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Holiday Special Starts and Announcing our New Loyalty Rewards Program

Hello Fellow ChartWatchers!

I have two big announcements for you this time around:

OUR HOLIDAY SPECIAL IS NOW ON!

With the holiday season just around the corner, we've fired up our Holiday Special.  It's a great way for you to join up or extend your StockCharts.com account at the lowest possible cost.  Here's how it works:

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Are you already a member?  No worries - just extend your current membership by 6 or 12 months to get this same special deal.  It doesn't matter if your account expires next month or next year, you can still renew now to get this special pricing.

(BTW, if you recently renewed and are worried that you missed out on this special, check your renewal carefully - you probably got the additional free month without realizing it.  We're sneaky that way.)

ANNOUNCING A NEW REWARDS PROGRAM!

If you've been a member of StockCharts.com for more than a year, you now qualify for our long-term loyalty discount!  Here's how it works:

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If you click on that badge, you should see a popup window appear that contains a Coupon Code.  That code, which is unique to your account and cannot be shared, can be used to reduce the cost of any renewal or upgrade order.   The amount of the reduction depends on how long you have been a member.

To use the coupon, you simply write it down and enter it into the "Coupon" field at the end of our sign-up process.

Coupon codes can only be used once, however, going forward, for each year that you are a member, you will receive an additional coupon with a larger discount.

And YES, you can combine your coupon code with our Holiday Special  to lower the  cost of your subscription even more!  (However, you can also save your coupon code for later if you want - it doesn't expire.)

(By the way, if your StockCharts.com account has recently expired, watch your email box this week for a message with a special re-subscription coupon code.)

This is just our way of saying Happy Holidays and THANK YOU to all of our loyal, long-time subscribers!

- Chip

Gold and Silver Bull Market Rages On

While there are lots of questions surrounding the sustainability of the stock market advance, there seems to be little resistance ahead for commodities, specifically gold and silver.  The U.S. dollar is the primary variable.  As you can see from the charts below, gold and silver seem to have no boundaries to the upside.  Every time the dollar shows any strength to the upside, it is met with heavy selling and back down it goes.  Those same consistent headwinds for the dollar are providing gold and silver with tailwinds and the bulls are taking full advantage.  Below are three charts, reflecting the long-term downtrend for the dollar and the major upswing for both gold and silver:

We don't have to guess or try to figure out the reaction in gold and silver.  It's very simple.  Both will react inversely to the dollar's movement.  So if we figure out the dollar, we can figure out commodities.  One glance at the long-term picture of the dollar probably tells us all we need to know.  If the trend is our friend, then it stands to reason that the dollar's path is downward.  That leaves but one option for commodities - higher prices.  There will be intermediate periods of dollar strength, which will temporarily cool off commodities.  But don't expect any sort of bubble-bursting move to the downside in commodities until the dollar has clearly reversed its downward spiral.  I just don't see it happening anytime soon.  The Fed has said repeatedly that it will keep interest rates low.  Europe has begun to hint that interest rates there need to move higher.  That combination alone will keep pressure on our currency.

I would expect the U.S. Dollar Index to fall back to retest the lows in the 70-71 range sometime in 2010.  That should provide more opportunity on the long side in commodities.  I'd use any short-term weakness as an opportunity to enter your favorite positions within this group on the long side.

LARGER CORRECTION LOOMING FOR GOLD?

Gold prices are obviously rising, and they are rising rapidly. However, given the move has begun to go parabolic in its 8-year of rally - we have to question how much higher gold prices can go in both the short and intermediate-term. To this end, the monthly charts adds some perspective in our mind.

