StockCharts Blogs - ChartWatchers

SILVER RIPE FOR TRADING AGAIN

With all the press centering in upon Gold gains recently +10%, Silver has risen by +19% - thereby outperforming the yellow metal by +9%. Silver - the poor man's good; now looks rather ripe for trading once again. This is as it should be in a metals bull market - silver should always outperform gold. And the manner in which the technicals are shaping up in both absolute and relative terms - we should see both gold and silver move to new highs and not return to the lows forged on 12/30/11 at $1567 and $27.88 respectively.

In our opinion, we shall be playing silver form the long side, for the techncials are rather compelling. First, the weekly Silver chart shows a series of continuation patterns or bullish consolidations that have all lead to new highs. And, each one began with the 20-week stock at oversold levels. In fact, the first two times this occurred, silver rallied for 2-years plus and gained in the multiple of 100%s. Next, let's note the current price has held the 110-week moving average. which it has done on a number of occasions, and then rallied rather strongly. We expect this current test amid the bullish consolidation to take silver price upwards of $50/oz or more - a minimum gain of +34%, which is really rather paltry by past rallies, but one that has the potential to go much much higher.

Therefore, we are left to wonder what shall trigger such buying in the metals and silver in particular. Will be be turmoil in the Middle East? The Euro falling apart? Faster-than-expected economic activity around the world? New rounds of QE? They are all good questions, and perhaps an amalgamation would probably be the most likely scenario.

ENERGY SHARES START TO SHOW RELATIVE STRENGTH

Energy shares were this week's strongest market sector. That's the first time we've seen relative strength by the energy sector in three months. Chart 1 shows the Energy Sector SPDR (XLE) trading at the highest level in seven months. [A "golden cross" has also been formed by the 50-day average rising above the 200-day (gold circle)]. The line along the bottom is the XLE/SPX ratio, and shows it breaking a three-month down trendline. That's a sign that money is starting to move into this sector more aggressively. Chart 2 shows the Market Vectors Oil Services ETF (OIH) very close to breaking through its 200-day average (red circle). Its relative strength ratio (below chart) is also starting to rise.

THE BULLISH MOVE IN GOLD ISN'T OVER

It takes time and patience for continuation patterns to play out.  Many traders grow frustrated, especially after the stealth move higher ends because of the time involved for continuation patterns to form.  The current bull market in gold has lasted more than a decade and there are few technical signs of it ending now.  First, let's take a look at a 12 year weekly chart to step back and grasp the overall picture:



You can see from the blue circles above that every "stealth" move higher has been followed by a longer than usual consolidation period.  And that makes sense. There needs to be a cleansing period where a whole new group of longs participate as weaker hands let go of their positions.  The other technical observation is that the current consolidation phase has allowed a VERY stretched MACD to move back down to test its centerline.  This means that gold's 12 week EMA essentially equaled its 26 week EMA.  A lot of the overbought conditions have been relieved.  Another observation is that every time gold has seen its weekly RSI dip beneath 50 and its weekly stochastic fall to 20 or below, that combination has resulted in a very strong buy signal.

Now let's take a look at the current pattern on a daily chart:



There are a couple of different interpretations which would lead to differing methods of accumulation and risk management.  Obviously, we have a bullish wedge breakout, but also have the prospects of an inverse head & shoulders pattern that would measure to 2075 in time.  Perhaps an inverse right shoulder will form on a back test of the wedge breakout?  Either way, this pattern looks bullish and I'd be a buyer of gold.

I've provided a few technical reasons why I believe gold is going higher.  Fundamentally, I believe gold will be higher because Fed Chairman Bernanke wants to inflate our way out of the financial crisis and the resulting economic weakness.  The next big issue is going to be inflation, I have no doubt.  If you've listened to Bernanke, you know the Fed will do EVERYTHING it can to avoid a deflationary environment.  They will continue to expand the Fed's balance sheet.  QE 3 is coming so get ready.  Ultimately, there will be a price to pay and it's going to come in the form of inflation.  What do you think is going to happen to gold prices as inflation is sparked?  Inflation may stay historically low for the next couple years, but it is NOT going to remain low.  I rest my case.

I'm featuring the GLD as our Chart of the Day for Tuesday, February 21, 2012, where I highlight various entry and exit points to satisfy just about every trader's style. CLICK HERE if you'd like more information.

