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THE NEED FOR SPEED

Hello Fellow ChartWatchers!

Are you feeling more bullish now?  Last week's rallies have put some needed energy back into the traders that haven't gone on vacation this summer.  Technically the market is mixed and you can see evidence of that in the articles below - John Murphy talks about a positive development on the daily charts while Arthur Hill points out a negative sign on the latest monthly charts.  Clearly the markets have a ways to go before anyone can say a bull market has returned, but last week's trading was the first bullish action in a long time.

THE NEED FOR SPEED

Here at StockCharts, we are constantly looking for ways to get you our charts as quickly and consistently as possible.  Much of the past two months has been spent adding and testing two different "web acceleration" technologies to our site in an effort to reduce the time it take for our charts to move across the Internet.

The first technology we tried came from a company called Akamai.  While this technology works well for other websites and, at first, showed some promising results for us, when we dug deeper we discovered that it really wouldn't work well for us mainly because when the market is open our charts cannot be cached (i.e., saved for later reuse).

The second technology looks much more promising however.  It is called "XIP" and it comes from InterNAP, the same company that currently connects us to the Internet.  XIP dynamically adjusts the low-level settings that control how data flows across the Internet.  It works best when transmitting large items (such as a chart) across long distances.  The bigger the object and/or the longer the distance, the more XIP helps.

(Another really nice thing about XIP is that it doesn't require any changes to your computer - it's a change that we make here in our datacenter.  No install, no settings to mess with, just improved speed - pretty nice!)

At this point we've completed our internal testing of XIP and the results look good.  In our tests, XIP reduced the time it takes to send out our charts by 30 to 40% in most cases.  That said, we now need your help.  We want to make sure that if we switch to XIP it won't cause any problems for our users.

If you have a spare second this morning, please click on the following link and see if you have trouble seeing any of the charts on the page.  If any of the charts don't appear, please let us know.  If any of the charts take a really long time to appear, please let us know.  (If some of the charts appear 30 or 40% faster than they did before, please let us know too!)

Here's the link:  http://stockcharts.com/charts/gallery.html?VMW

Some of the charts on that page use the "old, standard" technology and at least one of them uses the new XIP technology.  See if you can see which is which just by refreshing the page.  Click here to send us your comments and thanks for helping us test this technology.

- Chip 

S&P 500 BREAKS LONG-TERM MOVING AVERAGE

On the monthly chart, the S&P 500 broke below its 12-month moving average for the first time since July 2009. Even though moving average crossovers do not pick exact bottoms or tops, this moving average cross captured the major moves over the last eight years. As with all moving average crossover systems, success depends on a strong trend or sustainable move. A trading range or choppy market will produce whipsaws. For now, the S&P 500 broke below the 12-month SMA with a sharp decline in May-June. This is bearish until proven otherwise. There was a rebound in July, but the index needs to close above 1100 to negate this latest signal.


Click this image for details

The indicator window shows MACD(5,35,5) moving back into negative territory and below its signal line. This is also a long-term bearish development. First, momentum favors the bears when MACD is negative. Second, MACD is also moving lower and getting more negative. A move back into positive territory is needed to turn momentum bullish again. Why use MACD(5,35,5)? Monthly charts are already long-term oriented. Monthly price data is also smoother than daily or weekly price data. Changing the MACD settings from (12,26,9) to (5,35,5) increases sensitivity.

STOCK INDEXES BREAK DAILY DOWNTREND

Stocks turned in a strong performance Thursday. The three major stock indexes shown below closed back over their 50-day moving averages. The S&P 500 (Chart 2) and the Nasdaq Composite (Chart 3) did so for the first time since early May. Another positive sign is the ability of all three indexes to close above the down trendline drawn over their April/June highs. The next hurdle to overcome is their July highs and 200-day moving averages. The short-term stock picture does appear to have improved with the growing possibility of a rebound to the mid-June peak. The rally in stocks was supported by a rally in most commodities, most notably copper prices which hit a three-month high.

UNDERSTANDING DIVERGENCE

Divergences are among the most misused technical analysis tool anywhere, in my opinion.  The first step in successful trading using divergences is understanding both their strengths and their limitations.  My preference is to focus on divergences as they relate to the Moving Average Convergence Divergence (MACD).  Others use divergences on bound momentum oscillators like the RSI and stochastics.  The word "bound" refers to the physical limitations of both of these oscillators.  They cannot print a reading higher than 100 nor lower than 0.  That's a fact.  By definition, a "positive" divergence occurs when you have lower equity prices and a higher oscillator reading.  So think about this for a minute.  If a stock is selling off and prints a stochastics reading of 0, what is the likelihood that stochastics will be lower the next time prices move to new lows?  I'd say there's a 0% chance.  So if prices do move lower, you're guaranteed to have a positive divergence.  To me, that's an absolutely worthless piece of technical evidence.  RSI is also a bound oscillator, but it rarely moves below 20 or above 80.  Therefore, it's a bit more reliable in terms of suggesting slowing momentum.  I may check the divergence on the RSI occasionally, but it's never a primary indicator for me.
 
