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A GUIDE TO THE STOCKCHARTS SOCIAL SCENE

FACEBOOK? TWITTER? YOU TUBE? LINKED-IN? - In case you missed it, StockCharts has recently expanded into several different social media networks.  So, what do you need to do about it?  Do you have to join these things too?  If so, which ones?  What's different about the information there compared to what's on the website?  We agree that it can be confusing.  Here's an FAQ about it:

Q: What's the difference between these four new areas and the website?
A: Our website contains the vast majority of our content in both the tools area and in our Blogs area.  Our Facebook page contains notifications of any blog articles we publish along with some fun, free features like "Quote of the Day" and occasional contests and giveaways.  Our Twitter feed pretty much duplicates our Facebook page for Twitter users.  And our Linked-In group allows Linked-In members (i.e., professionals) to connect with each other inside that network.

Our YouTube page is a little more special.  There you will find instructional videos and tutorials that aren't available elsewhere.  We will post links to new videos on our website when they become available.

Q: Do I have to join these other places?
A: No, you don't have to join any of these other places if you don't want to.  Anyone can visit our Facebook and YouTube pages without having to join anything.  Any content that we put on Twitter and Linked-In will also appear on our website and our Facebook page.

Q: If I only want to join one of these, which one should I join?
A: Facebook - definitely.  (But also bookmark the YouTube page.)

Q: I want to join everything.  What do I do?
A: Create a Facebook account and then click "Like" at the top of our Facebook page.  Create a Twitter account and then click "Follow" on our Twitter page.  Visit our YouTube Channel page and click "Subscribe".  Finally, create a Linked-In account and then join our group.  Keep in mind that if you join all of these networks, you'll see lots of duplicated announcements.

Q: Does any of this cost money?
A: Nope.

Q: Why would I want to do this?
A: Again, this is all optional.  People who join these networks will probably be notified of updates to our websites sooner than others.  They can also use these networks to share information with other StockCharts users.

Q: Are you going to join any other Social networks?
A: No - four is probably too many already!

BASIC MATERIALS LEAD MARKET RALLY

I wrote on Tuesday that strength in foreign currencies (especially commodity currencies like the Aussie and Canadian Dollars) was negative for the U.S. Dollar but positive for most commodities. One reason for that view is that stronger foreign currencies suggest growing confidence in the global economy. Another sign of growing optimism is that basic materials (which are tied to commodites) have been the strongest market sector since the market bottomed in early July. Chart 1 shows the Materials Sector SPDR (XLB) already trading at the highest level in more than four months. Its rising relative strength ratio (below chart) has been rising over the last two months which shows superior performance by the economically-sensitive group. Another reason for their superior performance since the start of July is the fact that the U.S. Dollar is weakening again. That's normally bullish for commodities and stocks tied to them.

S&P 500 HEADED TO HISTORICAL OCTOBER BOTTOM?

The S&P 500 is square within the September/October "historically weak" time frame, but it has been nothing short of astounding to be sure...to the upside. We've seen a rally in 10 of the past 13 days, with prices now squarely upon major previous high resistance. And we believe the counter-trend rally in all probability ended itself in the wee hours of Friday morning's overseas trade with the S&P futures breaking out above the 1131 level...and promptly failing. If Friday hadn't been the "triple witching" of options and futures (we refuse to recognize "quadruple witching" given we know of no one person of institution trading single stock futures) - then a larger decline may have indeed developed. But this very well may change next week.

As for the technicals, there are several very clear patterns: 1) the bullish "head & shoulders" bottoming pattern everyone is pointing to at this juncture; and 2) the bearish consolidation after the sharp decline off the April highs. We vote with the latter given overhead resistance and the anemic volume of this current rally, although anemic volume doesn't seem to have the same technical cache it used given the high frequency trading dominates nearly 40% of the trading volume. Still, being classical technicans, we should see the rally fail at current to slight higher levels and for a sharp decline to develop into the historical October bottom. Our target is the 50%-62% retracement zone...which equates to roughly 880-to-940.

