StockCharts Blogs - ChartWatchers

FIXED INCOME ETFS GAIN GROUND

While some money is starting to creep back into stocks, investors are still showing enthusiasm for bonds. And I'm not talking just about Treasuries. More impressive gains were seen in other bond categories like corporate bonds and TIPS. Chart 1 shows the High Yield Corporate Bond ETF (HYG) closing above its 50-day line for the first time in two months. Chart 2 shows the Investment Grade Corporate Bond ETF (LQD) breaking out of a short-term "symmetrical triangle". It did so on noticeably heavy volume as well. Chart 3 shows the TIPS Bond Fund also turning higher. To me, that suggests that investors are willing to embrace more risk, but aren't yet ready to abandon bonds for stocks.

 

Chart 1

Chart 2

Chart 3

SOME OF THESE THINGS ARE NOT LIKE THE OTHERS

Hello Fellow ChartWatchers!

Now this will probably give away my age, but one of my first memories of television was from the educational children's show called "Sesame Street" and the song that they used to sing called "One of These Things is Not Like The Others".  In case you aren't familiar with this, click here to see the song performed by one of the show's biggest stars.

Granted, that game is seems pretty straightforward - even for a monster! - but I find myself thinking about that song every time I use our CandleGlance feature; especially when I use it in conjunction with our Sector Bullish Percent Charts:

These are nine of our sector-oriented Bullish Percent Indexes.  They are based on the P&F charts of hundreds of stocks and show the percentage of those stocks that have "bullish" P&F chart signals.  (For all the gory details, please see this article.)

But given this display, all we have to do is what Cookie Monster was doing - find the chart(s) that are behaving differently and see what that tells us about the market.

The first thing to notice is that almost all of the indexes have recently turned around and are moving higher - a very good sign for the market overall.  Looking closer you should see that the Energy index ($BPENER) is the only index that is currently higher than it's 50-day Moving Average (the red line).  Healthcare, Industrials and Materials are all positioned well above their 20-day Moving Average (the blue line) and just below their 50-day - a pretty good indication of strength returning to those sectors.  Consumer Discretionary, Consumer Staples, Financial stocks and Technology stocks currently have the weakest looking BPIs - while all are now moving higher, they are all still under (or just over) their 20-day Moving Average and haven't displayed the same kind of strength that the other sectors have.  You might also notice that the 20-day Moving Average for those stocks is still heading down which it has turned up for the others.

The fact that Consumer-oriented stocks as well as traditional bull-market sectors like Technology are still lagging should cause ChartWatchers to pause and reflect about the strength of the current rally.  I'll be watching our BPI CandleGlance page closely for signs of more participation by Consumer stocks (bullish) or weakness in the Energy and Financial sectors (bearish) in the coming days.

- Chip

TIME FOR JUICED ETFS?

The market is at a crossroads short-term.  We've been bouncing back and forth after that early May drubbing.   So is the rally ending or is it just starting?  Well, we can only look at the technical, sentiment and historical indicators and come up with a "highest probability" scenario.  Regardless of how you're approaching the market, you need to maintain a sense of skepticism and be prepared to acknowledge that your short-term call is incorrect.  So with so many questions unanswered, why is now the time to consider juiced ETFs?  It's simple.  We're at resistance levels across our major indices.  Juiced (or leveraged) ETFs are appropriate, in my view, in rare circumstances when the potential reward justifies the risk being taken.  I don't believe in them as an every day trading vehicle.  The odds are stacked against the trader who tries to call the market direction every day and who uses ETFs as a way to possibly profit from such calls.  Holding for more than one day can cause erosion in the price of both juiced longs and juiced shorts.  I've produced videos detailing the effects over time of holding onto these juiced ETFs and it makes little sense to hold over longer periods of time as the risk/reward strongly suggests you'll end up losing.
 

Let's look at the market technicals first by reviewing a chart of the QQQQ (ETF that tracks the NASDAQ 100 index):

The reversing candlestick (doji) at resistance with stochastics in the 90s after the recent uptrend calls into question any further rally here.  Can the market continue this rally?  Absolutely.  But we're looking for highest probability.  The technicals suggest this could be an area where a reversal takes place.
 
On to sentiment.  In late April and early May, the VIX surged as fear grew and the major indices experienced a fall that was eerily reminiscent to September/October 2008.  Since that fall in the indices, however, the VIX has been drifting lower as investors have collected themselves and fear has been alleviated to some degree.  But on the chart below, the VIX has touched a key support level.  Check it out:

If the VIX bounces, even temporarily, it's likely to trigger more selling of equities in the near-term.  That's another short-term negative.
 
