一个笨蛋的股指交易记录-------地狱级炒手

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March 18, 2006HEAD AND SHOULDERS DOLLAR BOTTOM?By Chip Anderson
John Murphy
It's possible that the current dollar pullback is part of a large basing pattern of the head and shoulders variety. A case can be made that the Dollar Index formed a left shoulder at the start of 2004 and a head at the start of 2005. The fourth quarter peak near 92 stopped right at the spring 2004 peak. That allows for a neckline to be drawn over those two peaks. That interpretation allows for a drop in the USD to last summer's low near 86 as part of a possible right shoulder. That would be a fifty percent retracement of the 2005 price advance and would be a logical spot for new buying to emerge. Any severe break of last summer's low, however, would call into question the "head and shoulders" interpretation. On the upside, the Dollar Index would have to clear the "neckline" near 92 to confirm a long-term bullish breakout. Neither of those two events appears likely over the short-run. Even if the "head and shoulders" interpretation proves correct further out in time, the short-term picture for the dollar is looking weaker.

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March 04, 2006GLOBAL RATES ARE HEADING HIGHERBy Chip Anderson
John Murphy
Yesterday's decision by the ECB to raise rates was pretty much expected. What wasn't expected was the hawkish comments that accompanied that rate increase with hints of more to come. The Japanese have been talking about doing the same and may do so before the month is out. From a global standpoint, I find the impending Japanese move to raise rates more significant. For one thing, Japan is the second biggest economy in the world. Another reason (that I've written about before) is my belief that Japanese deflation has been one of the reasons that long-term bond yields have stayed so low. Yields on the Japanese 10-year bond rose this week to the highest level in eighteen months (1.64%). It was reported this morning in Tokyo that core consumer prices rose 0.5% in February which is the highest since 1998 (when global deflationary problems started). Earlier this year, I wrote about the correlation between with the rise in the Japanese stock market (which hinted at an end to Japanese deflation) and the rise in gold. Both are pointing to higher global inflation and interest rates. Up to now, only the U.S. has been raising short-term rates which may explain why bond yields have stayed down. With the rest of the world starting to raise rates as well, I suspect that bond yields are finally starting to move higher. Chart 6 shows how close they are to doing just that.

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February 18, 2006DOW HITS MULTI-YEAR HIGHBy Chip Anderson
John Murphy
The Dow was the only one of the major averages to reach a new high this week. That continues its new upside leadership that I wrote about last week. With the Dow now above the 11K level, the next potential upside target is its 2001 high at 11350. One of the big reasons for the Dow's strength was Honeywell. Last week I showed the Dow leader closing above 40 for the first time since mid 2001. It continued that bullish trend this week and appears capable of reaching 50. Another big Dow winner was Hewlett Packard. The chart below shows that Dow leader trading at nearly a five-year high. It's usually a good idea to take what the market gives us. With money starting to flow toward the Dow Industrials, stocks like Honeywell and Hewlett are where a lot of the new market leadership is coming from. Along with biotechs and telecom stocks.

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February 05, 2006S&P 500 BREAKS ITS 50-DAY LINEBy Chip Anderson
John Murphy

The chart below shows the S&P 500 closing the week below its 50-day moving average. That suggests a further drop toward 1245. The daily MACD histogram bars also paint a short-term negative picture. They stayed below the zero line and failed to confirm the previous week's price bounce before weakening even further this week. That only affects the short-term trend. It's the weekly trend that I'm more concerned about.

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January 21, 2006VIX TURNS UP -- S&P TURNS DOWNBy Chip Anderson
John Murphy
A week ago Thursday I wrote a message entitled: "Low Volatility (VIX) Index May Increase Market Risk in 2006 -- S&P 500 Pulls Back From Overbought Condition" (January 12, 2006). The next two charts are updates of the ones shown at that time. I was concerned that a rising VIX from the lowest level in a decade could start to put downside pressure on an overbought market. So far that has been the case. Chart 1 shows the VIX breaking through its December highs to register an intermediate upside breakout. It's no coincidence that the jump in the VIX accompanied heavy stock selling. Chart 2 shows the short-term damage done to the S&P 500 SPDRs. Although the SPY closed right on its 50-day average, the daily MACD lines turned negative after failing to confirm the recent price move to new highs. Heavy downside volume is also negative. The last time the SPY saw such heavy trading was around its October lows. Heavy selling after a price decline often signals a bottom. Heavy selling after a price rise usually signals a top. This looks more like a top than a bottom. The blue arrow on the RSI line shows the "negative divergence" that I wrote about on January 12. After expressing concern about that divergence, I suggested that "this looks like a good time for short-term traders (or those looking for an excuse to take some January profit) to do so". Today's downside action suggests that it's time to do some more selling.

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January 07, 2006CONCENTRATING ON STRENGTHBy Chip Anderson
John Murphy
The market is starting the new year with a bang. Virtually all of the major market averages have risen to new 52-week highs. Some of that new optimism is the result of the Fed minutes released earlier in the week hinting that it might be close to ending its rate-hiking. I've expressed skepticism about the staying power of the early 2006 strength. But only time will tell if that skepticism is warranted. I've also suggested that January is traditionally the best month of the year to take some money out of the market is one is so inclined to do so. An alternative to taking money out of the market is rotating it to those market groups that are leading the market higher. It should come as no surprise that some of those early leaders are commodity-related stocks (especially gold) and foreign stocks. I've been writing about that trend for several months. I suggested earlier in the week that those same Fed minutes that sparked this week's market rally also weakened the dollar. If anything, the falling dollar has accelerated the move into commodity-related stocks and foreign markets this week. Hopefully, our readers are already aboard those moves. Energy stocks are also among early 2006 leaders as oil has climbed back over $64. Oil service stocks are the clear leaders there. Chart 1 shows the Oil Service Holders (OIH) hitting a new record on Friday. The recent pullback stopped just above its 50-day average and chart support along its late September high. That's a textbook example of what an uptrend should do. Its relative strength line is also in new high ground. Chart 2 shows the Energy Sector SPDR (XLE) nearing a challenge of its September high. It too is starting to outperform the S&P 500 again. While that may help boost the S&P over the short run, continued energy leadership is usually bad for the S&P further out in time. Early 2006 leadership is also coming from chip and internet stocks.

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December 10, 2005GOLD STOCKS BREAK OUTBy Chip Anderson
John Murphy
Gold bullion climbed over $5.00 today to end at $519 which is the highest level in twenty-four years. Gold has now exceeded its 1983 peak at $514. Despite my concerns about a possible pullback around the $500 area, bullion shows no signs of slowing down. That may be partially due to the bullish action in gold stocks. Although the XAU Index had recently achieved a major bullish breakout, Newmont Mining (the biggest stock in the XAU) hadn't yet done so. Neither had the AMEX Gold Bugs Index (HUI). The next two charts show, however, that both have now joined the XAU in new high ground. The weekly bars in the first chart show Newmont closing over 50 for the first time in two years. The second chart shows the HUI breaking through its late 2003 highs to achieve a bullish breakout as well. The HUI/SPX ratio in Chart 7 has just broken a two-year down trendline. That's tells me that gold stock leadership is going to continue as is the bull market in bullion.

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November 20, 2005NASDAQ HITS FOUR-YEAR HIGHBy Chip Anderson
John Murphy
The chart below shows the Nasdaq Composite having hit a new four-year high this week. It's now trading at the highest level since the spring of 2001. There's another shelf of potential resistance to watch at 2328 (see circle), but the action has been impressive. That also continues the trend of higher lows and higher lows that started in the fourth quarter of 2002. Some of our readers have asked, however, about a price pattern that's been forming since the start of 2004 that's marked off by the two converging trendlines shown on the chart.

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November 06, 2005S&P TREND IMPROVES -- SOX REGAINS 200-DAY LINEBy Chip Anderson
John Murphy
The weekly bars in Chart 1 show the improvement in the S&P 500 this past week. Not only did it close back over its (red) 40-week average, but it closed above its (blue) 10-week average as well. Even more impressive was the heavy upside volume. That strong action moved the market out of its danger zone. Having survived the dangerous month of October, the market has now entered a seasonally strong period between now and yearend. The weekly histogram bars are still negative (below the zero line). However, they have risen for two consecutive weeks (meaning the MACD lines are starting to converge). While that doesn't constitute a "major" buy signal, it does suggest the covering of short positions (or lightening up on bear funds). With oil still on the defensive, fourth quarter market leadership is coming from financials, retailers, the transports, and technology. Most of the recent technology leadership came from Internet stocks which closed at a new recovery high (Chart 2), while semiconductors have been one of the market's weakest groups. This week, however, the SOX Index climbed back over its 200-day moving average (Chart 3). It's a good sign when even the weakest groups start to show some improvement.

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October 16, 2005WHY BEAR FUNDS ARE TRADING VEHICLESBy Chip Anderson
John Murphy
My Wednesday message on bear funds wrote that they should be used as trading vehicles and not as a long-term investment. One of our readers asked why. That's because the market has a history of rising more often that it falls. To hold a bear fund in a rising market ensures unnecessary market losses. Since the start of 2003, for example, the bear fund would have lost 28% while the S&P 500 gained 34%. In other words, a bear fund would have been a bad holding over the last three years. The picture is even worse the further back we look. The chart below compares the S&P 500 monthly bars to the Rydex Ursa bear fund (red line) for the last ten years. The bear fund is designed to move in the opposite direction of the S&P 500. The bear fund fell from 1995 to 2000 as the market rose. After rallying from 2000 to 2002, it fell again from 2002 to 2005. That means that the bear fund fell for seven out of the last ten years and three out of the last five. It would have done a little better than the S&P 500 since 2000. But it would have lost a lot in the three years since 2002 and a lot more over the entire ten-year period. That's why it shouldn't be used as a long-term investment. A bear fund can and should be used, however, when the market looks like it may be turning down -- as it is now. In my view, that makes bear funds trading vehicles and not long-term investments.

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October 02, 2005MARKET ENDS SEPTEMBER ON A STRONG NOTEBy Chip Anderson
John Murphy
MARKET AVERAGES CLOSE BACK OVER 50-DAY LINES... The market had a lot thrown at it this month. A spike in energy prices, plunging consumer confidence, and rising long-term interest rates. It also had the month of September to deal with which has traditionally been the worst month of the year. While the market bent a bit during the month, it refused to break. And then ended the month on the upside. The first three charts show essentially the same pictures. The three major market indexes held support at their late-August lows and closed the week back over their 50-day averages. [The S&P and the Nasdaq also stayed over their 200-day averages]. That action prevented a chart breakdown and has kept the market in a trading range. This week's bounce also kept weekly and monthly indicators in positive territory. Part of Friday's market gains were probably the result of falling energy prices. Some other positive signs were new signs of strength in small caps, the Nasdaq, semiconductors, and the transports. Chart 3 plots a ratio of the Nasdaq 100 divided by the S&P 500 . The ratio peaked in early August when loss of Nasdaq leadership started to weigh on the entire market. The good news is that the ratio started to bounce again this week (see arrow). The market usually does better when the Nasdaq shows upside leadership. A lot of the Nasdaq leadership came from the semiconductors.

- John Murphy

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September 24, 2005OIL MAY BE FORMING SHORT-TERM TOP ...By Chip Anderson
John Murphy
Today's selloff in oil of more than two dollars may be completing a right shoulder in a short-term head and shoulders top in the key commodity. The September bounce has fallen well short of the late-August peak (the head) and is about equal to the early August peak (left shoulder). It's now challenging its 50-day average and may be headed for a test of the neckline near 62.50. A close beneath that support line would turn the short-term trend down. That would weaken energy stocks even further. I'm not suggesting that the long-term bull market in energy is over. I am suggesting that it's come too far and is need of some correcting. I also believe that the price spikes from the two recent hurricanes have probably been overdone. What better time to take some energy money off the table when TV stations are talking about nothing else. One TV station showed a chart of the XLE yesterday and said it was a good thing to buy when oil prices are rising. That's the "kiss of death" in any rally.

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September 10, 2005FRIDAY BLOOMBERG INTERVIEW ...By Chip Anderson
John Murphy
Some of you may have watched my 7:10 am interview on Bloomberg TV Friday. I discussed the upside breakout in the healthcare sector that I wrote about earlier in the week. For those of you who missed it, however, I'd like to show the same charts that we used on the air to make my point more clearly about the activity within the healthcare group itself. The chart below shows the Health Care Select SPDR (XLV) closing above its early 2004 peak this week to achieve a bullish breakout. [It's now challenging its 2000 peak]. The rising relative strength line since the end of 2004 shows that healthcare has been a market leader year (along with energy and utilities). The point I made this morning was that the XLV provided a vehicle for buying the entire healthcare sector. But there were two other ETFs that also provide exposure to the healthcare group in biotechs and drugs.

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August 20, 2005NYSE BULLISH PERCENT INDEX IS OVERBOUGHT ...By Chip Anderson
John Murphy
One of the ways to determine if the stock market is in a long-term overbought or oversold area is to chart the NYSE Bullish Percent Index which is shown in the chart below. The BPNYA measures the percent of stocks that are on point & figure buy signals. The two key numbers on the chart are 30 and 70. Readings under 30 show the market in a major oversold condition. Readings over 70 show a major overbought condition. The chart shows that the index traded over 70 three times since the start of 2004. A more dangerous signal is given when the line drops back under 70. That's a sign that the overbought market is starting to weaken. I point this out because the BPNYA has just fallen back below 70 (see red arrow).

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August 06, 2005S&P CONTINUES TO WEAKEN, MACD TURNS DOWN ...By Chip Anderson
John Murphy
The market's short-term picture continues to weaken. Yesterday I wrote about the MACD lines for the S&P 500 being on the verge of turning negative. They did that today for the S&P and several other major market averages. That signals the start of a short- to intermediate-term correction. For the S&P 500 SPDRs (Chart 1), the first significant test of support will come around the 122 level. Two peaks were formed around that level (March and June) prior to July's upside breakout. On pullbacks, an index is supposed to find support along old breakout points. Another potential support level is the rising 50-day moving average. The market's overbought condition, combined with the fact that August is usually a weak month, is enough to raise the market's risk level for the balance of the summer. Chart 2 shows the Dow Diamonds falling back below their June high at 105 on rising volume. That's another caution flag.

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July 17, 2005DOW STARTING TO CATCH UP...By Chip Anderson
John Murphy
A few weeks back I wrote about the close linkage between the Dow Transports and Industrials. At the time, both were threatening their spring lows. Now both are testing their June highs (see first chart). A Dow close through that barrier (combined with a similar upside breakout in the Transports) would constitute an intermediate term Dow Theory buy signal. Two of the biggest contributors to the Dow's recent strength are General Motors and IBM. The second chart shows GM trading at a new five-month high after climbing above its 200-day moving average earlier in the week. Although IBM is still well below its 200-day line, it's climbed to a new three-month high this week (see the last chart). It looks like money is starting to nibble at some previously-neglected blue chips.

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July 03, 2005WINNERS AND LOSERS OF 2005, FIRST HALF RESULTS ...By Chip Anderson
John Murphy
The bars in the following chart show the best and worst group performers for the first half of the year. To no one's surprise, energy was the top sector -- while the fuel-sensitive transports were the weakest. Utilities took second place thanks to falling bond yields. Another defensive group -- healthcare -- did relatively well. Midcaps did better than small and large caps. Dividend paying stocks also held up ok (as did large cap value stocks). Among the first half's weakest groups were basic materials (which include cyclical stocks), consumer discretionary , and the technology-dominated Nasdaq . The relative strength bars paint a picture of a defensive market that's being hurt by rising energy prices. If the second half of the year is going to be any better, the first half laggards are going to have to do better. And it's hard to imagine a strong market as long as energy remains in a leadership position.

It wasn't a good first half, but it wasn't terrible either. All the major stock indexes ended in the red but not by much. The S&P 500 lost -1.7%, the Dow -4.7%, and the Nasdaq -5.4%. Bonds gained more than 5% to outpace stocks. The dollar gained 10% while commodities gained a respectable 5%. The rising dollar made U.S. assets preferable to foreign assets during the first six months of the year. Of course, it's easy to spot winners in hindsight. And there's no guarantee that the first half trends will continue. One important lesson from the first half results, however, is that there are always winning groups -- even in a weak market. Our job in the next six months will be to pick second half winners and avoid losers -- no matter which direction the market takes.



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June 18, 2005HEALTHCARE ETF HITS 52-WEEK HIGH ...By Chip Anderson
John Murphy
While a lot of attention has been paid to rising energy and basic material stocks this week, not much has been written about healthcare. It's time to correct that. Chart 1 shows the Health Care Sector SPDR (XLV) closing the week at a new 52-week high. [The only two other sector SPDRS to hit new highs were energy and utilities]. The relative strength ratio shows that healthcare started to do better than the S&P 500 near the end of last year. Although the relative strength line has been slipping of late, its trend is still higher. How much higher can be seen more plainly Chart 2 which shows that the healthcare relative strength ratio has broken a down trendline starting in the spring of 2003. That makes some sense. Healthcare is considered to be a defensive sector and would be expected to underperform during a cyclical bull market. Its stronger performance during 2005 is another sign that investors have been favoring more defensive stock sectors. Earlier in the year I listed healthcare as one of my favorite picks for the year. I haven't changed my mind. Chart 2 also shows that the XLV is challenging its 2004 peak. A lot of today's buying came from biotechs.

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June 04, 2005OIL ISN'T DEAD YETBy Chip Anderson
John Murphy
... A lot of recent optimism on the stock market and the economy has been predicated on the view that the historic rise in oil prices has probably ended. A lot of economists have also declared the major bull market in commodities over. Both of those predictions may prove to have been premature. Over the last two weeks, the price of crude oil has bounce off its 200-day moving average and then risen to the highest level in more than a month. After a pullback yesterday, it's trading back over $54 today. The chart below reflects the recent improvement in the price of crude and suggests a possible retest of its early April high. That explains the recent move back into energy stocks. It may also explain why the recent market rally is running into some profit-taking. Crude isn't the only commodity that's turned up recently. The CRB Index of commodities is rising again after bouncing off major support levels.

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May 21, 2005NASDAQ LEADS MARKET HIGHER...By Chip Anderson
John Murphy
In my view, the most significant improvement has taken place in the technology-dominated Nasdaq market. The Nasdaq Composite Index broke through its 200-day average on Tuesday and has broken its 2005 down trendline. Its relative strength line has turned up relative to the S&P 500 . That's usually a positive sign for both. Nasdaq leadership is essential in any market upturn. That's what we're getting right now. One of the missing ingredients in recent market bounces has been higher volume . Yesterday's market upturn, however, saw all the major averages exceed their normal daily volume. That's a sign that institutions are starting to buy back into the market with more enthusiasm. The Nasdaq now appears headed toward its February/March peaks near 2100 .

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May 07, 2005A LOOK AT THE NYSE COMPOSITE INDEX ...By Chip Anderson
John Murphy
Every time I write about a certain stock market index, I'm asked why I don't write about some of the others. I generally try to spread my coverage around to all the major stock indexes, but can't cover them all at once. I also try to find the one that's giving the truest read on the overall market. Yesterday, for example, I used the S&P 500 for an in-depth market view and came up with a mixed picture. If I had chosen the Nasdaq, I would have a gotten more negative reading. If I had chosen the NYSE Composite Index , I would have come up with a slightly more positive read. Chart 1 shows part of the reason why. The NYSE is the only one of the major market indexes that stayed over its 200-day moving average in late April. Considering that most of those indexes are now back above their 200-day lines, I'd have to say that the NYSE may have given the most reliable reading. I decided to focus on the NYSE today and to re-introduce some point & figure charts. I'm going to revisit the Bullish Percent Indexes on the major market averages which also utilize point and figure charts.

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April 16, 2005HOW FAR DOWN?By Chip Anderson
John Murphy
After this week's breakdown, there can be little doubt that the cyclical bull market that started in October 2002 has ended. The question now is how far down can the market drop. The daily bars in the chart below show the S&P 500 SPDR breaking its January low and closing beneath its 200-day moving average. Downside volume was very heavy. There's a support level at 108.60 at its late October low. But I think the S&P (and the other major stock averages) are headed all the way back to its August low. That's based partially on standard chart analysis, and partially on Elliott Wave Theory. The chart shows that the rally off the August low took place in five waves. The breaking of the bottom of wave 4 (the January low) confirmed that the rally ended. But there's another Wave 4 to consider.

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April 02, 2005BAD NEWS FOR ECONOMICS, DOW THREATENING LOWBy Chip Anderson
John Murphy
THE ECONOMIC NEWS ISN'T GOOD ... It's interesting to see the media put a positive spin on recent economic reports. It was reported this week that fourth GDP growth was lower than expected while prices were higher than expected. That was described as good for the economy. Earlier this morning, the government reported that March non-farm payroll numbers were only half what was expected. That was reported as good because it lessened the chances for higher interest rates. A report of lower consumer confidence was viewed as a non-event. The ISM report showed a weakening in manufacturing activity coinciding with surging raw material prices. That apparently is why companies haven't been hiring. It was reported that although the ISM number fell to 55.2, it was still above 50 which is good. My question is how can a slowing GDP number, slowing manufacturing activity, lower consumer confidence, higher raw material prices, and fewer jobs be good for the economy. The market is telling the truer story. Sector rotations during the first quarter paint a bearish picture for the market. After suffering a bad first quarter, the market fell sharply again today and threatens to get even worse. A number of stock indexes are testing chart support at their 2005 lows. I suspect they'll be broken sooner or later. Since the market is also a leading indicator for the economy, economists might do well to pay more attention to the message the market is sending. Unfortunately, it's not an optimistic one.

DOW THREATENING JANUARY LOW... The daily Dow chart shows the market at a critical juncture. The Dow fell 99 points today and is threatening its January low, its 200-day moving average, and its September peak at 10390. I suspect all will be broken. There's always the possibility of an April bounce. But seasonal factors then turn negative until the autumn. My best guess at this point is that Dow is headed toward its fourth quarter low near 9700. I would continue view any short-term bounces as selling opportunities. Two of the best places to be right now are energy and cash. If you haven't already done so, take a look at some bear market mutual funds. They'll allow you to make money in a falling market.

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March 19, 2005DON'T MIND THE BIG VOLUMEBy Chip Anderson
John Murphy
Most of the major market averages closed in the red today, but only marginally. After trading down most of the day, the S&P 500 closed with a loss of less than a point. The S&P also held at its late February low at 1184. While the price action was relatively tame, volume was heavy. Don't pay too much attention to that however. Friday was a triple witching day which often produces heavier trading. The S&P also underwent some "rebalancing" in its stock weightings to ensure that only publicly traded shares are counted in a stock's capitalization. That means that some shares will have a bigger weighting and others a smaller. That also contributed to today's heavy volume. I wouldn't read much into it or today's price action. Despite today's late bounce, the market still looks toppy to me for reasons that I've already spelled out in previous messages.

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March 05, 2005ELLIOTT WAVE UPDATEBy Chip Anderson
John Murphy
LOOKING FOR 62% RETRACEMENT AT 1250 ... With the S&P 500 having broken out of its recent trading range, and trading at the highest level in more than three years, it's time to revisit my earlier Elliott wave interpretation and came up with some possible upside price and time targets. Let's start with the monthly bars in Chart 1. As far as the technical indicators are concerned, the monthly MACD lines are still positive. The buy signal given in early 2003 is still intact. The monthly RSI line, however, is in overbought territory. That's of some concern, but doesn't prevent the market from moving higher. The question is how much higher. The horizontal lines measure the percentage retracements of the 2000-2002 bear market. The S&P has already moved above the 50% level. That makes the next upside target the 62% retracement level which sits near 1250 . There are some other technical measurements that confirm a move at least to that higher level.

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February 19, 2005THE SCALE HAS TIPPED TOWARDS INFLATIONBy Chip Anderson
John Murphy
At the New York Expo last weekend, Martin Pring made the case that the battle between the forces of deflation and inflation had reached a critical inflection point. In other words, his charts showed that the deflation/inflation scale was about ready to tip in one direction. He arrived at that conclusion by comparing rate-sensitive (deflation) stocks with commodity-related (inflation) stocks. When rate-sensitive stocks are in the lead, deflation is dominant. When commodity-stocks lead, inflation is dominant (or becoming so). Which brings me to our last chart. It's a ratio comparison of basic material stocks to financials. With long-term rates rising this week, and inflation and commodity prices picking up, the week's strongest sectors were basic materials and energy. The weakest sector was financials. The chart below is a ratio of the Materials ETF (XLB) divided by the Financials ETF (XLF).

MATERIALS/FINANCIALS RATIO TURNS UP ... The fact that the ratio has been trading sideways for almost two years shows that deflation/inflation forces have been pretty evenly balanced (as the Fed has been pointing out). This week, however, the XLB/XLF ratio broke out to the highest level in three years. That tells me that the scale has finally tipped in favor of inflation. If inflation is no longer contained (as the Fed has claimed) it may have to abandon its "measured pace" and raise short-term rates faster and longer than it had planned to. Rising inflation expectations could boost long-term rates. All of these trends have important implications for investors. For one thing, it'll be better to be in inflation-sensitive stocks (like basic materials) than deflation-sensitive stocks (like financials). It also hints at higher interest rates -- both short and long. All of which seems to strengthen my negative view on the stock market and my preference for cash, commodity-related stocks, and defensive stock groups in general.


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February 05, 2005DOW AND S&P BREAK BARRIERS, MARKET IN FIFTH WAVEBy Chip Anderson
John Murphy
DOW AND S&P 500 CLEAR RESISTANCE BARRIER... The hourly bars for the Dow Diamonds and the S&P 500 SPDR show both having cleared initial resistance at their mid-January highs. [Both also closed back over their 50-day moving averages]. Small cap indexes accomplished that earlier in the week, which hinted that the large cap indexes were heading in the same direction. I also showed the improvement in market breadth figures earlier in the week. That greatly increases the odds that the blue chip averages are headed for a challenge of their old high.

