StockCharts Blogs - ChartWatchers

GO AWAY IN MAY? REALLY?

Ok, I understand the logic - partially.  In order of S&P 500 calendar month performance since 1950, May ranks 8th out of 12 and June ranks 10th out of 12.  However, both have produced positive annualized returns and in this period of very low interest rates, does it really make sense to pull that portion of your investments devoted to equities?  What's not mentioned by most who follow this theory, though, is that there are VERY bullish periods that fall within both of these calendar months.  Simply avoiding the market during May and June makes little sense given that the first handful of days in May and the last handful of days in May have produced annualized returns of 37.72% since 1950.  Compare that to the average annual return on the S&P 500 since 1950 of 8.46%.  By sitting on the sidelines, your money has no chance of working for you during periods where annualized returns are more than four times the average.  Does that make any sense?  The middle of May does tend to have neutral to bearish implications, but only on the S&P 500 does our historical meter, The Bowley Trend, actually turn bearish.

The part I find most disturbing regarding this theory is the perception that all equity investments suffer after the beginning of May.  Do these folks realize that since 1971 the NASDAQ has produced annualized returns of 13.85% and that NASDAQ prices have moved higher 23 of the 38 years over this period?  Does pulling your equity investments really make sense given the NASDAQ's relative outperformance during May?  By the way, June's annualized return since 1971 on the NASDAQ is 10.67%.

Now for the really good part.  Let's talk about the small caps, the Russell 2000.  In terms of the Russell 2000 monthly performance, only December has been a better month than May over the past 22 years.  The annualized return during May on the Russell 2000 since 1987?  How about 24.40%?  Do you still feel like May is an atrocious month for equities?  While I'll admit that May isn't the best month overall for equities, not even close to it, the facts suggest you might do more harm to your portfolio by "going away" than by staying.  There's some food for thought.

As for the current state of the market, it continues to perform as I suspected it would.  You cannot stand in the way of a significant market trend.  The bias remains on the bullish side.  The VIX, after breaking down from a triangle pattern, moved back higher to retest the breakdown as prices consolidated, then has moved lower.  A declining VIX is somewhat synonomous with higher equity prices and that's what I continue to look for and trade based upon.

Happy trading!

Tom

SPECIAL ENDS ON APRIL 30th!

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CHANGE IS IN THE AIR AT STOCKCHARTS

Wow.  This past week has been a very hectic one here at StockCharts.com.  Four - count 'em - four H-U-G-E changes have happened in addition to our 10-year Anniversary Sale is drawing to a close.  I posted about most of this stuff in my blog, but I wanted to review it again here to make sure everyone was aware of what's been happening.

Last Chance for our 10th Anniversary Special Pricing!

All through the month of April we've been running a special to celebrate our 10th year of providing great Internet financial charts.  Right now, if you subscribe (or renew) for a year, you'll get 2 free months of additional service.  If you subscribe for 6 months, you'll get 1 free month of additional service. 

If you are already a member but your account doesn't expire for several more months you can still take advantage of this offer!  Just place a renewal order now and we'll simply add the additional time on to the end of your account.  You'll never see a better pricing deal from us so renew now and save. 

US Stock Data Now Coming from IDC/Comstock

After numerous issues with our old datafeed, we've hit a major milestone in our efforts to improve the reliability and accuracy of our website.  Data for all US stocks now comes from our new IDC/Comstock datafeed.  This should greatly enhance the stability of our website.  We are working to get Indexes and Canadian date from the new feed also but that will take some time.

This is a perfect example of a change that take us a ton of work and effort but doesn't result in something that's very visible to you.  There's also no guarantee that the new feed will work better than the old one - although we fully expect that it will.  Hopefully you understand that there is a TON of behind-the-scenes work like this that we do to ensure that the charts continue to flow.

New Support Area Debuts

Our new Support area is now live on the site and standing by to help you whenever you need it.  You'll find improved articles, documentation and FAQs in our searchable KnowledgeBase as well as a new form for sending us your questions.  The tools we use to answer your questions have also improved.  Hopefully, you'll never need them, but it's nice to know they are there if/when you do.

To see the changes or send us a question, just click on the "Support" tab at the top of any page.

ChartSchool Gets a Design Facelift,  Rest of the Site Will Get One Soon

It started with the Blog area, then it spread to the Market Message.  Now it has spread to the Support area and ChartSchool.  Will it ever be stopped?!?!?!?

I'm talking about the new design we have - cleaner with our new logo and simplified navigation links.  Click on the "ChartSchool" tab to see it.