That brings me to the MACD.  Let's start with the definition.  The MACD is the difference between any two moving averages.  Are they converging (moving closer together) or diverging (moving further apart)?  It gives us a sense of momentum in an underlying stock or index.  The "standard" MACD is the difference between the 12 period EMA and the 26 period EMA.  StockCharts allows the printing of a simple chart to provide the calculation.  Check out this S&P 500 daily chart:
 

As prices move higher or lower, it's very typical for the shorter-term moving average to change more abruptly in the direction of price.  But after a period of rising or falling prices, the difference between these moving averages begin to "converge" and that's the signal that momentum is shifting.  While many technical indicators lag, the long-term positive and negative divergences that form on the MACD actually precede trend reversals.  Last Tuesday, we issued three stock setups and one was flashing a buy signal based on a long-term positive divergence that had formed.  Take a look below at the result since:
 

There are definitely rules to follow when buying a stock with a positive divergence or selling one with a negative divergence.  If you're interested in divergences and would like to learn more about them, feel free to join me on Tuesday, July 27th as I lead the fourth in our monthly Online Traders Series events.  CLICK HERE for more details on this event and for additional trading candidates with long-term positive divergences currently present.
 
We are also featuring another stock with a powerful long-term positive divergence in place as our Chart of the Day for Monday, July 26.  CLICK HERE for more information.
 
Happy trading!

NOW THAT'S A TRADABLE RALLY!

After a horrid 2nd quarter, the S&P 500 is sure making up it's losses at a rapid rate. We've been rather bearish of late given the S&P was trading below its major moving averages that delineate bull & bear markets, with the prospect of these important resistance levels proving their merit with another leg lower. The only caveat we've had is that our models were near oversold levels. They never made it that far, but certainly they have now turned higher - with the S&P now gingerly breaking back above our resistance levels. This is material in our mind, and it has caused us - for now - to become tactically bullish. Our reasons are simple:

1. The bullish consolidation formation was confirmed with a breakout above trendline resistance;

2. The 40-day stochastic is rising from right at oversold levels; our proprietary models are based on the stochastic, so it serves a useful purpose here for illustration;

3. All the major moving averages - except the medium-term 75-day moving average - were violated from below; and,

4. Breath has been astoundingly good on this rally. Volume is a bit suspect; but we've found this argument not to hold water in the trading world any longer given the entire March-09 to April-10 rally was on low volume.

Therefore, our upside targets are 1120-to-1160, and we'll expect to see this develop by August-end...which pencil to paper would suggest a rally of another +11% in the space of a month. Now that's a tradable rally.

MONITORING EQUAL-WEIGHT INDEXES

We have added a new page of charts to help us monitor the relative strength of equal-weighted indexes against their capitalization-weighted counterparts. Cap-weighted index values are dominated by the larger-cap stocks in the index. For example, the 50 largest-cap stocks in the S&P 500 represent about 70% of the index value. Conversely, the Rydex S&P Equal Weight ETF (RSP) gives each of the 500 stocks equal weighting when calculating the index value. As a general rule, the equal-weighted indexes will outperform their cap-weighted counterparts because smaller-cap stocks dominate the index, but not always, so we want to monitor their performance so we know where we should put our money.

There are 11 equal weighted ETF, 10 of which are sponsored by Rydex. One of those 10 is RSP, mentioned above, and the other 9 are for the SPDR Sectors. Finally, there is the Nasdaq 100 Equal-Weighted Fund ETF (QQEW). The RSP chart below is an example of all the charts on the new page.

The Price Relative line is calculated by simply dividing the value of RSP by the SPY. When RSP is stronger, the price relative line rises, and it falls when SPY is stronger. Is this really such a big deal? Well, yes, it is. From the March 2009 low the SPY advanced 87% to the May 2010 top. RSP advanced 125% during the same period, which is 44% better performance.

On the negative side, it appears that the equal-weighted indexes are often weaker during pullbacks and declines, but as a practical matter there are no hard and fast rules, and we need to constantly be aware of the relative performance of these two types of indexes.

Below are two charts comparing RSP and SPY over the long term. Note the peculiar behavior of RSP during the 1990s. This was when the stock market bubble was inflating, and money was concentrated in large-cap stocks. When the bear market started in 2000, we can see the sudden up turn in relative strength, and RSP didn't hit its bull market top until a year after SPY.

