StockCharts Blogs - ChartWatchers

SOME SLIDES FROM MY "WORLD TOUR"

For the past couple of months, I've been visiting with investments clubs around the country who have been gracious enough to invite me to talk.  So far I've talked with clubs in Portland, Pheonix and Dallas.  Calgary, Denver, and Houston are coming up with east coast cities to follow in the fall.

I wanted to show you a couple of the slides I used in my Dallas presentation yesterday and give you a pointer to our handout so that you were aware of some of the things in my talk even if you haven't attended one.  (At some point, I'll try and post the complete version of the presentation - but that won't be for a while.)

 

Above is our "top secret" back-of-the-napkin plan for ruling the world.  Basically, when John Murphy or Arthur Hill or I write market commentary, we try to make them timely, educational and based on tools that our readers have access to.

 

Did you know Point and Figure charts are like "scissor" lamps?  It's true!  When it is stretched out, it's like the trendlines on a regular bar chart.  When it is collapsed, those same trendlines become vertical columns on a P&F chart.

 Finally, here's a high-level process flow for doing technical trading:

 

My presentation then shows how many of our tools can be used to support this process.

- Chip

FINANCIALS FALL HEAVILY

Financial stocks are considered to be leading indicators for the rest of the market. Over the last year, the group has led the market higher. Yesterday, they led it lower. The chart below shows the Financial SPDR (XLF) falling 3.6% on huge volume. The big volume is more serious than the price drop. With the group (and the market) having rallied two months without a pullback, one certaintly seems overdue. And it may have started yesterday. If this just a short-term pullback, the XLF should find support along its January high. The green lines show that would also be a 38% retracement of the February/April rally. The ability of the XLF to stay above that initial support level will help determine if this is just a short-term pullback or something more serious.

FINANCIALS TOPPING?

In my first article of 2010, I indicated that financials would need to lead on a relative basis in order for us to see strength in overall equity prices this year.  Until late last week, financials have performed very well on a relative basis.  Take a look visually at what I was referring to:

It's quite evident that the market is going only as far as the financial sector can take it.  That leads to one very important question.  Will the technical problems that surfaced this past week be resolved quickly in the upcoming week, or is the market finally ready to pause and collect its breath?  While nothing is ever a guarantee in the stock market, my bet is that financials will underperform for at least a short period of time and that will stymie the market's advance.  So what damage was caused?

First, take a look at the weekly chart of the Dow Jones US Financial Index:

The long-term negative divergence that's present here raises intermediate-term concerns because such divergences on weekly charts tend to keep the bulls at bay for weeks, if not months.  The heavy volume reversal in financials late this past week printed a dubious candlestick for the week.  Our Chart of the Day on Friday morning featured a shorting opportunity on Citigroup (C).  Check out this chart:

C immediately fell to the short-term price support that we mentioned near the $4.40 level.  Now C rests in a trading range of $4.40-$5.00.  Let's see which level falls first.  Another short-term negative was the market's reaction on Friday to two solid reports.  Bank of America (BAC) tripled profit expectations, yet that large financial finished the day -5.49%.  General Electric (GE) also posted excellent results, but fell 2.7% on heavy volume and with a long-term negative divergence present on the daily chart.

Adding to the bears' fuel on Friday was the announcement that the SEC is alleging that Goldman Sachs (GS) defrauded investors out of $1 billion relating to mortgage investments.  I'm not going into the details of the allegations, but help me with the math here.  GS lost $23 per share on Friday, or $12 billion in market cap, because of $1 billion defrauding allegation?  Is there more to it than what was provided in the initial news release or was this a complete overreaction on options expiration day?  I guess we'll find out soon enough.

But here's the really ironic part of the GS story.  GS has market making operations.  Does anyone else see the irony in this being announced on options expiration Friday?  Let me tell you that prior to Wednesday, the largest daily spread of equity calls traded vs. equity puts traded was 1.5 million contracts.  After Intel (INTC) reported better-than-expected earnings on Tuesday, the spread of equity calls vs. equity puts skyrocketed to 2.0 million contracts on Wednesday.  On Thursday, that spread was 1.8 million contracts.  In other words, options traders have NEVER been so optimistic about the short-term market prospects and when everyone is buying up those calls, who is on the other side of the trade?  Well, it's one of the responsibilities of the market maker - to provide liquidity in the marketplace.  My proprietary relative complacency ratio hit 29% by Thursday's close.  This is a useful sentiment indicator based on equity options trading and it marked the second consecutive day over 25%, which are the only two days it's ever been that high.  Relative complacency generally marks tops.  I've never seen the market print extreme readings like the ones on Wednesday and Thursday.  So now let's discuss the timing of the SEC's Friday announcement.  While GS likely stands to be slapped on the wrist at some point in the future for these alleged violations, I can only imagine how much the timing of the SEC's announcement cost all those call buyers on Wednesday and Thursday and helped turn profits at market making units like Goldman Sachs'.  Let me just guess that it's more than $1 billion and leave it at that.  I'm calling it the 2010 financial bailout, as if they needed another.

