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Materials SPDR tests February low

The Materials SPDR (XLB) was one of the hardest hit sector SPDRs over the last four weeks. After a 15+ percent decline, the ETF is testing support from the February low. A big bullish engulfing pattern formed on Friday as the ETF opened weak and closed strong. Notice how the long white candlestick completely engulfed the prior red candlestick. Indicator-wise, the Commodity Channel Index (CCI) has a positive divergence working and a cross above the zero line would turn momentum bullish again.

Click this image for details

The February low and reversal provide clues on what to look for now. A harami formed the first week of February and there was a mini breakout the second week of February. A bigger breakout followed the third week of February with a gap up and close above the early February high. XLB advanced from 29.5 top 32.5 and then there was a pullback to the 31 area. This post-breakout pullback is called a throwback that provides a second chance to partake in the breakout. The Commodity Channel Index (CCI) also formed a positive divergence from late January to early February. Notice that the CCI break into positive territory corresponded with the XLB breakout at 31.5.

LEARNING FROM HISTORY, NAVIGATING THE PRESENT

The tremendous market volatility is stressing many traders. My approach to tense situations is to push back a bit, look at the big picture, and then return to shorter-term charts for making tactical decisions. I am a huge fan of the New High – New Low Index and invite you to take a look at its signals with me. Let us review the weekly chart of the previous bull market and apply those signals to current events.

(Ed. Note: The NH-NL Index will be available on StockCharts.com very soon.  Watch for an announcement on our homepage.) 

A bull market typically has three stages, clearly marked on this chart. If this is the model, then I believe that today we are between Stages 1 and 2, in a normal corrective zone. If this is right, how will the weekly NH-NL mark the bottom? If it follows the model of the previous bull market, it will signal a buying opportunity when it declines towards the minus 2,000 level. And where is it now?

 

The weekly NH-NL stood at plus 604 on Friday, 5/14.  I wrote at that time that we were moving in the direction of a bottom – but not there yet.  This week’s decline pushed the weekly NH-NL down to minus 516.  It is now closer to an important low, but more bottoming work needs to be done.  There is certainly no rush to jump in and buy.  We expect menacing price action to continue and the feeling of mass pessimism to darken in the weeks ahead.  Paradoxically, this will create a terrific long-term buying opportunity.

A combination of technical analysis, experience, and discipline provides the tools for understanding the markets and succeeding in them.  We share our research, including the analysis of NH-NL at www.spiketrade.com – and we cordially invite the members of StockCharts.com to visit us.

- Alexander Elder

BLOG ARTICLES WORTH READING

Hello Fellow ChartWatchers!

One of the more unexpected pieces of feedback that I've gotten as I have travelled around recently is that some people aren't reading our free Blog Articles because they associate blogs with rumor, innuendo, amateur writing, and lots of false information.   While that might be true of some blogs, rest assured that the free articles that we publish here at StockCharts.com in our "Blogs" section are not like that at all.

1.) Our Blog Articles are only written by staff members or people we have a very close working relationship with.

2.) Our Blog Articles are focused on charting, market analysis or the StockCharts website.

3.) We moderate all comments that get sent in about our Blog Articles to insure that they stay on-topic and don't contain mis-leading information.

4.) There is an educational aspect to everyone of our Blog Articles.

5.) We only post Blog Articles when we have something useful to say.

6.) Many Blog Articles contain charts that are linked directly to our website so that you can click on the chart and see how it was created.

7.) We publish several blog articles each day - over 2000 so far!

8.) New blog articles are announced in the "What's New" area of our homepage, on Twitter, and in our RSS feed as soon as they are published.

We know from our web stats that many people are not reading our free Blog Articles.  Please don't miss out on this very useful, free resource.  Simply click on the "Blogs" tab at the top of any of our pages to get started.  If you use an "RSS News Reader" program (more info), just point it to our RSS feed.

- Chip

S&P 500 AT A CRITICAL JUNCTION

The S&P 500 decline over the past several weeks has reached a critical junction point in the decline at the 380-day exponential moving average support level. There are several forward scenarios that can occur:

1) Prices are sufficiently oversold on a short-term basis to where the S&P can manage to move to new highs above the 1217 level. This would represent a rally of +12% or thereabouts. The question would then become whether significant and material negative divergences developed in the advance/decline and new highs/new lows indicators that would suggest a major top in the making. This period would likely be akin to that of the August to October 2007 rally that led to the end of the cyclical bull market.

