you how to create them. It's really easy. Just select Kagi or Renko from the "Type" dropdown in the "Chart Attributes" section of the SharpCharts workbench. You can even add indicators and overlays - although please be very careful about using those until you fully understand what they are telling you (for instance, a 20-period moving average becomes a 20-reversal moving average).
Have fun learning about these new tools - take time to learn about them and slowly incorporate them into your chart analysis if they work for you.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
May 04, 2008CRUDE AND NATURAL GAS LOOK OVERBOUGHT By Chip Anderson
John Murphy
When only one commodity group is hitting new highs, that's usually a sign that it's out of step with the others. That seems to be the case with energy. I still believe that the energy complex is due for some profit-taking. Chart 1 shows the United States Oil Fund still in an uptrend. The 14-day RSI line, however, (top of chart) is backing off from overbought territory over 70. The daily MACD lines (bottom of chart) may be stalling at their March high. That's not a lot to go on. Add in the fact that energy shares are among the day's biggest losers, however, and we see a market group ripe for profit-taking. Chart 2 shows a negative divergence between the 14-day RSI (solid line) and the United States Natural Gas Fund. That's another sign that the recent energy runup is on weak technical footing.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b1e970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b20970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
May 04, 2008CLOUDS GATHERING ON THE HORIZON By Chip Anderson
Chip Anderson
Clouds are gathering on your charting radar - can you see them? No, no - I'm not talking about the recent bad news on the US economy or the price of oil or any of that stuff. I'm talking about another new kind of chart that StockCharts.com will soon be offering to all our users - Ichimoku Cloud Charts!
Ichimoku charts are similar to traditional candlestick charts but with several additional lines added to them as well as the unique "cloud" area. Here's an example of what one looks like:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590afa970c-pi
(Note: These are not available yet! We are putting the finishing touches on them this week. Watch for an announcement in the "What's New" section of the site later this week.)
In the example chart above, the shaded area is called the "the Cloud". It serves as a dynamic support/resistance zone that prices tend to bounce off of. The thickness of the cloud is an indication of its "strength" - prices are more likely to break through thin cloud areas, than thick ones. The Cloud also can "trap" prices for a period of time - for instance from mid-March to mid-April. Finally, the thick green line that ends in late March is called the "Chikou Line" ("Lagging Line") and right now it is looking bullish since there is nothing above it (no clouds, no candlesticks, etc.).
There are lots of other aspects to interpreting Ichimoku charts which I can't get into in this article. Look for our ChartSchool to include a detailed article on the topic soon. Until then here are two resources you may want to look into to:
Here is a link which we sell in our online bookstore.
Again, we hope to have live Ichimoku charts on our website in the next week or so. Stay tuned...
Chip Anderson
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
April 19, 2008THE GAME HAS CHANGED By Chip Anderson
Tom Bowley
In the February 3rd edition of ChartWatchers, I made a bold prediction that the market had bottomed with the January lows. I did so because of the extreme pessimism in the options world. If you go back to 1995, the year that the Chicago Board Options Exchange began providing investors with historical put call readings, and average the daily put call readings, you'll find that 0.75 is the "norm". That's been the average end of day reading over the past 12-13 years. A .75 reading on the put call ratio means that for every 3 puts bought, 4 calls are bought. 3 divided by 4 = .75. When the ratio moves above 1.0, it indicates that more puts are being bought than calls. Now let's take it one step further - let's looks at the "equity-only" put call ratio. This strips out the index options used as part of more complex trading strategies employed by portfolio and hedge fund managers, and other investment professionals. The "equity only" put call ratio gives us much more of a sense of the individual traders' psyche.
Since October 2003 - the CBOE began breaking out equity options vs. index options at that time - the "equity only" put call ratio has hit or topped 1.0 on just 16 occasions. 3 of those occasions came on consecutive days from August 14-16, 2007. That marked a very significant bottom in the market. Then a month or so ago, it happened again. The retail investor couldn't take the pain any longer and jumped in on the "sure-fire" bet that the market would fall into oblivion. The "equity only" put call ratio spiked to 1.35 on March 17, 2008. That was the highest reading ever recorded at the CBOE since it began providing the "equity only" data. The 5 day moving average of the "equity only" put call ratio hit 1.01 that same day, also the first time we've seen that.
Would you like to take a guess as to which day the Dow Jones, S&P 500, NASDAQ, NDX, Russell 2000, and SOX all mysteriously hit their lows to launch the recent bullishness?
March 17th.
The chart below reflects the 5 times since 2003 that the 5 day moving average of the "equity only" put call ratio has exceeded .90. In every single case, that bearishness by the retail investor marked a very significant bottom.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6ef1970b-pi
And in the event you're wondering what happens when the "equity only" put call ratio declines to an extremely bullish level, check out the market's reaction in 2007 when the 5 day moving average of the "equity only" put call ratio hit its two lowest levels:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6ef3970b-pi
Clearly, the market has a renewed sense of bullishness as we've entered spring. The season has changed and so has the game. There's a reason the market is so resilient. The economy hasn't magically improved. We've simply run out of sellers.
Happy trading!
Join Tom
Posted by Chip Anderson at 4:05 PM in Tom Bowley | Permalink
April 19, 2008IMW VENTURES INTO RESISTANCE ZONE By Chip Anderson
Arthur Hill
Despite a big advance over the last few weeks, the Russell 2000 ETF (IWM) entered a resistance zone and has become overbought. There are two reasons to expect resistance around 72. First, the three February highs mark resistance in this area. Second, a 50% retracement of the December-January decline would extend to around 72. Corrective rallies normally retrace 38-62% of the prior decline. 50% marks the mid point and a good area to start expecting resistance.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590be5970c-pi
As far as oversold conditions, the Commodity Channel Index (CCI) moved above 100 for the second time this month. IWM remains both overbought AND strong as long as CCI holds above 100. I drew a trendline extending up from the March lows. A move below this trendline would signal trouble and a break into negative territory would be bearish for momentum.
Overall, a rising price channel is taking shape in IWM since mid March. As with the CCI indicator, this advance is in good shape as long as the lower trendline holds. I am marking key support at 68 from the late March and mid April lows. A move below the channel trendline and key support would reverse the uptrend that has been in place since mid March. Until such breaks, the bulls have the edge.
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
April 19, 2008SUSPICIOUS GAPS By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fcd970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fd1970b-pi
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.
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
April 19, 2008STORM ON THE HORIZON By Chip Anderson
Richard Rhodes
The intermediate-term broader market technical condition is improving; however, we believe that this "improvement" is nothing more than a respite before the larger storm develops. First, let’s note that the Wilshire 5000 has broken its bull market trendline off its 2003-2006 lows, and remains on the defensive below its 70-week moving average. Secondly, a countertrend improvement has developed from the longer-term 200-week moving average, which did indeed provide support back in 2004 in tandem with the 70-week moving average. We would posit - and perhaps it is too early to do so, but we certainly want to keep all options on the table - that the current improvement is nothing more than a "right shoulder" forming of a larger "head & shoulders" topping pattern. Obviously overhead resistance at the 2007 previous low at 14,100 and the 70-week moving average at 14600 must prove its merit with lower prices - and break below neckline support. If this is the case, then we could very well see prices falter sharply as low as 10,000.
Certainly one must be concerned with the credit crisis/contagion to be sure, for it is the "great unwinding" that took years to put in place - and we would be rather naïve to believe that it is to be solved in a matter of 6-8 months. If this bear market is over, then it would be the second shallowest on record - and given the largest debt bubble in history is unwinding - then we remain very skeptical the decline is over. Moreover, unprecedented stresses in the money markets have developed this past week; stresses which the stock market is ignoring at is own peril. This is our roadmap; we short sellers of rallies.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590cb2970c-pi
Posted by Chip Anderson at 4:02 PM in Richard Rhodes | Permalink
April 19, 2008PENDULUM SWINGS BACK TO STOCKS By Chip Anderson
John Murphy
This week's market action has been characterized by stock buying and bond selling. The change in the relationship between those two markets is shown in the chart below which plots a ratio of the 7-10 Year Treasury Bond Fund (IEF) by the S&P 500 SPDRS (SPY). The falling ratio since October shows that investors have favored bond prices over the last six months. Since mid-March, however, the ratio has turned up. That means that investors are rotating out of bonds and back to stocks. The rise in the ratio isn't enough to signal a major trend change between the two asset classes. But it does show that investors are feeling a bit more optimistic. Rising bond yields gave a boost to the dollar today and caused heavy profit-taking in gold.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590bbd970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
April 19, 2008KAGI AND RENKO CHARTS COME TO TOWN By Chip Anderson
Chip Anderson
StockCharts.com is pleased to announce that we have just added Kagi and Renko charting formats to our site. Go. Check em out.
Hmmm... Why are you still here? Oh, right. Not everyone knows what Kagi and Renko charts are. Well, lemme show you what a Kagi chart looks like first:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b49970c-pi
Pretty different eh? It's actually more like a P&F chart than a OHLC or Candlestick chart. For one thing, notice that the horizontal time axis isn't uniform. Just like a P&F column of X's, the thicker lines will go up until a reversal occurs. Similarly, thin lines go down until prices move up again significantly. Notice how the Kagi display makes the support/resistance level clearer on the chart above?
Renko is similar only instead of vertical lines going up and down, boxes are filled at a 45-degree angle during each uptrend and downtrend. Here's the same chart in Renko format:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b4e970c-pi
We are still working on creating detailed ChartSchool articles for Kagi and Renko charts. Until those are done, you can refer to these great discussions on Investopedia.com - one for
What? You're still still here? Go play with Kagi and Renko like everyone else! Oh, right. I forget to tell you how to create them. It's really easy. Just select Kagi or Renko from the "Type" dropdown in the "Chart Attributes" section of the SharpCharts workbench. You can even add indicators and overlays - although please be very careful about using those until you fully understand what they are telling you (for instance, a 20-period moving average becomes a 20-reversal moving average).
Have fun learning about these new tools - take time to learn about them and slowly incorporate them into your chart analysis if they work for you.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
April 06, 2008DIA BATTLES RESISTANCE By Chip Anderson
Arthur Hill
Despite some volatile price action the last few months, the Dow Industrials ETF (DIA) remains below a major support break and has yet to win the battle at resistance. DIA formed a rather large head-and-shoulders pattern in 2007 and broke support with a sharp decline in January. This support zone then turned into resistance and the ETF failed to break back above this zone in February.
DIA is making another challenge to resistance with a surge over the last three weeks. The prior surges fizzled around 127.5 and this is the first level to watch. A close above the February highs (127.5) would be positive for DIA. The bottom window shows MACD moving towards its signal line with an upturn over the last few weeks. A signal line crossover would be positive and show improving upside momentum.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590bfe970c-pi
Posted by Chip Anderson at 4:04 PM in Arthur Hill | Permalink
April 06, 2008A LOOK AT (COUGH, COUGH) FUNDAMENTALS By Chip Anderson
Carl Swenlin
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 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.
2007 Q4Est 2008 Q1Est 2008 Q2Est 2008 Q3TMT P/E Ratio (GAAP)20.722.524.823.6TMT P/E Ratio (Operating)16.616.916.916.1TMT Earnings (GAAP)66.1860.9555.1557.92TMT Earnings (Operating)82.5481.0881.1785.20Based upon the latest 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:
Undervalued (SPX if P/E = 10): 662 Fair Value (SPX if P/E = 15): 993 Overvalued (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://blogs.stockcharts.com/.a/6a0105370026df970c011168590c8c970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590c93970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590c9a970c-pi
Posted by Chip Anderson at 4:03 PM in Carl Swenlin | Permalink
April 06, 2008METAL AND OIL SERVICE STOCKS ARE BREAKING OUT TO THE UPSIDE By Chip Anderson
John Murphy
Throughout the market problems of the first quarter, stocks tied to basic materials have been the top performing sector. That's also been true over the last week. The chart below shows the Materials SPDR (XLB) trading over 43 today for the first time this year. That puts in in striking distance of its fourth quarter highs. The rising relative strength line below the chart shows the group's superior performance since last autumn. Three of the top performing stocks in the XLB are Alcoa, Freeport McMoran Copper & Gold, and U.S Steel.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590d11970c-pi
One of the top performers in the Oil Services Holders is Rowan Companies (RDC). The chart below shows the stock breaking out to the highest level since last July. Its relative strength ratio is doing the same. Beneath it, is a chart of ESV. It shows Ensco Intl already nearing a test of last summer's highs. Its relative strength ratio is in a strong uptrend. The strongest chart of all may belong to Halliburton (HAL). It shows that oil service leader nearing a challenge of its 2006 and 2007 highs in what appears to be a two-year "ascending triangle". (An ascending triangle is defined by two converging trend lines with a flat upper line and rising lower line. It's a bullish pattern.) A number of readers have asked where to start putting new money to work in the stock market. At the moment, two good choices seem to be basic material and energy stocks.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590d18970c-pi http://blogs.stockcharts.com/.a/6a0105370026df970c011168590d1f970c-pi http://blogs.stockcharts.com/.a/6a0105370026df970c011168590d23970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
April 06, 2008WHEN TRENDLINES COLLIDE By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
The Real Estate industry is undergoing lots of challenges right now. Let's see how those challenges are affecting the REIT charts. Check out the current chart for the Dow Jones REIT index:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ad2970c-pi
The problem with REITs is clear here - the blue downtrend line that started back in early 2007. It was created when the spike in October faltered around the 315 level.
The other problem is the break in the thin "2yr Support line" (just below 260) that happened back in December. That support level was created in mid 2005 and confirmed in June on 2006. It provided support in August of 2007 after the collapse began, but failed spectacularly last December. Since then, it's been a resistance level for the index - that is, until last week...
The longer term picture focuses on the 220 support level - the "4yr Support" line that I added. That level was created in late 2004 and confirmed in Oct. 2005. Recently, it halted the free fall at the start of 2008 and continues to look pretty strong.
The short-term question is "Will the index be able to break through that blue downtrend line? Or will it bounce lower and retest those two support levels again? ChartWatchers should be paying close attention to these key tests in the next couple of weeks.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
« Previous | Next »
March 15, 2008OIL PRICES, TRANSPORTS AND THE NEXT BUBBLE By Chip Anderson
Tom Bowley
It makes perfect sense that higher oil prices could derail (no pun intended) transports as the implications are clear. But the truth might surprise you. From Chart 1 below, you'll see that oil prices have been rising dramatically over the past 6 years. The price per oil was below $20 per barrel in 2002. That seems almost unfathomable as we contemplate $110 per barrel oil. That's nearly a six fold increase in the price of oil over a six year period. There's no possibility that transportations could thrive in that environment, correct? I mean, it just doesn't make any logical sense. Or does it? Supply and demand drives oil prices just as it does any other commodity or financial instrument, at least from an economic perspective. As the world economy was strengthening after our 2000-2002 bear market, oil prices naturally rose and they continued rising. Economic growth was sustained for a very long period and oil prices went along for the ride. Transports also benefit during economic expansion. So long as demand is at least partially responsible for higher oil prices, then transports can also thrive simultaneously. Now take another look at the Chart 1:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c40970c-pi
Crude oil rose dramatically during our economic expansion, but that expansion began to slow at the onset of credit issues relating to subprime loans that surfaced in July 2007. From the Chart 1, you can see that both crude oil and transports far outperformed the S&P 500 during the expansion period. But notice in Chart 2 the inverse relationship that's developed since July 2007:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c46970c-pi
Crude oil definitely was rising from increased demand during global economic expansion. But it also was benefitting from the weak dollar. Since July the dollar index has tumbled, down another 10% in the last 8 months. It's the spiraling downward dollar that is fueling crude oil's continuing advance. It has been that same weak dollar that has helped to fuel other commodities like gold, silver and copper. I'm not saying it's solely responsible, but the extremely weak showing of the dollar is, at a minimum, aiding the commodity bulls. I believe the one event that could turn the tide on commodities is the lowering of interest rates by the European Central Bank (ECB). World markets are suggesting that the economic weakness felt here in the U.S. is not isolated. To date, the ECB has been adamant that inflation is the primary concern and rates abroad have remained elevated. The interest rates here in the U.S. are heading lower, so until the ECB changes its policy stance, commodity bulls will likely reap the rewards.