And the answer is "No - It won't stop.  Soon it will take over the entire site."  Unfortunately, it will take us some time to get everything converted so please be patient.  For awhile, the site will have a "Split Personaility" as some pages have the old design and some have the new.  Hopefully, it won't last too long.  Look for the Home page and the Free Charts area to change soon.

Arthur Hill Officially Joins the StockCharts.com Staff as Senior Technical Analyst

After years of contributing content and commentary independently to StockCharts.com, Arthur Hill has decided to join us on a full-time basis.   In addition to contributing insightful commentary in our Market Message area, Arthur will contribute to our free blogs and our ChartSchool area.  We also hope to start posting more of Arthur's videos on the site soon.  Welcome aboard Arthur!

Phew.  That's enough for one week don't 'cha think?

DIFFERENT STRATEGIES FOR DIFFERENT MARKETS

In my last article, I noted that I was "undeniably bullish".  I can tell you that nothing occurred these last two weeks to change my mind.  More and more corroborating technicals have lined up to suggest this current rally has legs.  Perhaps the most important of them all was the triangle breakdown on the VIX.  The first chart below highlights the triangle that developed on the VIX during the 2000-2002 bear market and the subsequent breakdown of that triangle and how the S&P 500 surged higher following the breakdown:

 From the moment the VIX broke down, the major indices began rallying.  And the rally lasted for quite some time, with few pullbacks along the way.  Last week, the VIX broke below triangle support at 38 or so, then broke down below long-term price support at 36.  The question now becomes - will the major indices rally off of this breakdown as they did in 2003?  I believe they will.  Take a look below at the setup of the market as the VIX breaks down from a triangle pattern once again:

 The sectors that need to lead the market higher out of bear market territory are doing so.  Financials, technology (semiconductors in particular), transportation, consumer discretionary - these are the groups we want to see moving higher.  Check out the relative strength in financials:

 It's important to recognize that market conditions have changed.  That suggests you should change your trading strategies as well.  Let me give you an example of how we've operated.  From October 1st through March 22nd, we alerted only 10 individual stocks, instead shifting to more conservative and less volatile ETFs.  During the same period, we alerted 24 ETFs.  We were in capital preservation mode, only risking capital when it seemed appropriate.  Over the last three weeks, we have alerted 25 individual stocks and 0 ETFs.  It's not that we don't like ETFs, we simply believe trading ETFs lowers returns in an environment where individual stocks are thriving on the long side.  Trade the best stocks within the best sectors, timing entry and exit points based on technical support and resistance levels.  Many technical indicators were useless for several months while emotional trading ran wild.  That has changed and technicals are now back in style and much more reliable.  To see the stocks we've traded, click here.

I would like to encourage those of you who trade "juiced" sector and index ETF's (eg, SKF, UYG, SRS, URE, etc) to review an earlier video presentation that details many of the common pitfalls of the juiced ETF trader.  Two items should be kept in mind at all times.  First, these juiced ETFs are designed to do their jobs for ONE DAY only.  They lose value over time similar to options (though not to the same degree).  Secondly, determine entry and exit points on the juiced ETFs based on your technical analysis of the underlying index.  Too many traders look at the charts of the juiced ETFs themselves, searching for key support and resistance levels, or trading them on 20 day EMA tests or 50 day SMA tests.   That approach will not work with any consistency because of what's been mentioned above.  To view this presentation, click here.

Happy trading!

LUCKY #7

The various US market averages have seen six straight weeks of rally, and one must wonder is "lucky #7" is in the offing. We don't know honestly; however, there are signs the rally off the March 9th low is becoming "long in the tooth" and primed for a rather "nasty correction"in our minds. To this end, we think it instructive to look at the weekly CBOE Volatility Index or VIX.

Our interest here is upon the recent decline from rough panic-level of 80 to its current complacent-level of 34. Quite a bit of marginally good or second derivative news as we could say has pushed it lower; however, we would caution as it is on the verge of forging a bottom that should result in a sharp upward move that would coincide with a larger downward movement in the US market averages. The decline has reached back into trendline support levels, and has done so with the 20-week full stochastic moving back into oversold territory. This latter point is most critical: during bear markets, an oversold stochastic reading such as this has led to sharp upward adjustments. If we had to venture, then we would put the retracement higher at 50% of the downward move, which would roughly target the 55-60 zone.

If this forecast were to come to fruition; then we would likely see the major averages "test" their March lows. Thus, we foresee quite a bit of downside remaining in the equity markets; although there are interim hurdles that must be broken before this will occur. If they hold, then certainly higher prices could materialize in a larger mean reversion exercise; although that isn't our preferred forecast yet.