IT LOOKS LIKE MARKET IS IN FIFTH WAVE OF FIFTH WAVE ... From a longer-term perspective, very little has changed. I've written several times about the possibility of another upleg which could challenge (and maybe even exceed) the late 2004 peak. My work, however, still suggests that another upleg would probably be the final one in the cyclical bull market that started in October 2002. Or, to put it in Elliott Wave terms, I believe the market has begun the fifth wave of a fifth wave. [The fifth wave of the cyclical bull market started in August. The fifth wave of that fifth wave started this month]. I've been asked if there's a calendar date for a possible top. One possibility is March which would be the two-year anniversary of a major bottom. The other would be April. After January, April is the next strongest month in the first half of the year. One of the reasons I recently suggested some profit-taking during January was because that was the tail end of the strongest three month span of the year that normally starts in November. April ends the strongest six-month span that also starts in November. If the market does move to new high ground, my best guess for a top would be April.

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February 03, 2005GOLD STOCKS STILL TESTING LONG-TERM SUPPORT - TAKING WHAT THE MARKET GIVES USBy Chip Anderson
John Murphy
GOLD INDEX STILL TESTING TRENDLINE SUPPORT... Back on January 10, I wrote about the Gold & Silver Index (XAU) being in a support zone defined by the rising trendline shown in Chart 1. The trendline starts in April 2003 and is drawn under the April/July 2004 lows (see arrows). The third arrow still shows potential trendline support near 90 in the XAU Index. Chart 2 applies Fibonacci retracement levels to the rally that began last May. It shows that the XAU has retraced close to 62% of that uptrend. That also makes the area around 90 a potential support level. That lower horizontal line also shows potential chart support along the summer highs (see circles) and the September low just above 90 (see arrow). That's the good news. The bad news is that despite being in support, and in an oversold condition, gold stocks haven't shown any bounce at all. In fact, they've been the weakest market group during 2005. Which brings us to another charting technique that I wrote about in mid-January to help pinpoint a buy signal. That's a Point & Figure chart.

Chart 1


Chart 2

GOLD HASN'T GIVEN P&F BUY SIGNAL YET ... This is the same headline that I wrote on January 14 in another discussion of gold stocks. I was referring specifically to the lack of a buy signal given on a point & figure chart of the XAU Index. An updated version of that chart is plotted in Chart 3. Each box is worth one point. The x columns represent rising prices while the o columns represent falling prices. A sell signal was given during December at 98 when an o column fell below a previous o column. Since then, prices have continued to trend lower. In order to give a buy signal, the last x column has to rise above a previous x column. For that to happen on this chart, the XAU would have to rise to 97. It closed today at 92.35. The reason for incorporating P&F signals into your work is that they give more precise buy and sell signals than bar charts and, as a result, inject more discipline into trading decisions. Gold stocks are a good example. Although I happen to think that the XAU has declined to a level where it should start to do better, it's usually safer to wait for the market to prove itself. One way to do that is to wait for it to move back over moving average lines on the bar chart. Another is to wait for a Point & Figure buy signal. Or both.

Chart 3

BUT OIL STOCKS HAVE ... This is the second part of the headline that I used on January 14. I was trying to show that while gold stocks hadn't given a p&f buy signal, oil stocks had. At the time, the P&F chart of the Energy Select Sector SPDR (XLE) was giving a buy signal at 35.75 as the last x column exceeded a previous x column (Chart 4). Since then, the XLE has risen to a new high. It tacked on another couple of x's today (see green boxes) to close at 38.70. There's another lesson here. And that has to do with taking what the market is giving us. The point in trading is to make money in the market. That's done by buying something that's starting to move up. We can't always be sure in advance what that's going to be. It's one thing to have our analysis suggest that something should be going up. It's another to actually see it going up. That's why we use charts to trigger buy signals. And, while you're waiting for a buy signal in one group, try not to miss a good move in another. Take whatever the market is giving.

Chart 4

UNDERSTANDING POINT & FIGURE ... I've received a number of messages asking for more information on how to create and read Point & Figure charts. Stockcharts.com provides an excellent explanation which you can find under P&F Charts on the main menu. Once you get to the p&f page, simply click on "Understanding Point & Figure Charts" and you'll find more than enough to get you started. If you want to read even more on the subject, Chapter 11 in my book on Technical Analysis of the Financial Markets is devoted to p&f charting. I highly recommend that you learn more about this form of charting. [P&F charts are older than bar charts]. Each form of charting offers some benefits. Why not take advantage of both?


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January 22, 2005WHY I PREFER THE 50-DAY AVERAGE ...By Chip Anderson
John Murphy
The 20-day average is usually too short for my purposes which is to spot bigger trend changes (although it is the period used in Bollinger Bands). At the same time, the 200-day average is too long. Imagine holding a long position in the market waiting to see if it breaks the 200-day average. The chart below shows that the Nasdaq would have to drop more than 200 points (10%) to give a sell signal. That's too much to give up in my opinion. That's why I rely most heavily on the 50-day average. One of the simple rules that I follow is to require that any sector, industry group, or stock that I'm recommending close over its 50-day average. At the same time, I consider selling anything that closes under its 50-day line. There are some conditions that I look for to confirm a downside break. The market has to "close" beneath the 50-day line and in decisive fashion. Then it has to "stay" under it. Very often a market will attempt to climb back over its 50-day line. If it fails that attempt, that's another bearish sign. I also watch the "Friday" close. That's because a Friday close determines where a market ends on a weekly bar chart. [On a weekly chart, the 50-day average is converted to a 10-week average]. A Friday close beneath a moving average is more serious than a mid-week violation. That's even more true of the 200-day (or 40-week) moving average. In the chart below, the Nasdaq closed under its 50-day line on Wednesday, January 5 and remained beneath it through the end of the week. It never did close back above it. That's negative action -- and a pretty good reason to have considered doing some selling of longs (or initiating new shorts).

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January 08, 2005S&P GIVES FIRST WEEK WARNINGBy Chip Anderson
John Murphy
The S&P 500 ended the week with a loss of nearly 30 points (-2.4%). According to the historical record since 1950, a down close during the first week of January by the S&P 500 has resulted in a down year 45% of the time. A loss for the entire month of January raises the percentages for a down year to 58%. The good news is the the S&P 500 SPDRs (SPY) are still trading over their 50-day moving average. The bad news is that the Nasdaq market and the Russell 2000 Small Cap Index closed beneath that support line. Those were the two groups that led the market higher during the second half of 2004. They're now leading it lower. Also of concern is the volume pattern during the week. The biggest (red) volume bars took place during the four days while prices were falling. The smallest (green) volume bar took place on Thursday when the market managed a modest bounce. That means there's a lot more downside volume than upside volume. And that's not a good sign for the market. Daily indicators like the MACD lines have turned negative. [The weekly and monthly lines are still positive, but weakening]. If the S&P cracks its 50-day line, the next support shelf sits at 117 (see green arrow). The most significant support level on the chart is the early October peak near 114 (see green circle). Any close beneath that level would, in my opinion, significantly weaken the long-term picture.

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December 18, 2004RATES SHOULD BE MOVING HIGHERBy Chip Anderson
John Murphy
This time last year I wrote about my expectation for long-term interest rates to start moving higher during 2004. I got it only half right. They moved higher during the first half, but then fell back during the second half. It looks like bond yields will end the year pretty much where they started. A number of readers have asked why bond yields have stayed so low for so long and for my outlook for next year. Chart 1 shows bond yields turning back down at the start of 2000 and bottoming in mid-2003. The 2000 peak in yields coincided a falling stock market and rising bond prices. The deflation threat that existed at that time caused a major decoupling of bond and stock prices. As a result, bond yields and stocks became positively correlated. Bond yields turned up shortly after stocks during the first half of 2003, right after the start of the Iraq war and a plunge in oil prices. That caused a major rotation out of bonds and back into stocks -- reversing the 2000-2002 bear market trend. Chart 1 shows the yield on the Ten-year Treasury note turning up during the first half of this year and breaking the four-year down trendline (see circle). That wasn't a surprise. What was a surprise was the subsequent decline in yields back to that same trendline (see arrow). Let's take a closer look.

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December 04, 2004LONGER-TERM IMPLICATIONS FOR STOCKSBy Chip Anderson
John Murphy
The last paragraph in the September 23 report carried the headline: LONG TERM IMPLICATIONS FOR STOCKS AREN'T GOOD. To repeat what I wrote then, "An October pullback in oil would probably be helpful to the stock market during the fourth quarter. The ability of oil to stay over $40, however, will remain a drag on the stock market and the economy...and will probably limit stock market gains during 2005". So far, the October top in oil (and this week's downturn) has been bullish for stocks and fits into the idea of a fourth quarter rally lasting into the start of next year. The longer-term picture is still in doubt. If this is just an intermediate correction in oil, and if oil starts to rise again next year from $40 (as I suspect it will), the stock market could run into trouble. That's another reason why $40 crude is such an important number. In case you're wondering if oil really has an impact on stocks, take a look at the last two charts. The peak in oil during March 2003 (at the start of the second Iraq war) coincided exactly with a major bottom in the S&P 500 (see first arrow). The second peak in oil this October (see second arrow) helped launch the latest S&P 500 upleg. Right now, the drop in oil is working in the stock market's favor.

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November 20, 2004LOOKING FOR S&P 500 SUPPORT LEVELSBy Chip Anderson
John Murphy
The daily chart for the S&P 500 for the last year pretty much tells the tale. The trend is still up. But its 14-day RSI line is in overbought territory for the first time since last January. Its daily MACD lines are also up against their early 2004 high. That being the case, and given today's negative intermarket trends, a pullback isn't too surprising. The key point is how much of a pullback do we need to start getting a little worried. One way to judge that is to look at where the previous peaks are. Working from the left side of the chart, that would put potential support points at 1163, 1150, and 1146 -- and the October peak at 1140, which may be the most important. That's because a pullback to 1140 would be a 50% retracement of the last upleg starting in late October and a 50% retracement of the entire upmove that started in August. As long as prices stay over that level, I'm not going to get too concerned. If it doesn't, I will. The point & figure boxes in Chart 2 also show that the S&P has suffered a three-box reversal into the down (o) column. That simply confirms that the market is entering a short-term pullback. So far, the p&f boxes don't show any serious trend damage.

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October 16, 2004ROTATION OUT OF ENERGY AND MATERIALSBy Chip Anderson
John Murphy
The biggest market feature of the week was the fact that Energy and Materials were the two weakest sectors. This is a reversal of recent trends. The loss of leadership by those two former leaders contributed to this week's market selling. At such times, money moving out of former leaders usually finds it's way into former laggards. We haven't seen too much of that yet. Utilities (Chart 1) and REITs (Chart 2) continue to hold up very well. That may be the result of low interest rates or, more likely, a pursuit of dividend-paying stocks. That may also explain why value stocks have done better than growth stocks. Two groups that usually attract money in this environment are consumer stocks -- either staples or retailers. Although neither group has created much excitement, there are some stocks in each group that are showing good chart action. Yesterday, I showed McDonalds hitting a new six-month high. Here are a few others.

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October 02, 20044TH QUARTER RALLY, AND WHY NASDAQ LEADERSHIP IS IMPORTANTBy Chip Anderson
John Murphy
NASDAQ 100 TOPS 200-DAY LINE... One theme I keep repeating is the need for Nasdaq leadership during any fourth quarter rally. I'm happy to report that on the first day of the fourth quarter the Nasdaq 100 led a very impressive market rally that could carry through the rest of the year. Chart 1 carries three bullish pieces of information. First, the Nasdaq 100 Shares (QQQ) broke through their 200-day moving average. Second, the QQQ did so on the strongest volume in a month. Third, it was the strongest percentage gainer of the major market indexes and continues to show new market leadership. The QQQ/S&P 500 ratio line, which bottomed in mid August, hit a new two-month high today. Let me demonstrate why Nasdaq leadership is so important to the rest of the market.

WHY NASDAQ LEADERSHIP IS IMPORTANT ... Chart 2 is a ratio of the Nasdaq 100 divided by the S&P 500. When the ratio is rising, the Nasdaq is outperforming the S&P which is good for the market. When the ratio is falling, the Nasdaq is underperforming the S&P which is bad for the market. The Nasdaq/S&P ratio bottomed in October 2002 (green circle) which marked the end of the three year bear market that started in early 2000. The Nasdaq led the S&P higher throughout the entire 2003 market rally. The Nasdaq/S&P ratio peaked at the start of 2004 (red circle) which started a downside market correction that lasted until August. The green arrow to the bottom right shows the ratio bottoming in mid-August. [That's the upturn shown in Chart 1]. The main point of the chart is to demonstrate that a rising ratio (Nasdaq rising faster than the S&P 500) is a necessary ingredient if the market is starting another upleg.

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September 18, 2004ON USING MOVING AVERAGESBy Chip Anderson
John Murphy
WHY WE USE MOVING AVERAGES ... You've probably noticed that I rely very heavily on moving average lines. There are some good reasons for that. The main one is that they are one of the simplest ways to spot trend changes. But not all moving averages are equal. The 50-day moving average, for example, is most useful in spotting "intermediate" trend changes which can last anywhere from one to three months. A 20-day moving average is better for spotting "short-term" trend changes which can last for days or weeks. The 200-day average helps determine the direction of the "long-term" trend of a market, which can last for months and even years. Of the three, the 200-day average carries the most weight. For timing purposes, however, the 20- and 50-day lines are more useful. My favorite is the 50-day line. While a crossing of the 20-day line gives an earlier trend signal, the crossing of the 50-day line suggests that the trend has more staying power. This is true for the timing of entry and exit points. Buy signals are given when the price crosses over a moving average line. In that sense, upside moving average crossings are good for buying purposes. Crossings below the moving average lines can be used for selling purposes. They're not perfect, but they are very helpful. Moving averages also provide good discipline. A simple rule to sell a stock that closes under its 50-day moving average can prevent a lot of losses.
USING THE 50-DAY AVERAGE ON GE... The next chart shows why I find the 50-day most useful. Since we're following GE today, let's compare the daily price of GE to its 50-day average for the last year. The blue line is the 50-day average. [That's computed by adding up the closes for the last 50 trading days and dividing the total by 50]. Buy signals are given when the price closes over the blue line (see green circles); sell signals are given when the stock closes below the blue line (see red circles). The first two buy signals were given last December and May. In both cases, the stock rose after that. The first sell signal was given during March. The stock fell heavily after that. [The signals don't always work out that well, but they did in the case of GE]. Let's examine the last two signals more closely and bring the 200-day average into play for GE.

COMBING MOVING AVERAGE LINES... The next chart examines the last two GE moving average "signals" and also shows why it's important to keep an eye on the 200-day average. GE gapped under its blue 50-day average in early August (see red circle). As it turns out, that wasn't a great signal. Notice, however, that GE stabilized above its (red) 200-day average (see red arrow). That suggested that the "long-term" trend was still up. Within two weeks of issuing a "sell" signal, GE crossed back over its 50-day line to issue a new "buy" signal. That signal is still in effect. Notice that GE never closed back under its 50-day line after issuing a buy signal. That's another test of a moving average signal. Once a market closes above a moving average, that line becomes a support level. If it closes under the moving average, the signal becomes suspect. The blue arrow in late August shows the stock dipping under the blue line "intra-day" before closing higher. Intra-day moves don't count. Only the "closes" matter. This example shows the strength and weakness of moving averages. They may cause occasional "whipsaws", but they help keep us on the right side of the market. That's why we use them and why I call your attention to markets that cross their 50- and 200-day averages. It's a simple way to alert you to potential trend changes. You can then examine the market more closely using other charting tools. For weekly charting, the 10-week average replaces the 50-day, and the 40-week replaces the 200-day.

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September 05, 2004TELECOMM HAVE STRONG DAYSBy Chip Anderson
John Murphy
Telecom stocks had a good chart day. The AMEX Telecom iShares (IYZ) broke out to a new six-month high today. Its relative strength line has been rising since late June. Two of the biggest reasons for today's strength were SBC and Verizon Communications which are two of the biggest holdings in the ETF. SBC rose to the highest level in seven months. Verizon ended the day at a new 52-week high. Both relative strength lines have been jumping for the last two months.

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August 21, 2004DIVIDEND STOCKS LOOK PROMISING, S&P LONG-TERM OUTLOOK MIXEDBy Chip Anderson
John Murphy
GOING FOR DIVIDENDS... A falling stock market -- along with falling bond yields -- should make dividend paying stocks more attractive. And that appears to be the case. Chart 1 plots the iShares Dow Jones Select Dividend Index Fund (DVY), which invests in large cap stocks that pay dividends. The Dividend ETF has acted much better than the rest of the market since last April as reflected in its rising relative strength line. Pricewise, the ETF hit a new four-month high earlier in the week. The two groups most heavily represented in the Dividend Fund are banks (38%) and electric utilities (19%). Other holdings include (in order of size) chemicals, tobacco, insurance, fixed line communications, and energy.

S&P MONTHLY BARS OVERBOUGHT BUT STILL IN LONG-TERM UPTREND... The monthly bars in Chart 2 carry good and bad news for the S&P 500. First the bad news. The monthly stochastic lines above the chart are still weakening from overbought territory above 80 (see circle). In addition, the price bars show that the S&P bull trend stopped at its early 2002 peak (see box) -- after recovering half of the 2000-2002 losses. The good news is that the S&P remains above its (dotted) 20-month moving average (see arrow) which qualifies the current price drop as a correction as opposed to a bear market. And, finally, the monthly MACD lines which turned positive at the start of 2003 (see arrow) are still positive.

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August 07, 2004BOND DROP HELPS GOLD, SECTOR WARNING SIGNALSBy Chip Anderson
John Murphy
DROP IN BOND YIELDS HURTS DOLLAR, HELPS GOLD... Bond prices surged on Friday's weak job report. As a result, the yield on the 10-Year Treasury note tumbled to a four-month low and ended below its 200-day moving average (Chart 1). The sharp drop in U.S. rates pushed the dollar into a 2% decline. Chart 2 shows the dollar failing at its March high and ending under its 200-day line as well. The drop in the dollar pushed gold $7.30 higher and back over $400. Gold is also back over its 200-day average. That made gold stocks one of Friday's few winners. [The only other winners were rate-sensitive homebuilders and utilities].

EARLY 2004 SECTOR ROTATION WARNINGS... In my Thursday update, I chastised economists for missing the threat from rising oil prices earlier in the year, and made reference to earlier warnings that I had published on the subject. I thought it might be useful to list a few of those earlier messages, which discuss early sector rotation warnings. Two themes you will see repeated over and over is that leadership by energy stocks and underperformance by technology is a bad combination for the market. I've repeated those same warnings in recent messages. Those negative signs were written about as early as January and February. You can access those Market Messages by clicking on "More Archived Updates" in my Market Message section: --January 27: "Loss of Leadership From SOX Index May Be Bad Omen for Nasdaq" --January 29: "Tech Continues to Lead Market Lower -- Market Rotates to Consumer Staples" --February 4: "Loss of Nasdaq Leadership Could be Bad for Market" --February 10: "Rising Oil Is A Threat to Market" --March 10: "Sector Rotations Are Similar to Spring of 2000 -- Why Energy and Consumer Staple Leadership Isn't Good"



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July 24, 2004LONGER-TERM VIEW OF THE S&P 500By Chip Anderson
John Murphy
The monthly S&P 500 bars show why it's important to keep an eye on percentage retracement levels -- as well as chart levels. I've shown this chart before, but it's worth showing again. The 2003 S&P rally not only stalled at its early 2002 peak (near 1177) but after having retrace exactly 50% of its 2000-2002 bear market decline. Assuming the S&P breaks its 2004 low, it's logical to assume that it could retrace anywhere from 38% to 50% of its 2003 advance. Based on the retracement lines shown in the previous chart, that would call for a possible decline to the 1025-975 region (see box). That means that things will probably continue to get worse until they can start to get better.

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July 10, 2004MONTHLY MACD POSITIVE BUT WEAKENINGBy Chip Anderson
John Murphy
This is a good time to stand back and try to put things into a longer-term perspective. First of all, let's see why the 2004 rally has been stalled. The monthly bars in Chart 1 show that the S&P 500 ran into major chart resistance at its early 2002 peak. The horizontal blue lines also show that the S&P had retraced 50% of its 2000-2002 bear market. The monthly stochastic lines also show an overbought condition over 80. That was a logical spot for the cyclical bull market to stall. And stall it has -- for the entire first half of 2004. The monthly MACD lines have been converging since the start of the year (which usually reflects loss of upside momentum), but are still in positive territory. The last sell signal was given near the start of 2000. The last buy signal was given in the spring of 2003.

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June 19, 2004FALLING DOLLAR MAY BE HELPING COMMODITIESBy Chip Anderson
John Murphy
During the two years prior to 2004, a falling U.S. dollar pushed commodity prices to the highest level in more than a decade. During the first half of this year, a rebound in the dollar has coincided with a downside correction in commodities. That may be changing. Chart 1 shows the dollar rally stalling near its 200-day moving average during May (see circle) and again during June (see red arrow), and showing signs of rolling over to the downside. On Friday morning, the announcement of a record first half account deficit pushed the dollar even lower. Right on cue, gold prices jumped nearly $7.00 and commodity-related basic material (and cyclical) stocks led Friday's market bounce. That may have to do with expectations that commodity prices are headed higher again. Chart 2 shows the CRB Index starting to find support just above its 200-day moving average. Its daily stochastic lines are in oversold territory under 20. Further weakness in the dollar -- and an upturn in the CRB -- would help commodity-related stocks.

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June 06, 2004ENERGY STOCKS MAY BE TOPPINGBy Chip Anderson
John Murphy
One of the principles of intermarket behavior is that commodity-related stocks usually peak before the commodity. That's why the next chart is so interesting. While energy prices hit a record high early this week, the Energy Select Sector SPDR peaked in late April. That created a negative divergence with the rising commodity. The three peaks formed since early March also have the look of a potential "head and shoulders" top. To confirm that bearish pattern, however, the XLE would have to break the "neckline" drawn under the March/May lows. The relative strength line has been dropping for three weeks and is testing the up trendline starting in February. A break of that line would be a negative sign for the energy sector.

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May 14, 2004SURPRISED BY SURPRISED ECONOMISTSBy Chip Anderson
John Murphy
CPI AND PPI NUMBERS SURPRISE ECONOMISTS... The most frequently seen words in the financial press are "economists were surprised". It seems they're always being surprised by something. This week it was the "surprising" jump in the CPI and PPI inflation numbers. The fact that economists were surprised is a story in itself. It shows what happens when people ignore the clear messages being sent by the financial markets. And when they ignore the obvious. Take commodity prices for example.

The CRB Index has been rising for two years and recently reached the highest level in a decade. Rising commodity prices are a leading indicator of inflation. One of the reasons for that is because companies have to pay for rising raw material prices. In time, they have to start passing those increased costs on to their customers. It's simple economics -- and common sense. An increasing number of companies have announced planned price increases to no one's surprise but economists.
For months, economists have been dissecting rising inflation numbers to exclude surging food and energy costs -- as if they don't count in the inflation picture. Now with gasoline and crude oil prices trading at record highs, they've suddenly started talking about the inflationary impact of rising energy prices and the potential dampening effect that has on the economy and the stock market. Where have they been for the last few months as the market deterioration sent the same message. Long-term rates have jumped to the highest level in almost two years. Here again, economists told us there was no problem there because there was no sign of inflation. This week they suddenly started to take notice. That's why we look at forward-looking markets and not backward-looking economic numbers.
Now, the only one left to convince is the Fed. Trouble is the Fed is populated by economists.


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May 01, 2004A-D LINE TURNS DOWNBy Chip Anderson
John Murphy
LOWEST LEVEL IN MONTHS... It's been awhile since we've talked about the Advance-Decline lines in the various markets. The two charts below show why we're showing them now. The NYSE Advance-Decline line has fallen to the lowest level in four months. This is its weakest showing since the market rally started last March. The Nasdaq AD line looks even worse and has broken its 200-day moving average. That confirms that most of initial technical damage came from the Nasdaq. Trouble is it's now spreading to the rest of the market. All the more reason to be defensive at this point.

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April 17, 2004THE DRG/SOX RATIOBy Chip Anderson
John Murphy
DRG/SOX RATIO IS RISING... Earlier in the year I did an analysis of the DRG/SOX ratio as a way to try to measure the mood of the market. The ratio divides the Drug Index (DRG) by the Semiconductor (SOX) Index. The idea is that when investors are confident they buy chips and sell drugs. That pushes the ratio lower. That's what happened during October of 2002 when the market bottomed (see green circle). The downtrend in the ratio continued until last November when it started bouncing (blue circle). Its been trading sideways since then as the market rally has stalled. When investors turn more cautious, they sell chips and buy the more defensive drugs. That pushes the ratio higher. The DRG/SOX ratio is approaching the top of its six-month range and is close to moving above its 200-day moving average for the first time since last spring. The ratio has already broken its eighteen-month down trendline. An upside breakout in the DRG/SOX ratio would, in my opinion, signal a significant shift to a more defensive market mood. The two main reasons for that are rising energy prices and rising interest rates. That also explains why investors are selling rate sensitive stocks and buying energy. None of these rotations are good for the market as a whole.