At the hint of an ECB rate cut, we'd lock in any and all commodity profits.
Happy trading!
Posted by Chip Anderson at 4:06 PM in Tom Bowley | Permalink
March 15, 2008THE DOW AND THE JANUARY LOW By Chip Anderson
Arthur Hill
Technical analysis is a little art and a little science, which makes it subjective and open to interpretation. It is kind of like, gasp, economics. With a test of the January lows and a big surge on Tuesday, some pundits are talking double bottom. The interpretation of this double bottom depends on the charting style.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fb0970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fb5970b-pi
The two charts show the Dow with OHLC bars and with closing prices only. The bar chart sports a potential double bottom with two lows around 11750. In addition, the March low is actually above the February low. However, the close-only chart shows a clear downtrend with a lower (closing) low in March. The close-only chart looks more bearish than the bar chart. Before getting too excited about the double bottom chatter, I would keep in mind the clear downtrend on the close-only chart.
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
March 15, 2008GET A LONG-TERM PERSPECTIVE By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590aea970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590af2970c-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
March 15, 2008CHECKING OUT THE HOMEBUILDERS By Chip Anderson
Richard Rhodes
From a broader market perspective, the S&P 500 continues to weaken after having violated the 1982-2000 bull market was violated two weeks ago at near 1310. This would suggest that further weakness is forthcoming and quite sharp weakness at that. But in any bear market - the rallies are sharper and more poignant, and give rise to the "hope" that a bottom is forged. Last week's "Bear Stearns" implosion is simply part and parcel of the credit unwinding that appears to have quite a bit of distance to go if we take the S&P 500 trendline breakdown into account. We have projections near 945, or a 343 point fall from Friday's close.
But having said this, we want to hone in on the Homebuilder indexes and the fact that in January of this year - they forged a rather bullish monthly "key reversal" pattern higher from major support levels. While that isn't clear on this Homebuilder ETF (XHB) chart given the short period of time it has been around - if one looks towards the S&P Homebuilding sub-industry - one would find the very same pattern and from major support levels forged in 2002. Thus, given this major technical bullish pattern - and the fact interest rates are likely to continue lower as the credit crisis unfolds - then perhaps traders will find the homebuilders a 'relatively safe' area to hide, for everyone anywhere and everywhere 'knows their fleas'. Certainly in regards to the XHB, we would very well see a sharp rally unfold upwards towards $27.50 to $30.00, which would represent a rough back of the envelope gains of +37% to +50%. The homebuilder stocks are over-subscribed in terms of short positions outstanding - which could provide the fuel necessary to get to these levels regardless of the economic backdrop. Hedge funds look for leverage, and in an era of deleveraging - certainly using the short outstanding positions to goose them higher seems reasonable. On Friday, we were buyers of XHB, Pulte Homes (PHM) and Hovnanian Enterprises (HOV).
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590af0970c-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
March 15, 2008ONE STEP FORWARD, TWO BACKBy Chip Anderson
Site News
As we continue to evaluate alternative data feeds, we continue to be surprised by the results we are getting especially when it comes to data accuracy. Last week, we finally started charting intraday data from several different providers in our test lab. That allowed us to visible compare the results and see which vendors could give us the "best" data. We were surprised to find out that our current vendors data was by far the "cleanest" of all the feeds we were looking at. That was surprising because our users alert us to minor intraday spikes on our charts all the time. We've asked the other data vendors to explain why their data is so "spikey" - hopefully, they will be able to find and fix the problem. If not, we'll move forward knowing that we are providing our members with the cleanest data available - even if it isn't always perfect.
Posted by Chip Anderson at 4:02 PM in Site News | Permalink
March 15, 2008YEN HITS THIRTEEN YEAR HIGH By Chip Anderson
John Murphy
Last week I showed the Japanese Yen testing major chart resistance its 2000/2004 peaks. Today's 2% gain against the dollar put the yen over 100 for the first time in thirteen years (1995). While that's good for the yen, it's not necessarily good for global stocks which have been falling as the yen has been rising since last summer. Another low-yielding currency had a strong day today. The Swiss Franc gain of 1.5% made it the world's second strongest currency and pushed it to a new record high against the dollar. With the dollar and U.S. rates falling sharply today (along with stocks), gold and bonds had another strong day.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6eb5970b-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
March 15, 2008THE DISPLACED MOVING AVERAGE RIBBON By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
A while back, demonstrated the concept of the Moving Average Ribbon here as a way for seeing the "waves and ripples" for any stock. The concept is simple - just plot lots of Moving Average overlays on the same chart but change the period for each MA by a fixed amount.
Many people really liked that concept and many people still use it in their daily analysis. Here's a different take on that same concept - the Displaced Moving Average Ribbon:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b01970c-pi
(StockCharts members can click the link above to see exactly how the chart was created.)
Just like the MA Ribbon, the Displaced MA Ribbon plots several Moving Average overlays on the same chart, only this time each MA has the same period BUT the offset for each MA is increased/decreased by a fixed amount. For those who aren't familiar with it, the Moving Average overlay on SharpCharts can take a second, optional parameter which represents the offset (positive or negative) for a moving average. For example, if you specify "50,5" as the parameters for a MA, SharpCharts will plot the 50-day Moving Average line and then shift it to the right by 5 periods. Similarly, "50,-5" shifts the MA line 5 periods to the left.
The Displaced MA Ribbon can help you see when a stock's current trend is "running out of steam" - if all of the lines are marching in step, things a great and the current trend should continue. When the lines start to get "tangled", it's time to re-evaluate things.
In the example above, I choose to use a Simple Moving Average with a 50-day period and displacement offsets of 5 periods. All of those things can be adjusted to suit your situation. You may find that a ribbon based on 20-day EMAs with 10-period offsets works better. That's great! Experimentation leads to familiarity and then to trust - and you need to trust an indicator before you can trade with it.
While I personally prefer the original MA Ribbon, the Displaced MA Ribbon can provide a different perspective on things and can help alert you to trend changes you might otherwise miss.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
March 01, 2008TRANSPORTS FALL FROM RESISTANCE By Chip Anderson
Arthur Hill
The Transport iShares (IYT) is an ETF designed to match the performance of the Dow Jones Transportation Average. The key industry groups include airlines, railroads, truckers and air freight, all of which are quite sensitive to the overall economy.
After surging in January, the ETF met stiff resistance in February and this week's decline looks like the start of another leg lower. Resistance stems from the 200-day moving average and the reaction highs from late August to mid December. The ETF surged to this zone, stalled and then backed off with a vengeance the last three days.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b10970c-pi
In addition to a failure at resistance, a key volume indicator shows signs of distribution and increased selling pressure. On Balance Volume (OBV) peaked on 1-Feb and declined the last four weeks. Even while the ETF traded flat, OBV was already moving lower. The long red volume bars show high-volume selling that preceded this breakout.
Posted by Chip Anderson at 5:05 PM in Arthur Hill | Permalink
March 01, 2008WHIPSAW! By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590bd7970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590be0970c-pi
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.
Posted by Chip Anderson at 5:04 PM in Carl Swenlin | Permalink
March 01, 2008US CLEARLY IN BEAR MARKET By Chip Anderson
Richard Rhodes
As the credit crisis continues to unfold in rather negative fashion; many believe that the US economy will not enter into a recession, and many believe that if we do enter into a recession - that it is likely to be short-lived and shallow. We'd beg to differ as this will not be a "V" shaped recovery as most hope for, but more of the "U" variety that few fear...more long and drawn out. Demand for credit is high; availability of credit is low.
But our concern aside, the US equity markets have clearly entered into a bear market. Today, one should look at the monthly NASDAQ Composite chart to see that the defining technical indicators for the bull market off the 2002 lows have been violated. To keep it rather simple, for simple is best - rising trendline support of the rising wedge was violated. We all know from Technical Analysis 101 that monthly trendline breakdowns carry more weight. Also, the major trend defining 25-month moving average was violated - which in tandem with the trendline violation - argues strongly for sharply lower prices.
Therefore, rallies are to be sold, which given current prices are only but 161 points below the 25-month moving average - suggests this bear market is about to accelerate. And, we won't see it end until the current complacent 'public' hits the much vaunted "puke point." Where that point is will be debated for a number of months; but perhaps the 50%-62% retracement zone at 1844-2066 will offer at least an initial bottoming target prior to what is likely a sharp short covering rally. For now, all that really matters is that the trend lower; and as such...we are sellers of Technology, Consumer Discretionary and Retail shares.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b28970c-pi
Posted by Chip Anderson at 5:03 PM in Richard Rhodes | Permalink
March 01, 2008WHY A RISING YEN ISN'T GOOD FOR STOCKS By Chip Anderson
John Murphy
I first started writing about the danger posed to global stocks last summer when the yen first started rising. I also wrote that was because a rising yen was part of the unwinding of the so-called "yen carry trade". Over the last few years, global traders had been borrowing yen at almost no interest charge (shorting the yen) and using those funds to buy higher-yielding assets elsewhere including currencies and stocks. For awhile, it almost seemed like the global rally in stocks was predicated on the yen staying down and providing a continuing supply of cheap global liquidity. That all started to change last summer. Chart 1 shows a generally inverse relationship over the last two years between the Dow Jones World Stock Index (blue line) and the yen (black line). Note that every blip in the yen since the start of 2006 coincided with a market pullback. Last summer, however, the yen turned up in a more serious way. The upturn in the yen during July coincided exactly with the start of the topping process in global stock markets. Each subsequent yen upturn (November and December) coincided with another stock peak. That certainly suggests that yen strength is contributing to global stock weakness. That's because traders are now being forced to buy back yen shorts and sell assets elsewhere. Chart 2 shows the impact of the rising yen even more dramatically. That chart compares global stocks (blue line) to the yen (plotted as the black zero line). The blue line is in effect a global stock/yen ratio. It shows that a rising yen has been a bad thing for stocks. And there's no sign of that negative trend ending. At the risk of a bad pun, Chart 2 shows that a stronger yen has stopped "carrying" the bull market in stocks.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e56970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e59970b-pi
Posted by Chip Anderson at 5:01 PM in John Murphy | Permalink
March 01, 2008BLOOD ON THE CARPETS By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
Sorry for the ghastly title to this article, but the charts are rather ghastly as the moment and - as the image below shows - the damage is widespread:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590bdf970c-pi
That is a snapshot of our S&P Sector Market Carpet right now. Each stock in the carpet is represented by a colored square. The color of the square is determined by the change in the stock's price since February 1st. Dark red indicates a greater than 5% loss; dark green indicates a greater than 5% gain.
As you can see, there's only one sector that survived February - the Energy stocks. Our PerfChart tool brings that fact into even sharper focus:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590be9970c-pi
Keep these two great tools in mind as you follow the upcoming twists and turns in the markets. They should keep you out of trouble.
Posted by Chip Anderson at 5:00 PM in Chip Anderson | Permalink
February 16, 2008THE LINE CHART ADVANTAGE By Chip Anderson
Tom Bowley
This is a rarity. I am proposing that you use line charts - in one instance. A line chart simply connects one closing price to the next closing price. Intraday activity does not appear and is ignored. How in the world can line charts have an advantage over bar charts or candle charts? Well, there's one instance and I'm going to show you.
We discussed a couple of weeks ago how the recent lows in the market were accompanied by extreme bearish sentiment readings that many times mark significant long-term bottoms. So far those lows have held. Since that time, long-term positive divergences have appeared providing bulls with evidence that selling momentum has begun to slow. At first glance on a candle chart, it doesn't appear that a long-term positive divergence has printed. Take a look at the NASDAQ candle chart below:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c35970c-pi
Ahhhh, but wait a second! MACD = Moving Average Convergence Divergence. The MACD represents the difference between two moving averages. We use the standard 12 day and 26 day EMA's (Exponential Moving Average). Moving averages are calculated using closing prices. So if you're looking for a long-term positive divergence on a daily chart, you need to compare the CLOSING prices to one another. That's where the line chart comes in handy because it only connects closing prices. Take a look at that same NASDAQ chart, but this time on a line chart:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c37970c-pi
The line chart clearly has one advantage. This was an unusual circumstance because of the large gap downs and subsequent rallies that we experienced as the major indices put in their recent lows. We knew there was a reason why line charts were created and this is it!
The long-term positive divergences are yet another technical sign that indicates a bottom may be in place. However, the price/volume combination is our highest ranking technical indicator and it trumps divergences. If the major indices lose their recent lows as support and heavy volume accompanies the selling, that breakdown must be respected. In the meantime, we believe the market is range-bound as it attempts to develop a base from which to rebound longer-term.
Best of luck and happy trading!
Posted by Chip Anderson at 5:06 PM in Tom Bowley | Permalink
February 16, 2008DIA FAILS AT BROKEN SUPPORT By Chip Anderson
Arthur Hill
In the 15-December issue of ChartWatchers, I pointed out the possibility of a head-and-shoulders top in the Dow Industrials ETF (DIA). The ETF formed a weekly bearish engulfing pattern that week and this marked the mid December high. Subsequently, DIA moved lower over the next several weeks to confirm this bearish reversal pattern.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fc2970b-pi
This pattern remains in play and broken support is now acting as resistance. This is a basic tenet of technical analysis (broken support turns resistance). The ETF bounced back to broken support at the end of January, but this level turned into resistance as DIA fell back in February. This decline reinforces resistance around 128. More importantly, the head-and-shoulders reversal still dominates the landscape with a downside target around 112.5. The length of the head-and-shoulders is subtracted from the neckline support break for a target.
Posted by Chip Anderson at 5:05 PM in Arthur Hill | Permalink
February 16, 2008BOTTOM STILL NOT RESOLVED By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f67970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f6a970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f6d970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6f72970b-pi
Posted by Chip Anderson at 5:04 PM in Carl Swenlin | Permalink
February 16, 2008DOW JONES INDUSTRIALS CHANGING By Chip Anderson
Site News
Dow Jones announced last week that they are removing Altria and Honeywell from the index and adding Citibank and Chevron. The change takes effect at the start of trading on Tuesday.
MARKET HOLIDAY ON MONDAY - Don't forget that both the US and Canadian markets are closed on Monday.