--
Good luck and good trading,
Richard

PULLBACK IS LIKELY, BUT NOT GUARANTEED

The bear market rally has continued to move prices higher, and the strength is greatest in the smaller-cap stocks. For example, the S&P 500 has rallied 30% from the March lows, but the Rydex S&P Equal Weight ETF (RSP) has advanced 45%. Looking through the list of the Spider Sectors and their equal weighted counterparts, we can see that the equal weighted indexes are doing much better than the traditional cap-weighted indexes. Nevertheless, the S&P 500 has managed to move above the medium-term resistance presented by the declining tops line of the recent trading channel.

As we have noted in recent articles, prices have been advancing in the face of overbought short-term indicators. See the CVI below. It has stayed mostly on the overbought side of the zero line, and prices have moved higher as th CVI has diverged negatively. This is bullish and is evidence that the rally is probably not over; however, medium-term indicators are now becoming overbought. Note that the S&P 500 PMO (above) is above 2.5, and the VTO below are very overbought.

On the chart below we can see that our intermediate-term breadth and volume indicators are very overbought by historical standards. In a bear market this can be a problem; however, a bear market rally is like a mini-bull market, so it is possible for overbought conditions to clear without much (or even any) price deterioration.

Bottom Line: Based upon my perception of market behavior versus indicator status, I am expecting some kind of correction, possibly a short consolidation -- a week or so -- or a quick, scary couple of down days. Regardless of how the overbought conditions are cleared, I am assuming that the rally is not over and will persist for at least a few more weeks.

MCCLELLAN OSCILLATOR IS STILL POSITIVE

The McClellan Oscillator is a short- to intermediate-term momentum breadth indicator. It's calculated each day by taking the difference between the 39-day and 19-day exponential moving averages of the number of net advances on the NYSE (see Chart School for a more in-depth explanation). The chart below shows the NYMO (black line) compared to the NYSE Composite Index (green line). The McClellan Oscillator fluctuates between an oversold level below -100 and overbought territory above 100. Short-term buy and sell signals are given when it crosses above or below its zero (flat) line. The chart shows, for example, the NYMO bouncing from oversold territory in late February before crossing over its zero line in early March (circle). Although it has backed off from overbought territory at 100, it remains above its zero line. It would have to fall below that line to signal an end to the rally. The McClellan Oscillator is only useful over the short to intermediate term. In my view, its greater value lies in its longer-range version which is called the Summation Index.

DIA MAINTAINS UPTREND

The Dow Industrials ETF (DIA) shows a classic case of becoming overbought and remaining overbought. I featured DIA in ChartWatchers two weeks ago as it hit potential resistance around 80. The song remains the same as DIA finished at 81.31 on Friday.

Let's review resistance. First, the middle of the prior consolidation (yellow area) marks resistance in the lows 80s. Second, the Mar-Apr advance retraced around 62% of the Jan-Mar decline. In addition to resistance, the Commodity Channel Index (CCI) moved above 100 (overbought) for the fourth time in the last four weeks. Even though overbought conditions and resistance argue for a pullback, DIA refuses to cooperate with the bears right now.

This calls for another indicator that is more sensitive to the actual trend, which is clearly up. Enter the Percentage Price Oscillator (PPO). As the difference between two moving averages, the Percentage Price Oscillator (PPO) is a rare breed that offers the best of both worlds: a little trend and a little momentum. Moving averages measure trend, while oscillators measure momentum.

The bottom window shows the Percentage Price Oscillator (5,35,10) with its 10-day EMA (red signal line). Even though the indicator flatted over the last three weeks, it never broke below its signal line. The histogram shows the difference between the indicator and the signal line. While upside momentum may be waning, DIA is still edging higher and I will be watching the Percentage Price Oscillator (PPO) for break below its signal line that could signal the start of a correction. Expect DIA to continue higher as long as the Percentage Price Oscillator holds above its signal line.

DAILY EMA COMBO TURNS POSITIVE

I've received a number of requests to review the current position of the 13-34 exponential moving averages (EMAs). As you probably know, I place a lot of importance on that combination because of its strong track record over the years. I apply the 13-34 EMA combination to daily, weekly, and monthly charts. Let's start with the "daily" lines which measure the market's "short-term" trend. Chart 1 shows the 13 and 34 day moving average combination. For a short-term buy signal to occur, the 13-day (blue line) has to cross over the 34-day (red line). That short-term buy signal took place earlier in the week. But there's more. The black line below chart 1 plots the "spread" between the two EMA lines. [You can create that line by inserting 13,34,1 into the MACD indicator]. You can see a positive divergence taking place during March when the black line held above its October low (black arrow). [We've shown similar positive divergences in several other technical indicators]. More importantly, the black line has exceeded its January high and risen above the zero line for the first time since last May. [A crossing above the zero line by the black line coincides with a positive EMA crossing]. That's a sign that the current rebound has legs.