Consumer Discretionary and Technology Lead Sectors in StockCharts Technical Rank

Of the nine sector SPDRs, the Consumer Discretionary SPDR (XLY) and the Technology SPDR (XLK) have the highest StockCharts Technical Rank (SCTR). The SCTR for the Industrials SPDR (XLI) is in a close third. High SCTR scores indicate that these sectors show excellent relative strength and market leadership.


Click this image for a live chart.

The first chart shows the Consumer Discretionary SPDR (XLY) breaking above its 2011 highs in January and extending further in February. While the advance is getting overextended, this key sector is by no means weak. Broken resistance turns into the first support zone around 41. The indicator window shows the SCTR plot. In general, the security shows some relative strength when above 50 and some relative weakness when below 50. Notice that this indicator has been above 60 since early October and above 70 since late November. The SCTR is currently at 89, which indicates that this sector shows exceptional relative strength.


Click this image for a live chart.

The second chart shows the Technology SPDR breaking resistance from a large inverse head-and-shoulders pattern. Broken resistance turns first support in the 26.50 area. The SCTR moved above 60 in mid September and never looked backed. It has held above 70 since late November and is currently above 90, which makes it the leading sector. You can see all scores on the SCTR table page and read more about SCTR in our ChartSchool.

STOCKS ARE FAIRLY VALUED

News headlines are usually more confusing than helpful, especially when trying to determine if stocks are overvalued, fairly valued, ot undervalued. At any given time there will be those who simultaneously claim that stocks overvalued and undervalued. Of course, they all have their own methodologies, which (surprise, surprise) support their point of view.

We have always asserted that the most consistent and even-handed way to value stocks is based on their GAAP P/E (price to earnings ratio) relative to the normal historical range. The real P/E for the S&P 500 is based on "as reported" or GAAP earnings (calculated using Generally Accepted Accounting Principles), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued).

Market cheerleaders invariably use "pro forma" or "operating earnings," which exclude some expenses and are deceptively optimistic. They are useless and should be ignored.

The following are the most recently reported and projected twelve-month trailing (TMT) earnings, quarterly earnings, and price/earnings ratios (P/Es) according to Standard and Poors. The 2011 Q4 estimate is based upon 82% of companies having reported. The P/E values are based upon the S&P 500 closing price of 1343 on February 15.

The current P/E of abput 15 falls right in the middle of the historical range of 10 to 20, so we can say that stocks are fairly valued. As technicians we like to show a chart to give perspective. The red, blue, and green lines show where the S&P 500 (the black line) would be if it were overvalued, fairly valued, or undervalued. Note how overvalued the market became in the late 1990s and early 2000s. That is where our troubles began. Then there was the earnings crash on 2009, which completely distorted the range markings. With earnings returning to all-time highs the P/E range is more realistic, and we can reasonably say that stocks are fairly priced.

The distortions shown above might cause one to wonder if the normal range concept really has any validity. The long-term chart below demonstrates that it does. It also demonstrates how screwed up the market has been since the late 1990s as compared to the 70 years that preceded that period.

Bottom Line: The TMT GAAP P/E ratio is an objective measure of valuations, although it is a lagging indicator. Currently, earnings have returned to the normal trend, which is up over the long-term, and the price versus the normal P/E range relationship appears to be back in a rational configuration. Therefore, with a P/E of 15, we can say that stocks are fairly valued. This doesn't tell us where prices are headed, but it does support a bullish argument that prices could go higher before they become overvalued (P/E of 20).

SEATTLE SCU SEMINAR, VOTE FOR SEMINAR CITY #4, NEW eBOOKS

SEATTLE SCU SEMINAR ANNOUNCED! - Registration for our one-day Seattle SCU Seminar is now open.  If you are interested, you better register fast because this one is sure to sell out quickly.  Click here for more details including the seminar agenda.

LAST CHANCE TO VOTE FOR SCU SEMINAR CITY #4 - We're winding down the voting for which city we should hold our 4th SCU Seminar in this year. Currently Toronto is leading, followed closely by Dallas and San Francisco.  If you are interested in attending our one-day SCU Seminar series and you cannot make it to our LA, Seattle or NYC events, be sure to click on this link and vote for the city of your choice before the end of February.  We'll announce the winner in March!