Hence, a rather well-defined shorting opportunity has arisen, and we've elected to being the process of adding short positions. As far as this setup is concerned...they don't come much better.

FINDING THE NEW EMERGING LEADERS

Let's do a case study.
 
Wouldn't it be great to find the next Google (GOOG) or Apple (AAPL) in the early stages, before the meteoric rise?  It's definitely possible, but it takes homework and TONS of patience.  Every great long-term performer goes through similar breakout stages.  They will base, many times for long stretches, before another breakout occurs.  They tend to be strong relative performers, meaning they tend to base when the market breaks down and soar during market advances.  Occasionally, they even flat out break down before later resuming their march higher with a vengeance, or what I like to call an "exclamation point".  Let's use Netflix (NFLX) as our case study.  Since the beginning of 2009, NFLX has risen 400% from $30.00 to $150.00.  It hasn't been straight up every day, though, as there have been plenty of bumps along the way.  First, look at the overall performance:

While everyone wants to be in at the bottom, what were the key signs that suggested that this type of advance might be possible?  Well, check out the action just before this impressive rise began:

NFLX was downtrending aimlessly.  It certainly was emanating few signs of a potential blockbuster move to the upside.  But then came THE pattern. It was simple enough - a potential bottoming head & shoulders pattern.  The key part of these technical patterns, however, isn't the formation, but the "firmation", as in CONfirmation.  That occurs when the volume on the breakout leaves you breathless.  You don't have to wonder if the volume is of the "confirming" variety.  It's quite apparent.  NFLX broke out in January 2009 and that set the stage for what we've witnessed since - one of the best performing stocks for two years running.
 
NFLX has had its periods of ho-hum action and even breakdowns, but each such period has been followed up with that "exclamation point" move back to the upside.  Check out the next two charts, one in 2009 and one in 2010, that shows the potential breakdowns and the explosive recoveries:

The truly strong stocks don't leave you wondering whether a move is for real.  It's evident with exclamation points on the chart.  The combination of price action and accompanying volume is BY FAR my #1 indicator.  It trumps everything else.  Institutions cannot accumulate stocks without volume spikes and stocks cannot become superstars without price appreciation.  The two go hand-in-hand.
 
For Monday, September 20, 2010, we're featuring a small cap stock for our regular Chart of the Day that "could" be at the stage NFLX was back in early 2009.  A bottoming head & shoulders pattern formed and an "exclamation point" was delivered on Wednesday with a retest of the breakout area on Friday.  CLICK HERE for more details.
 
Happy trading!

NEW LONG-TERM BUY SIGNAL

Today another long-term buy signal was generated when the S&P 500 Index 50-EMA crossed up through the 200-EMA. Normally, we have high confidence in these signals, but, unfortunately, the long-term model has generated four, count 'em, four "long-term" signals in less than three months. On the chart below the red arrows mark the sell signals and the green arrows the buy signals. Prices have entered a trading range and, as you can see, they move just far enough in one direction to trigger a signal, then they reverse and go just far enough in the opposite direction to trigger the reverse signal.

This is not typical of how the model usually works, but any mechanical model will eventually run into rough patches where peculiar price movement defeats them. This is one of those times, and as long as the 50-EMA keeps making these shallow cuts back and forth, our confidence in the signals will not be robust.

The chart below shows a three-year time frame, and the first two signals (sell in January 2008; buy in August 2009) are what we would classify as normal. Note that the 50/200-EMA cuts are relatively steep and are quickly confirmed by price movement.

Our long-term signals are used primarily to identify the long-term trend of the market so as to have a context within which to make decisions in the intermediate-term time frame. Nevertheless, we expect the model to have a profitable record over time, and it does. See our Timer Digest rankings rankings through the link on this page or on the website.