2) Prices are sufficiently oversold on a short-term basis to where the S&P can only manage a countertrend rally towards the 1130-to-1180 zone, and then fall back and breakdown below the 380-day exponential moving average in an end to the cyclical bull market from the March-2009 low. This countertrend rally would be had with very poor underlying advance/decline figures and slack volume patterns.

3) Lastly, the current decline that has nascently broken  through the 380-day exponential moving average  - continues its extension lower without an relief or respite rally whatsoever. This would along the lines of a "mini-crash" or perhaps something even more dour. This would be the "tail risk" event that very few are expecting.

Having said this, the odds obviously favor one of the first two scenarios, with the first scenario in all probability being the "most likely" at this juncture. We have a difficult time postulating this course, but the technical evidence at the recent highs were coexistent with simply an interim high rather than a high formed by major negative divergences or non-confirmations. Lowry's rightly notes that all major bull market highs have had certain conditions attached to them; of which they were not present at the recent S&P high at 1217. They say we live in historically interesting times; and this case is no different. But is this time really different to warrant a different outcome than the probabilities suggest?

Good luck and good trading,
Richard

THE PITFALLS OF INCREASING VOLATILITY

Many traders look at volatility and think huge potential rewards.  I look at it and think huge potential risks.  I know I'm conservative, but it's two different ways of viewing the same market.  I concede that if you're on the right side of each extreme move, potential profits await - and big ones.  But good luck being on the right side each time it moves.  When the VIX rises as it's done the past two weeks, emotions rule the market.  Fundamentals?  Puh-lease!  Hewlett Packard (HPQ) beat its quarterly EPS estimates, then raised guidance.  It's reward?  At the low on Friday, it was down 5% from its stellar earnings report, and that was on top of the 10% it was already down in May prior to that report.  Congratulations HPQ, welcome to a fear-driven market.  Volatility is routinely measured by the Volatility Index, or VIX.  Check out the chart on the VIX and how it's risen dramatically off the mid-April lows:

Many who love the volatility and the possibility of big gains may also like trading the juiced ETFs.  Let me just say be careful.  I've done much research on these trading vehicles and produced educational videos on this subject.  They are not long-term trades and holding on during extended periods in an extremely volatile period can be absolutely lethal.  Let me give you a recent example.  On April 27th, the Dow Jones US Financial Index (DJUSFN) closed at 288.21.  On May 12th, the DJUSFN closed at 288.18.  So 15 days later and nearly an identical close.  The UYG (ultralong ETF that tracks the DJUSFN at a 200% clip) fell by nearly 1%.  The SKF (ultrashort ETF that tracks the DJUSFN inversely at a 200% clip) fell nearly 2.5%.  Losers were on both sides of this trade.  This "slippage" occurred in just two weeks!  Imagine holding these juiced ETFs for months, or even years!  These are VERY short-term trading vehicles only.  They are not designed to be held for longer than one day.  The only time it will benefit you to hold for longer than one day is if you're on the right side of the trend and the trend continues without whipsaw volatility.  In that case, the compounding nature of juiced ETFs actually increases your returns GREATER than the desired 200%.

Here's an example of what I'm talking about:

After that May 12th close on the DJUSFN of 288.18, financials tumbled for six straight days.  The DJUSFN fell 11.20% during that period.  If you were fortunate enough to be riding the SKF during those six days, you'd have made 25.14%.  Given the 200% "expectation", the SKF should have gained 22.40% during that period.  But it was the compounding of gains with juiced ETFs that actually exceeded the expectations of a doubling.  That's why I always discuss trading these juiced ETFs only when the underlying index is at a key support or resistance level on the chart.  If you catch a reversal, you can hold as long as the trend moves in your favor.  But always remember that back-and-forth, volatile action cripples your performance.  Thus, juiced ETFs should NEVER be considered a long-term holding.  It's one of the few times I can say with certainty that you WILL lose your money if you hold long enough.