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April 03, 2004RISING RATES HURTS BANKS AND HOMEBUILDERSBy Chip Anderson
John Murphy
10-YEAR YIELDS SOAR OVER 4%... While today's surprisingly strong jobs report was good for stocks, it was very bad for bonds. Bond prices fell more than two full points. The 10-year T-note, which rises when prices fall, surged all the way to 4.14%. That certainly seems to confirm the idea that long-term rates are finally starting to move higher. There's good and bad news in that. It's good for economically-sensitive stocks that do well in a stronger economy. It's bad for rate-sensitive stocks that are hurt by rising rates. In time, rising rates can be a bad thing. Over the short-run, however, rising rates are viewed as confirmation that the economy is getting stronger and the job picture is finally improving. This week's sector rotations showed a more optimistic market. The top sectors were technology, materials, and industrials. The weakest were financials, energy, utilities, and consumer staples. That rotation is reversing the more cautious mood of the market during the first quarter when consumer staples and energy were the leaders and technology was the laggard.

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March 20, 2004NASDAQ 100 LEADS MARKET LOWER.By Chip Anderson
John Murphy
NASDAQ 100 LEADS MARKET LOWER... The Nasdaq 100 QQQs were the worst percentage losers on Friday and reflected continuing weakness in the largest technology stocks. The daily chart shows the QQQ ending the week on a down note. The only saving grace was the relatively light volume. With the SOX leading the way down today, it looks like the QQQ will probably test its December low and its 200-day average just above 34. The final chart shows the hourly bars for the past week. Of particular notice was the last hour's volume bar. In the last hour of trading on Friday, the QQQ fell to a three-day low on the heaviest volume for the week. That shows some fairly heavy selling near the close on Friday.

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March 06, 2004PLUNGING BOND YIELDS BOOST FINANCIAL SHARESBy Chip Anderson
John Murphy
WEAK JOBS REPORT A MIXED BLESSING ... Today's weak job report was a shocker. It's weakness, however, is a mixed blessing. It's a potential negative for the economy since it erodes consumer confidence. At the same time, its negative economic message pushed bond yields sharply lower. Lower interest rates are good for the economy. That's probably why the stock market recovered today led by rate-sensitive stocks. But there's more. Lower interest rates keep the dollar weak. A weak dollar is bullish for commodity markets. That was seen in today's jump in most commodities. In the past, higher commodity prices have produced higher interest rates which helped stall commodity rallies. This time does seem to be different, which suggests that global deflationary pressures may still be at work. The bottom line is that the stock market doesn't have to worry about rising rates anytime soon. That should be a good thing. It should also be a good thing for commodity investments.

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March 07, 2009LOOKING TOWARDS SECTOR ROTATIONBy Richard Rhodes
Richard Rhodes
This year has seen the S&P decline by -24.3%; with the building crescendo of "fear" likely to provide for a bottom that can be traded sooner rather than later. We're looking towards sector rotation to play a large part in our trading strategy; and we're quite interested in the fundamentals as well as the technicals regarding a "long Industrials/short Healthcare (XLI:XLV)" pairs position. Quite simply, the Industrials have underperformed the S&P by -10.2% YTD, while Healthcare has outperformed by +7.5% YTD - this notes the obvious safety factor inherent in the Healthcare sector given its "less volatile" nature. However, the Obama Administration's tackling of the US healthcare system has sent XLV prices lower in the past two weeks. Moreover, there will likely be pressure upon XLV for the foreseeable future as Healthcare "safety" becomes a source of funds for those stocks - such as the Industrials - that have been beaten down. This is the fundamental argument.

Technically speaking, the XLI:XLV ratio has fallen rather precipitously in the past year from above 1.20 to a new low at 0.70; but it is precisely this "plunge" that has put the distance below the 130-week exponential moving average at historic proportions, with the 30-week stochastic falling below the oversold 20-level. We are mean reversionists at heart; and given this distance and the prior instances of the 30-week stochastic turning higher - then we are very interested in putting on this trade as the risk-reward is in our favor. Now, it hasn't turned higher yet; but once a catalyst appears...we'll be doing so.
Good luck and good trading,
Richard


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February 21, 2009BE PREPAREDBy Richard Rhodes
Richard Rhodes
In our last commentary, we noted that the S&P Energy ETF (XLE) was in the process of forming a bearish consolidation that argues for sharply lower prices. And since then, prices have consolidated further, but
are now poised to breakdown below trendline support and the October-2008 lows. However, this sector remains a favorite of both fundamental and momentum traders as perceived safety plays. However,
we would argue that while they may be so now; they will not be in the future, and in fact - if the market does indeed rally at some point soon - they shall not lead the rally.

In support of this thesis, we look at the S&P Energy ETF vs the S&P Consumer Discretionary ETF (XLE:XLY). Arguably, in this horrid economy, one would think that you would have to be out of your
collective trading mind to buy anything related to the discretionary stocks. But, the ratio chart shows that XLE has under-performed XLY since June-2008, and we are more interested know in the fact a bearish
consolidation has formed, which would imply the trend that began in June-2008 is about to reassert itself in the weeks ahead. Moreover, we see the very same pattern when we look at XLE vs the S&P 500 Spyder (SPY). This leads us to conclude that XLE is not where one wants to hold long positions; either in bull or bear moves, for it is poised to under-perform rather dramatically - perhaps by as much as 25%
difference if our back of envelope technical measurement target a 1.8 ratio. What one was considered "safety", will soon become a source of funds for more "risky" assets. Be forewarned; be prepared.


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February 07, 2009FOCUSING ON THE ENERGY SECTORBy Richard Rhodes
Richard Rhodes
Our focus today is upon the Energy Sector (XLE) and its relative valuation to the S&P 500 Spyders (SPY). Given the current bear market, we've found recently that market participants are once again willing
to return aggressively to what they know worked rather well in the last bull market - buying energy stocks as the dwindling world energy supply story continues to get quite a bit of play. We think this is
wrong-headed, for Energy is a "late cycle mover" rather than an "early cycle mover" out of recessions. Perhaps it is different this time; but we think not. Hence, we believe it wise to consider lightening up
aggressive overweight energy positions, and in some cases...we would advocate selling short the exploration & production group. We aren't as bearish on the oil service group, but that is a story for another day.
Technically speaking, the ratio has declined from its high of .70 to an initial low at .49, and from that point to today...a bearish sideways consolidation has formed upwards into the 200-day moving average. Perhaps just as important, this moving average is itself rolling over in bearish fashion. Reasonably thinking, we would expect it then to prove its merit as resistance, and for another leg lower to
develop to below the recent low at .49...into the 2005-to-2007 consolidation range. For those Elliotticians out there, this would be a simple A-B-C correction; which would give us two peaks upon which to
draw a declining trendline - a line in the sand upon which when broken above, would then signal the development of the next relative energy bull market. Until then, there is quite a bit of risk holding energy
shares.

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January 04, 2009PURSUING HEDGING STRATEGIES IN 2009By Chip Anderson
Richard Rhodes
As the credit crisis continues apace into 2009, we believe the time is rather "ripe" for pursuing various hedging "thematic" strategies to profit from relative valuations across the globe. Quite simply, we believe that the credit crisis will fundamentally impact various global regions in a different manner. Asian countries are likely to prosper more so than Latin American countries as Asia isn't as dependent upon energy or natural resources as is Latin America. Also, Ecuador's tacit default has caused a bit of angst in the region. Therefore, we are putting on a long Asia-Pacific ex-Japan (EPP)/short Latin America (ILF) spread trade.

Technically speaking, we see EPP has underperformed ILF for about the past 5-years; however, that changed in 2Q-2008 as the EPP/ILF ratio broke out of its bullish declining wedge. This bottoming pattern would suggest a multi-year rally; and one that appears ready to trade higher once again after a brief correction back into the now turning higher 60-week exponential moving average. If we keep it simple, and buy the ratio around 1.0, then we can expect over time to gain upwards of 50% on the trade with a target of 1.50.
We believe this shall be a "core position" for some years into the future, and we would look to add in various increments as we see it prove its merit with higher prices. More importantly, given the enormous government intervention into the capital markets around the world, we can not whether stocks go higher or lower - just that EPP outperforms ILF. There is beauty in this trade indeed.
Good luck and good trading!


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December 14, 2008WORLD MARKETS, CRUDE OIL, AND S&P ENERGYBy Chip Anderson
Richard Rhodes
As we approach the end of the year, we find world stock markets attempting to trade a bit higher, although volatility remains quite high, but off it's worst high levels. However, we believe it shall not be low for very long; hence our propensity is to use this rally attempt to put put back on several short positions. From our trading perspective, we believe the energy sector have quite a bit of downside remaining...even thought the sector has been decimated. Our reasoning: lower crude oil prices on the order of $30-$36/barrel. This range is a bit wider than we have previously stated, and it incorporates last week's Goldman Sachs reversal from $200/barrel to $30/barrel in the next 3-months due to the widening of the "super contango." Our reading of the technicals behind the S&P Energy ETF (XLE) seem to bear this out...no pun intended!
Looking at the XLE weekly chart, we find prices fell off a cliff much like all other sectors - breaking down through its bull market trendline and its 70-week and 200-week moving averages. Obviously this is bearish stuff, with the trend remaining lower. What our interest is in at present is the manner in which prices are consolidating in sideways fashion in conjunction with the inability of the 14-week stochastic to move higher out of oversold territory. This argues rather strongly we think for a resumption of the downtrend in the very near future that should coincide with crude oil prices falling towards our above-stated range. Our target is $33-to$36, which is about -25% off current levels. The question is one of timing.



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November 02, 2008WILL OIL SERVICES RETEST RECENT LOWS?By Chip Anderson
Richard Rhodes
The world stock markets remain rather "volatile" as the credit crisis continues to unfold, while this volatility pendulum continues to create some very unique and interesting value propositions we haven't seen in quite some time. Our focus at present is the relative relationship of the Oil Service Index (OSX) to Crude Oil futures; and the fact that this relative ratio is just off its lowest point in over a decade - having fallen from its high above 8.0 in 1998 to its 2008 low near 1.70. The current course of de-levering by the world's hedge funds has pushed this ratio from 4.0 to its recent low near 1.70, with last week's surge higher putting overhead trendline resistance into view in terms of a bullish breakout.

We find this bullish setup interesting from the perspective that perhaps oil service shares may have forged their bottom given last week's reversal from major weekly/monthly support levels; however, we do expect oil service shares to at least retest their recent lows as our forecast for crude oil futures stands at $39-$40...down another $25-$30 from current levels. We would be remiss if we didn't believe that oil service shares would falter in tandem with the price of crude oil.
Having said this, our favorite choices on a retest are Transocean Offshore (RIG), Schlumberger (SLB), Weatherford Int'l (WFT) and National Oilwell Varco (HOV).


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October 19, 2008"JUMP OFF POINT" FOR CRUDE OIL?By Chip Anderson
Richard Rhodes
Quite simply, the trend is sharply lower. The massive de-leveraging taking place in the capital markets has not spared crude oil at all; however, this shouldn't be a surprise given the "bell ringing" at the top was none other than a "key reversal month" that has led to mean reversion back into the 50-month moving average. The question is whether this level now crossing at $73.43 can be regained in the days ahead and be used as a "jump off point" to further gains. Unfortunately, we think not. A number of fundamental and technical factors at play will not allow for this to occur, with the probability of an even sharper decline than what we have seen YTD if prices continue to extend lower below this level.

One only need look at the 14-month stochastic that it has just rolled over and exited overbought territory. Hence, it remains quite some distance from levels that in the past have provided for rallies. If the stochastic must move to oversold levels, then it could very well be one year or more before we see a larger and more tradable bottom, this obviously begs the question as to what level crude would obtain before this larger rally could unfold. Our current target is $40,which will come into closer purview if the rising trendline at $60 is violated.
Given this, one would obviously not want to be in the oil stock complex to be sure; with the integrated oil players such as Exxon-Mobil (XOM), Conoco-Phillips (COP). Chevron (CVX) and Marathon Oil (MRO) likely to outperform the Oil Service stocks as they did during the last crude oil downturn. If we are have a favorite, it would be Chevron (CVX) given it sports a 4.10% dividend
Good luck and good trading!


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October 05, 2008WHERE ARE WE NOW?By Chip Anderson
Richard Rhodes
The bear market reasserted itself last week in a violent manner; trading sharply higher and lower in a matter of hours and days. This isn't your garden variety bear market as this one smells and feels much different given the enormity of the credit crisis. And there is no end in sight to the crisis from a fundamental perspective, which is giving rise to increasing calls that a "crash" is imminent. Perhaps that indeed what lurks around the corner, but crashes are very low probability events as they reside at the "end of the tail" of the probability distribution curve. We would argue we've had a serious of "mini-crashes" if one looks at the homebuilders; the oil and oil service sector; and the commodity miners. The decline in the homebuilders took 2-years to accomplish, while the oil/oil service and commodity miners took all of 3-months.

The question where does that put us now is a very good one. From a longer-term technical perspective, the S&P monthly chart has broken below its longer-term bull market trendline which would argue for sharply lower prices. However, the 14-month RSI is oversold for only the second time since 1980, with the other time occurring at the October-2002 bottom. This certainly puts the risk-reward towards a countertrend rally in the least. Shorter-term, we find the price distance below the 20-month moving avearge to be on par with that seen at other interim 2000-2002 bear market lows. The 1050-1080 zone is about as low at it gets. Again, this would argue for countertrend rally in the least.
Therefore, the risk-reward favors a tradable rally from current-to-lower levels as quite a bit of negative news has been discounted; the question however, still remains whether the rate of increasingly bearish fundamental news and earnings will overwhelm the technicals. It's all about risk-reward, and it would seem to us barring a low probability crash...we should be considering long positions into this decline.


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September 21, 2008VIEWING OUR "RISK AVERSION" CHARTBy Chip Anderson
Richard Rhodes
We'll admit last week was one of the more "interesting" trading weeks we have seen in a number of years, and if we must liken it to anything we've seen in our 25-years of trading - it would be the week before and of the 1987 Crash. The question we and many others have is whether last week was "The Low" or just "A Low" in the stock market; and to be perfectly frank...we don't know. But perhaps the most important chart in our trading universe at the present time is the simple "tactical allocation" ETF ratio chart between stocks and bonds - we use the S&P 500 Spyder (SPY) and the Lehman 20+year Bond Fund (TLT) ratio as our guide. In essence, this is a "risk-aversion" chart.

Quite simply, as stocks have moved lower, we've seen bond prices move higher/bond yields move lower as institutions/investors/traders have sought out the safety of the bond market at the expense of stocks. This resulted in the SPY/TLT ratio chart moving lower; and it has done so since July-2008 - breaking major support levels along the way. However, last week's unprecedented government intervention related to collapsing credit markets pushed stocks higher and bond prices lower/bond yields higher as market participants "feared" losing more money in the bond market as yields rose, with the only place to put that cash was in money market funds or in stocks - they chose stocks.
Hence, a bullish key reversal has formed off quite low levels, which the 14-week stochastic turning higher from oversold levels. In the past, this has led the ratio higher and coincided with higher stock prices. Whether or not we or you agree with the government intervention - the technicals are showing that last week was at least "a bottom", with the jury still out as to whether it was "the bottom." As we move forward, we'll certainly be able to fill in more of the myriad of technical blanks. Until then, sector and industry tactical long and short rotation will be paramount to outperformance.


Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com

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September 06, 2008MORE S&P 500 DECLINES AHEAD?By Chip Anderson
Richard Rhodes
The world's temperature gauge for risk is what we refer to as the "carry-trade" indicator...or the Euro/Yen Spread. When this spread is rising, then the world is said to be putting the carry-trade on and expanding risk profiles; conversely, when the spread is falling...the carry-trade is being taken off and risk is being shunned. We look at this to take the temperature of the capital markets in terms of risk. Right now, the patient is sick, and risk is being shunned, and the technical prospects for the patient indicate further risk aversion and a continuation of the "de-leveraging process."
Our statement is backed up by the simple technical fact the weekly Euro/Yen Spread chart has broken below its bull market trendline as well as its bull market 120-week exponential moving average. This would imply the "triple top" will breakdown with a close under 1.52, which would then target previous high support at 1.40 and then even lower.

Therefore, the trend is lower, and we'll note the recent lows in the spread all coincided with trading lows in the S&P 500. Given this material breakdown in the spread, then we'll have to assume that further S&P 500 declines are ahead of us...perhaps sharply so. Henceforth, we are aggressive sellers of rallies as they materialize, with our downside S&P target still rather wide between 960 and 1090.
Good luck and good trading, Richard


Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com

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August 17, 2008GOLD FUTURES - GOOD TIME TO BE A BUYER?By Chip Anderson
Richard Rhodes
The past month in the commodity markets has been a treacherous as we have seen it in recent years; and not one commodity has been spared. That said, our focus is upon gold futures given they have dropped from a high of $1,033.90 to their current level of $792.10, which is hard upon what we believe is major trend support at the sharply rising 20-month moving average. Quite simply, since, the 2001 breakout above this level - prices have returned to the 20-month on several occasions, and in each and every case this has been the proper time to be a buyer. Thus the question becomes whether this time is different...or not.

Obviously, one could very well make the bullish case as history is on one's side, with the risk as rather well-defined by a -2% breakdown below the 20-month level, which would put the stop at about $772.00. Friday's low trade for gold futures was $777.70, of which prices rallied roughly $15 off their low. Is this the requisite test of support and are higher prices forthcoming? Good questions to be sure; our only concern would be that it is different this time given the length of time prices have spent above the 50-month moving average - generally prices mean revert back to this level. Moreover, the 50%-62% retracement level consistent with bull market corrections stands at $550-$640...which is also where the 50-month crosses. Hence, one has to define one's time horizons.
In ending, we believe a short-term rally is developing to upwards of $850, but that is about as far as it goes. Of course we would reassess once our target was approached, but we would so with thoughts that an intermediate-term leg lower towards the retracement level is highly probable.
Good luck and good trading,
Richard Rhodes


Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com

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August 02, 2008QUESTIONS FOR THE FUTUREBy 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.



Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com

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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.

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

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June 22, 2008FOCUSING ON S&P ENERGY/FINANCIALSBy 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.

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: Rhodes-Capital.com

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June 08, 2008LOOKING TOWARDS THE HORIZONBy 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.

Want more of Richard's award-winning advice? Check out his Web site: Rhodes-Capital.com

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May 04, 2008"ROLLING CORRECTIONS" BENEATH THE SURFACEBy 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.



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April 19, 2008STORM ON THE HORIZONBy 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.



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March 15, 2008CHECKING OUT THE HOMEBUILDERSBy 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).





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March 01, 2008US CLEARLY IN BEAR MARKETBy 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.





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February 03, 2008NO ONE IS IMMUNEBy 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.





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January 20, 2008BULL MARKET IS OVERBy 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.





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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.





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November 03, 2007GOLD MARKET SOARING HIGHBy 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.





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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.





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October 06, 2007LISTENING TO THE COMMENTATORSBy 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.





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September 22, 2007RIDING THE S&P SURGEBy 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.





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September 07, 2007BIOTECH ETF HOLDING ONBy 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.
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.



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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.



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.



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August 04, 2007A BEAR MARKET IN FULL?By Chip Anderson
Richard Rhodes
Last week was a treacherous week indeed, with stock prices falling universally. That said, one of the "weakest indices" was related to the US small cap arena, and specifically to the Russell 2000 Index ($RUT). In the past, RUT led the market higher, but that changed last year as a bottom was forged against the S&P 500; however, we now see sharp absolute weakness has caused RUT to breakdown below its 85-week exponential moving average. This moving average during the bull market from 2002 has provided an excellent "buying point" – especially given when the 14-week stochastic has fallen below 50. Unfortunately, that isn't the case at present, as Friday's weakness caused prices to break through this important moving average, which to us suggests a "bear market" in small caps is now confirmed, with further downside price action likely in the months ahead.

As a result, a reasonable "first target" is 670, which is another -10% lower from current levels. But in the fullness of time, we would expect the decline to find major support at the 50%-62% retracement of the entire bull market, which on a worst case basis would be -30% from current levels. Moreover, if the decline looks anything like the April-to-October 2002 decline, then we could very well obtain our "worst case scenario" by the end of this year.





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July 07, 2007NASDAQ/S&P 500 RATIOBy Chip Anderson
Richard Rhodes
In November-2006, we noted that if one previewed the NASDAQ Composite/S&P 500 Ratio, one would find a very well pronounced and bullish consolidation forming. Well, its been 3 ½ years and the consolidation is still forming; however, there are emerging technical signs that a major breakout is forthcoming – one that would see technology stocks move to the forefront of market leadership in a manner not seen since the October-2002 to January-2004 relative rally that took the ratio from 1.42 to 1.88. Moreover, the rally could well become explosive to the upside.
First, we would call attention to the nascent breakout above the 170-week moving average; in the past this has provided a fulcrum point for trend reversals. And perhaps this is the case at present given the breakout above this level is not yet sufficient to warrant an "all clear" siren; but – the 20-week stochastic is just now turning higher from oversold levels consistent with past rallies of at least 0.14. If this circumstance were to occur this time, then we would see the ratio breakout above the bullish consolidation's trendline resistance level and above the April-2006 level of 1.81... putting the ratio at its highest level since late-2003 or early-2004.
Finally, on further confirmation of this nascent breakout, our upside target guide using the October-2002 rally into January-2004 rally would be around 2.07, with the time within 12-18 months. .Thus, it would seem wise to trade this "pairs trade" using a long QQQQ/short SPY position. Or, if one believes the markets is headed higher from current levels or if one must be long for any stylistic reason – then perhaps selected outright long positions in technology are warranted. In any case... the unloved technology sector is poised to gain substantial sponsorship.





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June 23, 2007LOOKING AT THE SEMICONDUCTOR INDEXBy Chip Anderson
Richard Rhodes
Last week's stock market correction was rather "brutal" to be sure; however, we believe that the balance of evidence suggests at this time it is nothing more than a correction and more likely a consolidation to higher highs. If this is so, then we want to be long those stocks that shall "lead" the market higher. At this juncture, our models and analysis argues that using current weakness in the semiconductor sector to accumulate shares will provide outsized gains in the months ahead.

Looking at the daily chart of the Semiconductor Index ($SOX), we find a rather longer-term, large and clear bullish pennant consolidation has formed. Of course the ultimate resolution should obviously be higher; and if we use the percentage measurement of the Oct-2002 to Jan-2004 rally added to the July-2006 low – then we arrive at rough reading of 1000 or nearly a 100% increase from current levels. We have a very hard time believing this given our skeptical nature, but this is simply a hard and fast technical measurement. In any case, moving average support has held, and a breakout above pennant resistance will likely lead to a "melt-up" of some degree given the large short position outstanding in the semiconductor sector and its relative "unattractiveness" over the past 4-years in which it has underperformed the S&P 500.

Every dog has its day they say; perhaps now it's the Semiconductors turn to bark.





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June 09, 2007MARKET FOCUSING ON 10-YEAR NOTE YIELDBy Chip Anderson
Richard Rhodes
Last week saw stocks sell off rather sharply for several days, of which the catalyst was the sharp rise in bond yields as inflation and too strong growth concerns too center stage. Since bond yields are now the tail wagging the stock market dog – we think it imperative to understand perhaps where bond yields are headed given stocks are now showing a highly inverse correlation with bond yields. If bond yields are headed higher; then ostensibly stock prices are headed lower.
The market's focus is upon the 10-year note yield; it is clear bond yields are in a bull market given the bottom forged in 2003, with a subsequent series of higher lows and higher highs. Also, we must point out that the 120-week moving average tends to illustrate the trend rather well, and further provides support to declines. Our concern, and it should also be our clients concern – is that a technical "head & shoulders bottoming pattern" is forming, of which a breakout above 5.25% would break neckline support and lead to still higher yields... perhaps sharply higher yields towards those extant in early-2000 at 6.75%.
Market participants aren't mentally prepared for this circumstance. Can you think what the world would look like if 10-year notes were at 6.75%? What the stock market would look like? What would have to happen for this to occur? Most – including us have been conditioned on a low interest rate environment after the technology bubble burst, as well as the sub-prime implosion. We and others looked for lower interest rates; not higher interest rates. We were wrong headed; now we must contend with a world with greater risks and lower levels of liquidity... and perhaps sharply lower stock prices after a 5-year bonanza.





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May 19, 2007PLATES STILL SHIFTINGBy Chip Anderson
Richard Rhodes
We recently featured the S&P 500 Large Cap vs. Russell 2000 Small Cap ratio surrogate using the ETFs SPY:IWM; with the implication that the tectonic plates were shifting beneath the markets, with large caps slowly, but surely coming back to favor at the expense. This was simply the thesis based on "looking through" out indicators; however, last week provided clear confirmation that indeed - a major breakout had taken place on the daily as well as the weekly and monthly charts. Obviously, this has major implications for our trading strategy; we are increasingly likely to trade the Pfizer's (PFE) or Cisco's (CSCO) or General Electric's (GE) of the world rather than small stocks.



Analyzing the SPY:IWM daily chart once again and keeping it rather simple; we find prices bottomed in April-2006, with the "right shoulder" of a larger "head & shoulders" bottoming formation breaking out above the major 500-day moving average resistance level, and then above neckline resistance. Moreover, the stochastic pattern is supportive of further gains. This breakout could not be cleaner... nor clearer; hence our confidence level is quite high that rotation in favor of large caps will come from the small cap area. Keeping it simple again; one must trade accordingly.



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April 21, 2007STOCK MARKET SEEING "ROTATION"By Chip Anderson
Richard Rhodes
The positive stock market rally is undergoing significant "rotation" within various indices, which in our opinion is quite important from both an investment and trading perspective. First, when we invest or trade, we want to run with the "fastest horses" in order to outperform the markets or one's particular benchmark. Therefore, it behests us to use technical analysis on specific ratio charts to discern where to put our money in order to earn outsized profits. This is relative investing 101. Last week, we will note that the large caps handily outperformed the small caps. This is a trend that has been ongoing for the past year, but one that hasn't really gotten the attention of the hedge funds and hot money. Well, that is about to change, and the media will begin to pick up on this material change and it shall have repurcussions throughout the trading world. If we analyze the ratio chart between the S&P 500 Large Caps (SPY) and the Russell 2000 Small Caps (IWM), we find a "major low" was forged in April-2006, and since then the ratio has held above its low and formed what appears to be a "right shoulder" of a larger "head & shoulders bottoming pattern." This is of course hugely bullish, for it portends months and years of outperformance by the large caps such as Wal-Mart (WMT), Citigroup (C), 3M (MMM) and Pfizer (PFE).



