During the DecisionPoint Report webinars I've added a "chart spotlight". For those of you who were members of the original DecisionPoint website, you probably remember Carl's "Chart Spotlight" on Fridays. Viewers and readers offer up some symbol suggestions via Twitter (@_DecisionPoint) and I determine, based on the chart, whether there is useful information to glean using our trusty Price Momentum Oscillator (PMO) and Trend Models. Last Wednesday a viewer suggested I look at Exxon-Mobil (XOM). It was a great suggestion! Lots of information to be gained looking at the daily and weekly charts for XOM.
The rise in the major indexes since the election has been stunning. The S&P alone is up over 15% in just over 3 months. That would be a terrific year by any measure. The Dow was up 18% since the election at its all time high on Wednesday, And the NASDAQ was up 17% during the same period when it hit its all time high on Wednesday.
In looking at the Dow I am seeing things that I haven't seen since 1987, 2000 and 2007. In other words, overbought technicals that come along rarely. Just look at the chart below and you will see that at its high last week the Dow had stochastics of close to 100 and a RSI of near 90. And it's the second time in just a few months the Dow got so overbought and lasted for a lot of days in a row, the most recent 13 straight days higher, something that has not happened since 1987 when the market experienced a major correction.
We all know that the market can remain overbought for an extended period of time; we're witnessing that right now. But being so extended makes it very tricky to get aggressive to the long side when the market could correct significantly with traders' holding the bag.
This is why we have gotten very defensive at EarningsBeats, holding off issuing any new trading alerts for the past few weeks now. There's no way I would short this power house of a market so the next best thing is moving to cash - which is a position - which is exactly what we have done. This can result in some frustrating moments like when the Dow surges 300 points in one day. But that was followed by a 100+ point down day as traders started to smell a near term top.
I've decided to conduct a Webinar this Tuesday, March 7 at 4:30 PM eastern. I will be joined by StockCharts.com Senior Technical Analyst Tom Bowley and we will be talking about stocks that recently beat earnings expectations and could be strong trading candidates, especially on any pullback, as well as the overall market in general; a snapshot review. In fact, we will be adding over 100 stocks to our "Candidate Tracker" of stocks that beat earnings expectations that will be made available to our members and will share some of those with webinar participants. If you want to join us for this Free Webinar just click here to register. We expect a packed house so try to sign up soon.
It is very tempting to jump all in when the market is rising and showing such powerful momentum. But when the market gets too overbought you've got to be patient, not worrying about missing every penny. Having cash ready to deploy on a pullback makes a lot of sense and if done right can be quite profitable.
At your service,
The $SPX has had a nice ladder effect going on recently. Much like the origins of technical analysis found in the early days, the market tends to move forward in ranges. These areas have been quite obvious recently. The range been support levels appears to be about 75 points on the $SPX.
Here is a copy of the chart I showed on The Commodities Countdown Webinar 2017-02-16.
The market has been experiencing an almost vertical rally over the past few weeks, but it has cooled over the past two days. The steep rising trend pushed our short-term Swenlin Trading Oscillators (STOs) into highly overbought territory. With Thursday and Friday's cooling off period, they have peaked. This is a very bearish configuration.
About a month ago, I wrote a ChartWatchers article detailing the bullish historical tendencies of retailers during the months of February, March and April. In particular, apparel retailers ($DJUSRA) have shown tremendous bullishness during the months of February, March and April. In addition, the DJUSRA was approaching a key price support level. As it turns out, that price support held and stocks in this group are beginning to trend higher as they typically do this time of year. First, let's check out the updated chart:
In case you haven't noticed, the Health Care SPDR (XLV) has taken a bullish turn. Chart 1 shows the XLV breaking out of a bullish "ascending triangle" that I described in my February 4 message. At the same time, the XLV/SPX ratio (top of chart) appears to be bottoming. And while biotech and pharmaceutical stocks have improved, healthcare leadership is still coming from other places. That earlier message showed three healthcare ETFs that are leading the healthcare sector higher. Two of those three have since hit new records.