First, let us state that we are not gold bugs, although we do believe they are headed sharply higher in the years ahead - hence we're intermediate-term bullish, with projections much higher than current levels. Second, in the shorter-term, we question whether prices have become just a bit too frothy and are in need of a correction. During the bull market since 2001, the 5-month RSI has reached into the 80-to-90 range on several occasions, which in each case corrected rather sharply lower back towards the 50-level before trending higher once again. Presently, the RSI stands at 84. It can go higher; but history has shown the risk-reward of buying gold at current levels may not be the most opportune entry point. Lastly, we would point out that gold prices are now a rather "stout" 45% above their 50-month moving average at $773/oz. Recent history shows us the once the 50% level is obtained, then we should become rather worried about a larger correction unfolding. At today's prices, this would roughly mean another $60/oz rally towards $1200/oz, which is a nice "big number." At that point, we're surely to see the media become even more lathered up than they already are about gold. Then, one should consider pulling back from the market for a bit as the undercapitalized players at taken to the woodshed for a quick beating - pushing prices lower into the oft-tested rising 20-month moving average currently rising through $921/oz.

In other words, those who chase this rally...keep your stops tight; or trade less than normal. In our opinion, there will be a better entry points in the months ahead.

Dow Hits Top of Channel

The Dow has been moving higher the last three months with surges early in the month and pullbacks later in the month. Notice how the Dow bottomed in early September, early October and early November. Also notice how the Dow peaked in mid September and mid October. Here we are in November with an early month advance and the Stochastic Oscillator overbought. As long as the Stochastic Oscillator remains above 80, it should be considered both overbought AND bullish. Notice how the indicator remained above 80 for two weeks in September and two weeks in October (yellow areas). Currently, the Stochastic Oscillator has been overbought for two weeks in November. The red dotted lines show the Stochastic Oscillator moving below 80. A similar decline below 80 would be short-term negative and argue for a correction within the bigger uptrend. Until such a move, expect overbought conditions to remain and the short-term uptrend to continue.


Click this chart for details.

TRENDLINES AND 50% RETRACEMENTS REACHED

The following three charts show the three major U.S. stock indexes having reached formidable overhead resistance barriers. Charts 1 and 2 show the Dow Industrials and the S&P 500 having retraced 50% of their bear market declines. More importantly, both indexes are testing major down trendlines drawn over 2007/2008 peaks. Given the fact that the market has rallied 60% in the last eight months without a meaningful correction, that's some cause for concern. Chart 3 shows a slightly different picture for the Nasdaq market, but the message is essentially the same. The Nasdaq Composite has reached important overhead resistance along its early 2008 trough around 2200. That puts all three stocks up against meaningful resistance barriers. Combined with the fact that numerous short-term divergences are starting to appear among market groups, and the recent rotation toward large-cap stocks in the consumer staple and healthcare categories, it looks like investors are starting to lock in or protect some yearend profits. That could lead to choppier market conditions.

STOCKS STILL OVERVALUED

Stocks have been in the overvalued end of the normal P/E range since the early-1990s, and this condition shows no sign of abating. Below is an excerpt from our daily earnings summary that will offer readers a better perspective. I have outlined the 2009 Q4 results because that is the first quarter not distorted by the huge loss reported in 2008 Q4. While the results of the current quarter are not final, 90% of companies have reported, and I don't think there will be any surprises from the remaining companies sufficient to change the estimated results a substantial amount. As you can see, valuations are projected to be well above the overvalued limit of the range (P/E of 20) through the first two quarters of 2010. If the market continues to rally, the over valuation will persist into the foreseeable future.

Since price movement over the last two decades seems to have little relationship to P/E ratios, why pay any attention to values? In fact, Decision Point's trend-following models consider price movement and nothing else. Nevertheless, we still want to be aware of the condition of the fundamental foundation of the market, and we believe that investor ignorance in this regard will only lead to more pain. After all, investors have been ignoring valuations for nearly two decades, and the result has been a stock bubble and two major bear markets. Most have not fared well during this period.