For this bullish pattern to be confirmed, a move above neckline resistance at 1.86 is required; however, we would become more confident a breakout is developing with a breakout above the longer-term 500-day moving average. The 40-day stochastic is showing strength from a higher low, which further increases the probability this bullish pattern will come to fruition. In other words, the ducks are lining up rather nicely.

And finally, we would also note that SPY isn't only poised to outperform IWM; it showing bullish technical patterns against European and Asian regional indices...and perhaps more importantly...the Emerging Markets. Hence, when we are long - we want to be long large caps; when we are short - we want to be short small caps and certain foreign regions or indices. It's just that simple right now.



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April 08, 2007LOOKING AT CRUDE OILBy Chip Anderson
Richard Rhodes
For the past couple of weeks, the markets have focused in upon crude oil prices and their attendant rise given the Iran hostage situation. The prevailing thought was that "geopolitical premium" was on the order of $4-to-$5 a barrel of the $67/barrel price; and that once the situation was concluded successfully - the premium would be lost rather quickly. Of course the situation was concluded last week, but the price of crude oil didn't "plunge" as expected. In fact, only not been the case as crude oil has lost only -$2.50 off its highs, with the decline quite orderly indeed. We cannot think of a more bullish respone than what was seen; obviously there are other mitigating factors extant in the price of crude oil that haven't allowed it to decline. Therefore, we think the current rally has "legs", with the recent weakness nothing more than a good old bit of profit-taking before an assault on the all-time highs. Technically, we can make the tentative "bullish case" given major support levels have held. Major trendline support has held; and the 200-week moving average has held; and minor trendline resistance was broken above. If the 60-week moving avearge just overhead can be cleared with a bit of authority, then our bullish confidence level will be raised materially.



Conversely, we can make the tentative "bearish case" that perhaps crude oil prices can "fail" at the 60-week moving average has it has done so for the past several days. Certainly this was the case in 2001 case where the flattening 60-week moving average turned prices lower by -33%. If this were to occur, then a 2001-like decline would target major support near $40. We think this is a remote probability, but a probablity nonetheless. Therefore, our current stance is quite simple: we are bullish of crude oil, energy stocks in general, and oil service shares in particular [Transocean (RIG) noted on Friday that demand for services was high and rising and likley to do so far into the future]. However, we understand the "risk" to the bullish trade, and can manage our risk easiliy using tight position stops.



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March 17, 2007REVIEWING THE "YEN-CARRY TRADE"By Chip Anderson
Richard Rhodes
The recent focus of the equity markets is upon the "sub-prime" mortgage problem; and upon the "yen-carry trade". We think both are valid concerns; however, the question of the "yen-carry trade" is more important in our mind than the "sub-prime implosion." Perhaps the sub-prime problem is the "catalyst" to start the correction ball rolling, while the "yen-carry" is the horse that does the heavy-pulling, and the heavy-pulling in this regard is a correction that takes stocks back to more traditional oversold levels.

That said, looking at the Yen-S&P 500 ratio, we find two clear periods in the past decade - one short and one long - where the yen rose against the S&P. And in both cases, when the yen was rising against the S&P 500, the S&P 500 was in an absolute correction. The first period was short, and coincided with the 1998 Russian currency crisis, which took the S&P lower by -22%; whereas the second period was more prolonged and coincided with the technology "bubble". The result was quite a larger bear market with the S&P dropping 50%. Thus there is precedent for a larger decline coincident with a rising ratio.

Hence we must be concerned given the ratio is starting to show nascent signs of wanting to rally once again. The initial "spike higher", coupled with the oversold 40-week stochastic certainly concerns us. Moreover, the yen is right upon its 80-week trading moving average, of which a break above it would be the first time it has closed above it since 2005. Obviously, this would usher in higher yen prices. So, we think the ratio rally continues, and we clearly believe stocks will falter.

And in ending, this begs the question as to just how "deep" a correction are we looking at. If we simply look at the weekly and monthly S&P charts, we find major weekly support crosses at 1330...or its 80-week moving average. Monthly support however, is at the 40-month moving average, which crosses at 1230. Therefore, we think it would be rather reasonable for a test of this zone to occur; of which the total decline off the high would be roughly -9% and -16% respectively. Normal corrections on the order of -10% are common; hence we are willing to split the zone difference leaving our target at roughly S&P 1280. Obviously, this means are are selling rallies.





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March 04, 2007RECENT DECLINE MORE THAN JUST A CORRECTION?By Chip Anderson
Richard Rhodes
Last week's market decline was quite interesting from a number of perspectives. First, the decline clearly mirrors the movement in Japanese Yen as the "carry-trade" is unwound; if one watches these closely, one will see that stock traders are cleary focused on the yen. We will have more to say on this in the future; but suffice to say, a major reversal higher in the yen has taken place. Secondly, and perhaps more importantly from an economic perspective in the US - is that our simple interest rate model of the ratio between the 5-year note and 10-year note ($FVX:$TNX) has broken important support at its "fulcrum point" of its 60-week moving average. Over the past 10-years, this model has generally kept one long during corrections if it is above its 60-week moving average; but for the first time since September-2001...it has broken below its 60-week moving average after attaining the 1.0 level. What we think the market fears is not "inflation", but slowing growth. And this is exactly what happened during the 2001-2002 broader market decline; and we all know just how "deep" and "gut wrenching" that bear market was. Thus, the odds of this decline being more than just a normal correction have increased given the interest rate model. Those who have followed it have done well. Our strategy at this point is to "short rallies" going forward until "the facts change".





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February 14, 2007HAVE THE SEMICONDUCTORS BECOME "DEAD MONEY"?By Chip Anderson
Richard Rhodes
The technology rally from July-to-present has occurred without the participation of the Semiconductor Index ($SOX). We find this rather "odd" to be sure, for one of the basic tenets of any broader market rally were that they were led in general by the technology sector, and more specifically the "high-beta" semiconductor industry. That hasn't been the case recently however, for the semis have lagged rather badly , and the question before us is whether they are "dead money" or not. A reasonable question we think.



Our opinion: the semis are poised to trade sharply higher...if...if they can get some "gitty up and go" behind them to breakout of either the ugly "head & shoulders" pattern or the more "neat" pennant formation. It matters not to us which pattern; we are only concerned with the results once trendline resistance is given...whether sharply higher prices materialize as anticipated. We give this more than a 50/50 chance given major support at the 200-week moving average held and turned prices higher; with the 20-week stochastic poised to reverse higher from "postive numbers". This would imply "strength", which would target nearly a 100% rally over the course of the next several years. And of further support to our thesis, the Semi/S&P 500 and Semi/NASDAQ 100 relative ratio charts are turning higher as well.
Therefore, we are carefully watching semiconductor price action, for we feel they are poised for a major breakout...with our favorite individual stock being Lam Research (LRCX).

Want more of Richard's award-winning advice? Check out his Web site: TheRhodesReport.com

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February 03, 2007SPY OUTPERFORMING XLYBy Chip Anderson
Richard Rhodes
From our vantage point; the S&P 500 SPDR (SPY) is poised to outperform the Consumer Discrectionary SPDR (XLY) in all-time frames (short-intermediate-long), with a new highs expected to be reached in the late-2007 to 2008 time frame. Our reasoning is such:

• First, the fibonacci 62% retracement level was obatined, and indeed did hold as it should during a bull market.
  

• Secondly, a bullish declining wedge is confirmed, of which steep trendline resistance was broken. Prices are consolidating short-term, but given the postive 20-day stochastic divergence...the path of least resistance is higher.
  

• Thirdly, if the 60-day moving average is broken, then we would expect to see mean reversion in the least to the 200-day moving average. This will be next "large fulcrum point" upon which we can either confirm or deny our thesis of new highs dependent upon whether prices breakout above this level or not.
  

• And lastly, even if we are wrong in our long-term assessment and prices are headed lower, we shall have ample time and an optimal entry point as prices "fail" to brekaout above the 200-day moving average level.
  
  

How to trade: One can either buy SPY and sell short XLY in equal dollar amounts; or, one can focus in upon shorting the consumer discretionary stocks given the general SPY overbought conditions. We are focusing in upon shorting the consumer discretionary stocks; and in particular...are looking for a high in the homebuilders after they have retraced quite some distances of their declines. Also, we have put on a "long energy/short consumer discretionary" trade that is proving to be quite profitable.



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January 20, 2007LOOKING AT A PAIRS TRADEBy Chip Anderson
Richard Rhodes
Today we want to look at a "pairs trade" theme we think has good fundamental and technical merit; it is a "long energy/short consumer discretionary shares" trade. Recently, we have begun to put this trade on in various ways; and one that we intend on adding to as it becomes more profitable. From a technical perspective, we use the S&P Energy and S&P Consumer Discretionary ratio (XLE/XLY) as our guide. As we look at the chart, we note that over the course of the past year, the ratio has been in a steady if not relentless decline. However, this decline has taken the ratio from overbought levels to oversold levels, and more importantly...into several major long-term support levels. We believe those support levels will hold; and obviously turn the ratio higher. Hence, one is to be long XLE and short XLY. We also have the trade on using long positions in Weatherford Int'l (WFT) and Peabody Energy (BTU); whilst being short Ryland Homes (RYL) and CarMax (KMX). As time moves forward and the trade becomes more engrained, we intend on fine-tuning the trade via swapping out these stocks for those that have greater potential; we want the most out the trade, for it is one that the "hedge and mutual funds" have taken the other side of. The rush to the exit will be quick; it will be fierce...and we will add to the trade as it occurs.






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January 05, 2007KEEPING AN EYE ON ENERGYBy Chip Anderson
Richard Rhodes
With the first week of the year out of the way; we have seen a rather sharp and violent sell-off in a number of asset classes including energy. Our interest is energy stocks: we think the sell-off has gotten a bit "overdone" to be sure as the oil service sector has dropped -7%; but as we know - markets can remain irrational far longer than we can stay solvent fighting them. But a buying opportunity is being created; however, it isn't in the oil service shares where we want to place our trading capital...it is in the integrated oil producers such as Anadarko Petroleum (APC); Conoco-Phillips (COP) Hess Corp (HES); Occidental Petroleum (OXY) and Valero Energy (VLO).
Our reasoning is technically oriented; the integrated oil vs oil service ratio has broken out to the upside through trenldine resistance, and has indeed found support recently at the 200-week moving average. Moreover, the 14-week stochastic has corrected an overbought condition, and nascently turning higher. Given this, we think that previous high resistance of mid-2002 and mid-2005 at 6.4 will be broken, with a move thereafter upwards of the 2001 high at 7.6.





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December 09, 2006A CORRECTION - OR SOMETHING LARGER?By Chip Anderson
Richard Rhodes
The recent "slowdown" in the major averages has produced "rotational undercurrents" between these averages; the most poignant we observe is the bullish breakout in the ratio of the S&P 500 Spyders (SPY) and the NASDAQ 100 (QQQQ). The reason we focus upon this is that it has implications in terms of traders taking on risk; in a normal bull run, traders tend to put on high-beta technology shares to increase returns above the market. Hence, when we begin to see strength in the ratio - it implies traders are shunning risk, which suggests a potential trend change is in the very near future. Perhaps it is merely a correction; perhaps it is something larger and deeper. History will be the final arbiter.
Technically speaking; the ratio chart has now broken out above it's shorter-term 35-day moving average, which given the 40-day stochastic is exhibiting positive divergences with the ratio...further suggests the ratio is headed higher. The real question is whether the more intermediate-term 130-day halts the rise and turns the ratio lower to new lows. In any case; it is our opinion that tactical short positions can now be considered with a greater probability of success than in recent months.





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November 04, 2006ANALYZING THE NASDAQ COMPOSITEBy Chip Anderson
Richard Rhodes
The broader market rally off the June/July lows has pushed all the major indices higher; and in particular the Nasdaq Composite has outperformed rather noticeably if one looks at the Composite/S&P 500 Ratio. It has moved from 1.625 to 1.725; not a very large move, but a relatively profitable one to those wise enough to have been overweight technology shares. In that technical vein, we cannot help but note the very long and drawn out bullish consolidation forming; one that is nearly 3-years old right now, and that will become older until a clear breakout above trendline resistance is obtained, or until it breaks down. Time will only tell. But remember, the longer consolidations take to form, the more powerful the move after the breakout. Then, and quite obviously, the first signs a breakout move was under way would be a move above the 170-week moving avearge, with confirmation coming on a break above trendline resistance. This would target a ratio level somewhere upwards of 2.07 if we use the October-2002 rally into January-2004 as a guide. Further, the time frame in which it is likely to do so is within a 12-18 months. Therefore, we are intently focused upon the 170-week moving avearge; once this occurs, then we are willing buyers of the ratio, which generally coincides with a broader Composite rally.





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October 21, 2006OIL SERVICES TAKING A BEATINGBy Chip Anderson
Richard Rhodes
First, much continues to be made of the decline in crude oil prices, and the positive impact of lower energy prices upon the world consumer et al. This much is known; but oil service stocks have been "taken to the proverbial woodshed" and beaten to death, which creates a very interesting and perhaps very profitable opportunity to buy these stocks as crude oil continues to move lower.
Our interest stems from the technical perspective of the Oil Service Index vs. Crude Oil Ratio ($OSX:$WTIC). We think it is rather clear on a historical basis, the ratio is trading now too far off its lows of the past several years, which gives rise to the emerging "rounding bottom". Thi is confirmed with the now rising 100-week moving average. Too, we find trendline resistance above it coming into play; a clear breakout above this level would serve to push prices sharply higher towards 5.0.
So, in the end, no matter how crude oil trades...oil service is likely to trade better and outperform. Our favorite individual plays in the sector for the months and years ahead are: Nabors Industries (NBR), Transocean Offshore (RIG) and Weatherford International (WFT).





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October 07, 2006RALLYING TECH SHARESBy Chip Anderson
Richard Rhodes
The sharp technology share rally has caught many "off-sides" to be sure. Take for example the NASDAQ 100 "Q's" +13.4% rise off their June low; this is quite impressive indeed...but not as impressive as the +19.7% gain in the Semiconductor Index (SMH). Our forecast is for the "Q's" to decline in the weeks and months ahead; thus, we are asking ourselves the question as to whether SMH will continue to perform relatively "better"...or "worse". It is a reasonable question, and one we will answer as "worse". In fact, given the past several day SMH trading action - we can now make the risk/reward case that selling short at current levels makes good trading sense.


First, let us note that we "respect" that the SMH chart has formed a very large bullish pennant pattern; it is not yet confirmed given trendline resistance has yet to be taken out, but it is certainly a sight to behold and perhaps a trade for another day. Our current focus is upon the 380-day moving average, for it has proven its merit as an "inflection point" for profitable trades. At present, price action has attempted to breakout above this level, but this overhead resistance level continues to prove is merit. This, coupled with the overbought 40-day stochastic suggests that there is further downside remaining back to the previous lows at $29.
Therefore, from a trading perspective - putting on a short position at SMH's current level of $34.29, while using a "close only" stop loss at $35.80 makes immiently good trading sense. We are risking $1.50 to return between $5 and $7; our initial trade target is between $27-$29.



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September 16, 2006IS THE CORRECTION OVER?By Chip Anderson
Richard Rhodes
Last week's commodity market decline was the most severe since 1980; which of course begs the question "is the correction over"? We don't believe that to be the case, as follow on selling will materialize taking prices far lower than one can believe.



In that vein, we think it wise to take a technical look at gold prices - ostensibly the leader of the bull market in commodities. From a longer-term perspective, we use the monthly chart, and we don't want to get to fancy with it. Right now, the 20-month moving average is rising sharply and crosses at $521; we think this level in combination with a normal 50%-62% "box retracement" of the entire bull since 1999 moves puts our comfortable buying zone between $520 to $550. Hence, another -10% to the downside will "clean the baffles" as late-long positions have been pushed harshly; thereby granting the gold market a healthy dose of skepticism as to whether the bull market is over. In our opinion at this point in time...it is not. Keep your eye on $520-to-$550 and prepare to buy.



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September 02, 2006GOLDILOCKS AND THE BEARSBy Chip Anderson
Richard Rhodes
While many believe a "goldlilocks" soft-landing is forthcoming for the US economy; we think the probability of this occurring is rather small given the ongoing weakness in the housing market. That said, we are bearish on equities given our overbought indicators, and the fact this rally is becoming narrower with fewer and fewer stocks leading the major indices back towards the highs. Therefore, we would use rallies to layer into short positions. In terms of sectors, we believe the "cyclicals" are poised to decline on both an absolute as well as relative basis. Looking at the feature relative chart of the MS Cyclical Index vs. the S&P 500, we find a material "topping pattern" has formed, and indeed it is breaking down. Obviously, this suggests further weakness going foward; some of the major components of the MS Cyclical Index (CYC) are Phelps Dodge (PD), US Steel (X) and Caterpillar (CAT).





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August 19, 2006STILL BEARISH IN TECHNOLOGYBy Chip Anderson
Richard Rhodes
Our recent comments stating we believe a bear market in technology stocks via the NASDAQ 100 has begun remains valid; however, our technical bearish must be tempered somewhat by last week's sharp rally. Quite simply, the rally has put monthly prices back above the 25-month moving average - the level that demarcates "bull and bear markets". If it holds and extends higher, then we must reconsider our stance going forward; but given the rally has come into major daily resistance levels...we are betting that prices will weaken from near current levels in the weeks ahead. In any case, the NASDAQ 100 is "sittin' the fence", and one must pay heed as to which side becomes the "jump off point". Therefore, given we expect a bearish resolution to this technical condition - we are looking towards putting on short positions in several technology stocks that have had stellar gains these past few weeks...over +25% higher. Our top candidates (no pun intended) are Research-in-Motion (RIMM) and SanDisk (SNDK).





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July 15, 2006A MOVE DOWN FOR THE SOX?By Chip Anderson
Richard Rhodes
We believe that the Semiconductor Index (SOX) is poised to move sharply lower in the months ahead into a tradable bottom. Our target is rising trendline support near 280, which presupposes a decline of -31% between now and then. Our reasoning is rather simple: First, the fundamental backdrop has been, and will continue to deteriorate in the months ahead as the Fed's previous interest rate increases come to bear. This suggests the news flow will not be positive for semiconductor stocks i.e. Advanced Micro Devices (AMD) warned on revenues and earnings recently. Secondly, the technical picture is deteriorating quickly; a larger bearish wedge was confirmed with the breakdown below trendline support, with this week's weakness causing the 50-month moving average at 420 to be violated as well. To us, this confirmed a bear market is in place, with the next leg lower towards our 280 target level now underway.

We are currently short Lam Research (LRCX), and will look to put on short positions in both MEMC Materials (WFR) and Cymer (CYMI) in the days ahead.

- Richard Rhodes

Want more of Richard's award-winning advice? Check out his Web site: TheRhodesReport.com

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June 17, 2006A LOOK AT THE NASDAQ COMPOSITEBy Chip Anderson
Richard Rhodes
The NASDAQ Composite is now in danger embarking on an extended move lower. Quite simply, we use the 25-month month moving average to demarcate the difference between bull and bear trends; and given the Composite is trading only 22 points above this level within the context of an RSI breakdown...increases the odds that this level will indeed be violated. We don't know how to be more simple than this.
To take advantage of this decline; we are in the process of putting on short positions via semiconductor equipment-makers such as Cymer (CYMI) and Lam Research (LRCX), and also looking to put on a short position in SanDisk (SNDK) in the very near future. These issues should lead the decline; and are quite far off their representative October-2005 lows.

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June 03, 2006THE DAMAGE FROM "THE MAY SWOON"By Chip Anderson
Richard Rhodes
The May Swoon as we are apt to call weakness seen during the month had led to an increase in confusion amongst technical analysts. However, we would argue that is all about "time horizons", and we should confuse short-term movements with long-term time horizons as we are beginning to see. In fact, our short-term indicators and models have traded to their lowest points in months; however our longer-term work has just begun to weaken. Everyone is conditioned to buy the dips, and those that haven’t have paid the price. Hence, we think the market is well seasoned for a larger sell-off from a longer-term perspective.
Let's keep it simple and take a long-term viewpoint; May's trade formed a bearish "key reversal" lower in many of the industrialized as well as emerging market indices (we have shown the S&P 500 as it is likely to outperform during any decline). Thus, if we use this bearish formation as our starting point – the probability of a correction towards the rising major 40-month moving average support at 1145 has increased significantly. This would complete a normal -10% correction, and actually cause no harm to the bull market in stocks. However, if prices break through 1445, then a clear bear market will have begun.

Therefore, from a tactical perspective - market strength such as that seen this week should be sold and/or sold short given the 40-month moving average target...allowing for a slight monthly rise. Our favorite market indices to short: short small and mid cap stocks as well as emerging market ETFs.


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April 16, 2006INTEREST RATES MATTER AT THE MARGINBy Chip Anderson
Richard Rhodes
Last week the 10-year note and 30-year bond rose decidedly above the psychologically important 5.0% level. This is first time since June-2002 that the 10-year has traded above this level. If we have learned anything in our 24 years of trading – it is that interest rates matter at the margin. Moreover, the technical prospects are very good for the 10-year to rise to 5.3% and the 30-year to 5.5%. Soon, we should begin to see a slowing of the economy and a equity market correction of at least -10%.

Thus, we like to look at the Lehman 20+ year bond fund/S&P 500 “Spyders” Ratio (TLT: SPY) to glean important information. At the present time, the ratio is oversold and due for a technical bounce in the least; however, in 3 of the past 4 bounces…stocks have corrected rather sharply, but not by -10% of more. But the higher rates go…the greater the risk – especially given the underlying internal deterioration seen during last week’s decline.

Therefore, we are selling stocks short – and moving to a slightly overweight short position in the Paid-to-Play “Long/Short” Portfolio.

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April 01, 2006LARGE CAPS VS. SMALL CAPSBy Chip Anderson
Richard Rhodes
Today we look at large cap vs. small cap stock via the S&P 500/Russell 2000 Ratio. Since 1999, the ratio has gone nowhere other than down; which means this is the 8th year of decline. More generally, the ratio runs in 7 year cycles, so given we are in the 8th year, perhaps the time to consider readjusting ones portfolio is a wise decision. In fact, we believe the winds of change are forthcoming; it may not be today's business or next weeks, but we cannot ignore the developing bullish falling wedge. This, coupled with the oversold 20-week stochastic suggest a trend change; with confirmation coming with a breakout above both trendline and 100-week moving average resistance.

Therefore, the risk/reward dynamic of being long the ratio is rather good bet; certainly this should be on everyone's trading radar going forward.

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March 18, 2006BROAD MARKETS TAKING "DEFENSE POSITIONS"By Chip Anderson
Richard Rhodes
With the broad market indices such as the Dow Industrials and S&P 500 hitting new multi-year highs, one would reasonably believe that the advance has further to travel and riskier and riskier positions taken. However, when we look underneath the hood, we find rotation taking place towards more traditional ?defensive positions?. This suggests market participants are skittish about the lagged effects of the past 2-year Fed interest rate hiking campaign, and are moving to decrease their beta exposure.

Our case in point relates to the ratio between the Pharmaceutical Index ($DRG) and the Semiconductor Index ($SOX). We find multi-year support has held, and our momentum oscillators are trending higher ? thereby suggesting movement towards higher levels in the months ahead. Therefore, we extrapolate this onto the broader market and hence look for prices to weaken towards a more traditional ?mid-term election year? October/November bottom.

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March 04, 2006A LOOK AT THE HOUSING INDEX ($HGX)By Chip Anderson
Richard Rhodes
Sometimes the best trade is the most obvious trade; and for us that is the “short housing” trade, or more succinctly…short the homebuilders. Interest rates moved sharply higher this week on the short-end as well as the long-end of the curve, and ht prospects are good for a continuation of this move. Thus, there is a fundamental component to the trade.

As the chart shows, the uptrend was clearly violated, with a “head & shoulders” topping pattern still under development. If $HGX breaks 235 – and we think this is a “good bet” given the 50-week moving average is rolling over with prices headed lower through it – then much lower target projections are ahead. Perhaps a loss on the order of another -25% from current levels; the risk is to a move above 275 or -7%. We like the risk-reward…and are involved in the trade.

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February 18, 2006LOOKING AT OIL AND GOLD/SILVER INDEXESBy Chip Anderson
Richard Rhodes
For the longest time, crude oil and gold prices have dominated the news in terms of bullish commodities. We like to look at the ratio between the Integrated Oil and Gold/Silver Indexes ($XOI:$XAU) for a possible "pairs trade", and every few years we are accorded any opportunity to do so. In fact…that time is now. If we look at the ratio, we find that the 150-week moving average is a very decent "fulcrum point" from which to trade; thus we will be moving into the trade via long positions in the XOI components of Amerada Hess (AHC) and Sunoco (SUN), while moving to a short position in Freeport McMoran (FCX) and Newmont Mining (NEM).

The trade has a well defined stop loss point per a ratio trade to 7.00, where it must trade for two weeks. The target: NEW HIGHS over the next several years.

"Paid-to-Play" Portfolio 2006 YTD Performance: +13.2%
S&P 500 2006 YTD Performance: +3.1%



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February 05, 2006DECLINE IN HOUSING MARKET CONTINUESBy Chip Anderson
Richard Rhodes
The decline in the housing market is becoming more and more real; however, the housing index has yet to fully reflect the risk of the potential for still slower housing growth numbers. In some cases such as Ryland's (RYL), new home sales were recently below 2004 levels. Thus, when we look at the Housing Index ($HGX), we find prices are now poised to correct their recent gains and still more. We foresee the index dropping from it's current 262 level all the way back to 200.