The extreme volatility is also creating problems for traders because of huge gaps in both directions at the opening bell.  Knowledge of gap trading is very important.  Most gaps are of the common gap variety, meaning they'll usually revert back to the prior close, "filling" the gap.  But there are other types of gaps that must be recognized at the time of, or just after, the gap in orderly to appropriately trade and minimize risk.  Last week, I held the second in our monthly Online Trader Series, "Learning to Trade Gaps with Precision".  You can still access this video.  Also, check out the exhaustion gap that we identified on Chipotle Mexican Grill (CMG) on our Chart of the Day from a week ago.  CMG fell 13 dollars after we featured it.  For more details on the CMG chart and on gap trading strategies, CLICK HERE.

Happy trading!

FOREIGN CURRENCIES TUMBLE

In early April, I expressed the view that the rally in the U.S. Dollar Index was coming mainly from weaker European currencies which meant that the dollar rally wasn't as widespread as it appeared. To support that view, I showed three foreign currencies that were rallying strongly against the greenback that included the Australian and Canadian Dollars along with the Brazilian Real. It didn't hurt that those three currencies were tied to commodity-producing countries and showed that global traders were still willing to assume some risk. That situation has changed. The next three charts show all three currencies plunging below their 200-day moving averages. The hardest hit by far is the Aussie Dollar. Chart 3 shows that high-yielding currency plunging to the lowest level in nine months. Money leaving high-yielding currencies usually flows into lower-yielding ones like the Japanese yen in a flight to safety.

WHERE'S THE SELL SIGNAL?

With the market in a dizzying decline, some of our subscribers are wondering why our market posture is only neutral. Where's the sell signal? The short answer is that the Thrust/Trend Model (T/TM) can only give a intermediate-term neutral signal if the long-term signal is still on a buy (the 50-EMA is above the 200-EMA). 

This decision is based upon the conservative assumption that bull market declines will be short-lived, and that a neutral signal eliminates market exposure during a correction, while at the same time addressing the lower probability outcome of a full bear market decline. In other words, we never know if a bull market correction will actually be the beginning of a new bear market, but we do know that most of the time it won't be, so we bet with the odds and go neutral.

To answer the question of when a new sell signal will be generated: Not for a very long time. First a long-term sell signal must be generated (50-EMA crosses down through the 200-EMA), which, based upon the current positions of the 50- and 200-EMAs, won't happen any time soon. Once the LT sell signal is generated, we then have to wait for another intermediate-term buy signal. After/if that IT buy signal fails, AND the LT sell is still in effect, an intermediate-term sell signal will then be generated.

The point is that we wait until LT conditions are negative, THEN we wait for intermediate-term rules to generate a sell signal within the negative long-term environment. Our foremost objective is to avoid losing money during declines. Short selling losses can have a double negative effect regarding our performance versus the market, so we try to limit it to only those times where the odds favor success.

This doesn't prevent individuals developing techniques that allow them to be more aggressive, but the parameters of the T/TM are intended to function within an intermediate time frame, with the hope of filtering out shorter-term swings.

Bottom Line: There is no need to expect a signal change for at least a couple of weeks. We think that the most likely next signal will be a new buy signal, resulting from a rally that ends the correction; however, the market needs to stop going down before it can go up.

EXTREME SENTIMENT VARIATIONS DRIVING VOLATILITY

Global stock markets have been quite volatile of late and significant gap ups and gap downs are becoming the norm.  While trading gaps may seem impossible at times, there is good news technically from the market selloff that resulted from the debt crisis in Europe.  In recent articles, I've spoken about long-term negative divergences, overbought conditions and extreme complacency and how that would likely lead to short-term market weakness.  That weakness first appeared in the influential financials sector one day before the news of the alleged Goldman Sachs (GS) fraud by the SEC.  Shortly thereafter, our two leading major indices - the NASDAQ and Russell 2000 - both printed bearish reversing candles to confirm the uptrend off the early February lows had ended.  Even if you weren't inclined to believe that the trend was over, at a minimum, it was important to note the elevated risks.