Ok, enough of my rant and back to the technicals.  Unless the bulls can show even more resilience and print a new high on financials, we'd look at the action this past week as a topping candle.  That sets up solid risk/reward shorting strategies in this space.  If financials break to new highs, a small loss is taken.  But if this truly does mark an intermediate-term top, an entry into the juiced ETF that tracks financials (SKF) wouldn't be a horrible strategy.  CLICK HERE for our Chart of the Day for Monday, April 19th for more details on how to approach this potential trade.

Finally, I'm excited to announce that Invested Central will be hosting our first monthly event of our just announced Online Trader Series on Tuesday, April 20th at 4:30pm EST, which will cover trading strategies of juiced ETFs in general.  If you trade juiced (or leveraged) ETFs, there are strategies to maximize profits that are critical and we'll discuss them in detail.  CLICK HERE if you're interested in learning more.

CONSUMER DISCRETIONARY STOCKS PRIMED TO LEAD

Since the beginning of the year, the market "Generals" if you will have been the S&P Consumer Discretionary, S&P Financial and S&P Industrial sectors given they are the only sectors to have out-performed the S&P 500. However, there is only one sector that has out-performed in both 2009 and 2010 - the S&P Consumer Discretionary sector. This is obviously counter-intuitive given the enormous de-leveraging occurring in the US economy and in particular with the US consumer - although recent retail reports simply haven't proven this to be much of an issue. Be that as it may, with the broader market seemingly ready for a correction, we think the consumer discretionary stocks are primed to be the leaders on the downside.

If we step back and take a long-term look at the sector, we find that since the March-09 bottom, prices have rallied a mere 117%. But more importantly from a technical position, we find prices towards the upper end of their range of the past 13-years,  with the 9-month stochastic overbought, with the percentage above their 30-month moving average trading at 20%. In the past, a 20% reading has coincided with a correction of some magnitude. Hence, there is certainly absolute as well as relative risk in the consumer discretionary space, which we would posit is in for a corrective period of several months in the least back towards its 30-month moving average...or a potential decline of roughly -20%.

That being said, if money exits the consumer discretionary space, then we're likely to see it re-enter another space. Our preferred choice for this rotation is the S&P Energy sector...which has lagged both in 2009 and 2010. It is simply energy's turn for sponsorship...especially when one considers they ratio between the S&P Energy sector and crude oil prices is at long-term historical support.

BREAKOUT FAILS

STOCKS: Based upon a 3/1/2010 Thrust/Trend Model buy signal, our current intermediate-term market posture for the S&P 500 is bullish. The long-term component of the Trend Model is on a buy signal as of 8/11/2009.

On Wednesday the S&P 500 broke up and out of the short-term ascending wedge pattern on expanding volume. On Thursday there was a small follow through advance on expanding volume, but short-term internals showed weakness, and it looked to me as if a pullback toward the point of breakout was likely. Instead, the breakout was a fakeout, and prices fell through support all the way back to the short-term rising trend line. At this point no damage has been done to the technical picture on the daily chart.

I do have concerns when I look at the weekly chart. Prices are at the top of an ascending wedge formation, and a correction back to the rising trend line seems the most likely next move. Could be that today's decline was the beginning of that correction.

SHARING COMES AND SNAPSHOTS GO AND STOCKCHARTS WINS AGAIN!

This past week we added an exciting new "Share" link to our charting tools.  The "Share" link lets you quickly send your chart to several major Social Networking websites like Twitter, Facebook and all of the major Blogging platforms.  Click here for more details.

We also announced that with the addition of our "Share" link, the need for our infrequently-used "Snapshots" feature has decreased significantly and therefore it will be removed soon.  Click here for more details.