We are short the homebuilders, and we want to become shorter.

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January 07, 2006FALSE BREAKOUTS AHEAD?By Chip Anderson
Richard Rhodes
The first 4-days of US trading has shown nothing but gains; and we believe that this “euphoria” is providing an upcoming opportunity to be come short the technology sector as a whole. Allow us to explain:

Using the weekly NASDAQ Composite chart, the rally off the low has clearly traded within a well-defined bearish rising wedge pattern. In fact, it has gone further into the apex that we would have thought, which last week saw prices breakout very modestly above trendline resistance. Common technical convention notes that the further along the apex – the higher risk of “false breakouts”; we think this is just such a circumstance. Therefore, we will soon opt to begin accumulating short positions in selected technology shares such as F5 Networks (FFIV)…perhaps next week; if not…then soon.

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December 10, 2005TOPS AHEAD FOR DEC/JAN?By Chip Anderson
Richard Rhodes
The December to mid-January time frame has produced a number of rather large and tradable tops throughout history; and it is our belief the probability favors just such a top developing given the current overbought momentum readings. That said, we also note that the declining Dow Industrials-Nasdaq Composite Ratio is forming a bullish declining wedge; this is important from the standpoint of “intra-group rotation”, for generally this ratio tends to rise as the broader market declines. Hence, the risk-reward dynamic suggests we want to be relative bullish of the more prosaic industrial shares, while being short of technology in a hedged portfolio. Aggressive traders can simply “rotate” into an overweight short position via technology shares.

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November 06, 2005LOWER PRICES AHEAD FOR NASDAQ?By Chip Anderson
Richard Rhodes
On a longer-term monthly basis, the Nasdaq Composite is very clearly forming a rather bearish "wedge" pattern. Resistance between 2080 and 2220 is quite strong, and rallies back into this zone are becoming weaker and weaker. Ultimately – and we think rather soon, this pattern will lead to lower prices…and perhaps sharply lower prices. Certainly the probability will have increased, and will initially be confirmed once prices decline through wedge support at 2098, and then through of the 25-month moving average at 2032. Then, and only then can we say with any confidence a ravaging bear market is upon us…and it is far closer than one would think.

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October 16, 2005WEAKNESS AHEAD FOR THE S&P500?By Chip Anderson
Richard Rhodes
Today, the simple technical picture is breaking down in our opinion. If we look back to 1994, we find the 80-week moving average has been an excellent swing trading tool as it holds the data as near perfect as can be expected. Our concern focuses upon the current decline from the normal 50%-60% retracement level back to the 80-week moving average. Normally, we would be buyers of its test for a move to higher highs, but given the 20-week stochastic isn't below 50 - thereby confirming at least modest technical neutrality - this indicates that prices have still lower to work. Therefore, a breakdown below the 80-week moving average would signal the countertrend rally off the 2002 lows is complete, and an overweight and aggressive short campaign to "short the rallies" should be undertaken. We don't make these claims likely, but the probability suggests further S&P 500 weakness ahead.

2005 Performance
ETF Portfolio: +9.1%
"Paid-to-Play" Portfolio: +19.2%


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October 02, 2005"TRIANGLE CONSOLIDATION" FOR THE NASDAQBy Chip Anderson
Richard Rhodes
Taking a long-term gander at the Nasdaq Composite, I think is very clear that the time is running out for prices to rise much further than they have at present. The reason is that prices are winding their way through the "triangle consolidation"; which means two scenarios exist – a bearish and bullish one to be exact. The bearish probability is highest in my mind with prices breaking down through trendline support and then the 25-month moving average currently at 2009 – thereby ‘confirming' a bear market has begun; or the lower probability breakout above major resistance at 2185-2200 – this would signal a new and larger leg higher is underway.

Given our stance is clear, it is so only because our longer-term models show the current rally's 'strength' has moderated significantly to where selling pressure is rising a sharp rate than in previous months. However, our shorter-term models are turning higher - which against the backdrop of our longer-term high probability scenario suggests a rally in the next several weeks that will be a 'final and material test' of the highs will occur and then fail with lower prices back towards 1200-1500 anticipated.
But the real cruxes of the situation will which themes to be involved in.
Performance
ETF Portfolio: +7.0%
"Paid-to-Play" Portfolio: +14.3%

- Richard Rhodes

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September 24, 2005SHORT POSITIONS IN LONG-END BONDBy Chip Anderson
Richard Rhodes
With both Hurricane Katrina and Rita now in the history books, local, state and federal government to issue more debt will need to issue debt for reconstruction efforts and so forth. This bearish fundamental coupled with the yield curve not inverting any longer suggest the risk-reward of short positions in the long-end bond is quite good.
From a technical perspective, we want to keep it simple. We note that TLT as it is forming a bearish "double top" and further resides right upon its bull market trendline. We expect lower prices to be confirmed on a breakdown through $91.25 level, with a swift and material decline towards our target at $86.

In our letter we are currently short, and will look to add to the trade in the weeks ahead.

2005 Performance:
ETF Portfolio - +8.6%
Paid-to-Play Portfolio - +15.3%


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September 10, 2005EFFECTS OF KATRINABy Chip Anderson
Richard Rhodes
With the passing of Hurricane Katrina, we want to hone our focus in upon the TLT:SPY ratio relationship. This is simply due to the enormous amount of local, state and federal debt issuance that will materialize due to the substantial nature cost of clean-up and reconstruction efforts of the Gulf Coast area. Also, there are concerns about the inflationary prospects for many building materials. So from a fundamental point-of-view we want to be a seller of bonds as we believe issuance/inflationary concerns will outweigh all economic weakness concerns.
The TLT:SPY ratio seems to bear this out, with bonds set to continue their downtrend against stocks as a 'midpoint consolidation' is rather clear on the weekly chart. Moreover, if one believes the market is in a "topping pattern" such as we do then if stocks are to decline in any way shape or form then TLT is likely to decline even more sharply. Thus, if one wants to be short with any type of confidence, we suggest being short TLT.

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August 20, 2005HOUSING INDEX ($HGX) COMING INTO CLEAR FOCUSBy Chip Anderson
Richard Rhodes
The current broader market decline has brought the Housing Index ($HGX) into clear focus; magazine after newspaper after TV show are talking about whether housing is overvalued and ready for a decline. We will save our thoughts for this for another time, but we do have some technical thoughts on $HGX.
We find the chart trending from the lower left to the upper right and what is defined as a "bull market"; but we are finding opportunities to be short with greater confidence if in fact several 'key levels' are violated. First, we expect the 18-week exponential moving average at 527 to be violated rather handily given all corrections of any magnitude have in fact broken below this key level prior to rebounding. The question then becomes whether the bull market trendline is violated; if so then obviously the bull market from the lower left to the upper right will have 'changed' to bearish. And finally, if the 50-week simple moving average is violated...then this would confirm the downtrend has become engrained indeed.
This is our roadmap; we covered our short housing stocks on Friday and now look to sell rallies given an oversold countertrend rally is warranted. We feel this trade may develop into one of the large for the remainder of this year and into 2006.

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August 06, 2005RICHARD IS ON HIATUS THIS WEEKBy Chip Anderson
Richard Rhodes


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July 17, 2005JANUARY DECLINE GAINING IMPORTANCEBy Chip Anderson
Richard Rhodes
The January decline to date is gaining in importance; if prices remain at current to lower levels through the next six trading sessions – then a bearish 'key reversal month' will form. This would signal 'exhaustion' of the uptrend, with any and all rallies considered selling opportunities. The last such monthly formation signal was January-2002...with the decline of nearly 50% materializing from January's high at 2098 to October's low at 1108. Now, we don't necessarily believe the decline is going to be this dramatic at this time, but we simply want to illustrate that a substantial decline is a higher probability event...even more so if the 25-week moving average currently at 1834 level is violated.

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July 03, 2005MS CYCLICAL INDEX IN MIDST OF CORRECTIONBy Chip Anderson
Richard Rhodes
The MS Cyclical Index ($CYC) is quite interest rate sensitive; and thus prone to large corrections witness the past 7 year history of which there are two very distinct 30% corrections. Hence, given short-term rates are rising, we believe that the index is in the midst of another such correction that over the next year will carry the index lower by over 20%. A top has formed, and thus rallies should be sold or sold shortwhile dips should not be bought.

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June 18, 2005IMPRESSIVE ACTION IN THE S&P 500By Chip Anderson
Richard Rhodes
The recent S&P 500 price action above the 1190 level is rather impressive, and can be considered a correction in 'time' rather than in price. This suggests new highs; however, those highs aren't expected to be accompanied by new highs in the Nasdaq Composite.
As the chart shows, S&P 500 large caps have outperformed the technology sector since January-2004 in a 'sawtooth' pattern. I think the S&P 500 is ready to outperform once again…and those hedge funds that want to increase beta via technology will left to their own devices given they are chasing performance. Further, this is suggestive of an overall 'market top' in the weeks/months ahead rather than a continuation pattern. Thus we would be sellers of rallies at the appropriate time.

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June 04, 2005BOND REVERSAL MEAN MOVE FOR INTEREST RATES?By Chip Anderson
Richard Rhodes
Rarely do they ring a 'bell' at the bottom, but Friday’s reversal higher in bond yields argues strongly for a sustained move higher in interest rates. Quite simply, Friday's employment report was clearly on the 'weak side'; with the 10-year note yield trading lower and then reversing and trading sharply higher. This 'key reversal' to the upside is likely a 'watershed event' in which bond yields will march higher over the short and intermediate-term time horizons. This pattern is one that we nearly trade with 'blind faith upon', and we did so on Friday by becoming short.
If one chooses to trade this pattern; one can short the 10-yr. or 30-yr. futures contract – or – short the Lehman 20-yr+ bond fund (TLT), but shares appear difficult to borrow at some brokerages – or – buy TLT put options. We don’t recommend options for those who haven’t had experience with them; and those that do must understand the risks.

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May 21, 2005RECENT DECLINE IN XOI CORRECTIVEBy Chip Anderson
Richard Rhodes
Quite simply, the recent decline in the AMEX Oil Index (XOI) appears corrective in nature; and thus one would want to be long these shares at this time as the risk-reward parameters are now favorable.
If past is prelude, and although it is not perfecta simple rhyme will do; the current correction is testing the sharply rising 110-day moving average, which when coupled with the lower 40-day stochastic level has provided excellent buying points over the past several years. If this test is successful as we expect; then a test of the highs is forthcoming. Therefore, we are long shares such as Exxon (XOM) and Chevron (CVX); but looking to add more and add oil service shares as well.

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May 07, 2005A SIMPLE ROADMAPBy Chip Anderson
Richard Rhodes
From a structural and fundamental point-of-view, things are bearish right now; however, the technical and sentiment action surrounding recent price gains is quite constructive; thus a larger rally appears underway. We are bullish but only insofar as the 65-week moving average of the S&P 500 holds at the 1145 level on a closing basis. If the 1164 level is broached, then this will be the first sign a larger breakdown is underway, and hence will put us into an initial short position; with a break of 1145 consider an 'all out bear market' calling for an overweight short position.
This is our simple roadmap stay long until our 'pivot points' are hit, and then act with impunity. For once the 65-week moving average is violatedthen the decline should be swift and heart wrenching.

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April 16, 2005"MINI-CRASH" FOR THE NASDAQBy Chip Anderson
Richard Rhodes
From Tuesday's close last week; the Nasdaq Composite ($COMPQ) has declined in mini-crash' fashion: down -4.8%. The question is whether there are further declines ahead or whether a sustainable rally will develop back towards the highs or even new highs. An instructive chart to this end is the monthly chart; which shows a major bearish consolidation after the 2000-2002 declines. In fact, trendline support was recently violated, with the next to last support' to be tested being the major 25-month moving average the other being the 2004 low.
Friday's trade broke below this moving average by 5 points; any further deterioration would certainly not suggest higher future prices. We very well may see this level hold given short-term oversold conditions, a countertrend rally develops and then a later date moving average failure. Or, this level holds and prices turn higher on a multi-month crusade. All are plausible outcomes, although we accord a higher probability to the first two.
Thus, a fulcrum point is at hand, which increases whipsaw risk but it will also solidify our questions about the next larger move in either direction. In our opinion, one simply should use rallies to put on short positions in the proper technology sectors/industries.

Posted at 04:03 PM in Richard Rhodes | Permalink


March 19, 2005SHORTING THE SOXBy Chip Anderson
Richard Rhodes
Today we expand a bit with 2 charts; with our contention that selling short the Semiconductor Index ($SOX) and several individual names has a high probability of success in the months ahead.
Looking at the $SOX, it is trading within a not yet complete' decline that began in 2000, of which the recent correction higher is complete given multiple failure' at the 200-week moving average. This absolute negative when coupled with emerging relative underperformance by the $SOX with the Nasdaq 100 ($NDX) [chart 2] indicates shares are headed lower...and for those wanting to add high beta' to their short portfolios may decide this sector warrants and overweight trading position'.
Our favorites are in the semiconductor and semi capital equipment maker industries : Xilinix (XLNX), BroadCom (BRCM), KLA Tencor (KLAC) and Novellus (NVLS).

Posted at 05:03 PM in Richard Rhodes | Permalink


March 05, 2005LONG TERM WEDGE PATTERN LOOMINGBy Chip Anderson
Richard Rhodes
The recent rally to new yearly highs hasn't materialized in all the major indices. In fact, the Nasdaq Composite has lagged rather badly; thus it is either 'poised to catch up' or it will become the leaders once the cyclical bull market ends. We dont know when that will be; but our fulcrum point for adding to technology short positions will be upon the Composite breaking below its 60-week moving average at 1998...only 72 points below current levels.

That said, the larger bearish wedge pattern is also looming; a breakdown to 1900 would confirm this longer-term pattern. This isn't todays business as many of the traditional bearish signals seen at tops is only just beginning to materialize. However, it pays to have a game plan going forward...and technology short exposure is a good strategy as price declines materialize.

Posted at 05:03 PM in Richard Rhodes | Permalink

hefeiddd

February 05, 2005MARKET RALLY IMPRESSIVE, POSES NEW QUESTIONSBy Chip Anderson
Richard Rhodes
Last week's market rally was impressive to be sure. Now, the question whether the decline off the early January highs are in fact intermediate-higher or more short-term in nature. Previously, we postulated the monthly key reversals' in the major indices put them in a position to decline further; however, that isn't clear any longer. In fact, the S&P 500/Nasdaq Composite Ratio is now testing the critical 125-dma trading signal' we use; if prices breakout above it then technology shares are expected to underperform . But, given the 40-day stochastic is overboughtthen the probability favors a turn lower.
CONCLUSION: The probability is increasing that a larger technology leg higher has now begun. Thus, an aggressive long trade would be the semiconductor sector' given their recent strength.

Posted at 05:03 PM in Richard Rhodes | Permalink


January 22, 2005JANUARY DECLINE GAINING IMPORTANCEBy Chip Anderson
Richard Rhodes
The January decline to date is gaining in importance; if prices remain at current to lower levels through the next six trading sessions then a bearish key reversal month' will form. This would signal exhaustion' of the uptrend, with any and all rallies considered selling opportunities. The last such monthly formation signal was January-2002with the decline of nearly 50% materializing from January's high at 2098 to October's low at 1108. Now, we don't necessarily believe the decline is going to be this dramatic at this time, but we simply want to illustrate that a substantial decline is a higher probability eventeven more so if the 25-week moving average currently at 1834 level is violated.

Posted at 05:03 PM in Richard Rhodes | Permalink


January 08, 2005OUTPERFORMING THE INDICES IN 2005By Chip Anderson
Richard Rhodes
Last week's stock market correction was significant in our opinion; for the technical patterns suggest the correction will continue in the weeks ahead. But more significant in the fact that if the correction extends sufficiently below certain levelsthen the entire rally cycle off the October-2002 is complete.
First and foremost, last week formed a bearish key reversal' lower that signals exhaustion from within the 50%-to-60% correction zone; this increases the probability of a test of the 1165 level, which is a mere 21 points lower. Thereafter, if extend lower through this level and then trendline support and the 65-week moving average then we must consider the rally phase complete. If this scenario doesn't materializethen obviously higher prices will develop; but given a rising interest rate environmentthis seems a fairly remote probability.
In any case, the most important trading decisions will be made regarding long/short sector rotation; this will be the key to outperforming the indices in 2005.

Posted at 05:03 PM in Richard Rhodes | Permalink


December 18, 2004Long-term Oil vs. GoldBy Chip Anderson
Richard Rhodes
Today we take a very long-term look at the relative valuation of integrated oil-related shares in comparison to gold shares ($XOI/$HUI). After the very long rise in gold shares in both absolute and relative terms; we find the present time is opportune to prune back long gold holdings and buy into integrated oil shares at current levels. This certainly isn't a popular decision given many are ‘gold bugs', but the fact of the matter is that this investment allocation merits strong consideration; for given when the Fed raises interest rates….they generally go too far and gold shares do quite poorly.
However, the technical picture is looking up. The ratio simply shows how ‘beat up' oil-related shares are to gold – losing nearly 80% since their 2000 high, but prices formed an absolute low in late-2003 followed by a successful test of the 50-week moving average. This, coupled with momentum turning higher from oversold levels suggests that the recent decline in integrated oil shares is an opportunity to buy oil related shares as a multi-year advance in both absolute as well as relative terms appears underway. If the ratio simply retraces back to its 200-week moving average, we would do very well. But if 50% of its decline is retraced…they we will have done enormously well.

Posted at 05:02 PM in Richard Rhodes | Permalink


December 04, 2004CONSUMER DISCRETIONARY VS. STAPLESBy Chip Anderson
Richard Rhodes
Today we look at the high relative valuation of Consumer Discretionary vs. Staples stocks. Current levels have not been seen; at the 2000 high in which the bubble burst', the ratio stood near 1.40. We believe that this stretched valuation' argues for one to reassess their portfolios in terms of the shares within them. To move into Staples would imply a defensive move' related to a decline in the overall stock market. While that may not be today's or tomorrow's businessone must be cognizant of the high probability discretionary stocks will not outperform from this point forward.
If we are correct, and we must be buyers' then we must consider the largest holdings in each group. If we must be long: Altria (MO), Anheuser Busch (BUD), Coca-Cola (KO), Colgate Palmolive (CL), Gillette (G), Kimerbly Clark (KMB), Pepsico (PEP), Proctor & Gamble (PG), Wal-Mart (WMT) and Walgreen's (WAG). Conversely, we would be sellers of: Carnival (CCL), Comcast (CMCSA), ebay (EBAY), Home Depot (HD), Lowe's (LOW), McDonald's (MCD), Target (TGT), Time Warner (TWX), Viacom B (VIA.B) and Walt Disney (DIS). It may seem counter intuitiverelative performance is important.

Posted at 05:02 PM in Richard Rhodes | Permalink


November 20, 2004RECENT RALLY IS SUSPECTBy Chip Anderson
Richard Rhodes
The recent rally to new highs in the S&P 500 large cap, S&P 400 mid-cap and S&P 600 small -cap is suspect. While higher prices may be offing in the near-term, we believe this rally could be terminal in nature given several divergences are evident. One of these divergences is the Nasdaq Composite/MS Cyclical Ratio ($COMPQ/$CYC); generally $COMPQ underperforms during a market rally as was evident from March 2003. However, $COMPQ has broken out against $CYC by moving above trendline resistance; this clearlyrings a bell' indicating the underlying tectonic plates are shifting; with an absolute trend change is not far off in the distance.
In the short-term, $COMPQ is pulling back in normal fashion to test trendline breakout. But, given the stochastic is oversolda turn higher is expected and for the ratio to resume its intermediate-term trend higher. Thus, if we are to be short into this recent rally we must clearly consider being short the cyclicals rather than technologywhich is counter intuitive technology is the higher-beta group.

Posted at 05:03 PM in Richard Rhodes | Permalink


November 06, 2004TOO EARLY FOR THE ALL CLEAR' BELLBy Chip Anderson
Richard Rhodes
Two weeks prior, a major bullish key reversal' higher developed in the S&P 500 Index; this led to Friday's new relative high. Given this, proper sector' positions are required to take full advantage of racing with the strongest'. In the past this meant buying high-beta technology shares; but over the past month the cyclicals have outperformed technology.
This is a potentially negative signal; the March breakout above the February high, and the August breakdown below the May low each failed. This breakout/breakdown was very obvious to all players just as Friday's breakout; thus it is far too early to sound the all clear' bell.
That said, the Nasdaq Composite vs. MS Cyclicals ($COMPQ :$ CYC) ratio shows that once trends become engrained, they remain trending for 12-14 months. The September low in the ratio broke bullishly above trendline resistance and the 120-day moving average; if this current correction holds, and then breaks out above the 250-day moving averagethen a 10-12 month period of Nasdaq Composite outperformance will be confirmed. If not, the Friday's breakout is likely to be short-lived indeed.

Posted at 05:03 PM in Richard Rhodes | Permalink


October 16, 2004THE 'WINDS ARE A CHANGIN'By Chip Anderson
Richard Rhodes
For all intents and purposes, the cyclical bull market that began in March-2003; and during the entire move to higher prices - S&P 500 Large Cap index performance 'lagged' that of the S&P 600 Small Cap index. However, the 'winds are a changin' as they say; the S&P 500/S&P 600 Ratio is showing signs of bottoming given the bullish declining wedge breakout.
If this is the case as we suspect, then subtle, but material change has taken place that will prompt the major market indices to move lower in a series of lower higher and lower lows...the definition of a downtrend.
Thus, if one is long...then one should define their risk tolerance at these levels; but if one were to be more aggressive...then short positions are warranted on all countertrend rallies.

Posted at 04:03 PM in Richard Rhodes | Permalink


October 02, 2004RELUCTANTLY BULLISHBy Chip Anderson
Richard Rhodes
Our comments will be quite short and to the point: In bull markets the more �aggressive' semiconductor sector leads the more �defensive' healthcare sector as market participants favor stocks with higher �betas' in order to increase performance. Over the past several weeks, that is exactly what has started to happen as many hedge fund managers have quite a bit of performance to make up between now and the end of the year.
Looking at the technicals, the Drug/Semis ratio moved back below its 100-week moving average this week (see chart below). Given that development, we must consider last week's trading action to be bullish for equities. While we are uncomfortable with this viewpoint given the major structural issues at hand, the current market environment demands that we listen to the technicals and thus we are closing out selective short positions and putting on selected long positions.

Posted at 04:03 PM in Richard Rhodes | Permalink


September 18, 2004TIME TO SHORT TECH SHARES?By Chip Anderson
Richard Rhodes
The current Nasdaq Composite rally is at an �inflection point� much in the same manner it was during the week of July 14th as prices slid to new yearly lows. The simple indicator we are looking at is the 60-week moving average, which in the past has an enviable record as an inflection point. If prices breakout above this level, then higher prices will develop; however, if the 60-wma acts as resistance as we believe it shall given the declining 200-wma�then a larger decline will be underway. Thus, if one is inclined to be short technology shares�this is certainly the �best risk-adjusted� time in which to do so.

Posted at 04:03 PM in Richard Rhodes | Permalink


September 05, 2004SEMIS NOT THE LEADERS THEY ONCE WEREBy Chip Anderson
Richard Rhodes
The recent carnage in the Semiconductor Index (SOX) moved to the forefront on Friday with INTC’s poor guidance moving forward. Thus, we must look at the SOX within the context of its relationship with the S&P 500 (SPX), and for this we use the ratio of the two Quite simply, we could very well see s a short-term bottom in the ratio in the days or weeks ahead – but it certainly isn’t within a historical context “the bottom” we would feel comfortable buying into on a longer-term basis. Our momentum indicators are now oversold, but it has paid to wait until a “positive divergence’ forms prior to becoming aggressively long this sector…which will require many months.
Bottom Line: We don’t expect the semiconductors to be “the leaders: on rallies as they once were.

Posted at 04:03 PM in Richard Rhodes | Permalink

hefeiddd

August 21, 2004ECONOMIC SLUMP FOR 2005?By Chip Anderson
Richard Rhodes
This past week showed stocks higher; their largest weekly gain in nearly 10 months. And, it did so within the context of sharply higher oil prices. By and large, this has set the tone for stocks to potentially move to new highsor so we are to believe. In fact, there is always that probability; however, we accord it a very small one at that.
That said , we are specifically looking at the bond-stock asset rotation for clues towards the best relative performance. Our and our proxy is the Lehman 20+ yr Bond Fund vs. S&P Spyders (TLT: SPY); and very simply we see that bonds over the past 2 months have outperformed stocks in a large manner. We believe this bottoming formation argues for a continuation of bonds outperforming stocks over the intermediate-term, although the current sharp stock rally indicates a correction in the ratio is taking placeperhaps to the 250-dma at .76. At this point, it would be wise to consider exiting stocks in favor of bondsas stocks are likely to fall further and faster than the current consensus believeswhich argues for a sharply decelerating economy into 2005.

Posted at 04:03 PM in Richard Rhodes | Permalink


August 07, 2004DISCRETIONARY VS STAPLES RATIO BEARISHBy Chip Anderson
Richard Rhodes
The weakness over the past several months is stark, which was made "more so" over the past two-day decline in all the major indices due to rising energy prices as well as a "punk" employment report. As a consequence of each of reports (and others) - our presumption is for consumer spending to remain weak in the weeks and months ahead...perhaps progressively becoming worse.

To understand this somewhat better, we turn to a very broad sector ratio we like to use - Consumer Discretionary (XLY) vs. Consumer Staples or (XLP). It goes without saying that if consumer spending is likely to weaken further, then consumer discretionary shares will weaken relative to the more necessary consumer staple shares. In fact, this has been occurring, but at still remains at historically high levels above 1.35. However, the emerging consolidation pattern below trendline resistance and the 40-week moving average argues for a new leg lower to have begun. If this is the case, then a move lower towards the 200-week moving average would be expected.

