StockCharts Blogs - ChartWatchers

VIX STARTS TO BOUNCE

Two Thursday's ago (January 6), I showed the CBOE Volatility (VIX) Index having reached a potential support level at last spring's low near 15, and warned that a bounce off that level could cause a stock market pullback. That's because the VIX and stocks usually trend in opposite directions as shown in Chart 1. The reason I'm coming back to the VIX today is because it's climbing 8% and beginning to look like it's short-term trend is turning up. Chart 2 shows the VIX action more closely. After bouncing twice off support near 15 since mid-December, the VIX is challenging its early January intra-day high at 18.63. A close over that initial resistance barrier would turn its short-term trend higher and could signal an overdue pullback in the stock market.

WHY THE MARKET IS WRONG

In my business I am exposed to the writings of a lot of really smart people, and it is never hard to find a few who are trying to explain to us why the market is wrong. The market is wrong, of course, because it has blithely gone its merry way without any regard for the brilliant analysis, presented by the writers -- analysis that explains with exquisite detail and flawless logic why the market should be doing the exact opposite of what it is doing.

Fundamental analysts are most prone to this kind of error -- writing reams of research, and then, by god, sticking to their guns as the market in turn puts them and their investors through a meat grinder. Most are trapped in a system where they are required to justify their actions with a good fundamental story, which is why, for example, Calpers (the State of California retirement system) was down 25% in 2009.

However, there are plenty of technicians who fall into the same trap when they start using indicators and oscillators as a crystal ball. This approach usually doesn't work any better than the fundamental crystal ball. You are basically left with a bunch of ambiguous technicals as a basis for making your next "call."

Rather than explaining why the market is wrong, we should be asking, "What is the market doing?", and acting appropriately. I am, of course, talking about a trend-following discipline. This approach is never perfect, but it is always rational because we respond to what prices are actually doing, not what we think they ought to be doing.

This article is not intended to explain our entire Trend Model methodology, just to plant a seed that maybe following the market is better than telling the market where it should go. Below is a chart displaying our Long-Term Trend Model. It generates a buy signal (green arrow) when the 50-EMA crosses up through the 200-EMA, and a sell signal (red arrow) when the opposite occurs. As you can see, it has been very timely and effective for most of the eleven years shown. You can also see imperfection when we got some whipsaw signals in 2010. Whipsaw is painful, but not nearly as painful as being caught on the wrong side of the market for an extended period. I just think of it as a cost of doing business. (The long-term component of the Trend Model is on a BUY signal as of 9/17/2010.)

There is another positive aspect to committing to a trend-following discipline in addition to ease of decision-making. When you are making discretionary decisions based upon some fundamental or technical theory, you are inevitably faced with having made a "call" and having the market go against you. What to do now? Change your position and risk whipsaw? Hang tough and hope the the market finally goes your way? Been there, done that. With trend following, your decisions are made for you, and position changes are based on objective reasons.

Unfortunately, most money managers do not use the trend-following methodology. Fortunately, it isn't hard to do, and you can do it yourself with not a lot of effort.

We have created a series of charts for our subscribers that specifically addresses the 20-EMA and 50-EMA relationship going back to the 1920s. You will see, as I said before, that it is not perfect, but you can also see that it is always adjusting to changing markets, and is overall very effective.

It is important to note that the 50/200-EMA model is used in our work to establish the long-term context of the market -- bull market or bear market. It responds slowly and will not react quickly enough to avoid something like the 1987 Crash. Our standard Trend Model is designed for shorter timeframes.

 

RALLY TIME!

The recent rally in the broader stock market has begun to correct; and it shall likely correct for the next several weeks. We view this decline much in the same manner as the Jan-2010 to early Feb-2010 decline, which the S&P lost roughly 106 points or nearly -10%. Certainly our momentum models are turning lower, and now we view the VIX as a confirming indicator that perhaps has higher prices in mind than anyone is prepared for at this juncture. But at this point, we view any decline in stocks as transitory prior to perhaps a larger high in the 2nd quarter.