Posted by Chip Anderson at 5:02 PM in Site News | Permalink
February 16, 2008COMPARING BOND ETFs By Chip Anderson
John Murphy
The below chart compares the performance of four T-bond ETFs since last July, when money started to flow out of stocks and into bonds. The four ETFs represent different durations in the yield curve. Through the middle of January, the top performer was the 20 + Year Bond Fund (TLT). Next in line was the 7–10 Year Bond Fund (IEF). That was followed by 3–7 Year Bond Fund (IEI), which was followed by the 1–3 Year Fund (SHY). The chart shows that the longer duration bonds did better than the shorter-term ones. That situation, however, may be changing. Over the last month, longer duration bond ETFs have fallen faster than shorter-duration funds. That could be a reaction to new fears of inflation arising from the aggressive Fed easing and a further steepening of the yield curve. That's because the long bond is the most vulnerable to fears of rising inflation. That also suggests that the long bond may no longer be the best place to be on the yield curve.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6eac970b-pi
The following three charts compare three bond ETFs with different time durations. The first shows that the 20+ Year T Bond Fund (TLT) has broken its 50-day moving average (blue line). Its the weakest of the three ETFs. The next shows the 7–10 Year T-Bond Fund (IEF) still trading above that initial support line. The last of the three shows that the 3–7 Year T Bond Fund (IEF) is holding up even better. That suggests to me that it makes sense to start moving away from the long bond to shorter maturities on the yield curve.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6eae970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6eb0970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6eb8970b-pi
Which brings us to TIPS (Treasury Inflation Protected Securities). TIPS are bonds that have some protection against inflation built into their pricing. That would seem to make them a good alternative in the current environment of falling yields and rising inflation pressures (record high commodities). Chart 8 shows the iShares Lehman TIPS Bond Fund (TIP) over the last year. . It has slipped a bit during February, but is holding over its 50-day moving average. The ratio below the chart divides the TIP by the 20+Year Bond ETF (TLT). The rising ratio since the start of 2008 shows that the TIP is starting to do better than the TLT. That may mean that bond investors are starting to favor TIPS for more insurance against inflation. That's not a bad idea.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6ebe970b-pi
Posted by Chip Anderson at 5:01 PM in John Murphy | Permalink
February 16, 2008DIGGING INTO MARKET BREADTH By Chip Anderson
Chip Anderson
StockCharts.com has an extensive collection of Market Breadth indicators. Many of them can be found under the "Breadth Charts" link on the left side of our homepage. However, one of the best places for studying market breadth on our site is - surprisingly - our Predefined Scan Results page. The page is easy to overlook but - fortunately - easy to get to. Just click on the "Stock Scans" link on the left side of our homepage and it will take you to the page I'm talking about. Here is a screenshot:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6fc9970b-pi
Now, the magic is in studying the ratios between various pairs of bullish and bearish scan results. It's up to you to determine which ratio(s) you trust the most - personally, I use these to try and confirm any signals I see on the "major" breadth charts. But one ratio I always keep an eye on is the ratio of Filled Black Candles to Hollow Red Candles (at the bottom of the screenshot above). It's probably the quirkiest ratio invented, but that's why I like it.
For those that didn't see my previous rantings about them, filled black candles and hollow red candles are what I call "Oxymoronic" candles. They arise whenever the market opinion about a stock dramatically reverses course in the course of one day. Usually candles that are colored black are hollow - that indicates that the stock closed higher than it did yesterday (black) and closed higher than its opening price (hollow). Conversely, red candles are typically filled in indicating that the stock moved lower during the day (filled) and closed lower than it did yesterday (red).
The "oxymoronic" candles appear when a stock gaps up (or down) on the open but then moves in the opposite direction during the day. The indicate "buyer's remorse" (or "seller's remorse") about a stock. The market is really confused about the stock's prospects - often it signals a change in the stock's current trend. The ratio of filled black candles to hollow red candles shows just how confused the market is and in which direction. If there are large numbers of filled black candles and few hollow red ones, then there were lots of stocks that gapped up and then fell back - overall that's a bearish signal. Conversely, lots of hollow red candles with few filled black candles indicates a bullish upturn might be on the way.
Other ratios on that page can be informative: Stocks in an New Uptrend / Stocks in a New Downtrend for example. Experiment with them - I bet you will find a useful tool or two.
Posted by Chip Anderson at 5:00 PM in Chip Anderson | Permalink
February 03, 2008THE MARKET HAS BOTTOMED By Chip Anderson
Tom Bowley
want to recap what was discussed in the last ChartWatchers newsletter. We were approaching significant long-term price support on the Dow and the lower trendline on the NASDAQ while pessimism was starting to ramp up. I discussed the possibility of a significant bottom approaching and to watch for the put call ratio to spike near the levels we saw in March and August of 2007.
First, let's take a look at the Dow chart.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c1d970c-pi
The Dow touched critical support and bounced 1000 points. The 13,000 area is a bit congested and will provide the bears some ammo as they attempt to fight back the bulls. If the market weakens, the recent lows and that long-term support area near 11,700 become HUGE. So for now, I'm looking for the Dow to be range-bound though I do maintain a slightly bullish bias with respect to the market overall. Economic supply and demand favors the bulls - just ask the shorts in the financial, homebuilding and retailing sectors.
Next, let's look at the NASDAQ uptrend channel that I discussed two weeks ago.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c28970c-pi
The NASDAQ moved down and briefly broke the trendline support level near 2240. Trendlines are not an exact science, however, so we must give a little room. In this case, the NASDAQ dropped down near 2200, but quickly recovered back into the channel. If you're in the bullish camp, you do not want the NASDAQ to lose 2200 as we move forward. That would result in a long-term trendline break AND violation of price support. We would likely see another 200 point decline to 2000 if that were to happen. I don't believe we'll see it.
Finally, did the pessimism ramp up as measured by the 5 day put call ratio? We've used this tool with tremendous success in helping to spot long-term bottoms. It's one of our key long-term sentiment indicators. Look at the chart below to see how the 5 day moving average of the put call ratio spiked as the market found a bottom. The red circles below indicate the 5 day moving average of the put call ratio in March and August of 2007. The blue circle shows us that the fear did in fact jump at the recent market bottom to suggest the last few sellers made it to the party just as it ended.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c33970c-pi
Happy Trading!
Posted by Chip Anderson at 5:06 PM in Tom Bowley | Permalink
February 03, 2008IWM NEARS RESISTANCE ZONE By Chip Anderson
Arthur Hill
With an oversold bounce over the last two weeks, the Russell 2000 ETF (IWM) is nearing a resistance zone from broken support and the 50-day moving average. Before going further, I should emphasize that the overall trend remains down for two reasons. First, the ETF broke down in January with a decisive move below its 2007 lows. Second, the 50-day moving average is below the 200-day.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c20970c-pi
This oversold could fizzle soon because the ETF is nearing resistance from broken support and RSI is nearing its December highs (red arrows). The November and December lows marked support and these now turn into resistance. This resistance zone is further confirmed by the falling 50-day moving average. RSI bounced twice in December, but peaked just below 70 each time. The indicator got another oversold bounce this week and is nearing the spot of its prior reversal. The moment of truth is approaching.
Posted by Chip Anderson at 5:05 PM in Arthur Hill | Permalink
February 03, 2008RESISTANCE THREATENS RALLY By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590c19970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590c23970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590c2e970c-pi
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.
Posted by Chip Anderson at 5:04 PM in Carl Swenlin | Permalink
February 03, 2008NO ONE IS IMMUNE By Chip Anderson
Richard Rhodes
We recently noted the US had in our opinion entered into a bear market; hence we believe rallies are to be sold in the coming weeks/months as prices enter into resistance. However, we continue to hear how other world markets such as the European, Asian and Emerging markets will be 'immune' from the US-led slowdown, and thus funds should flow from the US towards more international markets. We think this to be patently wrong, for the time to be long international markets at the expense of US markets has past. With the US Federal Reserve addressing the problem - however futile this may prove or not prove - the international central banks are not addressing the looming crisis. Hence, we will posit that the US is poised to outperform the international markets for months if not years into the future given the 'lead' the Federal Reserve has created via lower interest rates.
Technically speaking, we look at the ratio of the surrogate ETFs for the US and international markets - the S&P 500 Spyders (SPY) and the World ex-US (EFA). It is quite clear the trend has been lower since the world pulled out of recession in 2003, and the clear trade has been to be long International versus a short US position. But the emerging bullish wedge pattern suggests a trend change is in progress. A breakout above the 60-week exponential moving average would solidify this in our minds, and cause to err upon the side of being long US large caps at the expense of International markets.
This isn't the common prevailing wisdom; but given the contrarian nature of the trade... it shall catch everyone wholly off-guard and scrambling to make amends. So, for those overweight International Funds... this should serve as fair warning.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ab3970c-pi
Posted by Chip Anderson at 5:03 PM in Richard Rhodes | Permalink
February 03, 2008DATAFEED MILESTONES By Chip Anderson
Site News
We hit two milestones with our Datafeed Upgrade project during the past week. First, the upgraded data connections for our older Thomson feed were installed on Friday. The problems we had last summer were because there was too much data to fit through our 3 megabit data connections. We now have 15 megabit data connections in place so that particular problem shouldn't reoccur. Second, because of last year's snafu, we are adding a second data vendor and last week we also started getting test data from our new IDC ComStock datafeed. Now that the IDC hardware is installed and working we can focus on the next step - reprogramming our systems to use the IDC data in addition to the Thomson data we use now. Look for us to start incorporating IDC ComStock data into our charts in a month or so.
Posted by Chip Anderson at 5:02 PM in Site News | Permalink
February 03, 2008JANUARY BAROMETER PREDICTS BAD YEAR By Chip Anderson
John Murphy
I haven't heard anyone in the media talking about the January Barometer, which is based on the view that "as January goes, so goes the year". That's probably because they only talk about it when the market has a strong January, which predicts a good year. Unfortunately, this January was a very bad one. The 6% loss in the S&P 500 makes it the sixth worst January on record. According to the Stock Trader's Almanac, "the January Barometer predicts the year's course with a .754 batting average. It goes on to state that "every down January on the S&P since 1950, without exception, preceded a new or extended bear market, or a flat market". In addition to a bearish January Barometer, the market had a bad chart month as well. The monthly bars in Chart 1 show the S&P 500 falling -6.12% since the start of 2008 on the heaviest volume in a decade. The monthly stochastic lines (above chart) have fallen to the lowest level since mid-2003. The monthly MACD histogram has been negative for two consecutive months.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6e9e970b-pi
Posted by Chip Anderson at 5:01 PM in John Murphy | Permalink
« Previous | Next »
January 20, 2008IS IT BEAR SEASON? By Chip Anderson
Tom Bowley
The two most frequently asked questions these days are as follows: (1) Are we in a bear market? (2) Where's the bottom?
Let's take them one at a time. A bear market is generally defined as a decline of 20% or more. At the close on Friday, the declines across the major indices from their recent highs are:
Dow Jones: -2181 pts, or -15.27%
S&P 500: -251 pts, or -15.93%
NASDAQ: -521 pts, or -18.21%
NASDAQ 100: -395 pts, or -17.64%
Russell 2000: -183 pts, or -21.38%
The Russell 2000 is already in a bear market and the other indices are closing in on it. We believe it's going to be close as to whether all the indices actually hit that 20% decline. Pessimism has been ramping up in the last 2 or 3 trading days and extreme pessimism marks significant intermediate-term or long-term bottoms nearly every time.
Now let's tackle that second question - how low might we go? First, look at the 10 year weekly chart on the Dow. There was a long-term double top at 11,700 that finally gave way in the second half of 2006, as can be seen below:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c29970c-pi
On the NASDAQ, we're watching a long-term parallel uptrend channel that's been in place for over 4 years. If that channel is broken, then more downside is entirely possible. Below is a look at that long-term channel:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c31970c-pi
Perhaps the most important factor in the market right now is the increase in pessimism as reflected by the spike in the VIX at the end of last week and the increase in the put call ratio. In both March and August of last year, bottoms occurred as the 5 day moving average of the put call ratio moved above 1.30. That signaled extreme bearishness in the options world and the market bottomed as the put call ratio is a contrarian indicator. In November 2007 and again in early January, the market was dropping, but fear was not hitting panic levels. That has begun to change and will be a very important indicator to watch as the next week unfolds. In the chart below, you can clearly see the spiking 5 day moving average as significant bottoms were reached in March and August of 2007 (red circles):
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c39970c-pi
From the blue arrow at the right hand side of the chart, you can see that fear is ramping up considerably with last week's selling. Continuation of that trend will increase the odds of a significant bottoming process.
Happy Trading!
Posted by Chip Anderson at 5:06 PM in Tom Bowley | Permalink
January 20, 2008DOUBLE TOP PARADE CONTINUES By Chip Anderson
Arthur Hill
The Materials SPDR (XLB) joined the double top club with a sharp decline this past week. The Finance SPDR (XLF) and Consumer Discretionary SPDR (XLY) started the club with double top support breaks in August. The Russell 2000 ETF (IWM) broke double top support in November. And finally, the S&P 500 ETF (SPY) broke double top support this year. These are not small double tops, but rather large reversal patterns that have been confirmed. Moreover, these are important ETFs and lower lows are clearly bearish.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b6c970c-pi
The double top unfolded as XLB met resistance around 43 in October and again in December. The intermittent low formed in November and XLB broke below this low to confirm the pattern. XLB is also trading below its 50-day and 200-day moving averages. Even though the big trend is now down, the ETF is short-term oversold and could bounce. Broken support turns into resistance around 40 and there is also resistance in this area from the two key moving averages. An oversold bounce is possible, but I would expect it to fail around 40. Look back at the XLF and XLY double tops for clues on how this pattern may unfold in the coming weeks and months.
Posted by Chip Anderson at 5:05 PM in Arthur Hill | Permalink
January 20, 2008BEAR MARKET RULES APPLY By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590b29970c-pi
The next chart presents a long-term view, which makes it more clear how serious the situation is.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b2e970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590b32970c-pi
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.
Posted by Chip Anderson at 5:04 PM in Carl Swenlin | Permalink
January 20, 2008BULL MARKET IS OVER By Chip Anderson
Richard Rhodes
The bull market is over; the Dow Industrials broke below its major bull market trendline extending from the 1982 bear market lows through the 2002 bear market lows. Obviously, one cannot take this lightly, as last week's negative price action was more of a bear market "exclamation point" intended to say that from this point forward - rallies are to be sold and sold hard. However, it would appear the initial decline is coming to an end quite soon; the 30-month moving average crosses at 12,038 and was successfully tested on Friday. Too, the previous highs all-time highs at 11,500 are just below current levels. The 9-month RSI is approaching levels that in the past have coincided with bull market correction bottoms and bear market bottoms. Thus, the risk-reward profile for the Dow is changing in the short-term from bearish to 'flat' and will ultimately turn to bullish. But, remembering that the trend is lower... rallies will be short-lived.
But that said, one would do well to consider 'guerrilla bear market tactics' when trading from the long side, of which sector rotation will be paramount. Rallies are likely to be short and sharp; but sold hard. The sectors now showing emerging bullish relative strength patterns versus the S&P 500 in our models are the beleaguered Financials and Consumer Discretionary (Housing and Retail). The Basic Materials and Energy sectors are showing emerging negative patterns. These are non-consensus calls at the moment; but given the former held relatively during last week's carnage, while the latter were aggressively - perhaps these will be the emerging theme trades of 2008.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b67970c-pi
Posted by Chip Anderson at 5:03 PM in Richard Rhodes | Permalink
January 20, 2008AVOIDING PROBLEMS BEFORE THEY START By Chip Anderson
Site News
Here are three things that everyone should do periodically to ensure that your computer works well when using StockCharts.com. Every day we get messages from lots of people that are having problems with their web browser and usually one of these steps will fix the problem. If you follow these tips at least once a week, you'll have a better browsing experience on StockCharts.com (and most other websites too!).