Finally, we also wanted to announce that for the 8th straight year, StockCharts.com has won the Readers' Choice Award for Best Technical Website from Stocks and Commodities magazine!  Thanks to everyone who voted!

THE ROAD AHEAD - OUR TRANSITION TOWARDS "THE INSPECTOR"

Hello Fellow ChartWatchers!

Is the two-month old rally coming to a end now that April has arrived?  The Dow's PPO is tantalizingly close to a bearish crossover right now.  Arthur Hill sees weakness in the S&P 500 while Tom Bowley still sees opportunities.  Read their thoughts below for more details.

The Road Ahead

At StockCharts, we are constantly improving the website.  Recently, we've begun transitioning from using Sun's Java to power our interactive tools to using Adobe's Flash.  There are several reasons for this change:

1. Flash works for more people - Our customer support team gets at least 4 or 5 complaints every week from someone having problems with Java that we can't solve.  So far, we have not had any complaints from someone who can't get Flash to work.
2. Flash starts faster - Most new people who visit our website have already visited a site with some Flash content, thus when they start a Flash program on our site, it starts very quickly.  Java can take up to 60 seconds to begin running our program.
3. Flash allows us to create richer, more interactive tools.  Flash provides us with better looking graphics and animation effects that we plan on incorporating into our tools very soon.
4. Because Flash is quicker to start, it can be integrated into other tools - specifically the SharpCharts workbench.  Check out my "Inspector" announcement below for an example.

We realize that for some people, running Flash-based tools presents a problem so for now we will continue to provide Java-based versions of our current tools as well.

During this transition, we have been working on a Flash-based version of our ChartNotes annotation tool.  The goal of that tool has been to copy the look and feel of the Java version as closely as possible.  At this point we think we've done that.  People who have used the Java version for years should be able to use the Flash version and feel right at home.  Please let us know if that is not the case.

Given that the Flash version and the Java version are almost identical, people have been asking "Which one should I use?  Why should I change over to Flash?"

At this point, everyone should be trying to use the Flash version of ChartNotes and only use the Java version if they experience problems.

"The Inspector" - The Start of an Exciting Future

As to "Why Should I Change to Flash Now?", a key reason is because a new feature will soon appear that you will probably want to use and that new feature relies on Flash's speed and better looking graphics capabilities.  We call it "The Inspector" and we are starting a Beta testing period for it today.

"The Inspector" allows you to mouse over ANY SharpChart and see the values of any point on the chart without needing to go into ChartNotes.  It gives you a set of light-gray, moveable crosshairs and a data box that follow your mouse when it is over the chart.

This screenshot doesn't really do it justice, you need to see it in action.  Fortunately, you can take The Inspector for a limited test drive by clicking here.

Because "The Inspector" is so small and fast, we are going to be able to "build it in" to the SharpCharts Workbench.  The idea is that soon all of the charts on the workbench page can be "inspected" just by mousing over them.  The current "test drive" page doesn't give you full access to the workbench yet, but it will soon.

We are still actively working on "The Inspector" and will probably make some changes before it is officially released.  Still we'd like to hear your feedback on this new tool and our new Flash-based direction.

Happy Easter everyone!
- Chip

JUMP IN CHINESE SHARES BOOSTS COMMODITIES

Stocks and commodity markets rallied on Thursday on news of an expansion in manufacturing in China, which is the world's biggest user of commodities. A few weeks back I wrote that weakness in Chinese shares was one of the factors weighing on commodity markets (along with a stronger dollar). With the dollar looking overbought and vulnerable to profit-taking, attention is now turning to China. And the news there is good. Chart 1 shows the China iShares (FXI) surging 2.5% on Thursday to the highest level in three months. The FXI has also broken a five-month resistance line. That's giving a strong boost to Emerging Market iShares (Chart 2) which are soaring (thanks also to big gains in Brazil, India, and Russia).

LOOKING INTO OIL SERVICES

The market rally higher has taken quite a few stock groups along for the ride - most notably the Consumer Discretionary and Industrial sectors. However, we've begun to see some very small rotations out of this group, and into the Energy group. This interests us greatly, for Crude Oil prices are now hard upon the $85/barrel level and showing signs of moving still higher. This will benefit the Energy group disproportionately given the broader Energy sector has under-performed the S&P 500 by roughly -4.0% this year. This is on top of further under-performance last year of over -4.0%. Thus, we believe the time has come to own Energy shares. But which sub-set of Energy do we want to own?