The ensuing selloff has relieved the overbought oscillators and negative divergences.  In addition, the extreme relative complacency that certainly contributed to the selling was relieved.  After the panicked selling of May 6th and 7th, our equity only put call ratio (EOPCR) printed an extreme PESSIMISM reading that was the highest since November 21, 2008, marking a short-term bottom (see chart below).  I've discussed in many articles in the past how the elevated EOPCR can be used on a relative basis to gauge investors' complacency and pessimism.  When that ratio reaches extremes, it doesn't necessarily mean the market has topped or bottomed (although in many instances it will coincide with tops and bottoms).  Instead, what traders should take from it is that risks are elevated and, at a minimum, hedges should be in place.  Acknowledging increased or reduced inherent risks in the stock market is as important as finding quality trades.  Risk averse traders/investors could simply move to cash when relative complacency hits high levels.  Such a strategy would have avoided the latest carnage.  Check out this year-to-date chart of the EOPCR and how the S&P 500 was impacted by swinging sentiment:

Personally, I consider the -20% level (red line) to be "extreme pessimism", at which point I begin looking for other confirming signs of a potential bottom.  These confirming signs could be reversing candlesticks, long-term positive divergences, oversold oscillators, an exhaustive gap, etc.  On the flip side, the +20% threshold signals that a near-term top could be approaching and hedging strategies (or increased cash levels) should be considered.  As you can see from the chart, the relative complacency signaled that long positions carried higher risks starting in mid-March.  By mid-April, the relative complacency had grown to over 35%, a record since the CBOE began providing the EOPCR data in 2003.  One week later, the major indices began suffering huge losses on very heavy volume.  I didn't know when exactly the selling would occur, but I could see it coming.  Here was an excerpt from our daily Market Chatter on April 15th, essentially at the market top:

"The bulls continue to overcome everything in their path - at least for now.  Historically, April 13th and 14th represent two of the worst trading days of the month.  The bulls could care less as the major indices keep marching forward.  The extreme complacency that we've been referring to lately apparently wasn't extreme.  Yesterday's complacency most certainly was!!!  Are you ready for this?  How about .33 on the end of day equity only put call reading?  Think that's extreme?  Well, let us just say it's the lowest daily reading EVER since the CBOE began providing us the equity only data on October 21, 2003.  There hasn't been a single day more complacent than yesterday.  What added to that complacency was the volume of equity contracts traded.  4 million contracts.  While there have been more contracts traded in a day, there has never been the disparity between calls and puts.

Consider this:  There were 3 million equity calls traded while just 1 million equity puts.  That difference - 2 million more equity calls - far exceeded the previous record of 1.5 million.

We understand what we're seeing, which is the bulls' complete ignorance of every red flag waved in front of them.  But we 100% believe that ignoring these signs and simply going along with the crowd without any hedges in place could potentially result in disaster.  We're not interested in that strategy and you shouldn't be either.  Whether the market continues higher or not in the near-term, it makes no sense whatsoever to be 100% long in this market without a backup plan or hedging strategies in place."

The risks were there and were obvious to me.  But everyone has to make his or her own call as to the risks they're willing to take each and every trading day.  Given all the volatility of late, knowledge of gap trading strategies is paramount.  On Friday morning, we issued our daily Chart of the Day featuring a stock that had recently printed an exhaustive gap.  Recognizing that gap, this stock was considered for a short alert and it promptly fell nearly six dollars intraday on Friday.  You can check out that chart and video by CLICKING HERE.

Additionally, on Tuesday, May 18th at 4:30pm EST, I will be presenting the second in our monthly Online Trading Series, "Learning to Trade Gaps with Precision".  You can learn more about this presentation by CLICKING HERE.  I hope to see you there!

Happy trading!

FTSE FORMS LARGE BEARISH BROADENING FORMATION

The London FTSE ($FTSE) has an expanding right triangle working over the last 7-8 months. These are akin to broadening formations, which are also bearish reversal patterns. After an advance from 3500 in March-09 to 5250 in October-09, the index moved into a volatile consolidation period. Notice the higher highs and relatively equal lows. It was a volatility and uncertain period. The pattern would be confirmed with a break below support around 5000. Such a move would also break the 52-week moving average for the first time since July 2009. Upon a confirmation break, the downside target would be the next support level around 4500, or another 10% lower. The indicator window shows RSI hitting the 40-50 support zone for the third time in a year. Momentum remains bullish as long as RSI holds this zone. A break below 40 would turn momentum bearish and could be used to confirm a support break at 5000.