[*]CLEAR YOUR BROWSER'S TEMPORARY FILE CACHE PERIODICALLY - Your browser stores copies of all the web pages you visit on your hard disk in something called the "Temporary File Cache." In theory, by storing stuff in the cache, your browser can reduce the time it takes old pages to load. Normally, your browser manages all of things it stores in the cache automatically but sometimes it gets confused. This can cause lots of problems, especially with complex pages like our Charting Workbench. Confused caches can also eat lots of hard drive space. By clearing out your browser's temporary file cache at least once a week, you can keep your browser working efficiently and prevent website problems before they appear. The instructions for clearing your cache can be found here. We've set Firefox to clear our caches every time we shut it down. (BTW, Be careful to NOT erase your Cookies when clearing your cache.)
[*]REBOOT YOUR COMPUTER DAILY - Computers, especially older ones, need to be restarted from time to time in order to keep running efficiently. After several hard days of browsing the net, things like plug-ins and hung programs can start to build up - especially in older versions of Windows. We've heard stories of people leaving their computers on for months at a time, seemingly without problems, until... By rebooting your computer every day you'll ensure that it is running efficiently and stuck programs aren't waiting to ambush you later. We reboot our computers every day.
[*]MAKE SURE YOU HAVE FREE SPACE ON YOUR DISK - Web browsers (and many other computer programs) assume that you have lots of free space on your hard disk. If they encounter a computer with a full hard drive, lots of bad things can happen. They may crash. They may corrupt the temporary file cache. They may run really slowly. They may hang. They may display lots of red X's on the pages you are looking at. They may refuse to run Java applets. Etc. etc. etc. Always make sure you have several 100 Megabytes of free storage on your hard disk before starting a big browsing session. It will save you a ton of grief.
Posted by Chip Anderson at 5:02 PM in Site News | Permalink
January 20, 2008SO MUCH FOR GLOBAL DECOUPLING By Chip Anderson
John Murphy
I've expressed reservations before about the recent theory of global decoupling. The reasoning was that foreign markets would remain relatively immune to a major selloff (and possible recession) in the U.S. That view struck me as strange, especially with the close correlation that's existed between global markets over the past decade. Which is why Chart 1 shouldn't come as a surprise to anyone. It shows a sampling of the world's major developed stock markets over the last year. And, not surprisingly, each and every one of them started to fall in November along with the U.S. market. Most haven fallen as far as far as the U.S., but they are falling. The only ones still in the black for the last year are Hong Kong (+26%), Germany (+12%), and Australia (+2%). The biggest yearly losers are France (-7%), Britain (-5%), and Canada (-2%). By comparison, the S&P 500 lost -6.5%.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c7e970c-pi
Posted by Chip Anderson at 5:01 PM in John Murphy | Permalink
January 20, 2008"BEARISH" PERCENT INDEXES By Chip Anderson
Chip Anderson
Lots of people are doing the Chicken Little thing these days. Is the concern/panic justified? Are we really entering a new Bear market? Which charts are going to calmly and objectively tell us what is really going on?
Whenever I want to study "the big picture" and see if anything really significant has changed, I usually turn to the "Bullish Percent" charts that we maintain here at StockCharts.com. For those of you that haven't heard of them before, a "Bullish Percent" chart plots the percentage of stocks in a predefined group that currently have a "P&F Buy Signal" on their Point and Figure chart. You can read more about Bullish Percent charts here.
Usually, Bullish Percent Indices oscillate lazily somewhere between 30 and 70. Because they are the result of studying thousands of charts, the BPI's for the Nasdaq Composite and the NYSE usually move pretty slowly and it takes them a little bit of time (at least a week) to reflect a significant change in the market. While they may be too slow for day-traders, that slowness makes them very reliable for the rest of us.
So, with all this talk of a Bear market, what do the BPI's say? Here are the charts:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590bdd970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590be7970c-pi
Well... I think the word "Yikes!" might actually apply here. Both the Nasdaq and NYSE BPIs are now lower than they have been since the start of the Bull Market in 2003. That should give any ChartWatcher pause. Remember, readings below 30 indicate a change in the market and right now these charts have reading at or below 20.
Usually, the BPIs bounce back from super-low readings quickly. If that happens in the coming weeks, don't be fooled. Continue to watch them closely because a second plunge below 30 after a recovery would be confirmation of a Bear Market. Check out this chart of the lead up to the 2001 Bear Market:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590beb970c-pi
After the first BPI-plunge in mid-1998, things recovered and the Nasdaq soared to record heights. But the second BPI-plunge in 2000 confirmed the end of good times for everyone.
Be careful out there.
Posted by Chip Anderson at 5:00 PM in Chip Anderson | Permalink
January 06, 2008KEEP AN EYE ON BONDS By Chip Anderson
Tom Bowley
We've been following the bond market closely and for good reason. Earnings and interest rates drive the stock market. We are seeing a lot of signs of an economic slowdown, perhaps even a mild recession. As a result, earnings will not be spectacular and we'll likely continue to see companies lowering guidance. The equity markets are already discounting prices to account for lower profits in first half of 2008. Stocks have taken a huge hit to begin 2008, but divergences are indicating that selling momentum is slowing similar to what we witnessed in the summer of 2006. One of the hardest hit indices last week was the NASDAQ 100. Take a look at Chart 1 below and note that as the NASDAQ 100 has hit new recent lows, the MACD is actually much, much higher than it was at the time of the last low. This is a development worth watching as the same situation developed in the summer of 2006 before a significant advance.&n bsp; That setup can be seen in Chart 2.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c66970c-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c6d970c-pi
Expect the Fed to continue lowering interest rates. We believe the next cut will be 50 basis points and we wouldn't be shocked to see the Fed step up prior to its end of January meeting and introduce this next cut between meetings. The bond market is clamoring for more rate cuts with the odds of a 50 basis point cut increasing. In previous articles, we've discussed the likelihood of falling interest rates as a result of the triangle breakdown on the ten year treasury yield. If that yield falls below 3.80%, there is little support until the yield reaches 3.05%. That would portend an aggressive rate cutting campaign by the Fed, which we believe is in our future. Continued decreases in interest rates will send "safe" money in the bond market back to equities as investors look for higher returns. Lower rates will further weaken the U.S. dollar, providing greater opportunities in gold and other commodities.
Posted by Chip Anderson at 5:06 PM in Tom Bowley | Permalink
January 06, 2008RATE CUTS NOT HELPING By Chip Anderson
Arthur Hill
The Fed started cutting interest rates on August 17th with a surprise 50 basis points cut in the Discount Rate. There have been three more rate cuts since 17-Aug, but the Dow Jones Industrial Average has nothing to show for these cuts. The first two rate cuts fueled the rally from mid August to mid October. However, the last two rate cuts coincided with reaction highs on 2-Nov and 11-Dec (third and fourth cuts). The negative reaction to the last two rate cuts indicates that something is rotten in the kingdom of stocks. With Friday's employment report, the Dow moved below 13000 and finished the week below the 17-Aug close. The Dow is now down after four rate cuts. The bearish argument was further reinforced this week when the 50-day moving average moved below the 200-day for the first time since November 2005. This is also know as a "dead cross".
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590b09970c-pi
Posted by Chip Anderson at 5:05 PM in Arthur Hill | Permalink
January 06, 2008RETEST STILL IN PROGRESS By Chip Anderson
Carl Swenlin
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590cb4970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590cbe970c-pi
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.
Posted by Chip Anderson at 5:04 PM in Carl Swenlin | Permalink
January 06, 2008HISTORY REPEATING? By Chip Anderson
Richard Rhodes
The S&P 500 is off to its worst start to begin a new year since 2000; however, this isn't the larger headline to us. If were writing the story, the headline would indicate the probability of a bear market having begun rose significantly last week; but it did not do so given the very poor US employment report. It did so given our demarcation line between "bull and bear markets" – the 80-week moving average – was violated in earnest last week. We don't take this signal lightly; nor should our clients.
As the S&P 500 Weekly chart illustrates, there is a bit of "symmetry" between the 1999-2000 topping pattern and the current topping pattern as each was unable to breakout above the 1550-1577 zone. In the 2000-2002 bear market, prices clearly broke through the 80-week moving average and didn't look back. It wasn't until 2002 that prices were able to regain this moving average, which signaled the start of the cyclical bull market. Of note, prices successfully tested and retested this moving average numerous times prior to last week's breakdown. Hence, its significance can't be understated.
And one final note. In the first paragraph – we stated the "probability" of a bear market now underway has "risen significantly." We won't sound an all out "bear market call" until the 30-month exponential moving average crossing at 1381 is violated... a mere 30 points lower from current levels.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e6eea970b-pi
Posted by Chip Anderson at 5:03 PM in Richard Rhodes | Permalink
January 06, 2008SINGING IN THE (TICKER) RAIN By Chip Anderson
Site News
Just what you wanted right? Actually, this is the "Ticker Rain" that we talked about in the last newsletter. It is finally up on our website at http://stockcharts.com/charts/tickerrain.html. What is "Ticker Rain" you ask? It's a Java program that creates a chart which shows you many of the ticker symbols that are being requested by StockCharts.com users. The ticker symbols "rain" down the chart and stack up into columns. The taller the column, the more popular the ticker symbol. Up to 100 columns build up over time. You can click on any of the columns to see a SharpChart for that ticker symbol. Every 30 seconds, we remove whichever column has been inactive for the longest time and add a new ticker symbol on the right side of the chart. Over time, the more active columns collect on the left side of the chart.
You can use Ticker Rain to see which symbols are hot and whether people are looking at long-term or short-term charts of those symbols. It can help you see if there are any new trends in the market that you should be aware of.
Note: Ticker Rain only shows a small subset of the chart requests that we get. Ticker Rain also works better when the market is open - it can be slow on the weekends and late a night.
You kind of have to see Ticker Rain in action to fully understand it. First, make sure you have Java properly installed on your computer, then click here to start the rain!
Posted by Chip Anderson at 5:02 PM in Site News | Permalink
January 06, 2008S&P 500 THREATENS 400-DAY MOVING AVERAGE By Chip Anderson
John Murphy
During the August market drop, I wrote about the importance of the 400-day moving average as a major support line. . The daily bars in Chart 1 show the August and November price declines bouncing off that long term support line. The chart also shows, however, the S&P 500 closing below that support line today. . The 400-day line also resembles a "neckline" drawn below the August/November lows. That's another reason why today's breakdown could have bearish implications for the S&P 500 and the market as a whole. A close below the November intra-day low at 1406 would be further confirmation of today's moving average violation. Chart 2 shows why the 400-day line is important.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ab8970c-pi
Posted by Chip Anderson at 5:01 PM in John Murphy | Permalink
January 06, 2008S&P BULLISH PERCENT GIVES THE BIG PICTURE By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
Welcome to 2008! The start of a new year is always a good time to look for the big-picture perspective on things and few things say "Big Picture" better than the Bullish Percent Indices. By condensing the technical picture for 500 important stocks down into just one number, the S&P 500's Bullish Percent value ($BPSPX) gives you a great indication of the overall health of the market. Check it out:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590c7b970c-pi
Starting in 2004, the BPI settled down into a nice little pattern - rallying after hitting 50% (green arrows) and then reversing soon after passing 75% (red arrows). It repeated this pattern four times as you can see. At the start of 2007 however, something changed - the BPI bounced between 70% and 80% a couple of times, then fell sharply and didn't bounce at 50% for the first time in years (blue arrow). When it finally bounced in September, the BPI was down around 33% (purple up arrow) which was its lowest reading since March 2003. The biggest warning sign came soon afterwards when the BPI was only able to rally back up to 70% before falling again (purple down arrow). That was its lowest "peak" in years and a real sign of weakness. The weakness was confirmed in December when the BPI only rallied back up to 56% - a very troubling sign indeed.
Remember, these numbers represent the charting "health" of the 500 biggest stocks in the market - and the diagnosis isn't looking promising right now.
Posted by Chip Anderson at 5:00 PM in Chip Anderson | Permalink
December 15, 2007INFLATION'S BACK! By Chip Anderson
Tom Bowley
Three consecutive economic reports have shown that inflation, after lying dormant for several years, has been rekindled. The Fed, surely armed with the economic data we've seen, decided to lower the fed funds and discount rates by another quarter point each. Slowing growth and a pick up in inflation is not what equity indices want or need. Is higher inflation here to stay or is it just temporary? Based on the Fed's action last week, the Fed likely believes this blip is temporary. They've said as much in previous meetings, acknowledging that commodity prices could continue to put upward pressure on inflation. However, they've also noted that they believe a slowing economy would curb demand for oil and other commodities.
We're in the camp that expects inflation to moderate despite the recent upward pressure. Yields on the ten year treasury bond, while increasing lately, are acting in a normal technical fashion. We discussed a few weeks ago the likelihood that the yield would drop to the 3.80-4.00% support area. That's exactly what happened. The recent jump back up on the yield is a routine retest of the breakdown - very normal technical action. Take a look at the chart on the ten year treasury bond yield below.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590fe6970c-pi
Posted by Chip Anderson at 5:06 PM in Tom Bowley | Permalink
December 15, 2007A HEAD-AND-SHOULDERS FOR DIA By Chip Anderson
Arthur Hill
Is that a head-and-shoulders pattern taking shape in the Dow Industrials ETF (DIA)? While it has yet to be confirmed, traders and investors should keep a close eye on this chart in the coming weeks.
The potential head-and-shoulders pattern extends from June to December. The left shoulder formed in July, the head in October and the right shoulder is currently under construction. Notice that DIA opened strong on Monday and finished the week near its lows. In fact, DIA formed a bearish engulfing this week by opening above the prior week's close and closing below the prior week's open. This week's reversal opens the door to a reaction high around 137.5. A peak here and decline back to the support zone would complete the right shoulder. Neckline support rests around 127-129. A break below 127 would confirm this big reversal pattern and project further weakness towards 113.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590e96970c-pi
Posted by Chip Anderson at 5:05 PM in Arthur Hill | Permalink
December 15, 2007RETEST IN PROGRESS By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7178970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7185970b-pi
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.
Posted by Chip Anderson at 5:04 PM in Carl Swenlin | Permalink
December 15, 2007TICKER RAIN BETA STARTS NEXT WEEK By Chip Anderson
Site News
We've developed a nifty little tool called "Ticker Rain" that will show you, in real time, which ticker symbols are being heavily requested by StockCharts.com users at any given moment. Similar to our "Ticker Cloud" page, Ticker Rain will help you see if there are other interesting stocks out there that you should be looking at. When the market is open, small lines will drop from the top of the page and pile up at the bottom of the page in columns. Each column represents a different ticker symbol and each falling line represents a recent chart request. The result is both informative and fascinating to watch. We will post a link to our Ticker Rain tool in the "What's New" section of the website later this week.
COMSTOCK DATA FEED EQUIPMENT BEING INSTALLED THIS WEEK - Remember when we told everyone that it takes a l-o-n-g time to get a second datafeed installed? Well, it takes about "this" long. The new networking equipment showed up last week and we expect the Comstock servers to show up this week. At that point, we'll be able to start converting our software to work with the new feed and then we can begin performance testing. In a perfect world, that stuff will be complete by the end of January. We'll see how long it takes in the world in which we live. Stay tuned...