How about historically?  How do U.S. equities tend to perform in mid- to late-June?  Well, since 1950 on the S&P 500, the June 18th through June 26th period has yielded 45% of days that have closed higher than the previous day.  This compares to the "norm" throughout the year of 53%.  Clearly, the market's tendency is to trade more bearishly during this period.  Furthermore, the annualized return on the S&P 500 since 1950 during this period is -24.98%, a full 33 percentage points below the "norm" of 8.5% annual returns on the S&P 500.
 
Technicals suggest we are in an area where we could be topping.  Sentiment in the form of the VIX says we're at a level where the VIX could bounce, leading to weakness in equities.  And history tells us to be very careful this time of year.  The odds appear to be stacked against the bulls.  Therefore, trading a juiced ETF that moves inversely to the market might make sense here, with fairly tight stops in place of course in the event the recent bull rally marches on.
 
If you prefer to look at individual stocks, I used StockCharts scanning engine to produce a list of stocks that are likely to move lower if the overall market stumbles.  I recorded this as a very brief tutorial on setting up a simple scan searching for technically unhealthy stock candidates to short.  If you'd like to view this chat, CLICK HERE

We also offer a FREE Chart of the Day and Video Chart of the Day at Invested Central.  The chart for Monday came from the scan that I performed above and can be viewed by CLICKING HERE.

Happy trading!

THE VOLUME ISSUE

One of the issues that has concerned many analysts is the lack of volume supporting the rally from the June lows, but looking back over the last year we can see that volume has not been at all impressive for either of the rallies beginning in July 2009 or February 2010. This is a great illustration of why we do not use a volume or breadth component in our primary timing models. In my opinion, only price movement is relevant when a decision point appears to be at hand.

This does not mean that we don't use volume and breadth indicators as secondary tools to further assess what price is telling us, and to dig deeper than the raw volume bars, which since the beginning of the bull market have not shown enthusiastic support.

One of the tools we use is the McClellan VOLUME Oscillator, which is calculated the same as the McClellan Oscillator except that we use daily advancing and declining volume instead of advances and declines. The core element of the Oscillator's construction is to calculate a fast and slow exponential moving average of the daily advancing volume minus declining volume. These moving averages are displayed below as the 5% and 10% Indexes. Subtracting the 5% Index from the 10% Index results in the McClellan Volume Oscillator reading. The cumulative total of the daily Oscillator reading gives us the Volume Summation Index.

While the raw volume has been pretty consistently below average throughout the bull market, it is what it is, and prices have been rising. The Volume Oscillator and its components allow us to view the internal quality if that volume. The convergence and divergence of the two moving averages expresses the short-term momentum of advance-decline volume through the Oscillator, and the Summation Index presents a medium-term view.

What we see are fairly usual index/indicator formations and ranges. The exception being that the recent correction brought the 5/10% Index complex more deeply below the zero line than is typical for a bull market (or bear market, for that matter).

The recovery out of the recent lows looks normal and healthy. The 5/10% Indexes are back above the zero line, which is where they need to be in a bull market, and the Summation Index has bottomed, although it is still below zero. The Oscillator is in the overbought range, which is a problem for the short-term.

Summary: While raw volume continues to be a problem, looking below the surface shows that advance-decline volume relationships and behavior are normal, and in general support a bullish outlook.

A BREADTH THRUST FOR THE MCCLELLAN OSCILLATOR

Before getting into this breadth thrust, let’s review the McClellan Oscillator and McClellan Summation Index. Basically, the McClellan Oscillator is the 19-day EMA of Net Advances less the 39-day EMA of Net Advances (advances less declines). Like MACD, it is a momentum oscillator for Net Advances. The McClellan Summation Index is a cumulative measure of the McClellan Oscillator. The summation index rises when the Oscillator is positive and falls when the Oscillator is negative.


Click this image for details

The chart above shows the Nasdaq McClellan Oscillator ($NAMO) in the lower indicator window. Notice how the oscillator surged from below -50 to above +50. This 100+ point swing from negative territory to positive territory is a bullish breadth thrust. A similar bullish thrust occurred in February. The main window shows the Nasdaq McClellan Summation Index ($NASI). Notice how it declined steadily from late April to early June as the McClellan Oscillator remained consistently negative. The bullish breadth thrust in the McClellan Oscillator pushed the Summation Index above its 10-day SMA for the first time since late April. The chart below shows the NYSE McClellan Oscillator and Summation Index for reference. You can click on these chart to see the settings.