Click this image for details

OUR 1-WEEK SPRING SPECIAL AND OUR NEED FOR SPEED

SPRING SPECIAL NOW ON, BUT ONLY FOR ONE WEEK! - As Chip mentioned above, we are now running our Spring Special which allows new subscribers and members to extend their subscriptions at a big discount.  Sign up for 6 months and we'll give you a 7th month for free.  Even better, sign up for 12 months and we'll give you 2 additional months for free.  But don't delay - unlike past specials, this one will only last until next weekend.  Click here to get started.

NOW WITH BIGGER, STICKIER FONTS - We've increased the default size of the text on our website and we've made the font sizing box (near the top right corner of most pages) sticky - meaning that it will remember your preferred font size and you won't have to reset it each time you visit the website.

INVEST-ED-CENTRAL'S NEW VIDEO SERIES IS EXCELLENT - ChartWatchers contributor Tom Bowley has been hard at work putting everything he knows about investing into a wonderful online video tutorial that is now available via our bookstore.  Click here to learn more and see a free preview.

AKAMAI IS SPEEDING UP STOCKCHARTS - We have been working with Akamai Technologies to improve the speed and reliability of our website.  This week we will be migrating most of our charts onto the Akamai "Web Acceleration" network in an attempt to reduce the number of Internet "middle men" that can sometimes slow down our charts.  Preliminary testing shows that Akamai can cut in half(!) the time it takes for one of our charts to cross the country.  We hope those results hold up when we start sending our real traffic over those links later this week.  Stay tuned...

SNAPSHOT CHARTS WILL DISAPPEAR FROM OUR SITE NEXT WEEK - As previously announced, we are discontinuing our Snapshot chart feature now that our new "Share" feature is available.  If you have any important snapshot charts that you want to save, you'll need to download them to your computer's hard disk before next Wednesday.  To do that, just right-click on the chart and select "Save Picture As..." from the popup menu that appears.

FOLLOW US ON TWITTER FOR OUR LATEST UPDATES - Here's the link to our Twitter feed.  Let's see if we can get 1000 followers before the end of May...

DR. ALEXANDER ELDER JOINS CHARTWATCHERS

Hello Fellow ChartWatchers!

There is a TON of great stuff happening at StockCharts.com right now.  First off, I want to make sure that everyone is aware that our SPRING SPECIAL is going on right now.  Subscribe or extend your account for 12 months and we'll give you 2 additional months for free!  (Subscribe of extend by 6 months and we'll give you 1 month for free.)  But please do not delay because unlike previous specials, this one will only last for ONE WEEK!  That means that you have to act before May 8th or you'll miss out.  Why not click here right now to take advantage of this fleeting offer?  Go ahead... We'll wait.

Are you back?  Good!  Now for the bigger news...

CATCHING AN IMPULSE

This week marks the debut of Dr. Alexander Elder in our ChartWatchers newsletter.  Dr. Elder's books are legendary - I honestly hope everyone has read at least one or two of them.  They can make anyone a better investor almost instantly.  I am thrilled to have him contributing to StockCharts.com now.

Dr. Elder's first contribution was to allow us to add his "Impulse System" of red, blue and green bars to our SharpCharts.  Here's an example of what a chart with "Elder's Impulse System" looks like:

To create one of these charts, just select "Elder's Impulse System" from the "Type" dropdown on the SharpCharts page (or just click on the chart above to see an example).  We've also created a new ChartSchool article that explains exactly what the colors mean and how they are arrived at.

When Dr. Elder saw his system on our site, he sent the following reaction: "It is a pleasure to see my Impulse System charts on the web for the first time!"   Both he and I hope that it can help ChartWatchers everywhere.

INTRO: HOW I MANAGED MY PICK

Today Dr. Elder is also joining us as a columnist.  He and Kerry Lovvom (a trader profiled in the book "Entries and Exits") currently run a website called SpikeTrade.com - a community of experienced stock traders.  Each weekend, he writes a column called "How I Managed My Pick" that is a review of a trade that he entered and exited during the previous week.  The column's goal is to educate people based on lessons of real-world experience.  I think all ChartWatchers can benefit from Dr. Elder's articles.  The article below was written on the first weekend in April.  Watch for more current offerings in future newsletters. - Chip

A RACE BETWEEN A TURTLE AND HARES - ALEX ELDER

I did not expect to choose a Gold pick this week.