Bottom Line: The question now is how much faith do we put in this new buy signal. Since it is a buy signal, I would say that it gives the bulls a slight advantage, but my confidence will really blossom when prices break through the overhead resistance at about 1130 that has stopped progress three times since June.

FIBO FANS, ARCS AND TIMEZONES - OH MY!

Hello Fellow ChartWatchers!

Today we're taking the wraps off of our upcoming major upgrade to our ChartNotes annotation tool.  We've been working on this for a while now and we are getting close to releasing it out to everyone.  Even though it will probably be a couple more weeks before things are ready for release, I wanted to give you a sneak peek at some of the features that are headed your way soon.  Check out this screenshot:

 

In addition to all the new Fibonacci tools that we're adding, you'll also notice a new Triangle shape tool and the Quadrant Lines tool.  As you can see, this new version of ChartNotes is mostly about adding more drawing tools and capabilities.  There are several other new features that aren't shown on this chart.  I'll be posting more about those features, including our new Elliott Wave annotations feature, on the website later this week.

Again, these features aren't available on the website just yet - we have some internal testing to complete first.  Keep an eye out for more announcements on the "What's New" area of our website for more info on when ChartNotes v2 will be released.

- Chip

OFFENSIVE SECTORS LEAD SEPTEMBER SURGE

Leadership from three of the four key offensive sectors makes the September surge all the more impressive. I consider the consumer discretionary, finance, technology and industrials sectors as the offensive sectors that are key to the stock market and the economy. Leadership from at least 2 of the 4 is needed for a rally to have legs. Consumer discretionary represents the most economically sensitive sector (think retail). Finance represents the health of the banking system. Industrials represent the industrial base. Technology represents the appetite for risk with its high-beta stocks.



The S&P Sector PerfChart shows the consumer discretionary, technology and industrials sectors up over 8%** this month. All three are up more than the S&P 500, which means they show relative strength and upside leadership. These are the sectors the bulls want to see leading the market higher. The fourth wheel, finance, is up less than 8%, but still outperforming the broader market with a respectable 7.79% gain. The only negative here is the short-term overbought conditions after such a sharp advance in a short period of time.

REPORTING LIVE FROM A SHARPCHART NEAR YOU!

Hello Fellow ChartWatchers,

Today we're happy to announce the launch of our new tutorial video area.  You and find it at http://youtube.com/stockchartscom.  YouTube members can subscribe to that "channel" and get notified whenever we post a new one.  (We'll also announce new ones on the website...)  (...and on our Facebook page...)  (...and on our Twitter feed...).

The first video we created is an especially important one.  It's called "Getting Started with StockCharts.com" and it shows you seven important things that all StockCharts.com members should know about how to use their account effectively.

Topics include:

• Logging On and Off
• How to Use The SharpCharts Workbench
• Customizing Your Chart Settings
• Saving Custom Settings
• Annotating Charts
• ...and much more.

I strongly encourage everyone to review this video.  Even experienced StockCharts members may learn a thing or two.  Here it is:

(If you are unable to see this video inside the newsletter, click here to view it on the web.)

In addition to the "Getting Started" video, we've also added a "Behind the Scenes" look at our Computer Datacenter.  I'm also putting the finishing touches on a video entitled "Adding Overlays to Volume Bars" which should be available later this weekend.  We plan on doing lots of additional video in the coming weeks and months so stay tuned!

Oh, one last thing.  We're continuing to crank up our Facebook page and Twitter feed.  We've just completed our first free hat giveaway (watch for another one soon!) and we're currently running a fun little "Flash Poll" with the question being "How many people do you think work at StockCharts.com?"  If you are a Facebook user, please visit our page and click the "Like" button to get our latest updates.

- Chip

WILL EARLY SEPTEMBER RALLY HAVE STAYING POWER?

The summer is coming to an end for all practical purposes, with many traders returning from their vacations to a budding sharp rally. This presents an interesting situation for traders, for the historically weakest period lies directly ahead - the September/October time frame. Hence, the question is whether last week's rally was counter-trend in nature, or whether it represents a "thrust higher" of another sustained rally towards higher highs. In our opinion, it is too early to determine - but there several critical levels that will provide additional confidence in one viewpoint or the other.