At each price top for the last two months I have been expecting a correction to begin, yet price declines have been relatively small and each top is followed by a higher top. Frustrating! I am not trying to identify a shorting opportunity, because shorting is not recommended during a bull market. The only reason that a decent correction is important is that it will provide a lower-risk opportunity to open new long positions.

For two weeks the market has been rolling over into what could be another short-term top. Or it could be the beginning of the long-awaited correction. Negative divergences still abound, but, as I told a subscriber, these conditions are usually not too serious in a bull market. The market is vulnerable, but it is not a time for shorting. We could reasonably expect the rising wedge pattern to break down, but you can see that there is support just below the wedge.

Bottom Line: Market P/E tells us that there is no fundamental foundation under the market. This information is not useful in timing decisions, but it does tell us that there is more pain ahead in the long-term. In the short-term the market is topping again, and a correction is still possible.

BARRICK AND NEWMONT MINING TURN UP

With gold hitting new record highs each day, gold stocks are starting to play catch-up. Two of the biggest are at or very close to hitting new 52-week highs. Chart 1 shows Barrick Gold closing at a new 52-week high today. The gray line is the ABX/SPX ratio which has been dropping since February and just starting to rally. Chart 2 shows Newmont Mining closing at a new 52-week high as well. Its relative strength ratio (gray line) is turning up as well. What the two RS lines tell us is both big gold stocks are pretty good values relative to the rest of the market and are starting to show upside leadership for the first time in eight months.

BIOTECHNOLOGY ETF FINDING SPONSORSHIP

We find it rather interesting that the laggard Biotechnology group and the Biotechnology ETF (BBH) in particular have begun to find sponsorship; and it is our opinion that BBH is set to embark upon a period of both absolute and relative out-performance. Quite simply, BBH is forming a rather large and bullish consolidation, which implies prices will move above previous high resistance at $103.50 - a level that has proved for weakness in the past. But the prime reason we should consider long positions is that the 400-day moving average has held, while the longer-dated 40-day stochastic is bottoming in bullish fashion.

From a trading perspective, we would look to buy weakness as it develops in the days ahead. The four largest stocks in the index are Amgen (AMGN), Biogen (BIIB), Gilead (GILD) and Genzyme (GENZ). We have our opinions about the individual shares, and needless to say that AMGN isn't at the top of our list. Those looking to perhaps out-perform BBH...should choose a combination of GENZ and GILD and perhaps some of the other junior shares.

The fact of the matter is Biotechnology is going higher; choose your vehicle carefully.

MARKET IS STRONG, BUT CORRECTION SHOULD CONTINUE

Looking at the S&P 500 chart below, the breakdown from the ascending wedge pattern is clear enough, and expectation of the breakdown has been fulfilled. The rising trend line violation brings with it the expectation of a continued decline, but I do not have a price target at this time. The horizontal dotted lines show the closest and furthest likely support levels, but I have no expectations regarding either one.

At this point, I am still expecting a price low at the end of this month based on the 20-Week Cycle low projection, but it doesn't look as if the price correction will be too severe. My reasoning is that so far short-term oversold conditions are generating very strong bounces. Of course, this could change in a heart beat, so keep an eye on it.

Technically speaking, we do not yet have a down trend -- we need a lower high and a lower low.

When we think of a correction, we usually imagine a fairly straight forward decline, but there are other possibilities, such as a consolidation phase. When I looked at the longer-term chart below, it struck me how similar the current rally is to the rally off the 2003 low. There was a sharp leg up, followed by a short consolidation, followed by another leg up. At that point, many people expected a corrective decline. Instead, there was a sideways consolidation with a modest downward bias. I do not assert that the same kind of pattern will evolve this time. I just wanted to illustrate the possibility of other outcomes.

Gold hit an all-time high this week, and it is rising in the face of rising currencies. Gold typically falls when currencies are rising, so many analysts are suggesting that people are starting to view gold as the new reserve currency. On the chart below you can see that gold is being contained by a rising trend channel, so the next move should be back to the bottom of that channel; however, if people are moving away from paper currency, there is the possibility for gold to go ballistic.