Hence, once again - it time to sell discretionary shares vs. staple shares, but remember...if a bear market has begun, then all shares are likely to decline...only the defensive staples shares will drop as quickly.

Posted at 04:03 PM in Richard Rhodes | Permalink


July 24, 2004TECHNOLOGY MALAISE WARRENTEDBy Chip Anderson
Richard Rhodes
The current technology "malaise" has run for all intents and purposes for the past six months; however, the recent earnings and guidance "misses" have put it on the front burner as expectations for difficult 2H 2004 comparisons have come one quarter early. The question is whether this is warranted from both a fundamental and/or technical perspective - we believe the answer is yes.
However, rather than go into the fundamental challenges; we will simply focus upon price action...which on a longer-term basis is just beginning to deteriorate. To explain, the 200-week moving average has "capped" price movement repeatedly, which has applied sufficient pressure to lead prices below trendline and 60-week moving average support levels. These simple negative breakdowns should be given enormous consideration when seeking to be a buyer of technology, as one must define one's time horizon. But for our money...we will simply seek to sell all rallies back into breakdown resistance levels as the longer-term trend has clearly changed to bearish.

Posted at 04:03 PM in Richard Rhodes | Permalink


June 19, 2004FUNDAMENTALLY INTERESTINGBy Chip Anderson
Richard Rhodes
From a fundamental perspective...the past several months shows US interest rates to have risen very sharply as US economic data continues to show strength - from employment to manufacturing to retail sales et al. Moreover, higher energy prices led by gasoline and crude oil have further thrown a "negative light" upon interest rates; which in combination have caused sentiment to become decidedly negative. In fact, the 10-year note futures are now showing their largest short interest in quite some time...perhaps ever.

Consequently, this argues for a "catalyst" or "watershed event" to turn yields lower - and in fact Chairman Greenspan's renomination hearing commentary before the Senate sent bond yields plummeting. To us, this doesn't argue as to a watershed event; however, the "outside reversal week" lower price pattern in which yields formed last week argue for lower yields in the intermediate-term. This very pattern developed at the lows...and now at the highs.

Therefore, we are willing to venture into the long side of the bond market, for if short covering develops before the June 29-30 FOMC meeting as we anticipate...then the proper position is to be long either the bond futures or the Lehman 20+yr. Bond Fund (NYSE: TLT). That said...we are doing exactly...and looking to add more as prices move higher...doing more of what is working for you.



Posted at 04:03 PM in Richard Rhodes | Permalink


June 06, 2004RISING WEDGE ON RATIO CHART BEARISHBy Chip Anderson
Richard Rhodes
Over the past two week's, sentiment has gone from "highly bearish" to "highly bullish" - a change in circumstances that shows confusion above all, but the fact remains the current rally in the major indices has reached the important 50%-60% retracement levels typical of countertrend rallies. Therefore, there is reason for caution at this junction, and we find other "esoteric" reasons for being so: a change in leadership between "mid-cap" and "small-cap" shares that has accompanied the transition from bearish to bullish to bearish markets. Quite simply, we use the S&P 400 and S&P 600 ETFs - MDY and IJR (exchange traded funds). In bear markets, MDY tends to outperform, in bull markets IJR outperforms.

This brings us to our ratio chart, which is showing distinct signs of a "rising wedge" bottom formation, which would imply the current rally is in the process of "stalling" and will not reach new highs as many anticipate, but rather resume their recent trend towards lower lows. In our opinion, the determining factor is the ration breaking out above their 180-day moving average. Be prepared.

Posted at 04:03 PM in Richard Rhodes | Permalink


May 14, 2004TAKING ADVANTAGE OF WEAKNESS IN BONDSBy Chip Anderson
Richard Rhodes
The recent capital market turmoil across the oceans and through all asset classes be it bonds or stocks or gold, has exacerbated certain risk-reward relationships between these asset classes as the "carry trade" is being unwound. And while these relationships may become even "more skewed" in the weeks and months ahead - we believe the time is approaching whereby asset allocators will begin to favor bonds over US stocks. Increasingly, this relative valuation will come to bear upon investment gains...and must be exploited as the next larger picture trade for the coming year.
That said, our proxy for this relationship is TLT vs. SPY (Lehman 20+ yr. Bond Fund vs. the S&P 500 Index), which allows us to exploit relative gains using equities only. Since March-2003, prices moved lower in a very distinct downtrend - forming a declining wedge pattern that shows each successive low is losing momentum. And while no major levels of resistance have yet been violated - the pattern appears ready to conclude is slide and resume its upward trajectory. Thus, we would become interested in "speculatively" purchasing the ratio upon a move above the .75 to .77 level from its current .74 trough, which may develop in the days or weeks ahead given the negative divergence forming between prices and the stochastic.

Posted at 04:03 PM in Richard Rhodes | Permalink


May 01, 2004CONSOLIDATION OR DISTRIBUTION?By Chip Anderson
Richard Rhodes
Over the course of the past 4-months, price action in all of the indices have been "locked" within wide trading ranges. One question to be be answered is whether this is a "consolidation" to new highs; or a "distribution" to lower lows. If we had to answer this - we would suggest that against the fundamental backdrop of higher interest rates - the financial system has begun "DELEVERAGING" itself from the "carry trade" estimated to be $1.5 trillion. Therefore, we can conclude this trading range is a distribution formation...of which lower prices are developing.

But just as importantly, we must look to "style type" decisions for trading, of which the ratio chart between the SP 500 Large Cap vs. SP 600 Small-Cap is locked within a clear downtrend. However, nascent signs are developing that the outperformance of the SP 600 is coming to a close in the intermediate-term. The ratio is on the verge of breaking above trendline resistance, which would then prompt a move into the 80-week moving average...and quite possibly the previous highs near 4.75. Be prepared.

Posted at 04:03 PM in Richard Rhodes | Permalink


April 17, 2004ROTATION FROM TECH TO HEALTHCARE SECTORSBy Chip Anderson
Richard Rhodes
This past week brought in "clear view" the under the surface rotation that has been occurring from the technology sector into the healthcare/pharmaceutical sector - and thus we think it important to look at the Pharmaceutical/Semiconductor RATIO. That said, this "repositioning" is extremely important in our overall equity viewpoint; in the past it has coincided with significant shifts in the overall sentiment of stocks to defensive or negative - as a change in risk aversion develops.
This point is quite clear at the Sept-1998 peak, at the Feb-2000 low, and at the Sept-2002 high - each corresponding with a change in trend for the stock market. Hence, we find it extremely important at this point given it is nearly universally thought that stocks correcting to move higher. If this pattern holds, and it still is not clear - then a topping pattern of proportion is developing...that could last several years if past patterns hold.
The bottom line - if you are long - you want to be cautious and consider defensive issues; and if you are inclined to be short...then technology rallies are to be sold, and to be sold aggressively.

Posted at 04:03 PM in Richard Rhodes | Permalink


April 03, 2004LOOKING AT THE RUSSELL 300 "GROWTH VS. VALUE" RATIOBy Chip Anderson
Richard Rhodes
In terms of gauging the current substantial rally, we should look at the relative performance of the "growth" and "value" components thereof. In effect, if we are bullish, then we want to be long that which is outperforming. This is fairly simple.
Thus, when we look at the Russell 300 "Growth vs. Value" Ratio - we find the longer-term pattern is a confirmed "bearish wedge" continuation pattern, which augurs for lower lows than that seen during June/July 2002. However, a good short-term level in which to become sellers or buyers happens to be the 60-day moving average. In fact, Friday's sharp rally in the growth stocks has taken prices right back to this now important resistance level. If prices break above it - then one obviously wants to be long growth stocks over the next several weeks. But, if resistance proves its merit...then growth stocks will lag, and one could reasonably become short selected growth shares. In any event - any growth rally will be short-lived given the bearish wedge interpretation...which should translate into lower equity prices overall.

Posted at 05:03 PM in Richard Rhodes | Permalink


March 20, 2004NOT YOUR "GARDEN VARIETY" CORRECTIONBy Chip Anderson
Richard Rhodes
The past two-month trading period is one at the present time considered a "correction"; however, there are nascent signs it may be something quite a bit larger than just your "garden variety" correction. First, we note that trendline resistance is proving its merit by turning prices lower, which up to this point during March has allowed prices to form an "outside reversal month" lower. Now, whether this collective pattern remains in force and the monthly close near its low will be determined next...but it is negative nonetheless at this point.

Secondly, and a bit more of a "conundrum" if you will - is the current price level relative to the location of the both the 40-month and 50-month moving averages...it is in between.

What to do? Our strategy will be simple - we will respect the correction to 1060; but at that point make a determination as to the strength of the rally off that low. If strong - we become aggressive buyers until otherwise noted; if weak...then we aggressive sellers upon its completion. Outside of this - the ancillary technical evidence suggests the probability of the latter is greater...but we must remain objective.

Posted at 05:03 PM in Richard Rhodes | Permalink


March 06, 2004THE "CONSUMER" SECTOR RATIOBy Chip Anderson
Richard Rhodes
The stock market environment over the past six weeks has been fraught with a good deal of rotation out of specific indices such as the Dow and Nasdaq and into the S&P 400 midcaps and S&P 600 small caps. And it is precisely this rotation effect that we believe is developing in the weeks and months ahead between the Consumer Discretionary shares (XLY) and Consumer Staples shares (XLP).
In essence, the relationship between these two is a "signal" into investor confidence regarding spending patterns - a high ratio such as at 1.40 or above current levels mind you - indicates a belief stronger spending patterns are going to continue. However, we believe that given debt the incremental stimulus amount is likely to fall in the future means a "reversion" towards the mean will develop. Our target for this is the longer-term 200-week moving average which implies the recent decline off the highs is part and parcel of the first leg lower. Hence, we would be buyers of consumer staples and sellers of consumer discretionary and in some cases becoming outright short of discretionary shares - in particular several retailers.

hefeiddd

March 07, 2009WHERE'S THE FEAR?By Tom Bowley
Tom Bowley
Significant market bottoms generally share many key characteristics.  I like to see a spike in volume to get that last wave of selling in place.  During this "panicked" phase, it's also important to see pessimism rise to a relative level where we can be fairly confident that a rally can last more than an hour or two.  Obviously, oversold momentum oscillators like stochastics and RSI are in play at a bottom.  My favorite momentum oscillator - the MACD - can provide clues as to the duration of any potential rally.
On the Dow Jones chart below, notice that the MACD is pointing straight down on the daily chart.  It's unusual to see a long-term bottom form when momentum is so negative.  So at this point, if the pessimism ramps up to a point where a bottom forms, I'd only be looking for a short-term rally to follow.  In order to see a more sustainable rally ensue, I need to see this momentum slow and begin to reverse.  That's where long-term positive divergences come into play.  The market showed much more stability after the November lows and the positive divergence formed on the daily chart.  Check out the Dow Jones chart below:

  
While I acknowledge that market bottoms can be carved out without extreme pessimism, this type of pessimism usually does form during emotional markets.  I would certainly be much more confident about trading a rebound in the market if the pessimism reaches an extreme level first.  On the S&P 500 chart below, I've highlighted recent market bottoms, the 5 day moving average of the equity only put call ratio at that time, and the subsequent gains realized off of the panic bottom.  It's important to note that the average equity only put call ratio reading since the CBOE began providing the data in 2003 is .67.  The average since September 1, 2008 is .79, much higher due to the increased fear overall.  From these numbers, you can see that any move of the 5 day moving average above .90 should be respected.  Here's the chart:

  
For free educational videos of the put call ratio and how to successfully incorporate them in your trading strategy, go to www.investedcentral.com/putcall.html.
Happy trading!  


Posted at 05:53 PM in Tom Bowley | Permalink


February 21, 2009JUICING UP YOUR RETURNSBy Tom Bowley
Tom Bowley
I receive a lot of questions regarding the "ultra" shares and "ultrashort" shares and how to effectively trade them.  In particular, there are always questions asking why those "juiced" ETF returns don't correspond to the indices they're supposed to track over time.  Let me give you an example.  Take a look at the two charts below.  The first is a five month chart of the Dow Jones U.S. Financial Index ($DJUSFN), while the second reflects the ProShares UltraShort Financial (SKF) during that same timeframe.  The SKF is designed to inversely track the $DJUSFN at a 200% clip.  In order to benefit from weakness in financials, you could purchase the SKF and profit to the tune of 200% the decline in the index.  Just keep in mind that a ride on Space Mountain at DisneyWorld will seem like a stroll in the park compared to an investment in the SKF, however.  :-)
On the line charts (line charts show only closing prices) below, take a look at where the SKF closed on February 20th vs. January 20th vs. November 20th.  It was lower each time.  But how can that be if the $DJUSFN is lower each time?  If the index is putting in lower lows, shouldn't the ultrashort SKF be putting in higher highs?  The answer is no - check this out:

On November 20th, the $DJUSFN closed at 167.95 and the SKF closed at 262.45.  On February 20th, the $DJUSFN closed at 143.56 while the SKF closed at 188.25.  So over the last three months, the $DJUSFN fell 14.52%.  Since the SKF is designed to inversely double the returns of the $DJUSFN, one would reasonably expect to see the SKF closing roughly 29% higher than it did in November.  Instead, the SKF has FALLEN from 262.45 to 188.25, or 28.27%.  It should have GAINED 29%, but instead it DECLINED 28%.  What gives?  Well, so long as the index moves in one direction or the other, juiced ETFs do a fine job of following at a 200% clip - generally speaking.  However, after several days of ups and downs in the index, the juiced ETFs lose their value and cannot fulfill that 200% promise.  For a fairly simple explanation, go to our website at www.investedcentral.com and click on "Trading the Juiced ETFs".  It's roughly a 15 minute demonstration showing why the juiced ETFs cannot keep pace over time.  If you like to trade juiced ETFs, it will be well worth the time.

Here's the bottom line.  Avoid the temptation to trade the juiced ETFs based on its technicals.  I've come to realize that the technicals associated with those ETFs are irrelevant.  Instead, determine your entry and exit points based solely on the technicals of the underlying index that the ETF is designed to track.  From that index, determine your target and apply those measurements to the juiced ETF.

Happy trading!

Posted at 07:56 AM in Tom Bowley | Permalink


February 07, 2009BERMUDA TRIANGLE - WALL STREET STYLEBy Tom Bowley
Tom Bowley
We've seen this all before.  The sure-fire short setups get waxed as trendline support holds.  Then the bulls grow confident as the market soars only to get turned back by trendline resistance.  The cycle continues to repeat itself until we get resolution.  If you time your entries perfectly, the triangle formations can be powerful trading patterns, but patience and extreme discipline is required.
Right now, the market is faced with exactly that triangle mentality.  The triangle keeps squeezing with each high moving lower and every low moving higher.  At some point, something must give.  That time is quickly approaching.  The breaking of the triangle pattern doesn't necessarily dictate whether the bear market ends.  In fact, I would argue it doesn't matter at all.  It does matter whether the bulls can turn the recent upside action into something longer lasting, however.
Let's take a look at the unfolding triangles, first on the S&P 500:

Next, the NASDAQ:

There is one difference on the buying this time - it's the volume that's accompanying the move higher.  Any time we can get the price movement and volume confirmation, it's much more bullish.  We haven't broken resistance though.  Until we do, the volume is not as meaningful.  Whether we see enough bullishness to crack through triangle resistance is a story for next week.

The odds of reaching that first Fibonacci retracement (38.2%) area increases greatly if the major indices can break their current triangle patterns with heavy volume.  That's what I'll be looking for as next week unfolds.  Also, financials helped to spark the turnaround on Thursday morning and the rally has continued in that space since.  If and when that rally ends, it will likely signal the end to the overall market rally as well.

Happy trading!

Posted at 08:49 AM in Tom Bowley | Permalink


January 17, 2009IS THE DOLLAR TOPPING?By Chip Anderson
Tom Bowley
An interesting result of the government bailout of the financials and automakers, along with the huge economic stimulus package will be the long-term impact on the U.S. dollar. Can the dollar maintain its relative value as interest rates fall and deficits mount? Let's take a look at a few charts regarding the dollar and how we can profit if the dollar does plunge. First, let's take a look at the long-term picture of the dollar:

As you can see, the long-term trend in the dollar is down. Unless the dollar can pierce through the 92-93 area, the intermediate-term trend is down as well. Only the near-term chart shows any positive action on the dollar. And that rally is suspect technically as shown below:

A bearish head and shoulders pattern formed from October through December and broke down below the neckline with force. Should the dollar fail to navigate the near-term resistance (retest of neckline) and the longer-term trend resumes to the downside, gold is likely to be a primary beneficiary. Gold is one commodity whose long-term uptrend remains intact because of the long-term downtrend in the dollar. Take a glimpse at the long-term chart on gold:

The dollar and gold have an inverse relationship that's quite evident when you compare the two charts. During periods of dollar strength, gold weakens. However, dollar weakness leads to gold strength. So the question remains: What happens to the dollar as a result of the massive government bailout and the economic stimulus package? Answer that question correctly and you profit. It's as simple as that.
Happy trading!


Posted at 08:25 PM in Tom Bowley | Permalink


January 04, 2009WHAT LIES AHEAD?By Chip Anderson
Tom Bowley
In order to gain a decent perspective as to where we might go in 2009, it's always helpful to take a look at the past to see how we got here. 2008 was a horrible year for the major stock market indices. The Dow Jones, S&P 500, NASDAQ and Russell 2000 lost 33.84%, 38.49%, 40.54% and 34.80%, respectively for the year. It didn't matter where you put your money - nearly every stock index here in the U.S. as well as abroad suffered major financial and technical damage. It's not irreparable damage, but building a solid foundation for a future advance will be a key in 2009. Holding price support at the lows in the fourth quarter is paramount to building that solid foundation.
Clearly, the stock market suffered its worst annual loss in several decades. After all the selling and panic, especially towards the latter part of 2008, the Dow Jones finished 2008 23.66% below where it began this decade. The last time the Dow Jones lost ground during a decade was the 1930's, when it lost 39.64% over that ten year span. The Dow Jones would need to advance 31.00% to avoid having a losing decade. While anything is possible, that seems a tall order especially considering that the Dow Jones had already advanced 15.77% from the November 21st low through year end. Friday, January 2nd did get us off to a great start, albeit on light volume.
The U.S. stock market remains in a bear market. Despite the surge off of the November 21st lows, we must respect the longer-term bear market message. That doesn't mean we can't continue to advance near-term. In fact, I would be surprised if we didn't rally further during January. Historically, January is the best month for the NASDAQ and is one of the best months for the Dow Jones, S&P 500 and Russell 2000. Technically, if we look at possible Fibonacci retracements of the recent downtrend, we can attempt to pick a price point where the current rally may fizzle. Let's look first at the NASDAQ:

Here's the way the S&P 500 shapes up:

I do believe the market has moved from a very emotional, panic-stricken state to a more stable one. That's not to say we won't see periods of heightened volatility, but the initial shock that was felt in 2008 is behind us and so too is the enormous swings in prices from day to day. That should allow for a period of consolidation where momentum oscillators like stochastics and RSI can be used to more effectively time trades. Pay close attention to these indicators when they flash overbought and oversold conditions, however, because most likely trend changes will be sudden and perhaps without explanation. From the next chart of the VIX, you can see how the emotional roller coaster in the 3rd and 4th quarters of 2008 is finally calming down. Everyone can at least breathe a sigh of relief from that development.

I hope everyone had a very nice holiday season and here's to a healthier and happier 2009!
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.

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Posted at 05:05 PM in Tom Bowley | Permalink


December 14, 2008MARKET RALLIES TO FIND RESISTANCEBy Chip Anderson
Tom Bowley
I knew eventually we'd get a rally with legs. The recent long-term positive divergences across our major indices suggested a 50 day SMA test was on the horizon and that's exactly what we saw this past week. Key indices hit resistance and, not surprisingly, backed away on the first attempt. The bears have been in the drivers seat for the last few months. They were not going to be taken down without a fight. The battle was waged and the bears were victorious - for now.
The market has stabilized somewhat and that's a positive. I wouldn't go so far as to say it's stable, just that it's in the process of stabilizing. Thursday afternoon's selloff occurred with the VIX barely budging higher. That's a critical sign that the fear and panic that ruled the market and ruined portfolios is not a major factor currently. Resiliency is a word often associated with the market now. Horrible news is being routinely ignored. The Employment report last Friday was worse than anyone could have predicted. Yet after a quick morning selloff, the major indices rallied. On Thursday evening, the Senate rejected the House's proposal on a $14 billion bailout package and futures were bleak. Asian markets tumbled overnight and given the late day selloff on Thursday, US investors were worried that another steep drop was upon us. But futures improved into the open and the major indices mostly rallied throughout the day, finishing in positive territory and near the highs of the day. It's that old adage, "sell on rumor, buy on news".
I am beginning to rely less on sentiment indicators as the market appears to be moving away from the emotional level of trading that we saw for many weeks. I expect to see more back and forth action once a range is established. That should set up for very profitable trades using momentum oscillators like stochastics and RSI. During the recent downtrend, the daily RSI has remained primarily below 50. If conditions are truly changing, we should see that oscillator begin to move back and forth between the key levels at 30 and 70. In sideways, consolidating markets, the stochastics and RSI oscillators can prove to be the most useful indicators for entry and exit points.
Technicals precede fundamentals. They always have and they always will. If you can follow the price action, you can trade the market. Will the recent bullishness last? Yes, it's quite possible. In fact, I'm watching for the highs on this current leg up to define our trading range over the next several months. While January 2008 was horrific for equities, the December-January timeframe is historically quite bullish. Financials are trying to repair themselves technically, but hurdles remain. As you can see from the chart of the XLF below, it's attempting to ascend past key short-term price and moving average resistance as reflected below:

A move past key resistance will open the door to higher equity prices overall. Similarly, the SOX is also knocking at resistance's door as shown below in Chart 2:

These are two influential groups that will most likely need to participate in further strength in equities. Without them, this attempt could be futile.
I want to wish everyone a relaxing holiday season and a happy new year!
Happy trading!


Posted at 05:05 PM in Tom Bowley | Permalink

hefeiddd

November 16, 2008LOOK UNDER THE SURFACEBy Chip Anderson
Tom Bowley
This has been one ugly bear season. It cannot be compared to anything else seen on the S&P 500 since 1950. Not even close. But I'll say one thing - there's an awful lot of horrible economic news priced into this market right now. I am convinced that the worst is behind us. That doesn't mean we won't continue to see horrendous economic reports. This will be a holiday shopping season that every retailer in America had wished they could have skipped. We will see hundreds and hundreds of thousands of jobs lost in the coming months. As a result, home prices are nowhere near stabilizing yet. And without home prices stabilizing and economic improvement, banks aren't exactly sitting in the catbird seat either.
But the market prices these things in. That's why we've seen the NASDAQ drop 37.1% in the last 10 weeks. The S&P 500 and the Dow Jones aren't far behind, down 32.9% and 27.5%, respectively, during these last 10 weeks. The NASDAQ, from November 4th's close to the intraday low on November 13th, lost over 350 points, or 19.75%, in less than 7 trading days. Most technicians trying to time market bottoms using their trusty, dusty MACD's and OBV's and SUV's (oops, wrong story!), have erred miserably. They haven't worked with the precision most technicians have grown accustomed to. Instead, this wild market ride has been 100% about emotion. Sentiment indicators have worked like a charm. Two weeks ago, I commented that the VIX had just broken beneath its 20 day EMA for the first time in 2 months and that I was looking for a drop to 46. A couple days later, it hit 44 and change before bouncing again. Now the 50 day SMA on the VIX becomes an important level on a closing basis. Also, the put call ratio and the various moving averages that we use to identify "relative" complacency and pessimism have been of utmost importance in spotting key short-term reversals. Literally, on Thursday as we were wrapping up our noon chat and folks were exiting, I took a final look at the latest put call reading that was published at 1pm EST and it provided us with the final clue to start buying. The "equity only" put call ratio - during just one half hour reading - showed over 200,000 equity puts purchased and just 98,000 calls bought. That half hour ratio was over 2 to 1 in favor of puts, something I cannot ever recall seeing on the equity only reading. The market EXPLODED higher from 1pm on Thursday. Check out this 2 day chart on the NASDAQ:

We recorded the last few minutes of that chat session on our website for anyone wishing to listen to my shock and dismay following that put call reading! Reviewing sentiment indicators like the put call provides opportunities that otherwise would be missed using standard technical indicators and it's why it's such a huge part of our trading arsenal.
The MACD (dare I say!) has turned decidedly bullish on the daily charts. We have a long-term positive divergence in place as shown below:

The market appears to be at or rapidly closing in on a tradeable bottom. We believe the risk/reward is such that aggressive traders could look to enter long positions in increments during further weakness. Let's not forget, this Friday is options expiration and MAX PAIN!!!
As always, keep those stops in place!
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 at 05:06 PM in Tom Bowley | Permalink


November 02, 2008HISTORY REPEATS ITSELF AGAIN AND AGAIN AND AGAINBy Chip Anderson
Tom Bowley
Previously, I've mentioned a favorite indicator of mine - The Bowley Trend. The Bowley Trend is an analysis of stock market history, dating back to 1950 on the S&P 500 and 1971 on the NASDAQ. It identifies discernible bullish and bearish trends that have emerged over time and provides additional clues as to the direction of equity prices. I use The Bowley Trend to corroborate technical signals.
I mentioned in a July article the 2nd worst historical week of the year. We just experienced a major league beating during the absolute worst period. The most interesting aspect of October is that the worst historical period is followed immediately by the best historical period - amazingly, the bearish switch is turned off and the bullish switch is turned on, literally overnight. Consider the following annualized returns since 1971 on the NASDAQ:

October 22: 15 up days, 11 down days, annualized return -64.98%
October 23: 8 up days, 16 down days, annualized return -89.82%
October 24: 11 up days, 16 down days, annualized return -66.26%
October 25: 9 up days, 19 down days, annualized return -66.85%
October 26: 12 up days, 15 down days, annualized return -110.15%
October 27: 11 up days, 15 down days, annualized return -110.28%

Pretty darn bearish, I'd say. Now consider these bullish numbers from a period that immediately follows the above bearish period:

October 28: 17 up days, 8 down days, annualized return +132.02%
October 29: 16 up days, 10 down days, annualized return +68.14%
October 30: 13 up days, 13 down days, annualized return +46.85%
October 31: 17 up days, 9 down days, annualized return +105.77%
November 1: 16 up days, 12 down days, annualized return +62.41%
November 2: 16 up days, 9 down days, annualized return +144.07%
November 3: 16 up days, 10 down days, annualized return +84.13%
November 4: 15 up days, 9 down days, annualized return +54.94%
November 5: 21 up days, 5 down days, annualized return +153.46%
November 6: 15 up days, 11 down days, annualized return +43.91%

Quite a reversal, huh? This historical tendency was a contributing factor for Invested Central turning bullish on Monday, October 27th. The Bowley Trend shorts indices during bearish historical periods, goes long indices during historical bullish periods and remains 100% in cash during neutral periods - neutral periods are defined as periods where there are no discernible trends. During October alone, The Bowley Trend posted an incredible 27.44% return, over 45 percentage points higher than the actual negative return of 17.73%. Perfectly on cue, the major indices reversed course at the close on October 27th. Folks, I don't make this stuff up, I just report the facts. It is periods like these that has enabled The Bowley Trend to nearly triple the "buy and hold" returns of the NASDAQ since 1971. And it's as simple as following a calendar - the dates do not change. It's also why we provide this indicator to our members each day, it's that important.
Technically, the market is recovery mode. We've got a long way to go and the depths of this recession will be great. I've identified near-term support and resistance for the Dow Jones on the following chart:


From the above chart, I've identified a key price resistance level on the Dow Jones near 10,400. I believe the current range on the Dow is from 7800-10400 and that's where we'll trade. Should the Dow approach that resistance on lessening volume, be very cautious, and possibly consider shorting if you have a propensity to short. The volatility index, or VIX, is finally taking a breather. Take a look at the two VIX charts below. The first shows where we were in early September and my analysis then vs. where the VIX stands now and what it's signaling.