Last week's S&P 500 rally was strong in terms of price and breadth, but not volume. This remains the hallmark of all rallies off the Mach-09 lows. But our main focus is upon the developing bearish consolidation after the sharp April-to-July decline. This ongoing consolidation is now approaching major overhead resistance at the 140-day moving average, which has proven its merit as resistance to the previous two rallies. In each case, this has led to a decline into major support at 1000-to-1038 zone.

Hence, if one is bearish such as we are at this point - the risk-reward dynamic is favorable for selling short the market upon a move upwards of 1116. One's stop loss point would be a breakout above the previous recent high at 1132, at which point it would be rather clear a larger and more powerful will have begun.

IS A HEAD AND SHOULDERS BOTTOM FORMING IN STOCK?

Today's message is going to represent a shift in emphasis in favor of stocks. As you know, I've been writing since the spring about the huge move into bonds and out of stocks owing to fears of economic slowdown and deflation. I've also written in the past (June 17 to be exact), however, that a four-year cycle bottom is due sometime during the second half of this year. Although that four-year bottom usually kicks in during October, the last one (2006) took place during July and August (so it can happen earlier). It's also well known that September and October can be especially dangerous months. Having said that, one of the main reasons why I'm now leaning toward the view that this year's four-year bottom may occur sooner is the presence of so many potential "head and shoulder" patterns that are visible on stock charts. The S&P 500 is an excellent example of one. First a review of what a "head and shoulders" bottom looks like. It consists of three prominent lows (see circles) with the middle low (the head) slightly lower that the two surrounding lows (shoulders). Another feature of the H&S is that the right shoulder (the August low) often finds support at the same level as the left shoulder (May/June low). Another feature is a "neckline" drawn over the two previous highs (formed during June and August). Chart 1 is almost a textbook example of what that bottoming formation looks like. To actually complete a H&S bottom, however, prices need to close above the neckline. That's along ways off. However, it's not soon to consider the possibility that the market may be heading in that direction. Yesterday's explosive rally has already given a short-term buy signal. That can be seen in the point & figure boxes in Chart 2. By combining that possibility that a H&S shoulder is forming with the likelihood for a four-year cycle bottom during the second half of this year, I don't think it's too soon to start reallocating some funds out of bonds (or cash) and back into stocks.

FOUR KEYS TO A CONTINUING RALLY

Semiconductors.  Financials.  Small Caps.  10 Year Treasury Yields.
 
Take a look at the following chart as the relative performance of each of the above is plotted against the S&P 500:
 


 These are four of the biggest reasons why the market hasn't been able to sustain a move to the upside since April.  Until relative leadership returns (and stays for more than just a few days), the market is destined to waffle or head lower.
 
Semiconductors have been dreadful.  Talk about a lagging group since April!  The S&P 500 is 3% away from a significant breakout above its June high.  Semiconductors, on the other hand, are currently situated 15% below their June high!  That is NOT what uptrends are made of.  Semiconductors rallied this past week, outperforming the S&P 500 in the process.  That's a great start.  But before you get too excited, please realize that significant price resistance is dead ahead.  In fact, we've included the SOX as our Chart of the Day for Tuesday, September 7th.  CLICK HERE to view the critical resistance levels the bulls must negotiate as we enter another trading week.
 
Financials are key to nearly every uptrend in the overall market.  In April, I discussed the lack of follow through within the financial space and that turned out to be a significant red flag as the market topped.  In early August, as the S&P 500 continued testing its 1131 price resistance, the Dow Jones US Financial Index failed to clear 271 resistance.  Once again, it proved to be a warning sign as the S&P 500 dropped nearly 10% over two weeks.  240-271 is a very significant trading range on financials.  Whichever way we break in financials is likely to have a major impact on overall market direction.
 