Posted by Chip Anderson at 5:02 PM in Site News | Permalink
December 15, 2007RETAIL WEAKNESS IS A BIG PROBLEM By Chip Anderson
John Murphy
The two charts below demonstrate part of the reason why recent Fed moves haven't had much of a positive impact on the stock market. It has to do with negative fallout on retail spending resulting from the housing meltdown. The bars in Chart 1 plot the S&P 500 Retail Index, which has been one of the year's weakest groups. The RLX is on the verge of falling to a new three-year low. Its relative strength ratio (solid line) has already reached a five-year low. If the weak performance of retail stocks is a leading indicator of retail spending (which I believe it is), and if retail spending is 70% of the U.S. economy, then Chart 2 carries bad news for the U.S. economy and stock market. What's causing the retail breakdown? Chart 2 overlays the same Retail/S&P 500 ratio over a bar chart of the PHLX Housing Index. Notice the close correlation between the two lines. They both peaked in the middle of 2005 and have been falling together since then. In other words, the housing depression is closely tied to the retail breakdown. That suggests that there's a lot more to worry about than just subprime mortgages and liquidity problems. Which may also explain why recent Fed moves aren't helping much.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e717a970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7183970b-pi
Posted by Chip Anderson at 5:01 PM in John Murphy | Permalink
December 15, 2007OBJECTIONABLE PRICE OBJECTIVES By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
Every week we hear about a couple of message board posts that have appeared on some website somewhere which essentially says "StockCharts.com is saying that this stock will rise (fall) dramatically!" Here's a screenshot from a recent example:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e725f970b-pi
We said that? What? Huh?
First off, let me state for the record that StockCharts.com is not in the business of predicting stock movements. We never have been and we never will be. We provide tools that help anyone make their own predictions using any method that they feel comfortable with. If you ever think that we are recommending the purchase or sale of a particular stock, please think again and then re-read what we said.
OK now that that is out of the way, why the heck are these message board posters making the claims that they do? The first thing to understand is that ninety percent of these claims are made in "investment spam" messages. These messages are trying to trick people into buying (or selling) the stock in question without first doing due diligence. Hopefully I don't need to remind a fellow ChartWatcher like yourself of the need for lots of research prior to making buy/sell decisions.
That said, most of these messages also come with a link to a point and figure chart on our website - ]like this one - and, sure enough, that chart has a line on it that says (for example) "Bullish Price Obj. (Rev.): 38.5".
Here's what the spammers are trying to get you to do. They want you to think about things like this:
Wow, seems like StockCharts.com really is making a prediction about that stock. Seems like the good people at StockCharts think RMBS is about to tank big time. Ya know, John Murphy works with StockCharts.com and he's an expert. I think I better sell my shares!
Now, here's how you should be thinking:
What the heck is a "Price Objective" on a Point and Figure chart and what does it really mean?
Remember, just below every P&F chart is a link called "About Price Objectives". It leads to our ChartSchool article with all the gory details about how we calculated P&F Price Objectives and it contains numerous warnings about how they should be used. I urge everyone to read that page carefully but the bottom line is this: Price Objectives are simplistic and very unreliable. At best, they represent an upper (or lower) bound for the stock's next big movement. At worst, they are ammunition for scam artists.
So why have Price Objectives at all? Price Objectives hark back to the early days of Point and Figure charts when Technical Analysis was still in its infancy. Things like Bollinger Bands, MACDs, and MarketCarpets had not been invented then and Price Objectives were the best people had. Don't get me wrong, when properly understood, Price Objectives can be another useful tool for any chartist. Unfortunately, most people do not take the time to understand them and the scam artists count on that fact when posting their garbage.
Don't be fooled.
P.S. Happy Holidays everyone! Our next newsletter will go out in January.
Posted by Chip Anderson at 5:00 PM in Chip Anderson | Permalink
November 17, 2007DON'T GIVE UP, BULLS! By Chip Anderson
Tom Bowley
There has been clear technical damage on the major indices as a result of concerted selling. The NASDAQ 100, which has led the market higher for most of 2007, has been treated rather rudely over these past few weeks and that's never good. The reason? During periods of economic expansion, the higher growth technology stocks tend to outperform because of their ability to grow earnings more rapidly. The stock market, for the first time in a long time, is sending a message that the economy is much worse off than was originally forecast. The good news is that inflation is dormant per the tame PPI and CPI numbers released last week. A sudden increase in inflation would put the Fed in a box, but since inflation remains contained, the Fed has ammunition to continue lowering rates. That should, in turn, lead to a strengthening economy in 2008.
The bond market is already pricing in the next interest rate cut and as you can see from the chart below on the 10 year treasury bond we appear to be heading to the 3.80-4.00% area. That should keep downward pressure on the dollar and produce continuing gains for the gold sector.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e722f970b-pi
Posted by Chip Anderson at 5:06 PM in Tom Bowley | Permalink
November 17, 2007IWM FORMS BIG DOUBLE TOP By Chip Anderson
Arthur Hill
The Russell 2000 ETF (IWM) shows the beginnings of long-term downtrend. In stark contrast to QQQQ, IWM forged a lower low in August and a lower high in October. The inability to move above the summer highs showed relative weakness on the way up. The ETF is already testing support from the 2007 lows and relative weakness continues. The pattern at work looks like a large double top with a ton of support around 74-76. A break below the 2007 lows would confirm the pattern and the downside target would be to the support zone around 64-66.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7180970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7187970b-pi
Posted by Chip Anderson at 5:05 PM in Arthur Hill | Permalink
November 17, 2007MARKET ENTERING OVERSOLD RANGE By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c011168591002970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168591008970c-pi
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.
Posted by Chip Anderson at 5:04 PM in Carl Swenlin | Permalink
November 17, 2007TECHNICAL ANALYSIS GROUP DIRECTORY By Chip Anderson
Site News
We at StockCharts.com want to make it easier for people to find information about the various technical analysis resources in their local area. If you run a non-profit T/A user's group and would like us to list it on our website, please send details about your group (name, purpose, meeting place, typical meeting times) to chipa@stockcharts.com. We'll create a page with information on all the groups we learn about soon.
S&P COMSTOCK DATA PROGRESS REPORT - The data circuits for our new S&P Comstock datafeed are starting to be installed! While we still don't know when the work will be finished, we wanted to let you know that things are still progressing.
Posted by Chip Anderson at 5:02 PM in Site News | Permalink
« Previous | Next »
November 17, 2007BEWARE THE ETF "TRAP" By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
Last month I had the pleasure of sitting in on several local Technical Analaysis User Groups and seeing how they used many different tools to do group stock analysis. It was a very educational experience for me and I strongly recommend that everyone reading this newsletter join your local technical analysis user group. (If there isn't one in your area, why not start one?) Doing technical analysis with other people is probably the best way to improve your investing success - period.
But as I was sitting in the back of one of the classes, I watched them fall into one of the more insidious "traps" in technical analysis these days. See if you can spot it as I tell the tale:
The group was looking at an ETF for one of the more interesting market sectors these days. The person running the meeting pulled up a chart of the ETF on the screen for everyone to see (I was happy it was a StockCharts.com chart!). Someone in the group commented that the chart had a possible "double top" pattern and they were right - it certainly looked like a double-top. Someone else chimed in that the volume bars appeared to confirm that double-top hypothesis (I thought to myself "Yea! They are using volume to confirm chart patterns!") The group leader then suggested that they add some indicators to the chart to see what they showed - so they added a MACD and a Chaiken Money Flow plot to the chart. The MACD looked weak, but the CMF looked bullish. This caused the group to pause and check out a couple of other CMF plots with different parameters. Hmmmmm. Most of the CMF's were bullish. Eventually, the group decided to ignore the CMF data and move on.
Anyone spot the problem yet?
First off, the problem was NOT that the group ignored conflicting information from the CMF plot - it is very common that some indicators will be bullish while other ones are bearish. You need to think about which indicators you trust more and why. In this case, the group discussed it and decided that they trusted the MACD signals and the double-top chart pattern more than the CMF and that was a good decision.
The problem comes from the nature of ETFs. ETF stands for "Exchange Traded Funds" and they are all the rage right now. These are financial vehicles that are designed to track some index very closely and can be traded just like a stock. They are very useful to investors and the number of ETFs has increased dramatically in the past couple of years.
A typical example of an ETF is SPY which tracks the S&P 500 ($SPX). If the S&P 500 index goes up, SPY goes up. If $SPX goes down, SPY goes down. You can buy and sell SPY much easier than you can buy and sell the 500 stocks that make up $SPX and so SPY is a very useful tool in many investors' arsenals.
Have you spotted the trap yet?
Before I reveal the problem, let's look at two charts. Here is a chart of $SPX and one of SPY. See if you can spot the key difference:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e718d970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7198970b-pi
Look at the On Balance Volume indicator line. Notice the difference in the direction of those lines? I've added a moving average line to each plot to help you see that the OBV for $SPX is going up while the OBV for SPY is going sideways/down.
Have you spotted the trap yet?
The price plots for $SPX and SPY look extremely similar - just as they should. When $SPX goes up, SPY goes up and vice-versa. But now look at the volume bars. They don't look identical do they? First off, the volume scales are very different - $SPX ranges from 2 Billion to 6 Billion while SPY's volume ranges from 200 Million to 600 Million. But the bigger problem is that the "shape" of the volume bars aren't exactly the same. They are similar - but there are subtle differences in the position and magnitudes of the taller volume bars. Those differences are what caused the OBV plots to be different. But why would the volume plots for $SPX and SPY be different? Could this be the trap? Will Chip ever get to the point!? http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e71a0970b-pi
ETFs are different from stocks because of this fact: While the price of an ETF closely tracks the underlying index's value, the volume of an ETF only reflects the popularity of the ETF itself - NOT THE SUPPLY OR DEMAND FOR THE THING THE ETF TRACKS.
Consider the following hypothetical example: Let's say that for some reason an amazingly rich Jillionaire decides that they wants to invest in the market - so they buy 1 Billion shares of SPY in a single day. What would SPY's chart look like?
Despite all of this new demand for SPY, SPY's price chart would continue to mimic the value of the S&P 500 index. It would go up and down in the exact same way as before, just like $SPX does. Of course SPY's volume would have a HUGE spike in it, but that volume spike would have no impact on the price of SPY.
Now consider what would have happened if our hypothetical Jillionaire had invested in a real stock instead of an ETF. In addition to a huge spike on the volume chart, there would also be a huge jump in the price of the stock since the price of a stock is directly related to the demand for that stock's shares.
The key point here is that many kinds of technical analysis make an assumption that is not always true for ETFs. Any form of T/A that relies on studying both price and volume - including chart pattern analysis and price/volume indicators like the CMF - assumes that volume and price are directly related. Since there is no direct relationship between price and volume for an ETF, those analysis techniques should be used very carefully when looking at ETFs.
(Note: The volume for popular ETFs like SPY actually do a pretty good job of mimicking the demand for the underlying index, but that is due to indirect factors. As shown in the charts above, sensitive indicators can be thrown off by those differences. In the case of less popular ETFs, the differences are even greater.)
As I sat in the back of the class observing the give and take around their study of the ETF, I thought about speaking up. Unfortunately the class was almost over and I was late to my next appointment. Fortunately for you, I made a note to myself to write about it in the next newsletter.
Posted by Chip Anderson at 5:00 PM in Chip Anderson | Permalink
November 03, 2007NET NEW HIGHS ARE DRAGGING By Chip Anderson
Arthur Hill
Even though the Nasdaq and the NY Composite hit new closing highs earlier this week, Net New Highs did not keep pace and this could become a problem. Net New Highs equals new 52-week highs less new 52-week lows. I apply a 10-day moving average to smooth the data series and look for crosses above or below the zero line for a trend bias. The bias is bearish when the 10-day SMA for Net New Highs is in negative territory and the bias is bullish when the indicator is positive. On the charts below, the indicator is shown in area format and the underlying index is shown as a red line.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7308970b-pi
The 10-day SMA for Net New Highs on the Nasdaq moved into negative territory last week. This is quite surprising because the Nasdaq hit a closing high at 2859.12 on 31-October. Despite this new high, there were more new lows than new highs and this undermines the current advance. Something is not quite right. There should be more new highs than new lows when the Nasdaq is trading at or near at 52-week high.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e730e970b-pi
The 10-day SMA for Net New Highs on the NYSE dipped into negative territory last week, but recovered and moved back into positive territory this week. The NY Composite recorded a new closing high at 10311.61 on 31-Oct, but the indicator remained well below its early October high and was barely positive. Net new highs are not keeping pace. There are still plenty of new lows and this reflects bearish undercurrents in the NYSE.
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
November 03, 2007MIXED MARKET By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590fc1970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590fc7970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590fcc970c-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
November 03, 2007GOLD MARKET SOARING HIGH By Chip Anderson
Richard Rhodes
The bull market in commodity has extended beyond what many had believed it would in such a short period of time; be it crude oil prices or gold prices or even wheat prices - the bull market has surprised in its violence. The question before all traders and investors alike is whether the "risk-reward" of holding on to or adding to such positions is tenable. We don't believe it is in any of the aforementioned cases, but we'll only discus the gold market today, for it clearly has a "larger-than-life" following given it bottomed in earnest in 2001.
Quite simply, the rising gold market, and especially given its sharply rise over the past 6-years - has tended to increase the sponsorship of the metal from the engrained "gold bug base" to that of more main stream traders and investors. This is the manner in which bull markets evolve - they increase bull sentiment to the point where the contrarian point-of-view should be considered. We'll posit that point is "now", and while gold prices may very well have residual short-term upside remaining - it pales in comparison to an intermediate-term decline that could carry prices sharply lower from its current perch around $800/oz to somewhere near $600-$650. This wouldn't destroy or harm the bull market in any way whatsoever; however, it would bring sentiment back to more neutral levels upon which the bull market mete out the late longs and therefore can resume its upward trajectory to much higher levels.
Technically speaking, we find the distance above the 20-month moving average is at overbought levels and into trendline resistance that suggests the attendant "risk" is quite high; while potential "reward" is quite low. We need not understand any more than this from a technical perspective. Those who trade aggressively can "pick their places" in which to become short - for the backstop risk of the recent highs serves to limit losses. However, those preferring to "buy" at this juncture - we would simply say "wait", for there is little in the way of support until much lower levels at $675. For our money, we believe in "reversion to the mean", and ultimately in the next several years we are likely to see the 50-month moving average tested as it always it. The burning question is what level that test materializes? We'll further note this moving average is rising on average at $80/oz per year.
Therefore, while we like gold over the longer-term - we're looking for a sharp correction that will shake many late longs to the core. And once this happens - the gold market will be poised to rise farther and further than anyone now believes possible.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7179970b-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
November 03, 2007BEAR MARKET IN BANKS By Chip Anderson
John Murphy
Earlier today I showed the Bank Index on the verge of hitting a new low for the year. By day's end, it had fallen to the lowest level in two years (Chart 1). This puts the BKX on track to challenge its 2005 low. In case you're wondering what that means, the BKX has fallen more than 20% from its early 2007 peak. That qualifies as an official bear market in bank stocks. That 5% daily drop helped make financials the day's weakest group. Consumer discretionary stocks came in second worst. Other large losers were small caps and transports. Those are the same market groups that have been lagging behind the rest of the market since mid-year. Although all sectors lost ground, groups that held up a bit better than the rest of market were healthcare, energy, industrials, utilities, and consumer staples. Bonds also had a strong day.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ee1970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
November 03, 2007JUST CHECKING IN By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
I'm pretty busy this weekend and just have time to mention the following things:
[*]We've just released John Murphy's entire 2006 collection of articles in CD-ROM format. The CD includes a new video intro from John as well as a private search engine that makes searching all of these articles a breeze! Be sure to check it out.
[*]Don't forget to grab a copy of the 2008 Stock Trader's Almanac now so you can plan the start of 2008. John and I both love this thing and recommend it highly.
