StockCharts Blogs - ChartWatchers

A MOMENT OF TRUTH FOR THE RUSSELL 2000

The Russell 2000 has been lagging the S&P 500 and Nasdaq 100 over the last few months. Even with the big bounce off support this past week, the Russell 2000 remains below its August high. In contrast, the S&P 500 and Dow broke above their June highs this week and the Nasdaq broke its early August high this week. With a lower high in early August, the Russell 2000 traced out a bearish descending triangle (blue trendlines) and a break below support would signal a continuation of the current downtrend.

What exactly is a descending triangle? This pattern forms with a series of lower highs (red arrows) and equal lows (green arrows). The lower highs reflect rallies that were weaker and weaker. Buyers were not able to push prices above the prior peak and this shows weakness. The equal lows represent support and this is the place where buyers are still strong. A break below support would mean that sellers overwhelmed buyers and further weakness would then be expected. Based on traditional technical analysis, a break below support at 670 would target a decline to around 610. This downside target is found by subtracting the length of the pattern (60) from the break point.



It ain't broken until it's broken. The Russell 2000 remains between a rock (670 support) and a hard place (720 resistance). A break above 720 or below 670 is needed to break the deadlock and establish a directional signal. The 200-day moving average, July trendline and early August high mark resistance here and a breakout would be bullish. Should the index fail and form another lower high, keep an eye on descending triangle support at 670 for a bearish signal.

NASDAQ 100: TURNING BULLISH, BUT SHORT-TERM OVERBOUGHT

The Nasdaq 100 Index has declined farther than the broader indexes, and it has been slower in turning around; however, this week the index has turned the corner, and appears ready for a continued advance. The only problem is that it has become short-term overbought.

To demonstrate, let's look at the first chart which presents our On-Balance Volume (OBV) Indicator Set. The Climactic Volume Indicator (CVI) measures extreme OBV movement within the context of a short-term OBV envelope for each stock in the index. The Short-Term Volume Oscillator (STVO) is a 5-day moving average of the CVI. The Volume Trend Oscillator (VTO) summarizes rising and falling OBV trends. These charts tell us if the index is overbought or oversold based upon volume in three different time frames.

The first obvious feature is the price breakout above the three-month declining tops line, which signals that the trend is turning upward. Next we can see that the CVI and STVO have both hit their highest level in a year. While this is evidence of the short-term overbought condition, it also implies that an initiation climax has occurred, an event that signals the beginning of a rally.



While the short-term overbought condition tells us to expect some pull back and/or consolidation, the second chart presents a positive intermediate-term picture. It displays our three primary intermediate-term indicators for price, breadth, and volume. As you can see, while the price index was making a series of new lows, the three indicators were either flat or trending upward, forming positive divergences. Also, you will note that all three indicators have been moving up from very oversold levels, and they have a long way to go before they become overbought.



Finally, most sentiment indicators we follow continue to reflect strong pessimism, which is bullish for the market.

Bottom Line: Currently, the indicators show us that the trend is turning up. Short-term conditions call for a "pause to refresh," but, once a short correction/consolidation is complete, intermediate-term conditions allow for the rally to continue for at least a few more weeks. Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.

STILL BEARISH IN TECHNOLOGY

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).

AUTO-REFRESH CHARTS AND COOLING PROJECT

AUTO-REFRESHING CHARTS - We're continuing to monitor and tune the performance of our new Auto-Refreshing charts feature and so far things are going very, very well. We've heard feedback from tons of people saying that they really love this new capability. Here's what one person had to say:

Now my trading day couldn't be easier. I just set up my three charting windows and start auto-refreshing. At any point in the trading day, a quick glance over to my StockCharts screen tells me everything I need to know about the markets! - A.J. Tripp

Do you have a StockCharts success story you'd like to share? We'd love to hear about it!