If we look at the Integrated Oil/Oil Service groups ratio, then we find the Integrated Oils have underperformed rather markedly as they normally due out bear market bottoms. However, we're starting to see signs in the ratio that it is turning higher towards its 60-week moving average. A breakout above this level would obviously be positive and would suggest roughly a +20% integrated oil out-performance in the weeks and months ahead. Too, we find the 20-week stochastic fat oversold levels and more importantly - forging a positive divergence with ratio prices. This would seem to be the perfect setup.

Thus, while many Oil Service stocks have bullish patterns, we think it more prescient to consider shares in Devon Energy (DVN) and Conoco-Phillips (COP) at current levels.

Good luck and good trading,
Richard

INDUSTRIALS LEADING THE CHARGE

If you're looking for sector leadership in 2010, look no further than the industrials.  While other sectors have performed admirably, especially financials and consumer discretionary, none top the 13.13% year-to-date gain that industrials are sporting.  Compare that return to the paltry 0.57% gain in technology.  Because we've been witnessing a lot of sector rotation, we'd expect to see technology have its day soon, but for now the group can't seem to catch a relative bid.  Keep in mind that as recently as one week ago, energy found itself in that exact position.  It was down year-to-date, but last week's monster gains changed all that.  Energy blew away all sectors last week, gaining 4.39% in the process.  Energy bounced off of trendline support, but the sector ETF, XLE, still needs to close above 60 and distance itself from this level.  On recent attempts, it's failed.  Take a look at this three year chart of the XLE:

While energy looks to key resistance just above current prices and technology looks to regain its form from years past, the industrials are quietly sailing along, having posted gains in 7 of the last 8 weeks (off the February 5th bottom).  The one week where industrials "struggled", the XLI lost two pennies.  So over the course of the last two months, industrials have barely paused during their steady march higher.  How can the group be played on the long side after this huge run up?  Well, very carefully of course.  Just as money rotates between sectors, it too rotates between stocks within a sector.  Therefore, it stands to reason that chasing stocks making 52 week highs with very overbought momentum oscillators within the sector doesn't make much sense.  However, stocks in a sector rarely move simultaneously.  There are opportunities on a daily basis.  One industrial stock that surged on Thursday, breaking above price resistance and its 50 day SMA, carries an RSI of 61 and stochastics of 68, hardly overbought in this environment.  I'm featuring this industrial as our Chart of the Day for Monday, April 5.  CLICK HERE for details.

Happy trading and HAPPY EASTER!

SPY stalls at channel trendline

The S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQQ) are trading near the upper trendline of a rising price channel that extends back to August. I drew the lower trendlines first, created a second parallel trendline and then moved it up to match the reaction highs. After a sharp advance the last 6-7 weeks, both SPY and QQQQ became overbought and hit channel resistance. The first chart shows SPY stalling near the upper trendline the last two weeks. The second chart shows QQQQ hitting the upper trendline last week. The odds of a pullback or consolidation certainly seem high with these key ETFs overbought and channel resistance at hand, but we have yet to see any weakness.




The current overbought period is the longest since July-August, when RSI was above 70 for over two weeks. Prior to Jan-Feb, the last correction was in June-July. This correction ended with a surge that created extended overbought conditions into August. The July-August overbought condition did not foreshadow a correction. Instead, it foreshadowed a period of choppy trading (yellow areas) and a subsequent advance to new highs. Pullbacks pushed RSI just below 50 and ended when RSI crossed back above 50 (green arrows). These RSI dips provided a means to participate in the ongoing uptrend. Going forward, this strategy is certainly not fool proof, but it is something to think about with RSI trading near 70.

MORE NORMAL EARNINGS PICTURE

S&P has still not finalized 2009 Q4 earnings, but 99% of companies have reported, and I want to get the most current earnings picture out there, so I have updated our database to TMT earnings as of Q4 2009. This causes the horrible Q4 2008 numbers to drop out of the equation and gives us a more realistic look at valuations.

The chart below shows the S&P 500 in relation to its normal P/E range (10 to 20). The colored arrows on the right help to clarify where the cardinal points of the range are now located.

While the picture has improved considerably from a year ago, the S&P 500 is still above the overvalue limit with a P/E of 23. By the end of the year (see below), earnings are expected to improve, but still not enough to get valuations anywhere near fair value (15). If prices continue to advance, the market will remain extremely overvalued.