The QQQ ETF Has Fired Off A Warning Shot

The QQQ is the tracking ETF for the Nasdaq 100. It has lots of messages this week. Other indicators also exist for the Nasdaq 100. The $NDXA50R is a sweet indicator. Its even better paired with its mate the $NDXA200R. When the are used together they produce the gold/black plot pane below in Chart 1. The gold area represents the number of stocks above the 50 DMA in %. The Black represents the number of stocks above the 200 DMA on the left scale in %. So the dark gold is where the black is shadowing behind the gold histograms. Here is how I like to use it.

When the Gold is nice and high you are in a bull market. What is harder to see here, is the scales adjust for the 200 DMA and the bottom of the range for black is 55.We can see recently that the % of Nasdaq 100 stocks above the 200 DMA dipped to about 58 using the left scale. That is the first time it has been weak in a while. I will cover off more about how that helps us on the next chart. But first, I left the $NDXA50R:$NDXA200R ratio shown farther down in brown on this chart. When it reaches extreme lows, it can be a timely buy signal. You can see it would have helped in June and February as well. 


Two other things to notice on Chart 1. The acceleration of volume recently and the very low MACD. The volume is turning up the average for over 3 months. Low MACD's are usually indicative of a trend change, especially when the symbol has had a high MACD for months.

Here on Chart 2 is a long term weekly view of the $NDXA50R and the $NDXA200R.


Continue reading "The QQQ ETF Has Fired Off A Warning Shot" »

A Key Breadth Indicator Holds Strong During April Dip

The AD Volume Line held strong during the April pullback and formed a small bullish divergence over the last few weeks. The AD Volume Line is a cumulative measure of AD Volume Percent, which is advancing volume less declining volume divided by total volume. In this example, we are looking at the S&P 1500 AD Volume Line ($SUPUDP). I like to use the AD Volume Line instead of total volume because it represents net buying pressure. Advancing volume represents buying pressure and declining volume represents selling pressure. AD Volume Percent, therefore, is net buying pressure. The AD Volume Line rises when buying pressure is stronger and falls when selling pressure is stronger.

Click this image for a live chart

The chart above shows the AD Volume Line moving lower the first two weeks of April and holding above the March low. Meanwhile, notice that the S&P 1500 did not hold its March low. The higher low in the AD Volume Line amounts to a bullish divergence and indicates that net buying pressure remains strong. The AD Volume Line surged towards its early April high last week and remains in a clear uptrend. I view this as positive for the broader market, especially large-cap stocks because large-caps dominate the most active lists on the NYSE and Nasdaq.

Good weekend and good trading!
Arthur Hill CMT

Home, Home on the "Ranger" - StockCharts' New Interactive Zoom Control

Hello Fellow ChartWatchers!

After a couple of big down days, the market had 3 nice up days in the middle of the week to retest the 16450 level on the Dow before closing mixed on Thursday just before the Good Friday holiday.  After my article, you can see what John, Greg and the rest of our commentators think of these developments.  (Arthur Hill is on vacation this week.)  But before that, I need to tell you about two very important happenings here at StockCharts:

Our 15-Year Anniversary Special is Underway!

Yep, you read that right.  We are officially 15-year old now!  Seems like only yesterday we started this crazy journey.  Anyway, we're having a bunch of big specials to celebrate.  Click here for all the details. Do NOT delay however - this special only lasts 15 days...

The "Ranger" Brings More Interactivity to SharpCharts

I'm thrilled to announce that we've just added a new, very interactive, control to our SharpCharts charting tool that we are informally calling the "Ranger."  It allows you to quickly and easily set the start and end dates for your chart just by clicking and dragging your mouse!