The two parts of the healthcare sector that get the most attention are biotechs and pharmaceuticals. Both groups, however, have been the weakest part of that sector. But they are starting to show some improvement. Chart 2 shows the VanEck Vectors Pharmaceutical ETF (PPH) rising to the highest level in three months. It's also nearing a test of its 200-day average (red arrrow). The relatively small size of of its base, however, doesn't inspire a lot of confidence. Chart 3 shows the Nasdaq Biotechnology iShares (IBB) recently touching a four-month high to improve its short-term trend. It still needs to clear its September peak around 300, however, to turn its major trend up. Both groups are especially vulnerable to problems related to the pricing of drugs, which raises their risk level. For those looking to invest in this sector, the three top ETFs shown above offer the strongest choices. Or an investor can just buy the entire sector via the Healthcare SPDR (XLV). With so much of the market looking over-extended, healthcare may be one of the few sectors that still offers real value.
I made my case to EarningsBeats members this past Wednesday just before we started to see a bit of selling. Here are the highlights:
1-The VIX is up by almost 9% today as it tests its 50 day moving average from the downside even though the market is higher. This is troubling to me as I am seeing fear picking up in spite of today's buying.
2-All of the major indexes are extremely overbought. The NASDAQ has stochastics close to 100 and a RSI nearing 80. The Dow and S&P are close to those numbers. All represent sell signals.
3-The equity only put/call ratio is at its lowest level since November 15 of 2016. In other words, strong betting on the long side with a disproportionate number of calls to puts on options that expire on Friday. I see this as a contrarian signal.
4-The prime earnings season is basically over. Traders are going to be looking for other reasons to be long.
5-The S&P has been up six trading session in a row. This has happened only one other time over the past year.
6-There remain too many uncertainties that could derail the current rally at any moment. What might they be? Good question.
After I had mounted my case for a pullback there was some selling in the major indexes though the NASDAQ remained stubbornly strong. However I made it clear to members that it doesn't pay to chase stocks when the market is so stretched; best to wait for better opportunities.
For example, take a look at the chart for Apple which took off like a rocket after it posted better than expected earnings:
You can see that the stock rose 12.5% in just two weeks, a good year by some measures. You can also see that stochastics climbed up close to 100 and with a RSI of 90; the stock is incredibly overbought. But traders like to flock to stocks with strong earnings; it just makes sense to be patient and buy on your terms, not near the top. To me a much better entry point would be on any pullback to the 20 day moving average, now near $129, where it should get decent support.
This is what we do at EarningsBeats; scan for stocks that beat earnings and have solid charts. Some of these turn into trade alerts where we provide members with entry points, price target and stop loss. These trade alerts come from our exclusive "Candidate Tracker" and if you would like to see a sample just click here.
As a trader you need to continuously look for entry points on stocks that will provide you with high reward to risk potential. Chasing stocks that are stretched in an overbought market can eat away at your capital very quickly.
At your service,
Just like potato salad in the fridge, support and resistance levels for the S&P 500 have a shelf life and become stale over time. The value of the S&P 500 is based on the price of its individual component stocks. Support and resistance levels for the index loose their importance over time because component stocks and weightings change on a regular basis. The further the look back period, the bigger the transformation in this key index. The S&P 500 in 2017 is not the same as the S&P 500 in 2010, and certainly not the same as the S&P 500 in 1999. Chartists should keep this in mind when considering support and resistance levels for the S&P 500, as well as for other indexes and ETFs based on a basket of stocks.
Exercising patience and discipline to enter trades at appropriate reward vs. risk levels is obviously very important to any trader's success, but planning trades before they set up is just as important. Let me give you a few examples. First, let's take a look at Cullen Frost Bankers (CFR):
What started off as a soft week for stocks ended on a strong note. Friday's gain was enough to keep stock indexes basically flat for the entire week. But there was some improvement on the charts. The daily bars in Chart 1 show the Dow Industrials jumping 186 points (0.94%) on Friday. That was more than enough to keep it well above its 50-day average and chart support along its January low. Also encouraging was its 14-day RSI line (above chart) bouncing off the 50 level for the second time since mid-January. That's usually a sign of market that's consolidating rather than correcting. The only soft note on Friday was volume, which didn't match the price gains. The S&P 500 also saw improvement. Chart 2 shows the SPX jumping 16 points (0.73%) on Friday. If you look closely at the circled part of the graph, you can see a bullish short-term pattern called an "island reversal". That pattern is formed when a "gap down" (red arrow) is followed within a few days by a "gap up" (green arrow). That pattern usually signals higher prices. My Thursday message expressed concern that the two MACD lines for the SPX had yet to turn positive. The box on top of Chart 2, however, show the two MACD lines converging for the second time in two weeks. It wouldn't take much to turn them positive. Also encouraging was the fact that financials led Friday's rally. So did small caps and transports.