[*]When the Fed lowered interest rates last week, we set a record for outgoing bandwidth - over 100 megabits! Things held up well though (knock on wood).
[*]We're halting John's Video Updates until we can find a better solution for the "fuzziness" problems that YouTube creates. Look for JohnTV (http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e71a0970b-pi) to return in a couple of weeks. Until then, John will continue to do Audio updates just like before.
[*]We are continuing to upgrade our data infrastructure. The paperwork is all signed and now we are waiting for the teleco companies to install our new private data circuits. Hopefully they'll have that done before the end of the year (sigh).
And now, here's John!
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
October 20, 2007AUGUST VS. OCTOBER - OPPOSITE ENDS OF THE SPECTRUM By Chip Anderson
Tom Bowley
The panic selloff and subsequent recovery in August was nearly a mirror image of what we've seen in October. First, let's start with August. If you recall, we discussed how long-term market bottoms are marked by extreme bearish sentiment. The sentiment we saw in August doesn't get any more bearish. We had put call ratios routinely printing 1.30 to 1.40 and higher. The "equity only" put call ratio printed over 1.0 on 3 consecutive days, the first time that had happened since CBOE has been providing data to the public. For those of you unfamiliar with the put call ratio, it represents the number of put contracts divided by the number of call contracts. A number above 1.0 indicates that more puts are being bought than calls. Since 1995, the average or norm has been .75. The put call ratio serves as a contrarian indicator. The more bearish the put call ratio becomes (ie, the higher the number), the more bullish the implic ations for the stock market. It made perfect sense to us that a significant market bottom was put in place on August 16th after watching the put call ratio soar. The timing of the late afternoon reversal on August 16th and the ensuing gap up on August 17th couldn't have been better for market makers as options expired on August 17th. The reversal saved marker makers a bundle.
Now let's fast forward to October. As we approached options expiration Friday, the market had been straight up for weeks with tons of in-the-money calls. A further look at sentiment early last week revealed a 5 day moving average of the put call ratio that equaled its lowest level since April 2006. The pessimism from August had faded and sentiment was suggesting that the market was ripe for a selloff. Solid earnings reports came in from the likes of INTC, YHOO and GOOG, yet the market couldn't sustain attempted rallies. That was a big red flag and with so much money on the line for market makers due to options expiration, it should not have shocked anyone to see the indices sell off the way they did on Friday. This time a fortune was saved by market makers benefitting by a move in the opposite direction.
Where does this leave us now? Well, for starters, you must realize that next week is historically the worst performing week of the year, bar none. We are believers of historical tendencies and since 1950, the S&P 500 struggles more during the next 7 calendar days than it does during any other period throughout the year. In addition, the market had become way too complacent as we rose week after week after week. Below is a chart of the NASDAQ and key support levels to watch.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590fe8970c-pi
While we remain very bullish on the long-term prospects of the market, it could be financial suicide to ignore the short-term signals here. Take it easy, play it safe and look at any upcoming weakness as yet another opportunity to make money on the long side if panic selling kicks in.
Posted by Chip Anderson at 4:06 PM in Tom Bowley | Permalink
October 20, 2007ANOTHER LEG LOWER By Chip Anderson
Arthur Hill
The Consumer Discretionary SPDR (XLY) and Finance SPDR (XLF) broke down this week to signal a continuation of downtrends that began in July. In other words, the Aug-Oct rally was just a countertrend advance within a larger downtrend. XLF and XLF moved into bear mode when double tops were confirmed with support breaks in July. Both broke their March lows and forged lower lows. The advance over the last nine weeks retraced around 62% of the Jul-Aug decline and both ETFs met resistance near their 40-week moving averages (red arrows). This week's sharp decline ended this countertrend rally and started another leg down. In addition, a lower high formed and this is what downtrend are all about: lower lows and lower highs. The next support levels are around 30.5 for XLF and 34 for XLY. The Finance sector represents the banks, brokers and REITs. The Consumer Discretionary sector is the most economically sensitive. Needless to say, breakdowns in both bode ill for the market overall.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7278970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7280970b-pi
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
October 20, 2007CORRECTION UNDERWAY By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7286970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e728c970b-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
November 17, 2007BEWARE THE ETF "TRAP" By Chip Anderson
Chip Anderson
Hello Fellow ChartWatchers!
Last month I had the pleasure of sitting in on several local Technical Analaysis User Groups and seeing how they used many different tools to do group stock analysis. It was a very educational experience for me and I strongly recommend that everyone reading this newsletter join your local technical analysis user group. (If there isn't one in your area, why not start one?) Doing technical analysis with other people is probably the best way to improve your investing success - period.
But as I was sitting in the back of one of the classes, I watched them fall into one of the more insidious "traps" in technical analysis these days. See if you can spot it as I tell the tale:
The group was looking at an ETF for one of the more interesting market sectors these days. The person running the meeting pulled up a chart of the ETF on the screen for everyone to see (I was happy it was a StockCharts.com chart!). Someone in the group commented that the chart had a possible "double top" pattern and they were right - it certainly looked like a double-top. Someone else chimed in that the volume bars appeared to confirm that double-top hypothesis (I thought to myself "Yea! They are using volume to confirm chart patterns!") The group leader then suggested that they add some indicators to the chart to see what they showed - so they added a MACD and a Chaiken Money Flow plot to the chart. The MACD looked weak, but the CMF looked bullish. This caused the group to pause and check out a couple of other CMF plots with different parameters. Hmmmmm. Most of the CMF's were bullish. Eventually, the group decided to ignore the CMF data and move on.
Anyone spot the problem yet?
First off, the problem was NOT that the group ignored conflicting information from the CMF plot - it is very common that some indicators will be bullish while other ones are bearish. You need to think about which indicators you trust more and why. In this case, the group discussed it and decided that they trusted the MACD signals and the double-top chart pattern more than the CMF and that was a good decision.
The problem comes from the nature of ETFs. ETF stands for "Exchange Traded Funds" and they are all the rage right now. These are financial vehicles that are designed to track some index very closely and can be traded just like a stock. They are very useful to investors and the number of ETFs has increased dramatically in the past couple of years.
A typical example of an ETF is SPY which tracks the S&P 500 ($SPX). If the S&P 500 index goes up, SPY goes up. If $SPX goes down, SPY goes down. You can buy and sell SPY much easier than you can buy and sell the 500 stocks that make up $SPX and so SPY is a very useful tool in many investors' arsenals.
Have you spotted the trap yet?
Before I reveal the problem, let's look at two charts. Here is a chart of $SPX and one of SPY. See if you can spot the key difference:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e718d970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7198970b-pi
Look at the On Balance Volume indicator line. Notice the difference in the direction of those lines? I've added a moving average line to each plot to help you see that the OBV for $SPX is going up while the OBV for SPY is going sideways/down.
Have you spotted the trap yet?
The price plots for $SPX and SPY look extremely similar - just as they should. When $SPX goes up, SPY goes up and vice-versa. But now look at the volume bars. They don't look identical do they? First off, the volume scales are very different - $SPX ranges from 2 Billion to 6 Billion while SPY's volume ranges from 200 Million to 600 Million. But the bigger problem is that the "shape" of the volume bars aren't exactly the same. They are similar - but there are subtle differences in the position and magnitudes of the taller volume bars. Those differences are what caused the OBV plots to be different. But why would the volume plots for $SPX and SPY be different? Could this be the trap? Will Chip ever get to the point!? http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e71a0970b-pi
ETFs are different from stocks because of this fact: While the price of an ETF closely tracks the underlying index's value, the volume of an ETF only reflects the popularity of the ETF itself - NOT THE SUPPLY OR DEMAND FOR THE THING THE ETF TRACKS.
Consider the following hypothetical example: Let's say that for some reason an amazingly rich Jillionaire decides that they wants to invest in the market - so they buy 1 Billion shares of SPY in a single day. What would SPY's chart look like?
Despite all of this new demand for SPY, SPY's price chart would continue to mimic the value of the S&P 500 index. It would go up and down in the exact same way as before, just like $SPX does. Of course SPY's volume would have a HUGE spike in it, but that volume spike would have no impact on the price of SPY.
Now consider what would have happened if our hypothetical Jillionaire had invested in a real stock instead of an ETF. In addition to a huge spike on the volume chart, there would also be a huge jump in the price of the stock since the price of a stock is directly related to the demand for that stock's shares.
The key point here is that many kinds of technical analysis make an assumption that is not always true for ETFs. Any form of T/A that relies on studying both price and volume - including chart pattern analysis and price/volume indicators like the CMF - assumes that volume and price are directly related. Since there is no direct relationship between price and volume for an ETF, those analysis techniques should be used very carefully when looking at ETFs.
(Note: The volume for popular ETFs like SPY actually do a pretty good job of mimicking the demand for the underlying index, but that is due to indirect factors. As shown in the charts above, sensitive indicators can be thrown off by those differences. In the case of less popular ETFs, the differences are even greater.)
As I sat in the back of the class observing the give and take around their study of the ETF, I thought about speaking up. Unfortunately the class was almost over and I was late to my next appointment. Fortunately for you, I made a note to myself to write about it in the next newsletter.
Posted by Chip Anderson at 5:00 PM in Chip Anderson | Permalink
November 03, 2007NET NEW HIGHS ARE DRAGGING By Chip Anderson
Arthur Hill
Even though the Nasdaq and the NY Composite hit new closing highs earlier this week, Net New Highs did not keep pace and this could become a problem. Net New Highs equals new 52-week highs less new 52-week lows. I apply a 10-day moving average to smooth the data series and look for crosses above or below the zero line for a trend bias. The bias is bearish when the 10-day SMA for Net New Highs is in negative territory and the bias is bullish when the indicator is positive. On the charts below, the indicator is shown in area format and the underlying index is shown as a red line.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7308970b-pi
The 10-day SMA for Net New Highs on the Nasdaq moved into negative territory last week. This is quite surprising because the Nasdaq hit a closing high at 2859.12 on 31-October. Despite this new high, there were more new lows than new highs and this undermines the current advance. Something is not quite right. There should be more new highs than new lows when the Nasdaq is trading at or near at 52-week high.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e730e970b-pi
The 10-day SMA for Net New Highs on the NYSE dipped into negative territory last week, but recovered and moved back into positive territory this week. The NY Composite recorded a new closing high at 10311.61 on 31-Oct, but the indicator remained well below its early October high and was barely positive. Net new highs are not keeping pace. There are still plenty of new lows and this reflects bearish undercurrents in the NYSE.
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
November 03, 2007MIXED MARKET By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590fc1970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590fc7970c-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c011168590fcc970c-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
November 03, 2007GOLD MARKET SOARING HIGH By Chip Anderson
Richard Rhodes
The bull market in commodity has extended beyond what many had believed it would in such a short period of time; be it crude oil prices or gold prices or even wheat prices - the bull market has surprised in its violence. The question before all traders and investors alike is whether the "risk-reward" of holding on to or adding to such positions is tenable. We don't believe it is in any of the aforementioned cases, but we'll only discus the gold market today, for it clearly has a "larger-than-life" following given it bottomed in earnest in 2001.
Quite simply, the rising gold market, and especially given its sharply rise over the past 6-years - has tended to increase the sponsorship of the metal from the engrained "gold bug base" to that of more main stream traders and investors. This is the manner in which bull markets evolve - they increase bull sentiment to the point where the contrarian point-of-view should be considered. We'll posit that point is "now", and while gold prices may very well have residual short-term upside remaining - it pales in comparison to an intermediate-term decline that could carry prices sharply lower from its current perch around $800/oz to somewhere near $600-$650. This wouldn't destroy or harm the bull market in any way whatsoever; however, it would bring sentiment back to more neutral levels upon which the bull market mete out the late longs and therefore can resume its upward trajectory to much higher levels.
Technically speaking, we find the distance above the 20-month moving average is at overbought levels and into trendline resistance that suggests the attendant "risk" is quite high; while potential "reward" is quite low. We need not understand any more than this from a technical perspective. Those who trade aggressively can "pick their places" in which to become short - for the backstop risk of the recent highs serves to limit losses. However, those preferring to "buy" at this juncture - we would simply say "wait", for there is little in the way of support until much lower levels at $675. For our money, we believe in "reversion to the mean", and ultimately in the next several years we are likely to see the 50-month moving average tested as it always it. The burning question is what level that test materializes? We'll further note this moving average is rising on average at $80/oz per year.
Therefore, while we like gold over the longer-term - we're looking for a sharp correction that will shake many late longs to the core. And once this happens - the gold market will be poised to rise farther and further than anyone now believes possible.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7179970b-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
November 03, 2007BEAR MARKET IN BANKS By Chip Anderson
John Murphy
Earlier today I showed the Bank Index on the verge of hitting a new low for the year. By day's end, it had fallen to the lowest level in two years (Chart 1). This puts the BKX on track to challenge its 2005 low. In case you're wondering what that means, the BKX has fallen more than 20% from its early 2007 peak. That qualifies as an official bear market in bank stocks. That 5% daily drop helped make financials the day's weakest group. Consumer discretionary stocks came in second worst. Other large losers were small caps and transports. Those are the same market groups that have been lagging behind the rest of the market since mid-year. Although all sectors lost ground, groups that held up a bit better than the rest of market were healthcare, energy, industrials, utilities, and consumer staples. Bonds also had a strong day.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ee1970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
October 20, 2007AUGUST VS. OCTOBER - OPPOSITE ENDS OF THE SPECTRUM By Chip Anderson
Tom Bowley
The panic selloff and subsequent recovery in August was nearly a mirror image of what we've seen in October. First, let's start with August. If you recall, we discussed how long-term market bottoms are marked by extreme bearish sentiment. The sentiment we saw in August doesn't get any more bearish. We had put call ratios routinely printing 1.30 to 1.40 and higher. The "equity only" put call ratio printed over 1.0 on 3 consecutive days, the first time that had happened since CBOE has been providing data to the public. For those of you unfamiliar with the put call ratio, it represents the number of put contracts divided by the number of call contracts. A number above 1.0 indicates that more puts are being bought than calls. Since 1995, the average or norm has been .75. The put call ratio serves as a contrarian indicator. The more bearish the put call ratio becomes (ie, the higher the number), the more bullish the implic ations for the stock market. It made perfect sense to us that a significant market bottom was put in place on August 16th after watching the put call ratio soar. The timing of the late afternoon reversal on August 16th and the ensuing gap up on August 17th couldn't have been better for market makers as options expired on August 17th. The reversal saved marker makers a bundle.
Now let's fast forward to October. As we approached options expiration Friday, the market had been straight up for weeks with tons of in-the-money calls. A further look at sentiment early last week revealed a 5 day moving average of the put call ratio that equaled its lowest level since April 2006. The pessimism from August had faded and sentiment was suggesting that the market was ripe for a selloff. Solid earnings reports came in from the likes of INTC, YHOO and GOOG, yet the market couldn't sustain attempted rallies. That was a big red flag and with so much money on the line for market makers due to options expiration, it should not have shocked anyone to see the indices sell off the way they did on Friday. This time a fortune was saved by market makers benefitting by a move in the opposite direction.
Where does this leave us now? Well, for starters, you must realize that next week is historically the worst performing week of the year, bar none. We are believers of historical tendencies and since 1950, the S&P 500 struggles more during the next 7 calendar days than it does during any other period throughout the year. In addition, the market had become way too complacent as we rose week after week after week. Below is a chart of the NASDAQ and key support levels to watch.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590fe8970c-pi
While we remain very bullish on the long-term prospects of the market, it could be financial suicide to ignore the short-term signals here. Take it easy, play it safe and look at any upcoming weakness as yet another opportunity to make money on the long side if panic selling kicks in.