I expected a difficult week ahead, with many crosscurrents. Also, Inna, my manager, was taking two days off, and I knew I would have to spend a lot of time in the office, distracted from the screen. I kept looking at attractive shorts and longs, but in the end decided to go with what I thought was a defensive pick - a gold stock, AUY, picked by Colin B. one of our traders here at SpikeTrade.com.

Here is the chart of AUY at the start of the week:

This daily chart shows a quad bottom. The three rightmost bars are Red. I love these false downside breakouts. The purple arrow indicates a potential bullish MACD divergence, and the text in the box reminds me that the Impulse system will go off Red if on Monday AUY trades at or above 9.81.

On Monday, AUY exploded on a gap, making me think I missed the boat, but on Tuesday it began to sag. As I lifted my head from Inna's work in late afternoon, I noticed that AUY had touched 9.80. I figured it would want to poke its toe a little lower and placed an order to buy at 9.79.

I usually do not discuss my trade sizing in these reports, but will do it now because it shows something useful about risk management. On Sunday, facing a busy week, I decided to risk only $500 on this trade. My initial plan was to enter at 9.85 with a stop at 9.61, risking 24 cents per share, allowing me to buy 2,000 shares.

I call this the Iron Triangle of risk control: you know you maximum risk, you know your risk per share, you divide A by B to get the permitted number of shares.

On Tuesday, buying at 9.79 with the same stop, my risk per share was only 18 cents. Dividing $500 total permitted risk by 18 cents allowed me to bump up the size of my trade to 3,000 shares. I placed an order with eTrade which allows me trade unlimited size for $7.99. My entry grade was 96%, meaning I just about caught the low of the day.

On Wednesday AUY rallied, then sagged, but kept above my entry level. I am a great believer in holding out for a good buy, and it paid off here.

On Thursday, the last day of this short week, AUY rallied with great conviction. I seriously considered making it a longer-term trade, but caution prevailed; I prefer not to carry SpikeTrade picks like this one over the weekend. With Inna back in the office and me being able to concentrate on the screen, I was watching the intraday charts. When I saw a bearish divergence on the intraday chart, I took profits at 10.14. The gain was $1,050.

The lesson of this trade is that in a market driven by heavy crosscurrents a cautious defensive pick may well be the best solution!

All the best,
Alex

GOLD MINERS INDEX HITS THREE-MONTH HIGH

Three Thursdays ago (April 8), I wrote about the upturn in the price of gold and gold stocks. At the time, gold was breaking through a bullish "neckline" in a head and shoulders bottom while the Gold Miners Index was breaking through its March high. On Tuesday, I showed the Gold ETF (GLD) reaching a new 2010 high after a successful retest of its neckline. Today I'm going to focus on mining stocks which are starting to emerge as new market leaders. Chart 1 shows the Market Vectors Gold Miners ETF (GDX) trading at the highest level since January. This week's upside breakout has also taken place on rising volume which is another positive sign. So is the fact that the GDX/SPX relative strength ratio (below chart) is rising above its 2010 down trendline. That shows new leadership. The reasons for the latest upturn in gold assets are twofold. One is simply the fact that commodity prices have been lagging behind stocks and are starting to play catchup. Another is that gold plays a dual role as an alternate currency and is attracting some money coming out of Europe. [Gold is trading at a record high against the Euro, the British Pound, and the Swiss Franc]. The second point is illustrated by the fact that gold rose earlier in the week (when Greek debt was downgraded to junk) while most other commodities fell.

NASDAQ AND RUSSELL 2000 CONFIRM BEARISH SIGNS

In my last article I suggested the financials were topping and that would make any further advance in the market difficult.  Well this past week the action on the NASDAQ and Russell 2000, home of the high beta stocks, confirmed the bearish action.  We've seen several warning signs develop over the last several weeks.  These include extremely overbought conditions on both daily and weekly timeframes, negative divergences on the MACD on daily and weekly timeframes, outrageous relative complacency unlike anything we've seen since the CBOE began providing us equity only option data in 2003, and significant price resistance levels.