To wit, the weekly chart shows major support at the 16-to-18 zone is holding once again, and has for all practical matters back to mid-2007. This is reasonable, and one could very easily note once the VIX turns higher, then it generally "spikes" higher. If that is the case here, and the probabilities do favor such an outcome - then minor trendline resistance at 19 should be taken out. This would argue for a 200-week exponential moving average mean reversion exercise that would carry prices upwards to 24.56 or even slightly higher. At that point, quite obviously the technical landscape would need to be reassessed, for further gains would put the declining trendline off the 2008-to-2010 highs into play, and we fear what a breakout above this level would mean to stocks and the US economy in general.

TRADERS ARE ALL IN

Complacency in the market was setting records this past week.  The technicals?  They look great.  But can the market keep moving higher short -term when options traders are betting on it en masse?  Well, maybe, but if you enter stocks on the long side at this level, please understand the risk bar has been raised significantly.  Don't misunderstand my message.  I'm intermediate-term to long-term bullish and have been that way since shortly after the bottom formed in March 2009.  There have been short-term periods, however, when it's made sense to take a more conservative approach to trading.  ANY time complacency grows, I get nervous.  Why?  Because market makers are VERY good about making money and they do it at the expense of you and me.  As more and more folks trade call options on a relative basis, the odds grow that a near-term top is fast approaching.
 
Tons of net call option premium evaporated the last three trading days.  The NASDAQ lost 3% of its value from Wednesday's open to Friday's close and that shouldn't surprise anyone who follows max pain, which I define as the point at which in-the-money call premium equals, or offsets, in-the-money put premium.  It's generally in the market makers' best interests for prices to gravitate towards max pain into option expiration Friday.  So between the complacency and max pain, the bulls faced a huge short-term hurdle as January options expired Friday.  Unfortunately for the bulls, the market makers won again.  In my view, it's another form of TARP for the financials.  The good news for the Goldman Sachs of the world is that this TARP money doesn't have to be repaid.  Wonderful!  (sarcasm intended)
 
Since 2003, the CBOE has been providing information relating to the equity only put call ratio (the "EOPCR").  The average daily EOPCR since 2003 is .65.  The 60 day SMA of the EOPCR is at .54.  This is the lowest reading for this 60 day SMA on record.  The first such reading occurred on Tuesday.  Take a look at a one month chart on the NASDAQ:

Our trading strategy is to build cash during market advances where complacency reaches record or extreme territory.  Attempting to short the market can result in pain as overbought conditions can typically remain overbought for a period of time.  So as risks increase on the long side, we simply choose to take profits and use any weakness to re-establish positions.  My latest educational feature at Invested Central is the Anatomy of a Trade where I detail recent trades issued to our members to provide insight into our risk management style and strategy.  A well thought out plan of entry and exit points BEFORE the actual purchase is critical to trading success in my view.  To view my latest Anatomy of a Trade, CLICK HERE.
 
Happy trading!

DIA MOVE TO NEW HIGH WITHOUT SUPPORT CAST

The Dow Industrials SPDR (DIA) led the market this week with a new 52-week high on Friday. Not bad considering the Russell 2000 ETF (IWM) suffered its biggest weekly loss since early August. Overall, the up trends for the major index ETFs remain in place as they recorded new 52-week highs this week. The Russell 2000 ETF (IWM), S&P 500 ETF (SPY), S&P MidCap 400 SPDR (MDY) and Nasdaq 100 ETF (QQQQ) recorded their new highs at the beginning of the week, but peaked on Wednesday and were down for the week. Led the strength in IBM on Wednesday on General Electric on Friday, DIA finished the week on a strong note.


Click this image for a live chart.

Despite strength in Dow Industrials SPDR, the Russell 2000 ETF and the Consumer Discretionary SPDR have been relatively weak since mid December. The chart above shows the Price Relatives peaking in mid December. The IWM:DIA took a major hit this week and moved to its lowest level since late November. The XLY:DIA Price Relative has been working its way lower the last five weeks. The QQQQ:DIA Price Relative also took a hard hit this week. Even though DIA is doing its part, relative weakness in small-caps (IWM), the most economically sensitive sector (XLY) and large-techs (QQQQ) cast a shadow on this week’s rally.