LOOKING AT HOMEBUILDERS

As the market continues it counter-trend bullish rally, we find is more than interesting that the Homebuilders haven't yet taken a leadership role. We would posit that given it was the Homebuilders that was the "canary in the coal mine" for the sharp broader market decline, then if the economy were going to turn around and push higher...the Homebuilder ETF (XHB) would be in a very good position to benefit from it given they are quite oversold and heavily shorted. Thus, we would expect XHB to outperform the S&P as a rally unfolded.

Thus far, this hasn't been the case. When we look upon the Homebuilder ETF/ S&P 500 Spyder ETF Ratio (XHB:SPY), it has bounced around near it's lows since November-08, and has risen very little relatively. In other words - "a market performer" - nothing more. However, technical pattern is a tale of two as they can be construed as both bullish and bearish. If the lows continue to hold and the ratio breaks out above the 200-day exponential moving average, then obviously wedge resistance will be challenged and perhaps broken above. If not, and the lows are violated, then we'll see further broad market weakness and probably a slew of homebuilder bankruptcies.

Time will tell as they say; and that time is coming sooner rather than later.

Good luck and good trading,
Richard

UNDERLYING BULLISH SIGNALS STRENGTHENING

I am undeniably bullish right now.  My only question at this point is whether this is a very significant bear market rally or the early legs of a new bull market.  Believe it or not, I think it's the latter.  As pointed out in my last article, this rally is being fueled by two very influential groups - financials and semiconductors.  Wide participation in any short-term rally is necessary to justify any bull market call.  We are definitely seeing wide participation on this rally.  Breadth has routinely been 3 to 1 or 4 to 1 in favor of advancers on the NYSE and NASDAQ, and at times has grown to a 10 to 1 thrashing of the bears and beyond.  The S&P 500 followed the lead of the NASDAQ recently, soaring above its 50 day SMA on heavy volume, retracing to retest it on lighter volume, then surging to a new high.  The summer of 2007 was the last time that the S&P 500 was able to perform like that.  Look at the recent strength of the S&P 500 below:

The S&P 500's next price test comes in around 875.  However, if the VIX breaks down below key support in the 36-37 range, I believe the S&P 500 is heading a lot higher than that.  Take a look at the VIX chart below:

The relationship between the VIX and the current bear market is strikingly similar to the relationship between the VIX and the bear market of 2000-2002.  There were double tops, lower VIX readings on bear market lows, even descending triangles that, in the case of 2002, broke down and sent the market soaring.  I'm waiting for that breakdown to occur.  I'm convinced it's going to happen.  When it does, the next wave of buying will swamp the last one.  Click here to watch my video presentation, describing the reasons why I believe this bear market has ended.  The trading opportunities that are staring us in the face right now are astounding.
 
One word of caution:  The bullishness of late may require a price to be paid during options expiration week.  The number of call options bought in the last 4 weeks is absolutely staggering.  So enjoy this week while it lasts because tons of in-the-money calls may force a sudden drop in the major indices as we approach options expiration.
 
Happy trading!

TEN YEARS YOUNG!

OUR TEN-YEAR CELEBRATION IS NOW ON!  Chip started StockCharts.com ten years ago this month and to celebrate we are running our best special ever!

* Subscribe to (or renew) any of our online services for a year and get two additional months of service free!
Normally, you'd only get one month free.

* Subscribe to (or renew) any of our online services for six months and get one additional month of service for free.
Normally, you wouldn't get any free months.

* Order anything from our online bookstore and get free shipping (to anywhere in the US or Canada).
US customers will save about $5 and Canadian customerss will save about $10 per order.

* Refer a friend to StockCharts.com and get two free months of service when they sign up.
Normally, you only get one free month for each referral.

Don't delay however. These special deals will end soon. Click on one of the links above to get started!

DIA SURGES OFF 50-DAY

The Dow Industrials ETF (DIA) surged off its 50-day moving average with a big advance on Wednesday and a gap on Thursday. While the four-week surge is most impressive, the ETF is running into a resistance zone and becoming overbought. First, broken supports around 80 turn into resistance. This level is equivalent to 8000 on the Dow. Second, DIA retraced 62% of the prior decline and this key retracement can act as resistance. Third, the consolidation from late January to early February also acts as resistance (yellow area). Finally, DIA has advanced four weeks straight and is now up 23% since early March. This makes it overbought by most yardsticks. While securities can become overbought and remain overbought in strong uptrends, the chances of a correction are increasing. The bottom indicator shows the Percentage Price Oscillator (5,35,9), The bulls are in good shape as long as this indicator rises and remains above its signal line. A dip below the signal line could signal the start of a correction.