The Russell 2000 may hold the very first test for the bulls on Tuesday.  Check out this chart:
 


 The downtrend line off the April highs and the short-term price resistance both intersect almost exactly on Friday's close.  Early bullishness next week in small caps could bode well for the overall market.  Those who are in the intermediate-term bearish camp (including Invested Central) could consider trading the juiced ultrashort ETF (TWM), considering the strong reward to risk.  If the Russell 2000 moves much higher, you could exit with minimal loss.  However, if the Russell 2000 has found another intermediate-term high, a juiced short at this level would perform extremely well.
 
The selloff in bonds, and the resulting spike in bond yields, surely played a big part in equities rising last week.  In fact, the yield on the 10 year treasury hit MAJOR support in the prior week and was one of the reasons I felt we'd see a rally last week.  It didn't change the bigger picture, but definitely suggested the bulls had wrestled short-term control and could advance further in the near-term.  I alluded to that in my comments last Sunday evening.  CLICK HERE for more details.
 
Below is the chart on the 10 year treasury yield and the key support level just tested:
 


 It appears as though the yield could rise to the 2.88% area to test broken support.  So long as the yield rises, equity prices should remain stable to higher.  If the yield begins falling again, all bets are off.
 
Happy trading!

FIVE POSITIVES FOR THE DOW SPDR IN 2010

Stocks have been largely range bound throughout 2010, but the positives still outweigh the negatives overall. Chart 7 shows the **Dow SPDR (DIA)** starting the year just below 105 in January and finishing just below 105 this week. While it appears that DIA has nothing to show for eight months of trading, there are at least five (5) positives on this chart.

Click this image for a live chart

Working from left to right, DIA recorded a new 52-week high with the move above 110 in April (1). Despite a new high, the ETF then declined and broke its February low in late June. This seemed bearish at the time, but the ETF quickly recovered and surged back above 100 to create a bear trap (2). A falling wedge took shape and the ETF broke above wedge resistance in July (3). The uptrend was in good shape until a sharp decline in August knocked the wind out of the bulls. DIA ultimately held above the June low and reversed course around 100 this week (4). In fact, I would now label key support at 99. Also notice that StochRSI bounced off the .50 level (5). Looking back, we can see that pullbacks reversed as StochRSI moved above .50 and held above .50 (green dotted lines). This gives us two levels to watch in the coming days and weeks. The bulls have the edge as long as DIA holds 99 and StochRSI holds .50. 

ICI MUTUAL FUND STATISTICS

The Investment Company Institute (ici.org) compiles statistics on mutual funds and publishes them monthly. (There is a one month delay between the end of the month being reported and publication.) Decision Point has been collecting these data for almost five years, and we finally have enough to start charting it.  Amounts shown on the charts are in billions.

The bottom panel on the first chart shows the percentage of of mutual fund assets held in cash. A low percentage of cash indicates that fund managers are bullish on stocks and do not believe they will need much cash to meet redemptions, as would be the case if stock prices were to fall. The current percentage (3.4%) is lower than what it was near the top of the last bull market. I would consider that to be bearish for stocks.

The next chart shows assets in money market funds. What stands out to me is that, while money market assets have declined since the 2009 market bottom, they have not dropped to the levels seen during the bull market in 2005 and 2006. I interpret this as evidence of investors' reluctance to make a robust commitment to stocks, in spite of a substantial advance from the bear market lows.

Bottom Line: We seem to be getting mixed signals from the mutual fund assets data. The low percentage of cash held by fund managers is bearish for stocks; whereas, the level of money market fund assets shows plenty of cash on the sidelines which could be used to feed a substantial advance in stocks. On the other hand, perhaps the relatively high money market levels indicate that investors have reached their maximum tolerance level for risk in stocks and that they will not be committing any more money to the stock market. I am not sure if this is the correct interpretation, but it would seem to be confirmed by the consistently low volume the market has experienced during the advance from the 2009 lows.