Expect volatility to remain high, but lessening from the ridiculous levels over the past several weeks. Traders will need to remain on their toes, capturing profits when available and keeping appropriate stops in place to avoid big losses.
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 at 05:05 PM in Tom Bowley | Permalink


October 19, 2008IS THIS THE BUFFETT-BOTTOM?By Chip Anderson
Tom Bowley
Warren Buffett said he was buying stocks this past week. Should you? Well, it depends. If you buy stocks on a regular basis as part of a disciplined strategy - say in your 401(k) plan - then keep buying. The idea of buying stocks over the long haul is not only to buy when the market is soaring, but more importantly, to also buy when the market is falling. The key element is your time horizon. If you don't need the money for the next 5-10 years, then you stay invested and keep buying.
Here's the problem. Fewer and fewer of Americans buy and hold. We've seen many of our strongest companies buckle. Most financial companies have been brought to their knees during this financial crisis and the crisis is threatening to take many other sectors with it. American International Group (AIG) was thought to be a darling among Wall Street analysts. We don't need to detail the woes of AIG, just suffice it to say that no company is immune to failure. So if you're of the buy-and-hold mentality, remain diversified.
I am not of the buy-and-hold mentality and never will be. Technical analysis is where it's at. When the first signs of technical weakness appear, beware. Let sectors regain relative strength before committing back into the group. This very simple strategy avoids major carnage and it's the major carnage that wrecks portfolios, not the minor losses from timing a trade incorrectly.
Charts 1 and 2 below highlight, in hindsight, two major sector breakdowns in our market over the last few years. Both are heavily responsible for the technical damage the entire market is suffering right now.


We need housing to begin to show signs of improvement before the major indices are likely to recover.
While I have tremendous respect for Warren Buffett as an investor, he will admittedly tell everyone that he can't time market bottoms. I will wait for more technical signs before becoming aggressive.
Over the course of the last 3-4 weeks, the only trades that Invested Central has considered have been ETFs and they've been few and far between. Options expiration and max pain provided some super opportunities last week as the number of net in-the-money puts was 3 to 4 times the amount we had ever seen before. Coincidentally (sarcasm intended), the market soared on Monday and gapped up on Tuesday and we headed for the exits. We are 100% in cash at the moment and plan to stay that way in the near-term as the gyrations in the market are nauseating.
During markets like this, capital preservation is Job #1 for traders.
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 at 04:05 PM in Tom Bowley | Permalink


October 05, 2008SEPTEMBER WEAKNESS SPILLING OVERBy Chip Anderson
Tom Bowley
Two weeks ago, I said to buy the bottom. Sometimes, you're just wrong. I was wrong. Technical analysis is to the study of price action to increase the odds of predicting future price action. It's not an exact science, there are no guarantees, and there are times when you just have to tip your hat to the other side. So far, that's been the case. The market fell precipitously this past week, closing at new lows across our major indices. Volume was increasing late in the week, though it wasn't as heavy as we saw a couple weeks earlier. We can argue that it was the fault of Congress for acting too slowly. Others might argue that the bailout bill itself is the problem. From a technical perspective, the reason for the decline doesn't really matter. We're only concerned about what happened technically with the price action. We must always respect the combination of price/volume breakdowns, regardless of what other technicals are indicating. From the following monthly S&P 500 chart, you can see that we are as oversold now as we've been since the bottom of the bear market in 2002. Monthly RSI has moved below 30 and stochastics are approaching single digits, something that never happened in the 2000-2002 bear market.

We knew that September was historically weak and this past September certainly did nothing to disprove that notion. Since 1950 on the S&P 500, September is the only calendar month that has moved lower as opposed to moving higher. It is also the only calendar month that has negative annualized returns over the past 58 years. What many market participants don't realize is that Mondays are - by far - the worst day of the calendar week. Since 1950, the annualized return on Mondays (on the S&P 500) is a negative 16%. While I've done no study, I'd bet that psychological forces have a lot to do with it. But what's interesting is that if you had simply avoided trading on Mondays since the May 19th top (or shorted), your performance would likely have been much, much better. Consider the following: Since May 19th, we've had 17 Mondays, 12 of them the S&P 500 has moved lower. Of the 5 that have moved higher, only 1 (September 8) moved up more than 1%. Of the 12 down Mondays, 9 moved down more than 1% and 6 moved lower by 2% or more. Perhaps most astonishing is that the S&P 500 has lost 327.40 points since the close on May 19th, dropping from 1426.63 to 1099.23. The cumulative point losses on Mondays total 328.27, 100% of the decline. For comedy movie buffs who have seen Office Space, the stock market has had a REALLY "bad case of the Mondays".


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 at 04:05 PM in Tom Bowley | Permalink


September 21, 2008BUY THIS BOTTOMBy Chip Anderson
Tom Bowley
Market bottoms come in all shapes and sizes, but most have a few key ingredients. Without exception, critical market bottoms are borne out of excessive fear and panic. On Thursday, the VIX shot past 42. The last time we've seen the VIX that high, we were carving out the bottom of the 2000-2002 bear market (Chart 1). The equity only put call ratio touched 1.18 on Monday, signaling panic amongst retail investors. The 5 day moving average of the equity only put call ratio hit .95, exceeded only by the reading of 1.01 on March 17th - that was the day the market also saw a very significant bottom. I like to also measure the 5 day moving average of the total put call ratio and plot that against the 60 day moving avg to determine "relative" pessimism and optimism. As the spread between the two widens to extreme levels, bottoms and tops are formed in the market. The total put call ratio is highlighted in Chart 2.


Why is this bottom different? I believe it's different because it's confirmed by a long-term positive divergence on the S&P 500 weekly chart (Chart 3). Positive and negative divergences on the WEEKLY charts appear infrequently. It's an advance sign that long-term selling momentum is waning (in the case of a positive divergence). A negative divergence implies that the long-term buying momentum is slowing. Chart 3 below provides a few excellent examples.

One group that must lead us out of the mess we've been in is the financials. On Friday, the bank index broke out above critical resistance - toppling both its recent downtrend line and also significant price resistance at 75 (Chart 4). The relative strength of financials has been on the improve for the last few weeks and that bodes well for the longer-term health of the market (Chart 5).


Of course, I cannot end this week's look at the market without a quick snippet about max pain. We just witnessed perhaps the most manipulated market behavior ever this week, and it's totally legal. At a time when financials needed help in the worst way, our government announced a resolution trust-type entity AND banned shorting financials until October 2. While the SEC absolutely should focus attention on naked shorting, I was shocked to see our government take a step away from a free market society by not allowing the shorting of financial shares, even if just for a brief period of time. Not only was it unfair - without any warning - but it violently manipulated the stock market the day before options expiration. Let me provide you a few facts as they existed at 1pm EST on Thursday afternoon. The SPY (ETF tracking the S&P 500) was trading at $113.80. The max pain on the SPY was $127.06. The amount of net in-the-money put premium totaled $1.95 BILLION!!!! After the rally Thursday afternoon and the massive gap up on Friday morning, the SPY opened at 126.70. $1.95 BILLION SAVED! Ring the register!
There were many more examples, but let me give you just one more. Goldman Sachs (GS), which had fallen to $86.85 on Thursday at its low, rallied to open on Friday morning at $142.51. Max pain was near $141.00. MILLIONS SAVED! Ring the register. Imagine the impact this had across all stock, ETF and index options. Rest assured it saved key financial institutions billions and billions of dollars.
If you haven't had a chance to listen to our max pain presentation, it is archived on our home page and it's FREE. It's well worth the hour or so to learn more about max pain and its impact on short-term market direction. As a bonus, it includes a discussion regarding The Bowley Trend and how you can benefit from historical market trends.
Have a great week and 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 at 04:05 PM in Tom Bowley | Permalink


September 06, 2008DOLLAR'S RISE CRUSHING COMMODITIESBy Chip Anderson
Tom Bowley
The U.S. dollar couldn't move lower forever. It had to turn and when it did, we knew things might get ugly for commodities. Since the July 14th low in the dollar index, we've seen the greenback rise over 10% (see Chart 1). That has sent commodity prices reeling. Crude oil prices per barrel have tumbled nearly 30% (Chart 2). Silver is down approximately 37%. Copper is down close to 25%. Gold has fallen about 19%. Commodity-related stocks have been bludgeoned as institutions have been liquidating stocks that the bears simply couldn't touch just a couple of months ago.


Volatility provides opportunities, especially as options expiration approaches. Take a quick look at the VIX, which broke out of a downtrend early last week.

We will be watching the action very closely as we finish next week and then head into another options expiration week. Analysis of max pain generally serves us well. If you're interested in learning more about max pain and how options expiration can affect the stocks you trade, then go to www.investedcentral.com/maxpain.html for more details about an upcoming LIVE presentation. Best of all, it's FREE!
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 at 04:05 PM in Tom Bowley | Permalink

hefeiddd

August 17, 2008THE DOLLAR GOES GREEN AND MAX PAIN REVISITEDBy Chip Anderson
Tom Bowley
The dollar has bottomed and is beginning to trend higher for the first time in several years. Dropping crude oil prices are pushing gas prices lower at the pump and the dollar is strengthening. That's a combo that should make most consumers feel wealthier in time. Europe's economic woes as well as weakness in other parts of the world is putting pressure on foreign currencies. With the Federal Reserve here in the U.S. on hold - at least for now - the dollar is strengthening on a relative basis to its foreign counterparts. What's good for the greenback is not-so-good for commodities. The commodity run appears to be over. I'd be a seller into strength. The technicals have quickly deteriorated to levels not seen in the last few years. The strength in the dollar will make it difficult for commodities to regain their earlier form. Take a look at Chart 1 below to see how the technicals on the dollar are beginning to change for the better.

For the first time in over two years, the dollar has moved above the 50 week SMA. While the dollar could encounter some short-term resistance near 78, the long-term resistance area will be in the 80.00-80.50 range. Should the dollar push through that resistance, I believe we'll challenge the 92.50 level possibly by the end of 2009 or early 2010. A stronger dollar will push all commodities lower, but will especially hit gold hard. Until conditions suggest otherwise, you should consider trading the trend at hand.
In the July 19th issue, I discussed the effect of max pain and how the market gravitated higher to lessen the impact of net in-the-money put options. The same thing just occurred for August options expiration, only in reverse. Financials and consumer discretionary stocks had led a sizeable market rally into the beginning of this week. I calculated on Monday evening that the XLF (ETF tracking financials) had $118 million in net in-the-money call option premium. I'm only talking about one ETF here, so you can imagine what the total value of net in-the-money calls were at Monday's close across all index, stock and ETF options. Tuesday's decline in the XLF erased $67 million of this net call premium and Wednesday's 61 cent drop finished off the rest. JP Morgan Chase (JPM) had one of its worst days ever on Tuesday, wiping out millions of in-the-money call premium. Stock prices tend to gravitate towards the area of max pain, which is the price point where in-the-money call premium equals in-the-money put premium. While this gravitational pull doesn't work with every stock or sector at every expiration date, I'd caution any trader from trading stocks during options expiration week without first checking the underlying open interest. A quick glimpse at the open interest and in-the-money call and put options could save your portfolio dearly.
If you're not familiar with the concept of max pain or are interested in seeing how it might help your trading, follow the link below to an audio/video presentation that was done on Tuesday for our members. The presentation was shortened to highlight the discussion of max pain as it pertained to several stocks - mostly commodity stocks. I think you'll find it interesting at the very least. Go to www.investedcentral.com/maxpain.html for more details.
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 at 04:05 PM in Tom Bowley | Permalink


August 02, 2008EARLY BULLISH SIGNS EMERGING?By Chip Anderson
Tom Bowley
Spotting tops and bottoms is perhaps the best reason for utilizing technical and sentiment indicators in your investing and trading arsenal. The first signs of a bottom forming can be subtle and I'm beginning to see a few. Consumer discretionary stocks, which have been relative laggards during the market weakness, are showing slight signs of relative strength and on a longer-term weekly chart have printed a long-term positive divergence. Take a look at Chart 1:

Given the steep increase in crude oil prices over the first half of 2008, it's surprising that consumer discretionary stocks have held up as well as they have on a relative basis. The Conference Board Consumer Confidence Index increased in July (reported July 29th as of July 22nd) for the first time since December. One month's increase doesn't make a trend, but it certainly bears watching. Consumer confidence is important not only because it reports the consumer's view of current conditions, but it also provides the consumer's view of future expectations. A further deterioration in crude oil prices would likely have a bullish effect on the consumer discretionary sector and by the looks of the crude oil chart below, further deterioration is becoming more likely.

If crude oil breaks that head & shoulders pattern to the downside, the measurement would be to the $98-$102 area. One of my favorite stocks in the consumer discretionary group from a long-term perspective is Starbucks (SBUX). At Invested Central, we trade stocks, we don't invest for the long-term. However, the technical picture of Starbucks (SBUX) is quite compelling for a longer-term investor. The name brand is obvious and on the heels of a horrible quarter, you can pick it up on the cheap. Take a look at the long-term weekly chart below:

Until next time...
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 at 04:05 PM in Tom Bowley | Permalink


July 19, 2008POOR SENTIMENT, MAX PAIN AND THE BOWLEY TRENDBy 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:

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:

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.






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July 06, 2008PANIC AND FEAR? NO SIGNS JUST YETBy 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.

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.

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.

We'll find out in time. In the meantime....
Happy trading!


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June 22, 2008FINANCIALS LENDING NO SUPPORTBy 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.

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.

I would remain cautious near-term.
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.






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June 08, 2008RESISTANCE HOLDING, BAD NEWS FOR BULLSBy 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:

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.

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:

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 www.investedcentral.com. Invested Central provides daily market guidance, intraday stock alerts, annotated stock setups, LIVE member chat sessions, and much, much more.






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May 17, 2008LOOKING A LITTLE TOPPYBy 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.

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.

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.

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!


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May 04, 2008SEMICONDUCTORS AND FINANCIALS HELPING TO LEAD TURNAROUNDBy 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.

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.

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.

We remain optimistic and bullish until technicals suggest otherwise. Ignore the CNBC noise and follow the money.
Happy trading!


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April 19, 2008THE GAME HAS CHANGEDBy 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.



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:



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.





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March 15, 2008OIL PRICES, TRANSPORTS AND THE NEXT BUBBLEBy 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:



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:



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!



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February 16, 2008THE LINE CHART ADVANTAGEBy 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:



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:



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!



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February 03, 2008THE MARKET HAS BOTTOMEDBy 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.


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.


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.


Happy Trading!




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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:


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:


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):


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!



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hefeiddd

January 06, 2008KEEP AN EYE ON BONDSBy 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.





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.



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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.





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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.





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October 20, 2007AUGUST VS. OCTOBER - OPPOSITE ENDS OF THE SPECTRUMBy 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.


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.



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September 22, 2007BEARS BURNED BY BERNANKEBy 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.



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.



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September 07, 2007PREPARE FOR A WEAKER DOLLARBy 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.


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.



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August 25, 2007EXTREME PESSIMISM MARKS BOTTOMBy 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.



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.




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July 21, 2007DON'T IGNORE HISTORYBy Chip Anderson
Tom Bowley
We discuss so many different technical scenarios that sometimes we lose sight of what history has taught us. It's time to pause for a bit after a very nice rally in the equity markets and see what history has to say. For purposes of this discussion, all numbers below relate to historical performance on the S&P 500.

At Invested Central, we focus a great deal on historical tendencies and we believe you should too. There is overwhelming evidence that suggests viewing a calendar from time to time can immensely improve your trading or investing results. Let me give you a few historical facts to ponder, many of which you may already be familiar with.

Since 1950, the S&P 500 has advanced more often during the month of December than any other month. The ratio of advancing months to declining months for each calendar month can be seen below:

January: 36 times higher, 21 times lower
February: 31-26
March: 37-20
April: 38-19
May: 32-25
June: 30-27
July: 31-26
August: 31-26
September: 24-32
October: 34-23
November: 39-18
December: 43-14

Perhaps the biggest surprises on this list are April's 3rd place finish behind December and November, and September's dismal showing.

Now let's look at annualized returns from each month:

January: 17.01%
February: -0.24%
March: 11.97%
April: 14.77%
May: 3.12%
June: 3.18%
July: 10.53%
August: 0.50%
September: -7.19%
October: 11.01%
November: 20.93%
December: 20.46%

There are no huge surprises as the November thru January time period are the three best consecutive months to invest while the July thru September time period are the three worst.

We also study the historical trends on the NASDAQ and Russell 2000 to identify tendencies and we've found similar results, although the May and June months are much stronger for both the NASDAQ and Russell 2000, while March and July tend to be much weaker.

If your tendency is to attempt to improve your results via leveraging strategies, consider using the above historical tendencies to time your strategies more effectively.



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July 07, 2007THE WEAK DOLLAR COULD STRENGTHEN YOUR PORTFOLIOBy Chip Anderson
Tom Bowley
The U.S. Dollar Index is approaching levels not seen since 1992. The reasons are fairly obvious. Global interest rates are on the rise and our own interest rates have been on hold for 8 straight meetings. As foreign interest rates rise, foreign currencies generally strengthen, weakening the US dollar on a relative basis. The Fed could act to raise our rates and strengthen the dollar, but we don't see that occurring - at least not at this time.

Refer to Chart 1 below to see how the recent changes in Fed policy have affected the U.S. Dollar Index. The green arrow reflects the beginning of 13 interest rate increases that spanned two and one half years. The red arrow reflects the beginning of 17 interest rate decreases that spanned two years. The black arrow marks the beginning of a period of status quo, where interest rates have not budged.



In 2002, the U.S. Dollar Index began tumbling, and notice what happened to the Gold and Silver Index as shown in Chart 2. A weaker dollar will result in higher gold and silver prices. If the dollar continues depreciating, be sure to consider upping your exposure to the XAU.



If opportunity knocks, be prepared.



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June 23, 2007FLIGHT TO SAFETY RATIOBy Chip Anderson
Tom Bowley
I discussed many months ago how the rotation from the tech-heavy NASDAQ to the safety of the Dow Jones evolves over time. As earnings disappoint and growth slows, money moves away from the high octane growth stocks to the more conservative components of the Dow. That's what we saw back from 1984 through 1991 and again from 2000 to 2002. But when our economy grows and earnings begin to expand, money flows in the opposite direction - away from the Dow and into the NASDAQ. I believe we remain in this latter environment. Our economy is expected to grow in the second half of 2007 and into 2008 and if inflation remains in check, and I believe it will, this environment sets up beautifully for the higher growth NASDAQ stocks.

In Chart 1, I have reposted a chart from last October's newsletter showing the relationship between the Dow Jones and the NASDAQ since 1980. This "Flight To Safety Ratio" (calculated by dividing the Dow Jones Industrial Average by the NASDAQ) moves higher as money searches for the "safe haven" and moves lower as the NASDAQ leads during higher growth periods. You can see the down channel that has developed since 2003. Over the next 2-3 years, I'm expecting a continued move lower in this Flight To Safety Ratio to a point somewhere in the 4.00-4.25 range, marking a long-term bottom.



Chart 2 below shows a clear view of how the money rotates when the market fears that future earnings growth is in jeopardy. Recall last May through July as oil and other commodity prices surged and fears raged that higher commodity prices would mean higher inflation. The high growth NASDAQ plummeted much faster than the Dow Jones and S&P 500, resulting in a very quick spike in the Flight To Safety Ratio (Point A). Those fears were never realized however and market participants quickly moved money back to the higher growth equities on the NASDAQ by the end of 2006 (Point B). Then just recently, the increasing yield on the 10 year treasury note heightened levels of fear about future economic growth and again the money flowed out of growth and toward the safer Dow components (Point C). I believe our economy will strengthen during the balance of 2007 and into 2008 and we'll see this ratio continuing down in the channel that was illustrat ed in Chart 1.



There remains a lot of pessimism in the market as evidenced by very high historical put call ratio readings and a spiking VIX (volatility index). These two factors historically promote continued bullishness and do not coincide with long-term tops. If equity prices continue higher and economic growth keys the rally, you have to favor the higher PE stocks found on the NASDAQ.



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June 09, 2007A GOLDEN OPPORTUNITYBy Chip Anderson
Tom Bowley
The market periodically finds reasons to selloff, even in bull markets. This past week it was all about interest rates. You could see it coming. Interest rates had been rising for the last month. The yield on the 10 year treasury bond increased from 4.61% on May 8th to a high of 5.18% on Friday, June 8th, before settling back at the close to 5.12%. Equity markets get skittish as interest rates rise, and generally for good reason. When rates rise, access to capital begins to dry up, capital expenditures drop and corporate America sees shrinking profits. Think about what's driven the market for the last year or more - private equity deals, merger mania, and corporate share buybacks. As access to capital becomes more difficult, we see less of what's been driving the market higher.

But is this rise in interest rates temporary or permanent? And what's causing it? The answers to those two questions will directly impact equity prices over the next many months and quite possibly 1-3 years. First, you have to realize that bonds trade the same as stocks and their prices move up and down, rarely do they move in just one direction. Keep in mind also that as bond prices rise, yields drop. Conversely, as bond prices drop, yields rise. That's what we've seen over the past thirty days, a deep selloff in bonds and yields on the rise.

Look at the long-term chart of the yield on the 10 year treasury bond. Because bonds trade like stocks, technical traders follow the same basic principles. Long-term trendlines matter. As you can see from Chart 1 below, the yield on the 10 year treasury bounced off of long-term trendline resistance on Friday.



The second chart that we'd like for you to look at is a short term candlestick chart of the yield over the past few months. After a lengthy downtrend in bonds and a corresponding uptrend in yields, we saw the "dreaded" black candle appear at the top of the uptrend - see Chart 2.



If you're looking at the price of the bond, you'll see a red hollow candle appear after a lengthy downtrend. Both are reversal signs. We believe there is a very strong chance yields topped on Friday and began moving lower.

Black candles appearing the way this one did suggests that the heavy selloff in bonds and exhaustive gap down on Friday (and corresponding spike in the yield) is signaling the bottom of ten year bond prices and the top of the yield. The fact that the yield reversal occurred right at long-term resistance gives us more confidence the top has been hit.

We continue to believe that inflation is not a problem in the U.S. When the Fed meets at the end of June, we expect to hear that inflation remains a concern, but that they expect it to moderate throughout the balance of 2007. That news will keep interest rates in check and propel equity prices higher. Of all the scenarios that include higher interest rates, the only one that is terribly troubling is the scenario that shows inflation rising. If interest rates do continue their climb to offset a strengthening economy, we remain steadfastly bullish equity markets. Inflation is the wild card and we are convinced it is a non-event in 2007 and 2008.

Use the recent weakness in the stock market to buy for the longer term. We tend to recognize opportunities after they're over. Take a look now before it's too late.