CRAZY FROM THE HEAT - On the technology side of things we are continuing to upgrade our data center. We now have over 60 different servers driving our website. As you might imagine, 60+ servers consume quite a lot of electricity and produce quite a lot of heat. Because of that, we are embarking on a project that, when complete, will triple our power and cooling capacity. It's quite a large undertaking and will consume a lot of our attention in the coming months, but the end result will be well worth it as we will be able to continue growing our website for the foreseeable future.

AND A "HEART" TRANSPLANT TOO! - As if the cooling/power project wasn't enough, we've also placed an order for upgraded "load balancers" from F5 Networks. Our Load Balancers are the heart of our website - they direct your chart requests to the appropriate server(s) and automatically take any misbehaving servers off-line. While we love our current load balancers, bigger and faster ones are now available. We just placed a 6-figure order for new ones that should fix a variety of technical problems and take our site well into the future. We expect them to arrive within the next month.

CRB BREAKS 200-DAY AVERAGE

I wrote yesterday about recent selling in commmodity pits pushing the Reuters/Jefferies CRB Index into a test of its 200-day average. Today's five point drop has pushed it below that long-term support line in pretty decisive fashion (see red arrow). Chart 1 shows the CRB peaking in early May at 366 and bottoming in mid June at 329.61. The July rally attempt fell short of its May peak thereby leaving a pattern of "lower tops". Today's price drop puts the CRB in danger of breaking its June low. If it does, it will initiate a pattern of "lower peaks" and "lower troughs" which is symptomatic of a peaking market. That would be the first significant sign of a commodity top in five years. Although most commodities are falling today, the biggest weight on the CRB is coming from the energy sector.

BUBBLING RIGHT ALONG

Hello Fellow ChartWatchers!

There hasn't been much talk about it in the press but the Dow Industrials has continued its slow rise to new heights. How high? On the follow chart you can see that there are only two labelled peaks that are higher than the Dow's current level:

Last May's peak close of 11,577 seemed too good to be true, but if the Dow can re-rally to that level, it will be well positioned for a push up to its all-time high of 11,722 set way back in 1999. Yes, I know, I know. That's just overly optimistic "bubble-talk" right? Well, not exactly. What the Dow is doing is a long ways away from what the Nasdaq did back in 2000:

Don't you agree?

QQQQ REMAINS IN CLEAR DOWNTREND

On the weekly QQQQ chart, it is clear that the stock remains in a falling price channel and has yet to break key resistance at 38. There are two falling price channels on the chart (magenta trendlines) and lessons from the first can be applied to now to identify a trend reversal.

Both price channels are similar in duration (3-4 months) and depth (~15%). The first price channel ended after a long black candlestick and the current one formed a long black candlestick four weeks ago (red arrows). The trend reversed with a break above the upper trendline and high of the long black candlestick (May-05).

To reverse the current downtrend, QQQQ needs to break the upper trendline and move above 38. Until this happens, there is no evidence of a trend change and we should expect the trend to continue (lower prices). The most glaring difference: the current price channel is much steeper than the first. This shows that selling pressure was much more intense over the last few months.

TECHNICAL PICTURE IS MOSTLY BULLISH

The decline from the May top, and the subsequent sideways chopping have been hard on investors' nerves as they try to decide how things will eventually resolve; however, even though the rising trend line has been challenged twice in the last few months, the technical picture has been steadily improving. Also, sentiment indicators have been persistently and strongly pessimistic – some even worse than at the 2002 bear market lows – and this is bullish for the market.

The first chart shows the components of our Thrust/Trend Model, our primary timing tool. (A full discussion of this model can be found in the Glossary section of the DecisionPoint.com website.) The first thing we can see is the bullish double bottom that was formed as the price index was challenging the bottom of the rising trend channel. What remains to be seen is a decisive break above the middle peak of the "W", but the price pattern is positive nevertheless.

Until recently the model has been in neutral because the Percent Buy Index (PBI) has been below its 32-EMA, but, as you can see, the PBI has also formed a double bottom and has recently broken above its 32-EMA, switching the model to a buy signal. Also, the PBI, like most of our other medium-term indicators, is rising out of oversold conditions. The chart looks very positive.