RISING DOLLAR THREATENS GOLD UPTREND

Tuesday's message wrote about an overbought condition in stocks and commodities, and showed gold in particular starting to roll over to the downside. Although some have questioned the viability of the dollar/commodity link, my view is that it's alive and well. Intermarket relationships aren't perfect and do get out of line on occasion. My experience, however, it that sooner or later they snap back into place. This may one of those times. Chart 1 shows the PS Dollar Bullish ETF (UUP) bouncing sharply this week (after bottoming in November). Gold is the market most sensitive to dollar moves. And, not surprisingly, gold is the market being most negatively impacted. Chart 2 shows the Gold Trust Shares (GLD) slipping below its 50-day average for the first time since August. The price pattern has the look of a "triple top" formation (marked by three peaks). Notice that the first peak took place in early November when the dollar bottomed. Notice also that the daily RSI (top of chart) and MACD lines (bottom) have been descending since October. That shows loss of upside momentum. Chart 1 also shows that the UUP is still well below its 200-day moving average. A move up to retest that major resistance line (or its late November peak) will help determine if this is just a bear market bounce in the greenback or something more lasting. That upside test may coincide with stocks and commodities testing some underlying support levels. At this point, however, I'm inclined to view all of these intermarket trends as retracements of current trends and not necessarily major reversals.

Financials: A Home Run, But Avoid The "Triple" Play

Happy New Year!!!
 
The financial sector looks superb as we bring in a new year.  I am of the opinion, at least based on current technicals, that 2011 will be a solid stock market year and financials will be a primary reason.  I'm looking for solid quarterly earnings reports from this group over the next few weeks - much better than expected and with guidance raised in many instances.  I've written articles in the past about the performance of financials and the relative performance of financials vs. the S&P 500, and how that correlates to overall stock market performance.  Generally speaking, if financials are performing well, the market moves higher.  With that in mind, take a look at the relative performance of financials during 2010 and how it changed over the past 5-6 weeks:

Now let's discuss this chart as a few things stand out to me.  The topping of financials and the relative underperformance that transpired through early December 2010 kept a lid on overall market performance.  From the April highs to the start of December, the S&P 500 lost 3-4%, while the relative weakness in financials was quite apparent.  Most of the stock market's 2010 gains were attributable to December strength.  It was during this period that financials exploded higher on a relative basis, no coincidence in my opinion.  So far in 2011, financials are among the leaders once again.  Should this continue, there's a VERY strong likelihood the U.S. stock market heads higher from here.  Now back to the chart.  Look at the "Relative Support" level near the .231 level.  Once that relative support level failed, it became relative resistance.  The strength in financials in December sent this relative ratio above the relative downtrend line - a bullish development - but the relative resistance line remains intact for now.  If money continues to flow into financials on a relative basis and we can break back above the .231 level with force, it's likely to signal much higher prices for financials in 2011 and that will only add to the recent bullish market behavior.  I have a few short-term concerns about market direction, but my longer-term view is bullish for now.
 
Here's an obvious follow up to the discussion above.  If the financials are strengthening and the outlook looks great for 2011, why not "triple" our pleasure with a 3x leveraged ETF that tracks the sector.  The Direxion Daily Financial Bull 3x Shares (FAS is the ticker symbol) uses leverage to track the return of financials at a 3 to 1 clip.  It would seem reasonable that if financials grew at a rate of 10% in 2011, then the FAS would grow by 30%, right?  The answer is a clear and resounding NOOO!

In my last article, I discussed four New Year's trading resolutions for 2011.  If I added a fifth, it would likely be to avoid trading leveraged ETFs.  There is just so much that many traders don't understand about their appropriate uses and limitations that I generally cringe when I'm asked to comment on a particular one.  Despite my increasingly bullish outlook on financials, I'd avoid holding onto FAS for any length of time.  "Trading Leveraged ETFs For Profit While Minimizing Risk" is my topic for this month's Online Trader's Series event at Invested Central.  CLICK HERE to register for this event and to view a brief video that I produced on the basics of leveraged ETFs.
 
Invested Central has also added a brand new feature, "Anatomy of a Trade", that will debut this weekend.  The purpose of this feature will be to tear apart a recent trade idea that we communicated to members, identifying the risk/reward indications of that trade.  We'll pass along both successful and unsuccessful trade candidates, illustrating the importance of patience and discipline.  I believe it will be highly educational in nature and a real benefit to those who trade stocks, either casually or actively.  CLICK HERE for more details.  