Click this image for details

A REVIEW OF GLOBAL MARKETS

A question from a subscriber yesterday prompted me to make a quick review of global markets. I rarely look at global markets because (1) my overriding focus is on the U.S. market and (2) it is my observation that international markets and the U.S. market tend to run in the same direction. There are always exceptions to this rule, but broadly speaking global fundamentals affect nearly all markets and their charts reflect this.

As I review the 20 world market charts on the DecisionPoint website, I see that (with one exception) the 20-EMA is below the 50-EMA, which for the most part has these indexes in a medium-term neutral market posture. There are, however, a few whose 50-EMA has dropped below the 200-EMA, which puts them in a bear market by our rules.  Here's an example:

Three other charts are very similar to this one - they are the French CAC, the FSTE Milan Index, and the Shanghai Composite.  In addition, the 50/200-EMA crossover has not taken place with the Nikkei yet, but it is virtually guaranteed that it will happen soon.

While most of the charts may agree in directionality with the U.S. market and are showing weakness, it is interesting to note that five of the charts (25%) are showing considerably more weakness than the U.S. market. Unless we believe that the U.S. market will power upward with enough force to drag lagging global markets along, perhaps we should temper any optimism we may have regarding the market's recovery in light of global weakness.

- Carl

RSI remains bearish for SPY

The Relative Strength Index remains below 50 and bearish for the S&P 500 ETF (SPY). Bounded momentum oscillators trade within a defined range. RSI trades between zero and one hundred with fifty as the centerline. Think of this level as the 50 yard line in a football game. The bulls (offense) have the edge when RSI is above 50. The bears (defense) have the edge as long as RSI is below 50. The yellow areas show prior periods with RSI below 50, which correspond with declines. RSI met resistance near 50 during each decline (red arrows). In fact, RSI met resistance near 50 twice during the current decline. Momentum remains bearish as long as RSI is below 50. Look for a break above 50 to turn RSI bullish again.

Click this image for details

RSI is based on closing prices so I am showing a close-only line chart for SPY. While the most recent decline is obviously the deepest of the three, SPY has yet to close below its February closing low. SPY did, however, close below its late May closing low and this opens the door to a test of the February low. SPY also established a clear resistance level with two closing highs around 110.76. The bears clearly have an edge as long as SPY remains below these resistance levels. A break above these closing highs is needed to reverse the downtrend in SPY.

Look out Below!

Technically, this hasn't been brain surgery.  Our major indices broke down in early May on very heavy volume and, as technicians, we can never ignore that lethal price/volume combination.  The weakness also came on the heels of some of the most extreme complacency that I've seen.  When markets get complacent, the risks escalate.  It doesn't mean that markets crash and burn.  While the breakdown of equity only put call data wasn't provided in 1999 by the CBOE, we can still look at the total put call ratio and see that the market was extremely complacent in 1999 and the market traded higher for months on the heels of it.  So clearly, a market doesn't have to fall at the first signs of extreme complacency.  But the lessons learned should be obvious.  The risks of trading on the long side grow disproportionately to the returns desired.  Those risks were realized with the 2000-2002 bear market.

Traders like to trade.  That's what they do.  But everyone should step back and look at the big picture.  We are going through market turmoil unlike anything I've ever seen.  We are living through an inherently risky market.  Every day.  There is much debate, both fundamentally and technically, as to whether the market is heading higher or heading lower.  And that debate relates to both the near-term and long-term.  This is what makes a market.

Friday's carnage was felt on every index and every sector.  Few stocks were spared.  But just two days earlier, we had a robust advance that saw the exact opposite - the overwhelming majority of stocks carried the market higher.  There are two primary differences between the two "routs".  The biggest, in my view, was the accompanying volume.  Friday's selling saw 5.3 billion shares trade on the S&P 500.  Let's keep in mind it was a FRIDAY, when volume tends to slow down a bit from previous days.  Wednesday's selling saw just a little more than 4.0 billion shares.  Panic selling generally sees heavier volume.  The problem I have with Friday though is that there should have been little panic.  We traded within the same range that we've been trading in for the last couple weeks.  We didn't break down on Friday.  So why the panic?  Well, to me it's a sign that institutions are preparing for a further meltdown in equities.