Posted by Chip Anderson at 4:06 PM in Tom Bowley | Permalink
October 20, 2007ANOTHER LEG LOWER By Chip Anderson
Arthur Hill
The Consumer Discretionary SPDR (XLY) and Finance SPDR (XLF) broke down this week to signal a continuation of downtrends that began in July. In other words, the Aug-Oct rally was just a countertrend advance within a larger downtrend. XLF and XLF moved into bear mode when double tops were confirmed with support breaks in July. Both broke their March lows and forged lower lows. The advance over the last nine weeks retraced around 62% of the Jul-Aug decline and both ETFs met resistance near their 40-week moving averages (red arrows). This week's sharp decline ended this countertrend rally and started another leg down. In addition, a lower high formed and this is what downtrend are all about: lower lows and lower highs. The next support levels are around 30.5 for XLF and 34 for XLY. The Finance sector represents the banks, brokers and REITs. The Consumer Discretionary sector is the most economically sensitive. Needless to say, breakdowns in both bode ill for the market overall.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7278970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7280970b-pi
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
October 20, 2007CORRECTION UNDERWAY By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7286970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e728c970b-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
October 20, 2007TECHNOLOGY REIGN COMING TO AN END? By Chip Anderson
Richard Rhodes
Over the past 18-months, the technology sector has outperformed the S&P 500 by a rather handy amount; however, we believe this trend towards technology out-performance is very close to ending. This has major implications in terms of "rotation" to be undertaken by mutual and hedge funds as they are currently very very overweight technology; hence a period of "de-leveraging" themselves may create an opportunity to be short the sector as the "doorway narrows" as everyone attempts to get out at the very same time.
Technically speaking, we use the ratio between the S&P 500 "Spyders" and the NASDAQ 100 "Q's" (SPY:QQQQ). As the chart illustrates, a larger trading range has formed over the past 5-years, with prices now hard upon support at the 2.85 level - which also happens to be right at Fibonacci 38.2% retracement level. This important and critical support level in our opinion shall "hold" and provide for a rally back towards both the short-term 60-day moving average as well as longer-term 250-day moving average... if not higher. Quite simply, prices are oversold when one looks at the 28-day RSI level of 30.91, which is attempting to form a positive divergence with prices.
The most recent experience with an oversold RSI positive divergence occurred in early-2000 - which of course was "the top" of the technology bubble, and right before the onset of a recession. While we don't necessarily believe an exact "redux" is likely - the risk-reward dynamic does indicate that the risk is towards higher ratio prices rather than a continuation towards lower prices. Hence, we 'smell' an opportunity to be short a number of technology names in the days and weeks ahead.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590f96970c-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
October 20, 2007FALL SPECIAL ENDING By Chip Anderson
Site News
JOHN MURPHY VIDEO UPDATES NOW ONLINE! - In case you haven't seen it already, John Murphy is now posting video updates as part of the Market Message service. Now John's subscribers can watch him discuss the various twists and turn in the market and learn more about technical analysis from John's clear presentation style. "I hope we can use this new format to better educate our viewers about the tools I use to analyse the market" - John Murphy. If you subscribe to John Murphy's Market Message, just click on this link to see John's latest video.
LAST CHANCE TO TAKE ADVANTAGE OF OUR FALL SPECIAL! - Our Fall special runs from now until the end of October. After that, you will no longer be able to get an additional free month of service. Don't delay! Right now, you can get 7 months for the price of 6, or 14 months for the price of 12. This offer applies to BOTH new members and existing members. Even if your account doesn't expire for several more months, you can take advantage of this special offer by renewing now. Click here to get started.
2008 TRADERS ALMANAC NOW ON SALE - Last year we sold out of these fantastic books - a one-year calendar stuffed with important dates and valuable trading information that's sure to help anyone make better trading decisions. Don't be left out this year. We've increased our allotment to help with demand but chances are we'll still run short. At only $29.95, this book is a steal - Order your copy today!
ATTENTION PUBLIC CHART LIST AUTHORS! Next month we are changing the procedure for Public Chart List voting. There have been way too many people pushing the rules about voting for Public Chart Lists. Look for us to add a "Captcha" to the voting process. A "captcha" is one of those images of squiggly letters and numbers that you have to identify correctly to prove that you are a human. We hope this change will improve the quality of the votes that we get.
Posted by Chip Anderson at 4:02 PM in Site News | Permalink
October 20, 2007TWO DOW CYCLICALS TUMBLE By Chip Anderson
John Murphy
The Dow Industrials were hit especially hard on Friday. A lot of that was due to big tumbles in two of its cyclical stocks – Caterpillar and 3M. Chart 3 shows Caterpillar falling 6% (on higher volume) to undercut its 50-day average. CAT appears headed for a retest of its 200-day line. Chart 4 shows 3M tumbling 7% on huge volume. Both relative strength lines are in downtrends. The fact that both stocks are considered be cyclical in nature (or economically-sensitive) suggests that the market is getting more worried about the U.S. economy. That view is supported by the fact that Dow stocks holding up the best were in the defensive consumer staple and healthcare categories.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7211970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e721b970b-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
October 20, 2007OCTOBER LIVING UP TO ITS SCARY REPUTATION By Chip Anderson
Chip Anderson
One thousand words:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e719d970b-pi
All the sectors are moving lower this month led by the Financials. Click on the chart to explore more.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
October 06, 2007A BREAKOUT FOR THE DOW TRANSPORTS By Chip Anderson
Arthur Hill
Before looking at the chart for the Dow Transports, let's look at the Dow Theory situation. The Dow Industrials and Dow Transports both hit new highs in July and this marked a Dow Theory confirmation (bullish). Despite this bull market confirmation, both dropped sharply from mid July to mid August. In fact, both broke below their June lows and this development was bearish. The Dow Industrials quickly rectified this support break with a surge to new highs, but the Dow Transports could not get lift off and remained below its August-September highs. The Dow Transports has yet to confirm the new high in the Dow Industrials and this amounts to a Dow Theory non-confirmation.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e733a970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e733f970b-pi
Turning to the price chart for the Dow Transports, you can see that this key average broke above the August-September highs with a big surge on Friday. This breakout is significant because the Transports were showing relative weakness. The breakout is the first step to challenging the July high and confirming the Dow Industrials. At this point, the trend is up for the Dow Transports and I expect a move towards 5300-5500 as long as key support at 4800 holds.
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
October 06, 2007A GOOD TIME FOR A PULLBACK By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e72c4970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e72c8970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e72ce970b-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
October 06, 2007LISTENING TO THE COMMENTATORS By Chip Anderson
Richard Rhodes
Last week, both the Dow Industrials and the S&P 500 broke out to new highs last week in show of modest strength; but what we find more interesting that this circumstance... is that the foreign markets aren't outperforming the US large caps. One only need understand that TV commentators; Wall Street strategists and the trading public is enamored with foreign market exposure , whether it be developed markets - or even emerging markets. A majority of incremental funds allocated to US mutual funds have gone towards international funds. This love affair with all things "international" is quite likely coming to a close.
We'll simply show the ratio of the S&P 500 large caps (SPY) versus the Morgan Stanley EAFE Index (EFA), which tracks only international stocks. While money has poured into this sector, we find that since April 2006 - the out-performance has been minimal - especially given all the "hoopla." Too, we find the ratio has formed a bullish wedge bottom, with prices trading right below their 60-week exponential moving average. If prices breakout above this level - then this event would serve as confirmation to us that a multi-year period of international underperformance is ahead.
When you hear TV commentators or Wall Street strategists opine that the US is decoupling from international stocks; don't think again - they're right - but they are wrong given the US is very likely to outperform international stocks. This clearly will catch everyone offsides; which typically happens at major trading inflection points. Attention is to be paid.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7269970b-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
October 06, 2007WEEKLY MACD LINES TURN POSITIVE By Chip Anderson
John Murphy
Last Friday, I wrote that the weekly MACD lines hadn't turned positive yet for the S&P 500, but were close to doing so. They turned positive this week. I wrote last Friday that "we need to see a positive crossing by the weekly (MACD) lines (or a histogram move over zero) to confirm that the current rally has enough strength to move to new highs". Both events took place this week. The chart below plots the weekly MACD histogram bars on top of the S&P 500. Intermediate buy and sell signals are given when the histogram bars move above and below the zero line. Since this is weekly indicator, its signal are given much later than signals on daily charts (which turned positive during August). But it's an important confirmation that the current rally has some staying power. It's taken seven weeks from the histogram bottom in mid-August to a bullish crossing. That's not unusual. It took eight weeks for that to happen in the summer of 2006. What is unusual this time is that the bullish crossover took place as the market was hitting a new high. Most often, the weekly MACD lines turn up well before a new high. The reason for this late crossing is the unusually deep correction this summer. The histogram bars fell to the lowest level in four years. That's why it took it so long to turn positive. It's a late signal, but an encouraging one.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590efc970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
October 20, 2007TECHNOLOGY REIGN COMING TO AN END? By Chip Anderson
Richard Rhodes
Over the past 18-months, the technology sector has outperformed the S&P 500 by a rather handy amount; however, we believe this trend towards technology out-performance is very close to ending. This has major implications in terms of "rotation" to be undertaken by mutual and hedge funds as they are currently very very overweight technology; hence a period of "de-leveraging" themselves may create an opportunity to be short the sector as the "doorway narrows" as everyone attempts to get out at the very same time.
Technically speaking, we use the ratio between the S&P 500 "Spyders" and the NASDAQ 100 "Q's" (SPY:QQQQ). As the chart illustrates, a larger trading range has formed over the past 5-years, with prices now hard upon support at the 2.85 level - which also happens to be right at Fibonacci 38.2% retracement level. This important and critical support level in our opinion shall "hold" and provide for a rally back towards both the short-term 60-day moving average as well as longer-term 250-day moving average... if not higher. Quite simply, prices are oversold when one looks at the 28-day RSI level of 30.91, which is attempting to form a positive divergence with prices.
The most recent experience with an oversold RSI positive divergence occurred in early-2000 - which of course was "the top" of the technology bubble, and right before the onset of a recession. While we don't necessarily believe an exact "redux" is likely - the risk-reward dynamic does indicate that the risk is towards higher ratio prices rather than a continuation towards lower prices. Hence, we 'smell' an opportunity to be short a number of technology names in the days and weeks ahead.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590f96970c-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
October 20, 2007TWO DOW CYCLICALS TUMBLE By Chip Anderson
John Murphy
The Dow Industrials were hit especially hard on Friday. A lot of that was due to big tumbles in two of its cyclical stocks – Caterpillar and 3M. Chart 3 shows Caterpillar falling 6% (on higher volume) to undercut its 50-day average. CAT appears headed for a retest of its 200-day line. Chart 4 shows 3M tumbling 7% on huge volume. Both relative strength lines are in downtrends. The fact that both stocks are considered be cyclical in nature (or economically-sensitive) suggests that the market is getting more worried about the U.S. economy. That view is supported by the fact that Dow stocks holding up the best were in the defensive consumer staple and healthcare categories.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7211970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e721b970b-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
October 20, 2007OCTOBER LIVING UP TO ITS SCARY REPUTATION By Chip Anderson
Chip Anderson
One thousand words:
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e719d970b-pi
All the sectors are moving lower this month led by the Financials. Click on the chart to explore more.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
October 06, 2007A BREAKOUT FOR THE DOW TRANSPORTS By Chip Anderson
Arthur Hill
Before looking at the chart for the Dow Transports, let's look at the Dow Theory situation. The Dow Industrials and Dow Transports both hit new highs in July and this marked a Dow Theory confirmation (bullish). Despite this bull market confirmation, both dropped sharply from mid July to mid August. In fact, both broke below their June lows and this development was bearish. The Dow Industrials quickly rectified this support break with a surge to new highs, but the Dow Transports could not get lift off and remained below its August-September highs. The Dow Transports has yet to confirm the new high in the Dow Industrials and this amounts to a Dow Theory non-confirmation.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e733a970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e733f970b-pi
Turning to the price chart for the Dow Transports, you can see that this key average broke above the August-September highs with a big surge on Friday. This breakout is significant because the Transports were showing relative weakness. The breakout is the first step to challenging the July high and confirming the Dow Industrials. At this point, the trend is up for the Dow Transports and I expect a move towards 5300-5500 as long as key support at 4800 holds.
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
October 06, 2007A GOOD TIME FOR A PULLBACK By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e72c4970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e72c8970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e72ce970b-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
October 06, 2007LISTENING TO THE COMMENTATORS By Chip Anderson
Richard Rhodes
Last week, both the Dow Industrials and the S&P 500 broke out to new highs last week in show of modest strength; but what we find more interesting that this circumstance... is that the foreign markets aren't outperforming the US large caps. One only need understand that TV commentators; Wall Street strategists and the trading public is enamored with foreign market exposure , whether it be developed markets - or even emerging markets. A majority of incremental funds allocated to US mutual funds have gone towards international funds. This love affair with all things "international" is quite likely coming to a close.
We'll simply show the ratio of the S&P 500 large caps (SPY) versus the Morgan Stanley EAFE Index (EFA), which tracks only international stocks. While money has poured into this sector, we find that since April 2006 - the out-performance has been minimal - especially given all the "hoopla." Too, we find the ratio has formed a bullish wedge bottom, with prices trading right below their 60-week exponential moving average. If prices breakout above this level - then this event would serve as confirmation to us that a multi-year period of international underperformance is ahead.
When you hear TV commentators or Wall Street strategists opine that the US is decoupling from international stocks; don't think again - they're right - but they are wrong given the US is very likely to outperform international stocks. This clearly will catch everyone offsides; which typically happens at major trading inflection points. Attention is to be paid.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7269970b-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
October 06, 2007WEEKLY MACD LINES TURN POSITIVE By Chip Anderson
John Murphy
Last Friday, I wrote that the weekly MACD lines hadn't turned positive yet for the S&P 500, but were close to doing so. They turned positive this week. I wrote last Friday that "we need to see a positive crossing by the weekly (MACD) lines (or a histogram move over zero) to confirm that the current rally has enough strength to move to new highs". Both events took place this week. The chart below plots the weekly MACD histogram bars on top of the S&P 500. Intermediate buy and sell signals are given when the histogram bars move above and below the zero line. Since this is weekly indicator, its signal are given much later than signals on daily charts (which turned positive during August). But it's an important confirmation that the current rally has some staying power. It's taken seven weeks from the histogram bottom in mid-August to a bullish crossing. That's not unusual. It took eight weeks for that to happen in the summer of 2006. What is unusual this time is that the bullish crossover took place as the market was hitting a new high. Most often, the weekly MACD lines turn up well before a new high. The reason for this late crossing is the unusually deep correction this summer. The histogram bars fell to the lowest level in four years. That's why it took it so long to turn positive. It's a late signal, but an encouraging one.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590efc970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
September 22, 2007BEARS BURNED BY BERNANKE By Chip Anderson
Tom Bowley
It's been a very long time, but we can now unequivocably say that we have an accommodating Fed. The lowering of interest rates was the next piece of our bullish jigsaw that fit perfectly. It's all coming together. The bond market knew it was coming. You just have to follow the technicals. Take a look at the weekly chart of the 10 year treasury yields over the past decade and a half.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e71d0970b-pi
There is a long-term downtrend in rates that remains intact. The short-term uptrend that began in 2003 came to an end just before the recent Fed announcement. How long will we trend lower? That's a good question and a tough one. We expect the Fed will lower at least 1-2 more times and then re-evaluate our economic outlook. That would get the fed funds rate back down to the 4.00-4.25 area. From a technical perspective, we believe the yield on the 10 year treasury will ultimately drop to the 3.80-4.00% level. The economy should begin to grow more steadily late in the first half of 2008 and that may require the Fed to consider tightening again sometime in the second half of 2008 or early 2009.