Cons. Discrectionary/Retail In Decline?

As the 2011 trading year unfolds, it is rather clear that the consumer discretionary sector and retail in particular are showing a tendency towards declining rather than rallying with the overall broader market. This is change from the past 2-years, where the consumer discretionary names have out-performed rather than handily. Therefore, this interests us from a trading perspective, for although we may not want to outright short these names, then we certainly want to be under-weight them and/or short them versus another sector such as Energy.

To this end, we've illustrated the S&P Energy/S&P Consumer Discretionary ETF ratio. And what we see is rather interesting and bullish. Interesting in the fact the ratio is trading at mid-2006 levels, which was at the height of the housing-bubble home equity extraction period that fueled large amounts of frivolous buying. Thus, given today's challenged consumer environment, then it would appear the discretionary stocks are a bit overextended in absolute terms, and overvalued versus energy. But given the chart is XLE/XLY, then it means that XLE should gain rather nicely against XLY in the weeks and months ahead.

Hence, we are buyers of the ratio, and we'll do so via the individual shares in each group as it is far easier to put on given the ability to find XLY shares to be short. But for our interests, the ratio clearly illustrates our point.

NYSE Common Stock Only Indicators

QUESTION FROM READER: I’ve been noticing some anomalous behavior in the NYSE Advance-Decline data and other indicators based on NYSE data that does not match up with other measures of breadth.  I’ve read comments from other authors on numerous occasions that refer to the same problem and it seems to stem from the fact that a high percentage of the issues on NYSE are fixed income and closed end funds, not real equity issues.  Of late this has been, I believe, seriously skewing the data since stocks have been rising and fixed income is getting killed.

This is creating an apparent false (or at least exaggerated) divergence between price and AD line and other breadth measures as well (HL) and probably creating false Hindenburg Omens. This is, I believe, a serious problem for technical analysts who rely upon breadth data.  I have pretty much decided to stop using NYSE AD and NH-NL data and will instead switch to using Nasdaq. I think you could do the entire TA world a huge service and generate a lot of interest in your service by creating an NYSE ex-closed end and fixed income fund AD line and New Highs-New Lows.  It’s really NEEDED!

ANSWER: We have it! Way back in 2003 the New York Stock Exchange reconstituted the NYSE Composite Index to include ONLY common stocks, weighted by market float. (To clarify, issues that are not common stocks still trade on the NYSE, but they are not included in the computation of the NYSE Composite Index.} This resulted in a much more interesting index, one that competes well with other favorites in terms of volatility and correlation to broad market movement.

Some time after this Decision Point began collecting NYSE common stock only (CSO) breadth and volume data, and we have a set of NYSE CSO indicators that are available to subscribers through our Straight Shots Menu, as well as various indicator series.

Below we have two Advance-Decline charts -- one Common Stocks Only and one with all NYSE traded issues. Currently the NYSE Composite is composed of about 1800 common stocks, whereas there are about 3500 issues of all kinds traded on the NYSE.

Obviously, the All Issues indicators have no useful relationship to the NYSE, but we still carry them for comparison.

The important thing to note is that the CSO Advance-Decline Line for breadth is confirming the price highs of the current bull market, and it is unlikely that the broad market will run into serious problems under those conditions.

Other CSO indicators available on Decision Point are the Swenlin Trading Oscillator (STO), Stocks Above Their 200-EMA, Bullish Percent Index (BPI), ITBM/ITVM, New Highs and New Lows, McClellan Oscillator, McClellan Volume Oscillator, 1% EMA of A-D, and Volume Ratios.

 

CHIP SPEAKING IN LA, PRICING CHANGE FOR CANADIAN DATA, LSE DATA SOON

CHIP SPEAKING IN LA ON JAN. 25th - Chip Anderson will be giving his presentation "Getting the Most Out of StockCharts.com" down in Los Angeles (Long Beach) on Tuesday, January 25th for the Los Angeles chapter of the MTA.  Click here for more details.

CANADIAN REAL-TIME DATA PRICE CHANGE COMING - Because of increased demand we have to change the TSX pricing model that we use for real-time Canadian charts.  We will be moving from the TSX's per-chart model to its per-user model which provides unlimited access to real-time time Canadian charts.