To enable the Ranger control, create a SharpCharts and then find the "Range" dropdown located below the chart.  Change the "Range" dropdown so that it says "Select Start/End."  At this point, you should see a "Start" box, an "End" box and a new slider control.  That slider control is the "Ranger."  Here's a snapshot of what that area looks like with the Ranger on the right side:


So the Ranger control consists of three elements:

  1. The Date Scale - A changable set of months/years that make up the middle of the control.  This shows you the range of dates that it is possible to use for your chart.  If you use all of the dates currently shown on the scale, additional time will appear automatically.
  2. The Slider - The wider box in the middle of the date scale is a slider that represents the current date range for your chart.  The left edge of the slider corresponds to the left edge of your chart and the right edge corresponds to the right edge of your chart.  Just like with our PerfChart tool, you can click and drag on the left or right edge of the slider to change its size or you can click and drag the middle to move the slider through time.  As soon as you stop dragging, the chart will refresh with your new start and end dates!
  3. The Arrows - Clicking on either arrow will move the slider forward or backward by 1 time period.  You can also do that by pressing the left or right arrow key on your keyboard. (You may need to click on the Ranger one time with your mouse before the arrow keys will work.)

Ranger is one of those things that is harder to explain than it is to use.  Take a second and try it out for yourself.  Click here and try moving the slider around some.  You should pretty quickly get the hang of it.

Notice that as you move the slider with your mouse, the "Start" and "End" dates are instantly updated.  When you release the slider, the chart then follows suit.

To expand the range of the slider - and thus to create a longer-term chart - drag the left edge of the slider all the way to the left edge of the date scale.  As soon as you get close to the left edge, more dates will appear on the date scale.  When you release your mouse button, Ranger will update its scale to give you even more dates to choose from.  (Note: Because free users only get 3-years of chart data, the Ranger won't expand very much unless you are logged in as a member.)

One last thing - while dragging the slider around with your mouse is lots of fun, personally I think the most exciting thing about the Ranger is the way the arrow buttons/keys work - especially on a daily chart.  This allows you to move through a chart day-by-day and see how the patterns and indicator values develop over time.  That's huge.  Try it for yourself and see.

Here are a couple of additional notes about using the Ranger that you need to be aware of:

  • It cannot work in conjunction with the "Inspect" feature for technical reasons.  If you start to use Ranger, "Inspect" will automatically be disabled.  Just turn it back on when you are done setting the chart's range.
  • Intraday time periods can only be set in daily increments.  In other words, you cannot have a chart start or end in the middle of a day.
  • You can still type dates inside the "Start" and "End" boxes just like you always have.  Use of the "Ranger" slider is optional.
  • You can still use the calendar controls to set "Start" and "End" dates if you prefer those instead.
  • Once you have set Start and End dates that you like for your chart, remember to click the "Update" button to "Finalize" those values - especially if you are going to save the chart into a ChartList.

So we hope you enjoy this new control and find it useful.  Please feel free to send us feedback on it if you have some time.

- Chip

Sector Rotation Picture Quickly Changes to Defensive Outlook

Hello Fellow ChartWatchers!

If you are looking for lots of near-term optimism, I'm afraid the rest of this newsletter will be very disappointing.  There are numerous technical reasons to think the market is overdue for a pull-back.  And here they are...

Sector Rotation Points to Defensive Outlook

I've written on numerous occasions in the past about how anyone can quickly and easily use our Interactive PerfChart tool to study sector rotation effects.  Rarely however has the picture changed so quickly from a clearly "offensive" (bullish) situation to a clearly "defensive" (bearish) picture.  Check it out.  Here's a picture of the situation at the end of 2013 (only 3 months ago!).  This is a very bullish rotation picture:


To create this picture yourself, follow these steps:

  1. Visit our homepage, then click on the "S&P Sector PerfChart" link under all the ticker symbols.
  2. Click on the little "Histogram" button in the lower left corner of the chart.
  3. Right-click on the middle of the date-range slider (located at the bottom of the chart) and select "One Month" from the menu that appears.
  4. Press and hold down the left arrow key on your keyboard until the start date says "26 November 2013"
  5. Right-click in the middle of the chart and select "Show Cycle Line" to add the yellow line
  6. Finally, click and drag the yellow line until most of the bars are "underneath" it like I have on the chart above.

Looking at that chart, see how the bars on the left side (the bullish "offensive" sectors) are all outperforming the market while the bars on the other side are all underperfoming it?  That strongly suggests that the market felt things were picking up and looking good for the future.

(And, to be honest, the rotation picture had been similarly positive for several months prior to December as well.  Move the slider to the left to see for yourself.)