The model shown is for the S&P 500 Index, which gives us our positioning for the broad market, but we also apply the model to other market and sector indexes. As you can see in the table below, buy signals are being generated across a wide range of indexes and sectors.

This table is updated daily in the Decision Point Alert Daily Report.

No matter how positive things may look, there is always something to worry about. For me it is that we are overdue for a bear market, and we are also due for a price trough associated with the 4-Year Cycle. As you can see by the chart below, the 4-Year Cycle is pretty reliable in attracting price lows, and based on the history shown on the chart, there is about an 80% chance that prices will be lower later this year (and about a 20% chance that they won't).

Also, it is not easy to see on the chart, but the monthly PMO has topped and has been falling for three months.

Bottom Line: Actions taken by the Fed next week could torpedo my conclusions, but the most objective evidence we have shows that the market is configured for another advance, and this is backed up by the more subjective pessimism reflected in most sentiment indicators. On the other hand, if the models have been tricked by the market, they will normally turn neutral with only minor loses; however, stops should be used to guard against negative price action that is too rapid for the models' reaction time.

AUTO-REFRESHING CHARTS ARE HERE!

AUTO-REFRESHING CHARTS ARE HERE!

See Chip's article at the top of this newsletter for more details.

BOND YIELDS HIT FOUR-MONTH LOW

The U.S. economy added fewer jobs than expected during July and the unemployment report rose for the first time in five months to 4.8% from 4.6%. The weak job report is the latest in a string of signs that the economy is weakening. That's usually good news for bond prices which do better in a slowing economy. Technically, this is a logical spot for bond prices to start doing better and bond yields (which move in the opposite direction) to start dropping. Chart 1 is a monthly bar chart of the 10-year Treasury Note yield. The chart shows the 10-year yield testing a a major down trendline connecting the highs of 1994, 2000, and 2006. The last time I showed this chart I pointed out that this would be a logical spot for bond yields to start to weaken. And that's what they've been doing. The daily bars in Chart 2 show the reaction to today's weak news. The 10-year yield has fallen below its June low to the lowest level in four months. Besides pushing bond prices higher, falling bond yields have also given a boost to market sectors sensitive to interest rates – like banks, utilities, and REITs and to defensive stocks in general – and to safer large cap stocks (especially dividend-paying ones) at the expense of riskier smaller stocks. Falling rates are hurting the dollar which is giving a boost to gold.

A "REFRESHING" CHANGE

Hello Fellow ChartWatchers!

This week we are pleased to announce a brand new feature for StockCharts.com users - Automatically Updating Charts! Starting Monday when the market opens, members of our "Extra" service will have a new way to watch the market. On the SharpCharts Workbench page, Extra members will find a new setting called "Auto-Refresh" (located just below the Ticker Symbol box). By changing that setting to 15 seconds (for example), members can now have their chart updated automatically throughout the trading day. Of course, this feature works best with short duration intraday chart periods such as "1 minute" or "5 minutes". It is also especially useful to our non-delayed "ExtraRT" members. Just make sure the market is open before trying to use this new feature.

In addition to the "Auto-Refresh" box for Extra members, we've added another new feature that ALL of our users can take advantage of - "Y-Axis Labels". When this new checkbox is checked, you'll see the final values for all of the lines and price plots on your chart clearly presented as little "flags" on the right edge of the chart. Here's an example:

You'll find the new checkbox in the "Chart Attributes" section just under the chart.

Note: While the "Y-Axis Labels" setting can be saved into a member's account as a "Favorite Chart" or as a "ChartStyle", the "Refresh Rate" setting cannot be saved - it must be turned on manually each time you pull up a new chart. For more information, please see the "Instructions" link located just below any SharpChart.

Hopefully, these two new feature will help everyone continue to make better investing decisions with StockCharts.com's charts. And, as always, these new features come at now additional charge. Enjoy!