Bottom Line: Based solely upon the rising trend line violation, I am assuming that the market is in a corrective phase that will last for several weeks; however, a declining trend has not yet been established, and my assumption could be premature.

VOLUME TRENDS REVERSE; H&S PATTERNS EMERGE

In my latest article on October 18, I provided a very cautious tone but noted that volume trends remained strong - good news for the bulls!  Well, short-term volume trends now have turned negative, though the really key long-term price support levels remain intact.  A couple damaging technical developments make the end of week rally very suspect.  In the chart below on the NASDAQ 100 (or NDX), check out several annotations of significance:

 There's a lot of information on this chart to digest so let's address each item, one at a time.  First, notice since the March lows, we've seen the daily MACD break below its centerline only twice - once in early July and the other just recently.  The MACD centerline breakdown in July was accompanied by a breakdown beneath the 50 day SMA as well, just like we're seeing now.  The big difference though, in my view, is that the volume that accompanied the breakdown in July was extraordinarily light.  Recently, our breakdown has occurred with the heaviest down volume since the March lows.  This is a big red flag until it's resolved with a heavy volume breakout to the upside.

Next, notice the bearish head & shoulders pattern that has developed.  This pattern is not confirmed until we see a breakdown beneath the neckline on heavy volume.  Bottom line, the bears' work is not done yet.  It is, however, a beautiful symmetrical head & shoulders pattern, the easiest to identify visually.  Here are some of the key attributes of this head & shoulders pattern:

(1) Downsloping shoulders (from left to right) thus far, generally more bearish than upsloping shoulders
(2) Left shoulder peak = 1754.54
(3) Right shoulder peak (thus far) = 1733.22 (lower than left shoulder)
(4) Downsloping neckline, generally more bearish than upsloping neckline
(5) Left side of neckline = 1656.57
(6) Right side of neckline = 1652.44 (lower than left side of neckline)
(7) Distance between top of head (1780.83) and right side of neckline (1652.44) = the potential measurement on a breakdown, or 128.39 points
(8) Target on breakdown = right side of neckline (1652.44) minus measurement (128.39) = 1524.05.

The target on a potential breakdown is very interesting because it would represent a level that is less than 1% above the July breakout level that was never retested.  One of the basic tenets of technical analysis is that a price resistance level, once broken, becomes price support.  Usually such breakouts result in a later retest of the breakout level.  In the case of the July breakout, however, we have yet to see a retest.  This is the primary reason why I believe a short-term breakdown, if one were to occur, may only be temporary to backtest the July breakout.  I still view the July breakout level to the be biggest technical price support level on the various indices and sectors.  A head & shoulders breakdown could lead us exactly where we need to go technically, at least from a price support perspective.

The reason for studying the NDX instead of our other major indices is quite simple.  The NDX is comprised of many of the higher risk, higher beta names among the medium to large cap companies.  When market participants have an appetite for risk, the NDX begins outperforming the S&P 500.  We normally see this outperformance just before major bottoms are formed.  Likewise, the NDX usually begins to underperform the S&P 500 just before tops are reached.  So a quick review of the relative performance of the NDX vs. the S&P 500 can yield very important clues about how market participants view the market.  In our world at Invested Central, this is one of many "under the surface" clues we regularly watch to identify changing market conditions.

Below is a relative chart that dissects the performance of the NDX relative to the S&P 500.  Check out the chart and explanation below:

 A few items stand out and are explained as follows:

Point 1 - represents the peak of outperformance by the NDX, just one month before the market's major meltdown that kicked into full gear by mid- to late-September 2008.

Point 2 - notice that in November 2008, the NDX began to outperform the S&P 500, a few months BEFORE the S&P 500 actually bottomed.