Let's recap what's transpired in the market to get a better grasp of the overall technical picture.  In my mid-April article, I discussed the deteriorating condition of financials on a relative basis and how that was a sign of potential weakness in the major indices.  In my early-May article, I noted that both the NASDAQ and Russell 2000 confirmed the bearish action of the financials from a couple weeks earlier.  I discussed the relative complacency with Invested Central's members ad nauseum.  We saw massive volume accompany the breakdown across all of the major indices.  We've seen retests of that breakdown from underneath on lighter volume.  We are now in very bearish head & shoulders formations on many indices, sectors and individual stocks.  It's all set up for the bears.  Now they must deliver.  By "delivering", they must execute a breakdown of the current head & shoulders patterns on heavy volume.  That's the only ingredient missing.  This pattern is not confirmed until the breakdown occurs.  So the bulls do have hope, but it seems to me it's dwindling.

Let's look at the pattern on the S&P 500:

Different technicians may view this pattern differently.  I consider the first "computer-glitch"-aided selloff to have marked the right side of the neckline and the subsequent bounce to have formed a classic right shoulder test of the 50 day SMA.  Friday's move lower on big volume has simply set the table for the bears.  The bulls somehow need to defend this neckline support and they must do it NOW.  Monday will be interesting both in terms of where we open and then how we react to that open.  A tale will likely be told.

Based on all of this, the big question is.....how do you trade this market?  As I've been saying for several weeks, I'd do it with much less frequency, with fewer shares, and my holding period would be very short.  I normally favor swing trading, holding onto stocks anywhere from one week to as much as a few months, capturing more reliable moves in a trending market.  This market's volatility and inherent risk simply doesn't allow for that strategy, period.    Understanding the market environment is the first step in successful trading.  I'd be tempted to trade (short) only off of breakdowns occurring on heavy volume or light volume retracements to key resistance areas.  On the long side, you have to wait for reversing candles to occur at key support and then be sure to keep a tight stop in place and take profits quickly.  Here's an example of a recent long trade that we highlighted for members on Flowserve (FLS):

For Monday, we're highlighting our daily Chart of the Day, focusing on another reversing candlestick.  Hopefully, we'll have the opportunity for a quick gain as well.  This chart can be accessed by CLICKING HERE.

Happy trading!

ELLIOTT WAVE NOTATION OPINIONS NEEDED

ELLIOTT WAVE ANNOTATIONS - ANY PREFERENCES?  We're hard at work on the next version of ChartNotes which will have a significant number of NEW annotation features and capabilities.  We'll have more information about these improvements once things are closer to completion.

One of the features we'll be adding is the ability to quickly insert Elliott Wave annotations onto any chart.  But here's were we need your help - after some extensive research, we are still not sure what is the "most popular" style for designating waves on a chart is.  Some charts use "1, 2, 3, 4, 5" for the big waves and then "I, II, III, IV, V" for the smaller waves (and then "a, b, c, d, e" for the even smaller waves).  On the other hand, some charts use "I, II, III, IV, V" for the large waves and "i, ii, iii, iv, v" for the little waves.   Some use circles around their numbers.  Some use boxes around their letters.

If you are an experienced Elliott Wave chartist, we'd like to hear from you about your preferred technique for labeling your waves.  What combination of letters, numbers and symbols do you prefer?  Just use the Comments box for this article to send us your opinions.  Thanks!

BULLISH PERCENT HANGING ON - BARELY

Hello Fellow ChartWatchers!

Back down below 10,000 we go.  This is the fifth time in the past month that the Dow has dipped below that magic number.  The past four times resulted in quick rallies back above 10K - will that happen again on Monday?   Or have the bulls run out of ammunition?  Our experts below debate that very point in this edition of our newsletter.  Be sure to read their articles and then draw your own conclusions.

Here's a hint however:

The NYSE Bullish Percent is still up above 40 right which indicates that the Bulls are still hanging on.  If it falls below 30, then things could get ugly fast just like in mid-2008.  Next week should be very interesting.

CALLING ALL EAST COAST INVESTMENT CLUBS

In case you haven't heard, I've been traveling throughout the western part of the US giving presentations to various investment clubs about StockCharts and Technical Analysis.  I started in Portland, then Phoenix, then Dallas and most recently Calgary.  I'm off again next week to talk to the good folks at the Houston Investors Association.

So far, the feedback from my talks has been very positive.  I'd love to keep the ball rolling and I need your help to make that happen.  If you are a member of a large (50+ person) investment club that's based near the east coast of the US and your club is interested in having me come out and talk, please let me know via email - chipa@stockcharts.com.

Right now, I'm looking to schedule trips out there starting in August.  I hope to see you soon!