A final comment on performance, from the 2002 bear market low SPY advanced 107% to the 2007 top. RSP advanced 183% during the same period. Why hasn't anyone noticed?

Bottom Line: There are 11 ETFs that feature equal weighted indexes, and we track and generate timing signals on all of them in our Decision Point Alert Daily Report. On market advances these equal weighted indexes normally outperform their cap-weighted counterparts, but shifts in relative strength do happen, so we have set up a page of special charts specifically to monitor relative strength on these indexes.

NYSE SUMMATION INDEX'S "400" SIGNAL

Hello Fellow ChartWatchers!

With the market posting four solid up days over the past week, is now the time to get back in to the market?  That's the main topic of this week's newsletter and there are lots of opinions going around right now.

One of the key things to watch for after a prolonged market decline are the major market breadth indicators like the NYSE Bullish Percent ($BPBYA) and the NYSE Summation Index ($NYSI).  Like all market indicators, these lines condense the movement of hundreds of stocks down into a single line that can be used as a proxy for the overall health of the market.

Here's a chart of the NYSE Summation Index (red) overlaid on top of the S&P 500 (black):

(Click here for a live version of this chart.) 

The horizontal line on that chart illustrates that, for the past couple of years at least, things always get "interesting" when $NYSI approaches the 400 level.  (The vertical scale for $NYSI is on the right, the scale for $SPX is on the left.)  Notice the behavior of $SPX whenever $NYSI moves above or below the 400 line - strong, long-term trends usually occur.  Granted, the signal usually happens well after the start of the trend, but that's always the tradeoff - early entry versus whipsaws.  If whipsaws aren't your cup of tea, the $NYSI at 400 signal should do well for you.

It also lends perspective to the current market rise.  With $NYSI currently at -215, it is too early to declare the return of a bull market.  That said, if the Summation Index continues to rise and breaks through 400 then greater optimism is definitely warranted.

- Chip

THE MID-YEAR UPDATE

In the life of a technical analyst, a month seems like a week, a week seems like a day and a day seems like minutes.  Time flies and so do the charts and various technical patterns.  I think it's always a good idea to periodically take a step back and look at the broader picture.  It sounds like a good time for a mid-year update.
 
The following is a chart of the QQQQ, an ETF that tracks the NASDAQ 100 index.  In my last article, I took a look at the QQQQ and pointed out the likely resistance at the 50 day SMA and provided reasons for potentially trading a juiced ETF (QID) to capture gains from any fall in the underlying NASDAQ 100 index.  After falling for 2 weeks, the QQQQ moved into oversold territory and has bounced.  Check out the chart:
 

The market was very oversold to start last week with the constant pounding by the bears the prior two weeks.  RSI and stochastics had fallen to 30 and 7, respectively, a combination that generally favors the bulls near-term.  From those oversold levels, the market has bounced and gains last week were in the 5-6% range across all of our major indices.  It was certainly great to see the market regain half of what it had lost the prior two weeks, but even the gains didn't come without warning signs flashing and those warning signs were the subject of an hour long chat/video that I recorded at our website this past week for members of Invested Central.  I see potentially BIG problems brewing as it appears the summer months will not be particularly kind to the bulls.  I've discussed a few of these bearish signs in articles since mid-April, but if you'd like to check out the entire video, I think it'd be well worth the time to review this session.  It's free, simply CLICK HERE.
 
I'd like to focus on just one component of this session - the relationship between the 10 year treasury yield and performance on the S&P 500.  First, take a look at this chart:
 

First, it's important to realize that bond prices and bond yields move inversely to one another.  So when you see the yield dropping, it means money is flowing INTO bonds.  When money flows into bonds, it's coming from somewhere.  Over the past many years, it's generally been bad news for equities.  What I've found is that many times the yield can be an indicator of things to come for the S&P 500.  For instance, on the chart above, notice that the 10 year treasury yield bottomed in early 2009, just before the S&P 500.  Then again, three months ago, the yield topped a few weeks before the S&P 500.  There are several reasons why it appears that strength in equities will not be sustained for long.  One of those reasons is the breakdown in the yield beneath significant long-term support near the 3.10% level.  The recent spike in yields back to test that breakdown level is no doubt fueling the short-term rise in equity prices, but the question is - how long will it last?  I doubt much beyond the 3.10%-3.20% level.

 
A sector that I always follow closely is the semiconductors.  This group tends to lead during economic expansion, so watching the behavior here is generally critical to my market forecast.  Semiconductors are trending lower, and while that makes me nervous, it's also important to note that the relative strength in semiconductors remains strong, but showing signs of potential weakness.  Its relative performance vs. the S&P 500 is rising, but squeezing tighter and tighter into a narrowing triangle.  I've featured this group as our Chart of the Day for Monday, July 12, 2010.  If you'd like to view it, CLICK HERE.
 