First, let's take a glance at the Russell 2000:

The 650-750 area appears to be the trading range for the Russell 2000 now.  After weeks of steady movement higher, the bearish dark cloud cover candle from last week suggests the near-term is likely to be a bit more dicey.  The 20 week EMA is at 662 and rising and that too has proven to be a solid support level over the past year.  The Russell 2000 is being featured as our Chart of the Day for Monday, May 3, 2010 and can be viewed by CLICKING HERE.

The NASDAQ is a bit more bearish considering that it still has a long-term negative divergence present on its weekly chart.  That has the potential of leading to a 50 week SMA test to "reset" this oscillator.  Take a look:

I discussed in my last article the tendency for the S&P 500 to follow the lead of financials.  Given the relative weakness in that group, we must respect the likelihood that another consolidation period began this week.  Having the NASDAQ, a leader during the advance off the February lows, confirm our many bearish indicators with a DAILY close beneath its 20 day EMA for the first time since February is simply more evidence that the market is likely to take the breather it very much needs and deserves.  The Russell 2000, another relative leader since February, closed a fraction above its 20 day EMA on Friday and should be watched closely as a new trading week unfolds.

Until new highs emerge on our major indices, I'd view any short-term strength as an opportunity to lighten up on longs and/or hedge against further near-term weakness.  I'm not bearish equities at this point as a major uptrend is still intact, just cautious given the warning signs, elevated risks and an underperforming financial group.

Happy trading!

WHAT IS COPPER TELLING US?

We are rather interested in the manner Copper is trading at present, for Copper has shown itself in recent months to be a leading indicator of the path of the S&P 500. Perhaps this is due to it's economic sensitivity, or perhaps it is due to it's positive correlation with Chinese equities. In any case, the Copper/S&P 500 relationship is important to our trading regime. One cannot help but see that Copper bottomed in late December-2008 before the S&P 500 bottomed in March-2009, which we all know led to a rather material advance until January-2010. At that point, Copper topped out before the S&P 500, and then traded sharply lower - the S&P 500 followed shortly thereafter.

So, it should benefit readers to see that the current Copper decline is rather material, and we're now starting to see the impact of lower Copper prices upon the S&P 500 as it trades lower - with the prospect rather good of still further declines ahead. We're also interested in whether Copper breaks below its 70-day moving average, for it it does - then the S&P should experience weakness through a number of important technical levels such breaking below rising trendline support and very likely below  its 75-day moving average at 1150. In the end, major bull market support at 1085, which is roughly -10% from current levels, and well within the tolerances of a "shake-out" correction before the bull market resumes.

Good luck and good trading,
Richard

A SUPPORT TEST FOR THE DOW NEXT WEEK

With the third long red candlestick in three weeks, the Dow Industrials is once again testing support in the 11000 area. The senior average first exceeded 11000 on April 14th and then moved into a trading range. While a support break would be short-term bearish, it would not be enough to affect the bigger uptrend. After a 1300 point advance in just 11 weeks, the Dow was overbought and ripe for a pullback or consolidation. Even the best athletes need to rest after long sprints. Should a correction unfold, we can turn to broken resistance and the Fibonacci Retracements Tool to estimate downside targets. Broken support and the 38% retracement converge around 10700 for the first target.

Click this chart to see the details.

6-MONTH SEASONALITY GOING NEGATIVE

SIX-MONTH SEASONALITY: Research published by Yale Hirsch in the Trader's Almanac shows that the market year is broken into two six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher. (See Sy Harding's book Riding the Bear for extensive details on this subject.)

While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds. Below are one-year charts that begin on May 1, and end on April 30, covering the last four years. The left half of the chart shows the unfavorable May through October period and the right half shows the favorable November through April period. The green line shows the beginning of the favorable period, the red line the beginning of the unfavorable period.

As you can see, regardless of how the market performs on average, every year is different and presents its own challenges, and there is no guarantee that any given period will conform to the average. In fact, it is obvious, at least in the last few years, that bull and bear market pressures will override seasonal tendencies more often than not. Conclusion: Be aware of current seasonal tendencies, but first and foremost follow the primary trend.