Equities flourish in a growing economy with falling interest rates and little inflation. That is our forecast for the next 12 months and the primary reason we remain extremely optimistic and bullish. We have stated that the recent weakness was a buying opportunity as we expect equities to post very solid gains over the next 1-2 years. Focus on the large multinational growth companies found on the NASDAQ 100 for the balance of 2007, then be ready for a broad-based advance in 2008. Expect semiconductors to lead the rally into year end.
Posted by Chip Anderson at 4:06 PM in Tom Bowley | Permalink
September 22, 2007BONDS HIT SUPPORT By Chip Anderson
Arthur Hill
Buy-on-Rumor and Sell-on-News is a classic Wall Street axiom. In the internet heyday, Yahoo! would surge into its earnings announcement and then correct with a pullback near the actual announcement. The iShares 20+ Year Bond ETF (TLT) surged with the lead up to the Fed meeting on Tuesday and peaked a few days before the announcement. The rumor was the Fed cut and traders bought into this rumor in the second half of August. Traders took profits after the rate cut (news) was priced into the bond market.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ff7970c-pi
Despite the rather sharp pullback, the overall trend remain up and TLT finished the week in a support zone. The support zone stems from broken support, the 200-day moving average and the 50-day moving average. In addition, there is also support from the early August consolidation. A harami formed over the last two days with a long black candlestick and a smaller white candlestick (inside day). This shows sudden indecision and also indicates support. The overall trend remains up for TLT and I would expect the ETF to hold this support zone before continuing higher.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590ffc970c-pi
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
September 22, 2007NEW BUY SIGNAL By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e71c9970b-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
September 22, 2007RIDING THE S&P SURGE By Chip Anderson
Richard Rhodes
The "surge" of the past month in the S&P 500 is nothing short of astounding; and given the technicals involved – we believe prices are set to continue moving higher with a projection to 1630 into the October-December time frame. This represents a +6.8% rally from the Friday, September 21 close.
Quite simply, when we look at the S&P 500 hourly chart; we find a very picturesque "head & shoulders" bottoming pattern that was confirmed with the breakout above neckline resistance at 1496. Our target is arrived at using the percentage gain +9.1% off the 1371 low to neckline resistance at 1496, and then applying the gain to 1496 to arrive at 1632.
The question before all of us is "how do we get there", and what sectors will outperform and which will underperform. This is important as we believe an "important top" will form at 1632 given the current advance/decline line of NYSE "operating companies only" is lagging rather badly on the rally thus far. Typically, the advance/decline line tops out 4-6 months before prices do so; which occurred in June-2007. Hence, our target time frame of October-December 2007.
And finally, we'll also note that the hourly "head & shoulders" bottom 1632 target roughly converges with the weekly "head & shoulders" bottom breakout in 2004 that targets 1650; and speed-line resistance off the September-2001 bottom connecting the January-2004 high and the June-July 2007 highs. Attention is to be paid when various methods of technical analysis converge; and we are doing so.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590f43970c-pi
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
September 22, 2007TICKER CLOUDS ARE GATHERING By Chip Anderson
Site News
Later this week, we hope to release another new feature here at StockCharts - "Ticker Clouds!" A Ticker Cloud is a list of the most requested ticker symbols we've seen (calculated over the past 5 minutes). The size of each ticker is determined by its popularity and each ticker can be clicked to see its chart. Ticker Clouds are very similar to "tag clouds" that you may be familiar with from photo sites like "Flickr.com". Again, we hope to have them in place by the end of this week.
Posted by Chip Anderson at 4:02 PM in Site News | Permalink
September 22, 2007YOU CAN BUY A FALLING DOLLAR FUND By Chip Anderson
John Murphy
I first wrote about this inverse dollar fund in April 2006 and again on July 13 of this year. The ProFund Falling US Dollar Fund (FDPIX) is a mutual fund designed to trade in the opposite direction of the US Dollar Index. In other words, the fund rises when the dollar falls (hence its name). As I've suggested in the past, investors can use this fund to profit from a falling dollar. Chart 1 (plotted through 9/9) shows the Falling Dollar Fund trading at a new 12-year high. An alternative to buying a dollar inverse fund is to buy a foreign currency ETF. Chart 2 shows the Currency Shares Euro Trust (FXE) hitting a new high on 9/20 along with the Euro.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7234970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7238970b-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
« Previous | Next
September 22, 2007THE FED FIXED THINGS - OR DID IT? By Chip Anderson
Chip Anderson
The Fed's surprising move last Tuesday did wonders for the major averages and "wrecked" many technical forecasts in the process (oh well). As you can see below, Tuesday's rally moved the Dow well above the 50-day Moving Average (blue) which had been providing some resistance prior to that time.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590f1c970c-pi
The CMF and MACD lines also strengthened significantly as a result. So everything must be looking up right? Well... Check out this chart:
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590f1e970c-pi
This is a MarketCarpet chart (Java required) for all of the stocks that make up the S&P Sector ETFs. Each square represents a different stock. They are grouped into the 9 major S&P sector categories. The color of each square is determined by the percentage increase (green) or decrease (red) that each stock has had since the Fed made its move on Tuesday. To read this chart, look to see if the overall color of a given sector tends towards green (bullish) or red (bearish).
As you can see, many of the stocks on this charts are tending towards the red - especially in the Consumer Discretionary and Financial sectors. Only the Energy sector is showing lots of green. This indicates that there hasn't been much follow thru since the Fed's move on Tuesday and that the downward pressure that was in place prior to Tuesday may still be having an impact.
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
September 07, 2007PREPARE FOR A WEAKER DOLLAR By Chip Anderson
Tom Bowley
The jobs report sent a jolt to the stock market on Friday. We believe it'll be a temporary jolt, but a jolt nonetheless. That data gave the Fed all the ammunition it needs to do what the market has been expecting for weeks - to cut the fed funds rate. The question has now become, will it be 25 or 50 basis points? For the U.S. Dollar Index, it won't matter. The lowering of interest rates here in the U.S. will turn a weak dollar into an even weaker one. Take a look at the monthly chart (Chart 1) of the U.S. Dollar Index over the past 27 years and compare the movement in the dollar to the movement in gold prices (Chart 2) over that same span.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7248970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e724e970b-pi
Clearly, there is an inverse relationship between the dollar and gold that has weathered many economic cycles. So here's the question we need to answer. If the Fed is on the verge of beginning an interest rate reduction campaign, will the dollar continue to weaken? We believe it will, which in turn should lead to a continuing bull market in gold, at least in the short-term say over the next 3-6 months. Then we'll re-evaluate.
We have maintained a very bullish theme on equities in general and once we clear the historically bearish month of September, we expect the bullish long-term trend to resume. In an environment of a weak dollar, we especially like the large cap multi-national stocks found on the NASDAQ 100 where earnings can be expected to rise significantly. We continue to favor the technology sector.
Posted by Chip Anderson at 4:06 PM in Tom Bowley | Permalink
September 07, 2007FINANCE AND CONSUMER ETFs HAVE DOUBLE TOPS By Chip Anderson
Arthur Hill
The Finance SPDR (XLF) and Consumer Discretionary SPDR (XLY) formed large double tops this year, and both broke support in late July to confirm these bearish reversal patterns. Volatile trading ranges followed these support breaks (yellow ovals), but these ranges look like consolidations after a sharp decline. In other words, XLY and XLF became oversold in mid August, and these consolidations worked off these oversold conditions. Friday's sharp decline looks like the start of another move lower, and a move to the next support area is expected.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e729e970b-pi
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e72a1970b-pi
Both sectors are important to the overall market. The Finance sector represents banks, brokers and REITs. It is the single biggest sector in the S&P 500. Moreover, banks and brokers are at the heart of the sub-prime problems, and this issue is not going away until the Finance sector rebounds. The Consumer Discretionary sector consists of retailers, restaurants, media companies and automakers. It is the most economically sensitive sector, and a breakdown in XLY bodes ill for the economy overall.
Posted by Chip Anderson at 4:05 PM in Arthur Hill | Permalink
September 07, 2007SCARY RETEST ON THE HORIZON By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e726f970b-pi
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e7272970b-pi
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
September 07, 2007BIOTECH ETF HOLDING ON By Chip Anderson
Richard Rhodes
Although last week's broader market was under pressure, the long forgotten Biotech HOLDRs (BBH) showed surprising resilience, and, in fact, is on the cusp of a major breakout. If you'll recall, BBH has underperformed badly in the past, even while posting very good earnings. That puts BBH in the categories of "value" and "defensive," code words used to describe a security in which money will flow in a market decline. Thus, we can make a fundamental and technical case to be buyers.
From a technical perspective, BBH has a history of rising very sharply, then consolidating prices for a year or two. This current consolidation began in early-2005 – making it nearly 2 ½ years old. Classical technical analysis tells us that the longer the base – the more sustained the move. Thus far, previous support has held at $158, which is just above the rising 200-week moving average. Too, prices are hard upon the 80-week moving average at $171 – a level we think will be handily broken in the days and weeks ahead, given the 14-week Stochastic is turning higher from oversold levels. http://blogs.stockcharts.com/.a/6a0105370026df970c011168590f87970c-pi
Therefore, the technical setup is rather good. It really doesn't get much better than this as they say. Our target on the trade is above $220.
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink
September 07, 2007SITE DESIGN UPDATE ON THE WAY By Chip Anderson
Site News
We've started working on a site redesign that will update the way you get around the website. Right now there are too many parts of the site that are hard to find or inconsistant with other areas of the site. In addition, our site search feature is too hard to use and often doesn't give useful results. It will take us a couple of months to get everything worked out, but you can look forward to a better StockCharts.com experience once we've completed things.
Posted by Chip Anderson at 4:02 PM in Site News | Permalink
September 07, 2007VIX STILL IN AN UPTREND By Chip Anderson
John Murphy
Earlier in the week I heard a TV commentator (masquerading as an analyst) give his interpretation of the CBOE Volatility (VIX) Index. His conclusion of course was bullish. He correctly pointed out that peaks in the VIX usually coincide with market bottoms. He then bullishly concluded that since the VIX peaked in mid-August, the market had bottomed. The problem with that bullish interpretation is that the major trend of the VIX is still up. Recently, I wrote that the VIX would probably find major support near the 20 level before turning back up again. I got the 20 support number from two sources. One was the 50-day moving average. The other was the March peak. Pullbacks in an uptrend should always find support near a previous peak. If the VIX is turning back up (as it seems to be doing), that would signal the end of the market rally and not the start of a new uptrend. Here again, when you hear TV people doing their version of technical analysis, turn off the sound and look at your chart.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590fc5970c-pi
Posted by Chip Anderson at 4:01 PM in John Murphy | Permalink
September 07, 2007MARKET MOVING LOWER - DUH! By Chip Anderson
Chip Anderson
"The trend is your friend" or, in this case, the market's enemy. You may have noticed lots of vacillating in the traditional financial press this past week - gloom and doom after the market closes lower, supreme optimism the very next day when the market moves higher. ChartWatchers shouldn't be fooled by the media's need to generate market opinions that sell papers. The market's trend has been clear for weeks and despite what the optimists say, that trend is down. The Dow chart shows it clearly with three lower peaks separated by two lower troughs. Last week's third peak is the "final nail in the coffin" - confirming the downtrend beyond a shadow of a doubt. Don't fight a clear trend folks. Until a clear up-trend is re-established (see this article for details), the default expectation for stocks should be that they will move lower.
http://blogs.stockcharts.com/.a/6a0105370026df970c0105371e71d9970b-pi
Posted by Chip Anderson at 4:00 PM in Chip Anderson | Permalink
August 25, 2007EXTREME PESSIMISM MARKS BOTTOM By Chip Anderson
Tom Bowley
We've discussed in the past the tendency of the market to put in long-term bottoms when the bearish sentiment reaches extreme levels. Extreme bearishness is exactly what we saw on Thursday, August 16. Over the past 4 years or so, we've experienced many occasions when the put call ratio has exceeded 1.0. But there have only been a dozen or so times that the "equity only" put call ratio has topped 1.0. Prior to the recent downtrend, when had seen only one previous occasion where that "equity only" put call ratio topped 1.0 on consecutive days. That occurred in mid-August 2004. On the chart below, you can clearly see that the extreme pessimism seen then marked a long-term bottom, one that was never retested.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590f62970c-pi
Many market pundits are suggesting that we're headed towards disaster given the recent credit crunch. Even that nasty "recession" word is being tossed about. We don't believe a word of it. We look at the current market conditions as a major buying opportunity. Our only question is whether the market can sustain its recent rally as we head into the worst calendar month of the year - September. Major market tops normally coincide with excess bullish sentiment. For instance in 2000 when the major indices began its downward spiral, it was routine to see put call ratios down around .40-.50 - very bullish indeed. Everyone was buying calls because it was "easy money." Margin debt used to buy stocks was at outrageous levels and when the selling began, it fed off itself - a domino effect if you will. We are looking at a market at the opposite end of the sentiment spectrum now. Instead of record margin debt to finance stocks, we see record short interest. Instead of bullish call buyers, we have bearish put buyers. The masses in the options world rarely get it right.
When the Fed begins its interest rate cutting campaign - and the only argument in our minds is when, not if - the stock market will snap back like a stretched rubber band. We've only seen the beginning in the last week. We maintain our very bullish stance on the market with a bias towards the large cap NASDAQ 100 index.
Posted by Chip Anderson at 4:06 PM in Tom Bowley | Permalink
August 25, 2007EXPECTING SHORT-TERM TOP By Chip Anderson
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://blogs.stockcharts.com/.a/6a0105370026df970c0105371e725a970b-pi
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.
Posted by Chip Anderson at 4:04 PM in Carl Swenlin | Permalink
August 25, 2007WHERE ARE WE IN THE CYCLE? By Chip Anderson
Richard Rhodes
Given the volatility of the capital markets these past two weeks, we think it instructive to step back and take a longer-term viewpoint of the stock market to discern where we may be in the cycle. In doing so, we find the S&P 500 large caps - the strongest relative US average given its international exposure - trading well above its longer-term trendline as well as its 80-week moving average. In the past, this moving average has provided "fulcrum points" between bearish corrections in a bull market and outright bear markets. In the present case, this moving average was successfully tested seven trading sessions prior at 1378, and closed this week out at 1479... a full 100 points above it. Perhaps this simply indicates that a normal -10% correction within a bull market has occurred, and prices have now resumed their upward trend.
http://blogs.stockcharts.com/.a/6a0105370026df970c011168590eba970c-pi
That said, the credit contagion seems to be contained for time being; however, the character of the rally hasn't been "strong enough" for us to believe that a "lift-off bottom" is in place. Thus, we are now in the process of layering on short positions for the seasonal September-November swoon back into the 80-week moving average is forthcoming. And if broken - then we would expect to see a bear market decline of -20% and perhaps even more.
As they say: Timing everything.
Posted by Chip Anderson at 4:03 PM in Richard Rhodes | Permalink