JOSEPH MAJOCHA'S eBOOK "THE ART OF THE CHART" IS NOW ONLY $7.99 IN OUR STORE - Majocha's easy-to-read eBook teaches you the essential concepts of Technical Analysis using StockCharts.com tools and charts.  It can help anyone become a better, more organized investor and it is now only $7.99 as a PDF download in our online store.  Get your copy right now.

OH, AND DON'T FORGET TO REGISTER FOR SEATTLE CHARTCON 2012 - It's filling up fast!  Do not delay! Anyone who's a fan of StockCharts and this ChartWatchers newsletter really owes it to themselves to attend.  You'll meet all the ChartWatchers authors and see the Great Pacific Northwest at the absolutely best time of year.  Click here for details.

 

JURY DUTY, CRYSTAL BALLS AND BLACKJACK

(THIS WEEK'S DECISION POINT ARTICLE WAS WRITTEN BY GUEST WRITER ERIN SWENLIN HEIM)

As many of you are aware, I've been doing my duty as a citizen of this great country by serving on a jury.  It has been interesting, to say the least.  The trial is still not over, but I hope to be back full time sometime next week.

After my fellow jurors found out I was a stock market analyst, I began getting questions like, “What is the market going to do?”, “Can you tell me what stock I should buy?”, “What is up with Greece?”, etc.

For those of you who have had the pleasure, you know that jurors have a LOT of time on their hands.  It seems you ‘hurry up and wait’ constantly, so I was able to answer questions (except the one on Greece, because I have NO idea what the answer is there).

I began explaining my job as best I could without getting too technical.  First and foremost I told them that 1) I cannot predict anything, I have no crystal ball because if I did, I’d be rich and likely not here sitting on this jury; and 2) I am not a registered investment advisor, so don’t take anything I say as investment advice.

I told them that my job is to get as much information about market conditions and trends as I can so I can evaluate whether I want to take action or not.  Then I write about it on our website.  I explained that you didn’t want to ‘bet’ against the trend or conditions that tell you to expect a certain outcome. You have to determine what is happening in all three time frames, short-term, intermediate-term and long-term and let each time frame help guide you along.  All three time frames may say something different, but ultimately, the long-term trend affects the outlook for the long-term and the intermediate-term; and they both affect the outlook for the short-term. Additionally, I consider our technical indicators.  They give me more insight into what the condition of the market is whether overbought or oversold. 

I equated it to black jack (not that investing is the same as gambling, although for the uninformed investor I suppose it is).  You will generally do better than the ‘house’ or the market if you know the best way to play your hand given the condition of the dealer’s hand and the card trend (how many small or high cards have already been played).  You won’t always win, but you have a better chance. 

So, what is the trend and condition of the market right now? Looking at the chart below, the top part of the chart shows that the S&P 500 has been trending up since the market low in October.  The three bottom panes of the chart show us that right now in all three time frames, the market is overbought.  The majority of stocks are currently trading above their 20-, 50- and 200-EMAs.

How should we play this hand?  I like my odds.  It appears I have a good hand because the trend is with me.  However, the condition of the market is overbought and could work against me.  It is time to probably play conservatively.  I don’t think I want to ‘double-down’ on my bet and "invest more" money, I’ll count on the trend and that the dealer will not beat my hand;  I should see a return on the bet I already have on the table.

Unfortunately like blackjack, there is some ‘luck’ involved.  In the market, I equate luck to those outside influences on the market that I don’t have control over and can't usually predict.  Things that can throw the market an unexpected curve ball.  An example: news headlines from Europe and Greece.  Right now, certain news from Greece and Europe can cause the market to shoot up or tumble lower on just one headline!  A stray economic report or utterance by Mr. Bernake and all my prudent investments can greatly suffer or profit without any basis in technical analysis.

Bottom Line:  I told my jury friends to keep it simple, don’t get bogged down in the chatter and noise.  Get educated on technical analysis, learn as much about current market conditions and trends as possible so your investment decisions are based on analysis not chance.  Don’t let the “house” take advantage of you!

 

STOCKCHARTS ADVANCED SCAN LIBRARY NOW OPEN

Hello Fellow ChartWatchers,

Today I'm please to announce the grand opening of our Advanced Scan Library.  We've collected some of the best scans available and posted them in this new ChartSchool area for everyone to see.  We have a big collections of Sample Scans that will teach you how to use our Advanced Scanning tools.  A difference section contains all of our Predefined Scan criteria on one page for you to review.  We also have a collection of Published Scans that have appeared in other publications.  Finally, we have some User-Contributed Scans that our members have sent in over the years.