Historically, the trend next week remains bullish.  But after next week we enter the worst 2 1/2 month historical period of the year - BY FAR.  Here's a fact.  Over the last 60 years on the S&P 500, this period has accumulated losses totaling 23%.  We've actually seen advancing prices in 33 of the 60 years.  The problem is when the market goes lower, it REALLY goes lower.  Check out the returns from mid-July to late September in each of the following years:
 
1957:  -12.41%
1958:  -10.31%
1974:  -22.41%
1981:  -13.76%
1990:  -18.11%
1998:  -11.97%
2001:  -16.13%
 
Are we setting up for another year we can throw into this group?  It's hard to predict that type of weakness, but to be honest, it wouldn't surprise me.
 
There have been 3 years where we've seen gains of +10% or more, including 2009 where the S&P 500 gained 11.06%.  But if the market is prepping to make a big late summer move, there's probably better than a 2 to 1 chance it's going to be to the downside.  While history never guarantees us anything, I have to admit I'm nervous heading into these historical headwinds with technical sirens blaring.
 
Happy trading!

CURRENT S&P RALLY HAVE STAYING POWER?

The July 4th fireworks came a bit more belatedly this year as the S&P 500 rose +4.86% in the holiday shortened week. This performance was rather impressive in terms of points and breadth, but certainly not in terms of volume. To us, this calls into question the veracity and staying power of the current rally.

To wit, the current S&P rally has simply retraced back into major overhead resistance at the 380-day exp. and 200-day exp. moving averages at 1087 and 1095 respectively. Thus, we would expect to see prices fail at this zone given these moving averages are now rolling over to the downside. Further, we find the 40-day stochastic starting to "bottom feed" as near oversold levels, which is consistent with the downtrend in force as in the 2008 example. The puts the onus upon the bulls to reverse these negative developments; and perhaps they shall be successful. If prices do breakout above these levels, then one may conclude that the bull market is "back on."

From our trading perspective, we are now considering become aggressive short sellers against this zone,. with Consumer Discretionary shares being at the forefront of our trading strategy.

NEW LONG-TERM SELL SIGNAL GENERATED

As you can see in our Decision Point Alert Daily Report below our Trend Model has triggered a Long-Term SELL signal for stocks.  This occurs when the 50-EMA crosses below the 200-EMA.  It has been headed this direction for quite some time so it is not unexpected. Note on the chart below that the margin on this signal was a 50/200-EMA difference of 0.01. Not much, but as long as price remains below those EMAs, the distance between them will continue to increase.

In the daily chart of the SPX we see prices moving up toward resistance in the descending wedge.  With our short term indicators still bullish, this could continue.

Our indicators are now looking somewhat schizophrenic with the PMO turning up and moving toward a positive crossover along with other indicators looking bullish in the midst of a new long term SELL signal.  This new long term signal gives us a read on the environment in which our shorter term indicators and signals now operate.  It tempers our conclusions.  Carl's Learning Center article "Bull or Bear Market Rules" explains this best.

As we discussed Wednesday, our bullish short term indicators tell us a move toward resistance could continue.  But our environment is now bearish and with the bullish descending wedge being the dominant medium-term pattern, and, ultimately, lower prices should follow even as we move up inside this wedge.

Bottom Line:  A new long term stocks SELL signal has been generated based upon a "death cross" (opposite of "golden cross") of the 50- and 200-EMAs.  Decisions in the intermediate and short term now need to take this into account.  Nevertheless, short term indicators continue to be bullish and and there are now positive divergences on medium-term indicators. So we have a positive theme developing in a negative longer-term context, but we should consider it to be a temporary development.

Gold and silver test support zones

After sharp declines in late June and early July, gold and silver are testing important support zones from their prior lows. The fist chart shows the Gold ETF (GLD) hitting new 52-week highs in late June. These highs did not hold long as GLD declined towards support around 114-116. This zone stems from broken resistance, the May low and the February trendline. GLD remains in a clear uptrend as long as support holds.  Failure to bounce and a support break would reverse the 4-5 month uptrend in gold.



Click these images for details

The second chart shows the Silver ETF (SLV) with a weaker pattern than gold. While gold exceeded its May high, SLV fell short of its May high and forged a lower high. Despite a sharp decline from this lower high, SLV firmed near its support zone around 17. Support in this area stems from the May-June lows and the lower trendline of a triangle. Looking closer, we can see a small consolidation over the last five days. A break below these lows would signal a continuation lower and project a break below the support zone. It ain’t broken yet, but we need to watch this in the coming days. The indicator window shows GLD and SLV moving together throughout 2010. Even though gold is more precious and silver is more industrial, these two are still positively correlated.