However, if you want to see the market change its mind about things in a short period of time, just press and hold down the right arrow on your keyboard.  By the time the slider gets to now, things are almost 180 degrees reversed:


OK, granted, the Health Care sector is still negative, but can you think of anything that might be going on right now to cause that? ;-)

Ignoring Health Care, the "defensive " sectors - lead by Utilities - are currently in control of things.  It's not a bullish situation folks.  As always, you should check out this chart on a regular basis to see how things continue to evolve.  For more details, check out our ChartSchool article on Sector Rotation.

- Chip

P.S. Space at ChartCon 2014 is filling up fast.  I'd love to see you in Seattle this August if at all possible.  John, Arthur, Greg, Erin, Alex, Martin, Gatis, and Dick would too.  If you can make it, I guarantee you'll learn more about charting in those two days that you could ever imagine!  Click here for details.

Watching for a Spring Top

Last December 14 I wrote a message warning of the likelihood of a market correction during 2014. Midterm election years are the most dangerous of the four-year presidential cycle. ["The Four Year Presidential Cycle Suggests That 2014 Could Suffer a Major Downside Correction...The Strongest Six Month Period Ends in April"]. The message points out that midterm year peaks usually start in the spring. Since April ends the "strongest six month period" that starts in November, that makes April a good time to take some money off the table. It may also make the "sell in May" maxim more meaningful this year. The good news is that a major bottom usually takes place during the second half of the year (usually in October). Calendar-wise, we've now entered the dangerous spring season. That makes warning signs of a possible market top more meaningful. The monthly bars in Chart 1 show the S&P 500 rising above its 2007/2000 highs last spring to register a major bullish breakout. Those two prior peaks should act as major support below the market. Measuring from this week's intra-day high to the 2007 intra-day peak at 1576, an S&P 500 drop of 17% would bring it back to that major support level. That's probably the maximum correction we can expect. The red line shows the last two 17% corrections taking place during 2010 and 2011 (the 2011 correction of 19% lasted from May to October). The moral of the chart is that a correction as big as 17% would not disturb the market's major uptrend, and would most likely represent a major buying opportunity later this year.



A LOOK AT RECENT S&P 500 CORRECTIONS... Chart 2 shows the last 10% correction in the S&P 500 (using intra-day prices) taking place in the spring of 2012 (during April and May). Two years without a 10% correction is unusual. A correction of 8% took place in the autumn of 2012, and a smaller 7% drop in the spring of 2013 (during May and June). An even smaller pullback of 6% took place this January. An S&P 500 drop to its early 2014 February low near 1740 would represent an 8% correction (see first support line). That's probably the minimum correction we can expect this year.

This Market Is Officially Overvalued

On any given day we can find a wide range of opinions as to whether the stock market is undervalued or overvalued, and the bases for these assessments are also wide ranging and sometimes overly optimistic. I think a good starting point for estimating value is to use a price to earnings ratio (P/E) based upon twelve-month-trailing “as reported” or GAAP earnings (calculated using Generally Accepted Accounting Principles). I do not assert that this is necessarily the best method, but it is simple, easy to understand, and doesn’t rely on assumptions about future earnings. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued). The following chart shows the S&P 500 Index in relation to this range.


As you can see the S&P 500 has reached the top of the normal range and is overvalued. This kind of situation doesn’t always lead to disaster, but it tells us at the very least that conditions are not ideal for major new commitments to the long side. A price reversal is possible, but it is also possible that earnings will continue to rise, creating a rational environment for prices to continue higher. The bottom line is that valuations are unfavorable, making the market more vulnerable in this regard.

Watching the windsock,

Warning Signs Piling Up

In earlier 2014 articles, I've discussed warning signs that emerged from Volatility indices, behavior in the treasury market, relative weakness of banks and relative strength of defensive areas of the market like utilities and REITs.  In addition, the S&P 500 has shown a propensity to struggle during calendar years in which it shows January weakness - and we were very weak in January 2014.

Well, let's add a couple more concerns to this list - one a short-term concern, the other longer-term in nature.

The short-term concern relates to the 60 minute negative divergence that emerged on the S&P 500 as it pushed to an all-time high on Friday morning.  Check out this sign of slowing momentum just before the afternoon collapse on Friday:

SPX 4.5.14

The Dow Jones is not pictured here, but it too had a negative divergence appear on Friday morning as it was challenging major price resistance of 16577 (all-time high close from late 2013).