All of the scans are in Advanced Scan Workbench format, ready to be copied and pasted into the Advanced Scan Workbench by members of our Extra service.  Hopefully they will be helpful to you - especially if you are trying to learn more about creating your own scans.

Here's an example from the Published Scans section to give you a better sense of what the Scan Library contains:

(Click on that example to see the live scan criteria in the library which you can then cut and paste into the Advanced Scan workbench.)

The great news is that the Scan Library will continue to expand and evolve over time - especially the Published Scans section and the User-Contributed Scans section.  Do you have a non-trivial scan you'd like to see us add to the Library?  Send it to scanning@stockcharts.com and we'll consider it for inclusion.

- Chip

CLOSELY CORRELATED WITH US MARKET

My market message from Thurs, Jan 26th, argued for the inclusion of Canada in a foreign stock portfolio. I'm going to expand on Canada's unique role in the global intermarket picture in this message. In my view, Canada is unique for at least three reasons. First, it's very highly correlated to the U.S. stock market. That shouldn't be a surprise because Canada is the biggest trading partner with the U.S. It also means, however, that the two markets need to be charted together to ensure that they're sending the same messages. Another reason why Canada is important is because it's highly correlated to the Canadian Dollar. And the Canadian Dollar is closely tied to the trend of commodity markets. That's because Canada is one of the world's biggest exporters of natural resources. The Canadian markets, therefore, tell us a lot about the direction of global stocks, commodities, and currencies. Chart 1 compares the Toronto Stock Index (red line) to the S&P 500 (blue line) since 2000, and is simply intended to show the close correlation between the two markets. Over most of that time, the correlation coefficient (below chart) fluctuated between .75 and 1.00. One exception was during the first half of 2008 when Canadian stocks kept rising while the U.S. market plunged (see circle). That was due to the fact that commodity prices kept rallying into the middle of 2008 before peaking. Canadian stocks peaked with commodities.

STARTING OFF WITH A BANG

The 2012 trading year has begun with a "bang" to be sure. In terms of the S&P 500, we find that 16 of the 23 trading sessions have traded to the upside, with no losing session down more than -8 points or -0.6%. This is rather "one-sided", and it gives rise to thoughts that a correction must be forthcoming. Really, how could a rather sharp correction not take place given the European fiscal and debt crisis and the slowing the Chinese economy. There are so many negatives in front of everyone, there can't be any way the market should trade higher. However, one must try and understand the power of "money printing liquidity" provided by nearly all of the world's central banks.

We'll be the first to admit - we've been rather wrong-headed about this rally. There have been ample signs that this is nothing more than a counter-trend rally in a bear market, but then again there are technical signs it shall go further and farther than most believe. The question, is where do the probabilities lie in regards to this, and we look upon them in this blurb from the monthly perspective.

Quite simply, the risk-reward is to the upside given the October-2011 trade formed a bullish monthly key reversal to the upside - a signal that new highs were a higher probability than previously thought. Certainly given the European fiasco, one would have thought prices would trade lower; but when they did - it was only for a very short period. This is reminiscent of the pattern seen during the Russian debt crisis in 1998, when prices traded lower in October-1998 - only to trade over +40% higher in the ensuing 18-months. Frankly, the current technical pattern seem eerily similar from a corrective and MACD point-of-view - which would lead one to surmise that new highs in the S&P are forthcoming - in all probability into the 1600 area. But having said this, even if new highs develop, we would this as a bear market rally in much the same manner as those were in the 1970's trading range that broke to new highs only to falter massively in the months thereafter.

This is change in tenor for us; and one that we've held out for as long as we could. We are a "bear" with a bull hat on for the moment. The fact of the matter is that the S&P has broken above, and extended above all the necessary moving averages - which puts the risk-reward to the upside. There are other markets as well breaking out on a monthly basis such as Brazil, India and other Latin American countries - although China is not yet done so, or is even close for that matter. We've been bearish, and we've been rather wrong. Our outlook going forward will be for a weakening rally, with Energy, Healthcare and Gold/Silver shares leading the way. Moreover, we see an increasing potential for a "melt-up" to develop as rotation takes place out of bonds and into stocks. The low volumes associated with the markets at present certainly provide for this context.

So, the craziness continues...and we are left in humble stead to play "catch-up" until its time throw everything away again.