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May 19, 2007TAKE ME OUT TO THE BALLGAMEBy Chip Anderson
Tom Bowley
Folks, we're merely in the second or third inning of a nine inning game. Let there be no doubt, the bulls are in charge. And they will remain in charge. This current bull rally goes beyond interest rates, earnings, inflation, blah, blah, blah. It's not that those fundamentals aren't important, they are. But we are talking about supply and demand, Economics 101. We are seeing deal after deal after deal. We have been talking for months at Invested Central about the long-term effect of all of these buyouts and private equity deals. First of all, the fact that these deals are occurring at all should give you a clue about valuations - prices are CHEAP. Did you notice the premium Microsoft was willing to pay for aQuantive? How about 77%? We hear very little about initial public offerings (IPOs) and secondary public offerings. Instead, it's about buyouts, private equity deals, and corporate stock repurchase plans . That equals supply reduction. As supply dwindles, prices rise assuming demand is constant. The best news is that demand hasn't even begun to pick up yet. During the bull market run from 1995-1999, the NASDAQ rose more than 5% in a calendar month 22 different times. There were 22 different calendar months that produced gains of more than 5%. So, on average, the NASDAQ had 4 or 5 of these months each year. Interestingly enough that during the NASDAQ's advance since July 2006 there has not been one calendar month of 5% appreciation. Yet I heard last week talk of another "bubble". Let's get real! The psychology of investors is so tainted since the 2000-2003 NASDAQ crash that they cannot see the forest for the trees. I want to reprint a chart that was posted in a previous newsletter to give you the Big Picture view of what's transpiring in the stock market. I call it the "Axis of Normal Returns" (see chart below). Over short and intermediate terms, the market's pricing efficiency struggles, but over the long term generally gets it right. The Axis of Normal Returns provides a look at the Big Picture.



We anticipate a strengthening economy in the second half of 2007, an accommodating Fed - which we haven't had in several years - and, as a result, expanding multiples. The put call ratio, a contrarian indicator, continues to reflect bearishness or at best guarded optimism. Historically, that has not been a sign of a topping equity market. Rather, it provides the fuel for a further advance. As long as skeptics abound, the market has plenty of upside remaining.



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May 05, 2007SEMICONDUCTORS FINALLY MAKE THEIR BREAKBy Chip Anderson
Tom Bowley
We've been watching and following the semiconductors for the past many months, awaiting their attempt to join the stock market's rally. But it hadn't happened....until this past week. We have remained steadfastly bullish over the past couple years and became very bullish when we saw long-term positive divergences form on the MACD on the major indices last July. Lower lows were in place, but the MACD actually put in a higher reading on those lower lows. We could see that selling momentum was dying. In articles over the past several months, we've indicated that we believe the market could be ripe for an advance - the likes we haven't seen seen since 1999 and early 2000. However, we also indicated that we expected the Semiconductors to participate. We felt we needed to see participation from the semiconductors in order for the NASDAQ to lead the major indices higher. Let's take a look at two charts. First, let's look at the Semiconductor Index (SOX). We've seen repeated struggles at 492 until finally we got the breakout we were looking for. Not only did we see the breakout, but we've since retested that breakout area and by the end of last week were looking to breakout again. This is bullish action by the group and we're not looking for any significant resistance until the 530-540 area. If the semiconductors can take out that symmetrical triangle downtrend line shown below, there is solid potential for a very significant rally in this group.





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April 21, 2007EARTH DAY HIATUSBy Chip Anderson
Tom Bowley
Look for Tom's commentary next time.



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April 08, 2007USING THE PUT CALL RATIOBy Chip Anderson
Tom Bowley
The put call ratio ("PC") is quite simply the total number of put options divided by the total number of call options. These options include both individual equity options and index options. Every day you can monitor the relationship between put options and call options at www.cboe.com. Once in the site, click on "Data", then "Intra Day Volume". Every half hour, the information is updated. This article is not the appropriate forum to discuss options strategies and definitions, but in its most basic form, put option buyers are expecting the market to decline and call option buyers are expecting the market to advance. The PC gives you a quick, concise picture of the relationship between the put buyers (bears) and call buyers (bulls). The beauty of the PC is that it's a contrarian indicator. When the put call ratio spikes above 1.0, it indicates the market is becoming oversold short-term so expect a rally. When the PC drops below 0.6, the market is becoming overbought short-term so expect a decline. I like to use the 5 day and 21 day moving averages of the PC. Any time the 21 day moving average of the PC approaches 1.0, start looking for a bottom in the market. Historical PC data is available at CBOE beginning in 1995. Let's take a look at how this reading of investor sentiment could have been used to identify recent bottoms in the S&P 500 chart.



Notice that both bottoms formed when the PC was at extreme readings. The PC at the recent March lows was the lowest 21 day moving average reading since the data was compiled. That reading is indicative of a long-term bottom, not a long-term top. Major tops are formed when the market is euphoric. The recent extreme pessimism suggests that this bull market still has legs - strong legs. We remain very bullish on equities for the balance of 2007 and into 2008.



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March 04, 2007ENERGY - A BULLISH VIEWBy Chip Anderson
Tom Bowley
We have been in the bearish camp on energy and over the past several months and for now remain on the bearish side. But anytime you take a position on the bullish or bearish side, you need to realize patterns that could change your view. The price of oil broke a five year uptrend in 2006 that has us very cautious on the energy sector in 2007. There are circumstances and patterns that could develop to change our bearish view. Oil prices have been bouncing, from lows just under $50 per barrel to our recent highs back over $62 per barrel. Will the sudden uptrend continue or will the rally fade? No one knows the answer for sure, although there is a formidable bullish pattern that is potentially forming - the bullish inverse head and shoulder continuation pattern. Take a look at the following chart:


Off of a significant uptrend, we saw oil pull back in the fourth quarter of 2006 touching $57-$58 per barrel (inverse left shoulder). After a quick reaction bounce to $64 (first point of neckline) approaching the 50 day SMA, oil found a new low near $50 per barrel (inverse head). Now we're watching oil climb again, perhaps to test that $64 area (second point of neckline). Could we then witness one more pullback under $60 to form a potential inverse right shoulder before ultimately breaking out above $64? If that pattern develops, the breakout would measure to $78 or so, testing the highs from last summer. We realize we're getting a bit ahead of ourselves and we do not anticipate oil completing this bullish pattern. However, as a trader, you need to be able to recognize the possible bullish and bearish patterns that develop not only to maximize gains from opportunities, but more importantly, to minimize losses from mistakes. Let's watch the action unfold in the coming days and weeks and be prepared to react accordingly.



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February 14, 2007SEMICONDUCTORS FINALLY PROVIDING A LIFTBy Chip Anderson
Tom Bowley
We have been very bullish the equity market for months and we continue to be. But one wild card has been the semiconductors. In order to truly sustain a nice market rally, we felt the semiconductors would need to participate. Well, we've been waiting...and waiting...and waiting. Finally, a critical technical move was made this week. Semiconductors got the fundamental lift from Analog Devices (ADI) which said that January business conditions were improving. That was music to technology investors' ears. We've seen the fundamental news before, however. We wanted to see price action follow. On Thursday, price action followed in a big way. We had two technical issues to resolve on semiconductors. First, we needed to break a recent downtrend line spanning the last thirteen months. That issue was resolved on Thursday, as can be seen below (Chart 1):



There still remains a longer-term technical picture that must be resolved. Yes, the intermediate-term break of resistance was bullish this past week. But we will need a catalyst to break the symmetrical triangle that has developed over the last six years (Chart 2):



KLA Tencor (KLAC) added a little bullish semiconductor fuel Thursday after hours as they said they were "accelerating" their $750 million repurchase program and authorized another 10 million shares to be repurchased. That's a serious vote of confidence from the Board of Directors and shouldn't be ignored. However, we haven't seen the long-term symmetrical triangle break. Money speaks louder than words. While the break of the recent downtrend line was quite bullish, semiconductors still have much work to do.

We favor the group at this time and expect their contributions to be felt for weeks and months as the bull market continues to gain momentum.



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February 03, 2007TRANSPORTS LOOKING SOLIDBy Chip Anderson
Tom Bowley
Money generally rotates from one sector to another. Identifying the rotation early in the cycle can make a big difference in trading successfully. If you look at a long-term chart of the Dow Jones Transportation Index (below), you'll see that the group has been trending higher for several years. However, there have been periods when money has rotated out of the group as transports consolidated prior gains. In the past week, we have seen transportation issues rise to the front of the pack. This past week saw transports finish at an all-time high close. Volume was accelerating during this rise, indicative of accumulation. Outside of temporary pullbacks, expect continued strength in this group until proven otherwise.



Notice the inverse head and shoulders pattern that has formed over the past nine months or so. This represents a continuation pattern that upon breakout measures to 5900 in time. Continue to look for solid trading ideas in this group and you'll likely be rewarded during 2007.



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January 20, 2007BULLISH ON BIOTECHSBy Chip Anderson
Tom Bowley
Healthcare stocks have been performing quite nicely over the past few weeks. Looking at the Biotech Index, it appears more bullishness is on the way for this sub-sector. After a nasty 20% selloff from March through May, biotechs stabilized during the summer months before beginning an uptrend that netted over 160 index points in a three month span beginning in August. The continuation pattern that formed over the past two months is the cup and handle pattern. On the chart below, I've highlighted the cup formation. Just to the right of the cup, you'll see the sideways consolidation, or handle. As its name implies, a continuation pattern is one in which the prior trend resumes after a brief consolidation, or basing period, is completed.



Watch for a breakout above the handle that is forming. Though the biotechs appear poised for yet another move higher, keep in mind this group carries with it a tremendous amount of risk. You should consult your financial advisor before considering a position in this volatile sector.



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January 05, 2007AIRLINES FLYING HIGHBy Chip Anderson
Tom Bowley
Don't look now, but the airlines have found their wings. After drifting lower for the better part of 7-8 years, something strange has happened. Could it be? Yes, airlines are breaking out! I know it sounds impossible, but airlines for the first time in nearly a decade have become an attractive investment. Take a look at Chart 1 and you'll see that the multiple tops just above 56 were taken out in mid-November. Since that time, we've seen a nice retest of the breakout level and a reset of the momentum oscillators. The MACD came all the way back down to touch its zero line, or centerline. RSI and Stochastics, both overbought after the breakout, reset into neutral territory during the retracement period.



The sector has worked through mountainous debt and excess capacity and now actually appears to be in a position to raise prices in 2007. Combine that with potentially lower oil prices in 2007 and you can see why smart money seems to be rotating into the group. In Chart 2, check out the breakdown in crude oil. First, we saw the long-term trendline break late in the third quarter, coincidentally just before airlines broke out. Second, we've seen a head and shoulder top form on the crude oil chart with the neckline failing to hold support this week as crude oil saw its largest two day drop in more than two years.



For the first time since 1998, airlines may have earned a trip into your portfolio. Happy trading!



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December 09, 2006ARE COMMODITIES BOUNCING BACK, OR JUST BOUNCING?By Chip Anderson
Tom Bowley
We've seen commodity prices skyrocket over the past several years and equities that have exposure to commodities have gone along for the ride. Should we be concerned now that those commodities have experienced weakness over the past couple months? Or should we instead be focused on the ensuing rally over the past few weeks? That is a very good question. Commodity prices, in our opinion, are in the process of topping. In May 2006, while the CRB Index was moving to yet another high at 365, a long-term negative divergence on the MACD formed (Chart 1). That led to the subsequent selloff and loss of support at 330. We are now looking at short-term resistance near that 330 level and we're fast approaching.



That's a glimpse at the last eighteen months of activity. A longer term ten year view (Chart 2) paints a more probable topping picture. There was a clear break of five year trendline support during the summer months and a subsequent low that appears to be the right side of the neckline of a long-term head and shoulders top. We are potentially forming the right shoulder whose top could be our current level, or possibly coincide with the aforementioned short-term resistance at 330.



Either way given the chart pattern, it would seem prudent to at least recognize the red flag that is present and protect your portfolio accordingly.



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November 18, 2006WILL THE NASDAQ RALLY FIZZLE?By Chip Anderson
Tom Bowley
Not very likely. We've seen a very strong earnings season. Economic report after economic report suggests the Fed is done with its interest rate hike campaign. There are too many non-believers in the market's advance, just take a look at the short-sellers. Lots of cash sits on the sidelines - on corporate balance sheets and in money markets. Applied Materials reported earnings this week and indicated they had reduced the outstanding number of shares in their float by 10% due to an aggressive share buyback plan. We are seeing increasing interest among private investors in taking public companies private. These are clear signs that equity valuations are cheap. As interest rates decrease, and we've witnessed this over the past few months on the ten year treasury bond yield, earnings become more valuable and multiples naturally expand. But this rally has added fuel. It's the supply and demand relationship. Applied M aterials is just one example of many companies who are aggressively buying back their own shares, thus reducing supply. Notice the attention recent IPO's have received. There is a thirst for equities. Short-sellers have all but guaranted there will be demand to fuel this rally. A few weeks back, I posted an article describing the "axis of normal returns", then showing visually where the NASDAQ might be headed in the next couple years. I was hugely bullish then and I remain so now. Yes, the NASDAQ has advanced over 20% off its recent bottom, but history suggests there could be much more to this current rally. Look at the chart below. I deliberately ignored the 1999-2000 melt up and focused on other time periods where we've seen an uptrending NASDAQ. Notice many of the other "straight up" moves have jumped by considerable percentages. The NASDAQ's current move pales in comparison.





Posted at 05:05 PM in Tom Bowley | Permalink


November 04, 2006UNDERSTANDING THE MACD - NEGATIVE DIVERGENCESBy Chip Anderson
Tom Bowley
On the technical side, we believe the combination of price and volume is paramount to successfully trading the stock market. A strong second place finish goes to the Moving Average Convergence Divergence, or the "MACD". The standard settings on the MACD are 12, 26, 9. On daily charts, the MACD is the difference between the 12 day exponential moving average (12 day EMA) and the 26 day exponential moving average (26 day EMA) and this difference is plotted on StockCharts as the "thick black line". The 9 refers to the 9 day moving average of the MACD and is the "thin blue line". So what does the MACD do? Well, it is a momentum indicator. When a stock or index is rising, the 12 day EMA will be higher than the 26 day EMA and the MACD will be positive and above the zero line, or centerline. When a stock or index is falling, the 12 day EMA will be lower than the 26 day EMA and the MACD will be negative and below the zero line, or centerline. The beauty of the MACD is that as prices put in higher highs, the MACD will sometimes put in a lower reading. The significance here is that on the surface momentum appears to be strong if looking only at price action. Underneath the surface, however, the MACD begins to signal a very different message. The difference between the 12 day and 26 day EMA's is actually beginning to shrink, suggesting slowing momentum. These "negative divergences" can be a precursor to lower prices, and in some instances even predict a long-term top. Let's take a look at two examples. First in Chart 1, you'll see the Semiconductor Index which in mid-October experienced a rally that carried it beyond September highs. But take a look at the MACD reading on that higher October high. The MACD reading was actually lower, indicating that the momentum was waning. Astute technicians would have taken notice and lightened up on the sector or simply looked for opportunities elsewhere. We have seen a similar pattern unfold with retailers over the past week or two. Notice in Chart 2 below that the Dow Jones US Apparel Retailers Index continued to trade higher throughout October, but the MACD mysteriously lost its momentum. We're just beginning to feel the effects of that negative divergence now.



The primary purpose of technical analysis is to gauge supply and demand. Use the MACD and its signals to better manage your portfolio and trading success



Posted at 05:06 PM in Tom Bowley | Permalink


October 21, 2006FLIGHT TO SAFETYBy Chip Anderson
Tom Bowley
Recall in my last article the "axis of normal returns" showing the potential move of the NASDAQ over the next 2-3 years to return to its "normal line". This time I'd like to approach the NASDAQ's potential move from another angle - studying the relationship that has existed between the Dow Jones Industrial Average and the NASDAQ over the past 26 years. We all hear the phrase "flight to safety", but look at the chart below to get a visual picture of what happens when the more "aggressive" NASDAQ leads the market versus what happens when there is a "flight to safety" to the Dow. Point A on the chart in 1983 shows that the Dow Jones/NASDAQ ratio (hereinafter referred to as the Flight To Safety Ratio, or FTS Ratio) dropped to a low of 3.7, below the "normal zone" where the FTS Ratio has generally been situated during the majority of the time frame reviewed. Once the bear market of 1984 hit, the 7 year flight to safety culminated in 1991 with the FTS Ratio peaking at 7.5 (Point B), meaning that the Dow Jones traded at 7.5 times greater than the NASDAQ in terms of index points. After the 1991 peak, the NASDAQ enjoyed a 9 year period of outperformance over the Dow that ended in March 2000, with the FTS Ratio dropping to an all-time low of less than 2.0 (Point C). When the bubble burst, there was a rush out of equities, but the bleeding was far deeper on the NASDAQ as the FTS Ratio cleared the upper end of the "normal zone" once again, peaking at 7.0 (Point D) in 2002.



So where does the FTS Ratio go from here? Well, if it follows recent history, we'll see the next break out of the "normal zone" to the downside over the next couple years, perhaps to 3.50-4.00. That could coincide with a NASDAQ 4000-4500, right on the "axis of normal returns". Yes, I'm very bullish the NASDAQ.



Posted at 04:06 PM in Tom Bowley | Permalink


October 07, 2006IS IT TOO LATE TO CATCH THE NASDAQ TRAIN?By Chip Anderson
Tom Bowley
After a decent run up in stock prices, one of the questions always heard is "is it too late to buy?" Well, there's never a guaranteed right answer and a lot of analysts would say the bull market is long in the teeth and has run its course. I am not in that camp - far from it. The stock market has a history of volatility where it becomes almost euphoric near long-term market tops and utterly depressed at bottoms. Market prices move higher over time because earnings, over time, grow. But we also know that earnings can swing wildly in both directions, especially on the technology-heavy NASDAQ. Earnings multiples can expand quickly in rising markets and compress just as quickly in descending markets. So how can you truly value a market or determine whether a market is overvalued or undervalued? Let's start with the realization that the stock market is inefficient over short periods of time, but very efficient over longer periods of t ime. In the end, the market generally gets it right.

I refer to the chart below as the "axis of normal returns." It's a chart that dates back to 1980 on the NASDAQ and attempts to find the "middle of the road" in terms of market valuation, where approximately half the time the market is overvalued and the other half undervalued. The theory here is that the market goes too far in both directions and it takes time to steer it back on course. It's simple to look back and say the NASDAQ was incredibly overvalued in 2000. That doesn't matter any more though. Those days are over. The current question is, based on history, are we overvalued or undervalued NOW? Based on the chart, I'd say we're undervalued, perhaps significantly so. We've had swings above and below the "axis of normal returns", but we've always gravitated back to the normal line. I see no reason to think any different this time.

Many market pundits would suggest this bull market has run its course. I argue that what we've seen since 2002 is just the beginning of a move that takes us back to that "axis of normal returns." Time will tell who's right.






Posted at 04:06 PM in Tom Bowley | Permalink

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March 14, 2009Berkshire's "Flight to Safety" Breakouts (BRK/B) By Chip Anderson
Historical

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Continuing to look for "leading" technical signals that pointed to the market's recent crash.  It's always interesting to see how the country's "best" investor did.  Warren Buffet's Berkshire Hathaway had a couple of interesting jumps in its stock price during the period in question.  Comparing the percentage performance of BRK/B to $SPX, we can see two big jumps in 2007 (chart above) and one jump in 2008 (chart below).  Of course, not all jumps in BRK/B are signs of an impending crash - but these charts show that they shouldn't be ignored either.

Click here for a live version of this chart.

Posted by Chip Anderson at 11:24 AM in Historical | Permalink | Comments (0)


March 12, 2009Gold at 700 was the Beginning of the End By Chip Anderson
Historical

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The S&P 500 Index (yellow line) hit its most recent high in early October of 2007 (red arrow).  Since then it's been all downhill.  Were there any clear warning signs before the plunge began?

It's interesting to compare $SPX to $GOLD (the red line).  After creeping upwards consistently (on a log scale chart) since early 2001, gold spiked up to 715 in mid-2006 but quickly retreated back to its normal uptrend line.  However, gold's rate-of-increase increased as soon as it crossed 700 the second time in late August (blue vertical line).  $SPX began its fall soon afterwards.

Last November $GOLD retreated back to 705 before rallying again in the face to more bad economic news.  This suggests that the 700 level is important for both stocks and gold.  $GOLD probably needs to move below 700 in order to $SPX to begin a sustained recovery.

Posted by Chip Anderson at 8:55 PM in Historical | Permalink | Comments (5)


March 11, 2009S&P Bullish Percent Chart Turning Upwards ($BPSPX) By Chip Anderson
P&F

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Bullish Percent charts track the percentage of stocks in a specified group that have a P&F "Buy Signal" on their charts.  While the large-scale Bullish Percent indexes - the NYSE's ($BPNYA) and the Nasdaq's ($BPCOMPQ) - are still in a downward column of O's, the S&P 500's ($BPSPX) reversed today(!) and is heading higher.  Will the others follow the S&P 500's lead?

Posted by Chip Anderson at 9:35 PM in P&F | Permalink | Comments (0)


March 09, 2009Large Caps, Mid Caps or Small Caps? By Chip Anderson
Performance

  
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Long term answer: Mid caps.  Next question?

Posted by Chip Anderson at 4:17 PM in Performance | Permalink | Comments (2)


March 07, 2009One of These Charts is Not Like the Others (Dow Stocks) By Chip Anderson
Moving Averages

Click here for a live version of these charts.

OK - I apologize for the size of the image above, but it's worth the extra time needed to download I promise!

These are 6-month candlestick charts of the 30 stocks that make up the Dow Jones Industrial Average.  As the old "Sesame Street" song goes, one of these things is not like the others.  Can you spot it?

All of these charts look... well... terrible.  But if you look closely, you'll see that one has its moving average lines reversed(!).  Instead of the red 50-day MA on top (a bearish signal), one of these stocks has the blue 20-day MA on top.  Can't spot it yet?  OK, one more hint - look at the direction of the red 50-day MA lines on all these charts - on every chart except one, the red line is headed down.

Relatively speaking, IBM has been doing much better than its Dow brothers over the past 4 months and it shows in the position of its 20-day and 50-day MAs.  (MRK was doing pretty good also until very recently.)  Doing group chart analysis like this can help you spot "outliers" like IBM that may deserve closer scrutiny.

(BTW, only one Dow stock has a rising 20-day MA right now and it's not IBM.  Can you spot it?)

Posted by Chip Anderson at 1:43 PM in Moving Averages | Permalink | Comments (2)


March 04, 2009The Only Nasdaq Stock in a New Uptrend Right Now (ACIW) By Chip Anderson

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Only one Nasdaq stock began a new uptrend today.  Well... began a new uptrend as defined by the ADX indicator.  ACI Worldwide Inc recently had a bullish 50/200 Moving average crossover (corresponding to a nice bump up on good volume) and now its ADX line has moved back above 20 for the first time this year.  The ADX line - the thick black one - indicates if a stock is "trading" (i.e., moving sideways in a range) or "trending" (moving up or down fairly consistantly).  The ADX line for ACIW is now indicating that the stock may be breaking out of its recent sideways ways and beginning to move higher.  It's one of the few stocks with these kind of positive technical signals right now.


Posted by Chip Anderson at 4:11 PM | Permalink | Comments (2)


March 03, 2009Vroom! Autozone Jumps the Gap (AZO) By Chip Anderson
Chart Pattern

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After gapping down during December and January, AutoZone gapped up significantly in mid February and zoomed upwards today hitting a high of 157 at one point.  So why is the Chaikin Money Flow not zooming upwards as well?  The CMF gave a big "sell" signal today because the stock closed well below the mid-point of today's candle and thus the CMF considers most of today's huge volume spike to be "selling" volume.  Will this become another case of "all gaps must be filled?"


Posted by Chip Anderson at 8:02 PM in Chart Pattern | Permalink | Comments (2)


February 28, 2009What Did the VIX Know and When Did It Know It? By Chip Anderson
Market Indicators

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The VIX is the Volatility Index published by the Chicago Board Options Exchange (CBOE).  It measures the "implied volatility" of a hypothetical SPX option created from a weighted average of several actual SPX options.  (For all the gory details, check out our ChartSchool article on the VIX.)  Typically, the VIX is interpreted as an "inverse" market indicator - i.e., down is bullish and up is bearish.  In the chart above, I've plotted the reciprocal of the VIX with the ratio symbol "$ONE:$VIX" (Note: $ONE is always equal to, you guessed it, one.)  That allows me to then compare it to a chart of the actual market.  Looking back at the past couple of years, you can see that the VIX did an uncanny job of indicating "trouble ahead" for stocks.  Just like when it started moving up before the market did in 2002, the VIX started moving down in 2007 and the market followed dramatically in 2008.  Definitely, don't ignore this chart!


Posted by Chip Anderson at 3:55 PM in Market Indicators | Permalink | Comments (3)


February 25, 2009The Battle for Apple (AAPL) By Chip Anderson

file:///Users/chipa/Desktop/ditc20090225.png
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Apple has been bouncing around $90 since October.  Is that support going to hold?  One way to gauge the strength of a support level is to use the "Vol by Price" overlay - the horizontal histogram on the left side of this chart.  It adds up all the volume for any days on the chart that close within the bars price range.  The bars in two colors - one for volume when the stock closed up and the other for when the stock closed down.  In the case of AAPL, the long horizontal bar shows that lots of volume has occurred in the $90 - $100 range and that is the most important support level on the chart right now.  It also shows that the volume on "up" days (gray) is almost equal to the volume on "down" days (light blue).  The Vol by Price overlay clearly shows that 90 is the battleground for AAPL right now.  With AAPL oscillating around $90 (possibly in a triangle pattern), the battle is getting very heated and is worth watching closely in the coming days.

Posted by Chip Anderson at 5:09 PM | Permalink | Comments (0)


February 23, 2009Up + Down = Down (CQP) By Chip Anderson
Momentum

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The MACD Histogram shows the change in momentum of the MACD Line.  The MACD Line - in turn - shows the change of momentum in the underlying stock.  In the case of CQP, the MACD Line has been moving up pretty steadily since early October (blue trendline).  Recently however the MACD Histogram has started moving lower and is now diverging significantly from the MACD Line.  This signals trouble for the stock - something that may already be appearing on the chart.


Posted by Chip Anderson at 4:50 PM in Momentum | Permalink | Comments (0)