These are short-term issues.  Now for the more troubling problem.

In the consumer area, money has been rotating away from cyclicals and moving into staples.  That's a sign of overall market weakness as traders scurry to find safer alternatives.  In a bull market, the ratio of cyclicals to staples (XLY:XLP) normally pushes higher as the S&P 500 breaks out.  This indicates that traders remain in "risk on: mode and adds to the sustainability of a rally.

Before we look at the current state of consumer stocks, let's rewind back to 2007, just before the last bear market.  Check out how the shift in consumer stocks then was a precursor to market weakness ahead:
XLY vs XLP Ver 1

Now fast forward back to where we are today.  The S&P 500 just printed a fresh all-time closing high this past week, but the relationship between consumer stocks sent a very strong message to those watching.  Money over the past 4-5 weeks has shifted considerably towards the safer consumer staples (XLP) group.  In a bull market, we usually see the opposite.  Sustainable bull market rallies are accompanied by a strengthening cyclical group (XLY), but that's not the case now.  See for yourself:
XLY vs XLP Ver 2

We all have to recognize the changes that have been taking place below the surface of what appears to be a raging bull market.  If you simply listen to CNBC, you'll approach the market the same as you have since the start of this five year bull market.  But conditions are changing, highlighting the added risk of remaining long equities.

Next Saturday, I plan to discuss some of these market conditions in a 3 hour webinar, in addition to illustrating how finding the best stock candidates using the StockCharts scan engine - on both the long and short side - can benefit your trading results.  For more information on this event, CLICK HERE.

Happy trading!

Tom Bowley
Chief Market Strategist/Chief Equity Strategist
Invested Central/

Unconventional Oil and Gas Stocks Have A Good Week

FRAK is an Unconventional Oil and Gas ETF. It spurred up to new 2 year highs this week and closed above the previous high.

FRAK 20140405

Continue reading "Unconventional Oil and Gas Stocks Have A Good Week" »

Bullish Bond Patterns Could Foreshadow Stock Market Correction

The 7-10 YR T-Bond ETF (IEF) is tracing out two potentially bullish patterns and chartists should watch these patterns for clues on the stock market. The chart below shows IEF hitting resistance in the 102.25-102.5 area and then correcting with a falling wedge. With Friday's big surge, "correcting" could be the key word here because a breakout would signal a continuation of the January advance. Note that stocks were weak when Treasuries advanced in January. Taking a step back, notice that the ETF is also forming a big cup-with-handle, which is a bullish continuation pattern. A break above rim resistance would also be bullish and argue for a move to the 105 area. The height of the cup is added to the breakout zone for a target. The indicator window shows MACD falling just below zero the last few weeks. A break above the red trend line would reverse the downswing in MACD and turn momentum bullish.

Click this image for a live chart

Even though we have yet to see a breakout, note that strength in Treasuries could be negative for stocks for several reasons. First, stocks and Treasuries have been negatively correlated for most of the last five years. Second, money flowing into Treasuries is money that is not available for stocks. Third, Treasuries rise as the outlook for the economy falls. Fourth, strength in Treasuries reflects a certain risk aversion in the market. This risk aversion was reflected in the stock market because small-caps and techs are bearing the brunt of selling pressure on Friday.

Good weekend and good trading!
Arthur Hill CMT

GOLD Reverse Head and Shoulders

While I was reviewing the Gold daily 1-year chart, I noticed after Friday's close that we could be looking at a bullish reverse head and shoulders pattern forming up. I've annotated what I view as a left shoulder and head along with where we would look for a right shoulder.


As most of you know, this is a bullish pattern. I don't want to get to far ahead of myself, but here's how it would play out if the right shoulder comes to be. Once price has risen to form the right shoulder, price would then need to break through the neckline. I've annotated the neckline in the weekly chart below. 


If price penetrates that neckline, the expectation is for price to proceed higher to a minimum upside target that measures the length from the top of the head to the neckline. Interestingly that it would put price right around resistance that is already in place on the weekly chart.

Again, this is VERY early in the formation, so my hypothesis is based on whether first, the formation actually comes together and second, that the neckline will be penetrated. Just thought you'd be interested in seeing the possibilities with me!

Happy Charting,

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