TECHNICAL ANALYSIS 101 - PART 5

This is the fifth part of a series of articles about Technical Analysis from a new course we're developing. If you are new to charting, these articles will give you the "big picture" behind the charts on our site. if you are an "old hand", these articles will help ensure you haven't "strayed too far" from the basics. Enjoy! 

(Click here to see the beginning of this series.)

Candlestick Charts

Compared to traditional OHLC bar charts, many traders consider candlestick charts more visually appealing and easier to interpret.  Each candlestick provides an easy-to-decipher picture of price action.  An analyst can quickly see compare the relationship between the opening and closing price as well as the high and low price. 

The graphic above shows how candlesticks are constructed.

Candlesticks with hollow bodies indicate buying pressure and filled bodies indicate selling pressure.  Long upper or lower shadows form when the market moves significantly in a particular direction during the day and then reverses before the end of the day.  As a result, long lower shadows can infer bullishness while long upper shadows can infer a bearish market.

 

Candlestick Colors

When the ‘Color Prices’ option is selected on the Chart Attributes workbench, the Candlestick’s outline and  body be colored black or red, depending on the candlestick’s opening and closing prices and the previous day’s closing price. 

If the closing price is higher than the opening price, the body will be displayed hollow.  If the closing price is lower than the opening price, the body will be filled red with the following exception; if the closing price is higher than the previous day’s closing price, the body will then be filled black.

The candlestick’s shadows and body outline are colored black or red depending on the closing price compared to the previous day’s closing price.  If the closing price is higher than the previous day’s, the candlestick’s shadows and body outline will be colored black.  And the candlestick’s shadows and body outline will be red if the closing price is lower than the previous day’s closing price.

Market psychology is reflected in each of these candlestick formations in the following ways.

Up Day, Higher Close; typically results from expectations of higher prices (greed) out weighing expectations of lower prices (fear).  The length of the candlestick body shown indicates especially strong buying.

Down Day, Lower Close; expectations of lower prices (fear) are stronger than those of higher prices (greed).  As with the first candlestick, a longer candlestick body infers greater urgency of investors to sell their shares.

Down Day, Higher Close; a rare candlestick, this one begins with an opening gap up in price from the previous day’s closing price but closes down for the day.  A gap is defined as a price range where no trading takes place and is the result of a significant change in demand (gap up) or supply (gap down) before trading begins for the day.  In this case, heavy buying at the beginning of the day reversed but still closed higher than the previous day.  This is a bearish sign when it occurs well into an upward price move.

Up Day, Lower Close: another rare candlestick, this one begins with an opening gap down in price from the previous day’s closing price but closes up for the day.  This price action can be considered bullish during a downward price move since initial strong selling in the day becomes exhausted and buyers push the price higher at close.

 

The SharpChart AAPL above illustrates the candlestick format.  The up and down days are readily apparent with the use of candlestick charting.  When the balance between buyers and sellers change, candlesticks often form recognizable patterns signaling the change.  These candlestick patterns will be discussed in a later article.

Below, you can see how the three types of charts compare visually:

 




 

Next time, we'll get into Chart Scaling, Volume, and CandleVolume charts.

RALLY CONTINUES

Last Friday I said we should be looking for a short-correction because the CVI (Climactic Volume Oscillator) was very overbought, and prices were approaching overhead resistance. There was a very small correction, but prices kept moving higher, while the CVI zigzagged at overbought levels. We also observed the STVO (Short-Term Volume Oscillator) move down from overbought to neutral. This is the kind of thing that happens in bull markets, and bear market rallys. There is no guarantee that this bullish behavior will continue, but I suspect that it will.

Now medium-term indicators are reaching overbought levels -- see the VTO above and the intermediate-term breadth and volume indicators below. Clearing this overbought condition will be more difficult than the short-term clearing was.

Further complicating the issue is the overhead resistance. The market has reached the resistance line at the same time that internals have become overbought. A breakout at this time would be a very bullish sign; however, a real pullback, allowing the buildup of some internal compression would not necessarily be a bad thing.

Bottom Line: The market has been behaving in a positive manner ever since it rallied off the March lows. Of course it is possible that the bullish phase will suddenly fade, but for now I think we are experiencing a bear market rally that could move the S&P 500 up to the area of 1000.