Point 3 - outperformance by the NDX on a relative basis was significant from November 2008 to March 2009 as the S&P 500 bottomed.  Investors were showing their appetite for risk long before the market bottomed

Point 4 - By late April/early May 2009, this relative ratio was hitting levels that we're still failing to break above, a potential warning sign.

Point 5 - currently, this is the biggie.  As the major indices continue to break out month after month during this uptrend, why isn't the NDX outperforming?  I believe the appetite for risk is waning despite the higher equity prices.  If this relative ratio falls back beneath 1.55, it would signal a major shift in market sentiment.

Bottom line, the warning signs are out there and watching the price/volume trends turn negative short-term adds to our cautious stance.

Happy trading!

TECHNICAL ANALYSIS 101 - PART 15

This is the next 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 entire series.)

Price charts often have blank spaces known as gaps. They represent times when no shares were traded within a particular price range. Gaps result from extraordinary buying or selling interest developing when the market is closed. When the market opens, the price is raised or lowered enough to satisfy all of the buying or selling orders.

For an up gap to form, the low price after market close on the day of the up gap must be higher than the high price of the previous day. Up gaps are generally considered bullish.

A down gap is just the opposite of an up gap; the high price of the down gap day after market close must be lower than the low price of the previous day. Down gaps are usually considered bearish.

Up and down gaps can form on daily, weekly or monthly charts and are considered a significant when accompanied with higher than average volume.

A price chart with gaps almost every day is typical for very lightly traded securities and should be avoided. Prices often gap up or down at market open and then close the gap before market close. Such temporary intraday gaps should not be considered as having anything more significance than normal market volatility.

Many investors mistakenly believe that gaps influence future prices to the point of eventually filling the gap. Instances where gaps close within a few days of forming can be significant. However, gaps have little to no influence on price action weeks or months after forming.

Breakaway gaps signal a change in market psychology about the future prospect of a security, especially when accompanied by above average volume. A bullish breakaway gap forms when a security gaps up after an extended decline, extended base or a consolidation period. A bearish breakaway gap forms when a security gaps down after an extended advance, an extended top or a consolidation period.

Common gaps occur within a trading range or shortly after a sharp move as a reaction. These gaps do not reflect a change in market psychology, but rather represent price volatility or temporary imbalance of supply and demand. For instance, if a security has declined 20% in a week and gaps up, it would be considered a common gap and not likely to signify a change in trend. Or, if a trading range develops between $20 and $30, and a gap forms in the middle, it is probably a common gap.

Continuation gaps form near the middle of a short or intermediate trend in the same direction. These gaps signal a continuation of the preceding trend. Continuation gaps are also known as measuring or runaway gaps. These gaps can be triggered by news events that bring more market attention to a security.

Exhaustion gaps occur in the direction of extended trends. For an exhaustion gap to be considered valid, prices should reverse soon after the gap and close the gap. In the later stages of a trend, the extent of the trend becomes widely reported; eventually causing a surge in trading that cannot be sustained. These events often mark the end of the trend.

Next time, we'll start looking at Candlestick Chart Patterns.

LONG-TERM RATES MOVING BEFORE STOCKS

The 10-Year Treasury Yield ($TNX) is largely positively correlated with the S&P 500 - and also shows a propensity to lead the stock market. The chart below shows the 10-Year Treasury Yield peaking in July 2007 and stocks peaking in October 2007, three months later. Similarly, the 10-Year Treasury Yield bottomed in December 2008 and stocks bottomed in March 2009, again 3 months later. The 10-Year Treasury Yield now has peaks in early June and early August. In addition, the 10-Year Treasury Yield broke below its July low with a decline into early October. Should the current pattern hold, the stock market would be expected to peak between September and November. This period is three months after the June peak and three months after the August peak in the 10-Year Treasury Yield ($TNX). If we take the middle, then that means an October peak for the stock market. So far the S&P 500 remains above its early October low and the medium-term trend has yet to reverse.

Click this chart for details.