That might not sound like a big change at first because up until now, we have been providing Extra RT user with unlimited access to Canadian charts as part of our US$9.95 real-time fee.  Behind the scenes however, we have been paying the TSX on a per-chart basis.  When we started doing that back in 2004, there were relatively few Canadian real-time subscribers and we expected that the TSX's per-user fees for unlimited real-time charting would eventually come down.  Unfortunately, they haven't.  In fact the TSX recently clarified for us that the pricing is even more expensive that we originally thought.

Because our costs for Canadian data are continuing to increase, we will be switching to the TSX's per-user pricing model starting on March 1st.  After that date, new users and existing subscribers that need to renew will be able to choose if they'd like to use real-time data from the TSX exchange, the Venture exchange or neither one.

If you live in Canada, the cost of unlimited real-time data from the TSX exchange is CD$6.00 per month and the cost of data from the Venture exchange is CD$25.00 per month.  If you live outside of Canada, your only choice is to receive data from both exchanges for US$9.50 per month.  The pricing details can be found here: Canadians and Non-Canadians.

Because of those huge price differences, existing ExtraRT members that live in Canada will be automatically converted to the TSX-only plan as of March 1st.  They can then choose to add the Venture exchange for CD$25 per remaining month.  Existing ExtraRT members that live outside of Canada can choose to continue receiving Canadian real-time data for a special one-time conversion fee of US$6.00 per month.

We are not happy about these changes.  Clearly the current TSX pricing models for Level 1 real-time data (both per-chart and per-user) are not in line with the expectations of most Canadian investors.  We are trying to work with the TSX to get these fees reduced and hopefully something will change between now and March 1st.  Thanks to everyone who have recently made their voices heard on this issue.

Note: Originally we stated that the TSX changed their pricing for real-time data.  They have not.  The per-user pricing quoted above has been in effect since the TSX merged with the CDNX exchange back in 2001. Our apologies for any confusion this has caused.

LONDON DATA IS COMING SOON - We've made good progress on adding data from the LSE to our charting system.  We hope to have that data available in the next couple of weeks.  Stay tuned...

SPACE AT CHARTCON 2011 IS FILLING UP QUICKLY!

Hello Fellow ChartWatchers!

Happy New Year!  The response to our upcoming conference has been amazing. Since we announced our first ever get together for StockCharts users, over 100 people have registered.  They will be joining myself, John Murphy, Arthur Hill and the rest of the StockCharts team in Seattle this coming August for three days of in-depth technical analysis education and some great evening events.

As I said before, if you use StockCharts to make investing decisions, you owe it to yourself to attend this conference.  The current version of the agenda (subject to minor changes):

Friday, August 12th

9:00am - Welcome and Overview
9:30am - StockCharts from 10,000 feet - Chip
10:30am - Morning Break
10:45am - SharpCharts In Depth - Chip
12:00pm - Lunch
1:00pm - Advanced Annotation Techniques - Arthur Hill
2:00pm - Advanced SharpCharts Tips and Tricks - Chip
2:30pm - Afternoon Break
2:45pm - Point and Figure Charting for Fun and Profit - Chip
3:30pm - "The Technical State of the Current Market" - John Murphy and Arthur Hill

6:00pm - Sunset Dinner Cruise on Puget Sound

The conference kicks off on Thursday, August 11th with a series of presentations we're calling "StockCharts University" that focuses on the fundamentals of Technical Analysis.  And on Saturday, we dig even deeper into the website including topics like scanning and market indicators.  The agenda for the entire conference can be found here.

Beyond the conference sessions themselves, we're going to have three great evening events - a Northwest Wine Tasting, a Sunset Dinner Cruise on Puget Sound, and club-level seats at a Seattle Mariners/Boston Red Sox's game!  Every event will provide lots of time to mingle with StockCharts experts and other users like yourself.  I am really looking forward to those events.

If you register now, the cost of the conference is only $295 and that includes 1 year of our Extra charting service - a $250 value.  That means that as of right now the effective cost for the conference is less than $45.  That is a seriously good deal.

BUT THAT'S ONLY IF YOU REGISTER BEFORE THE END OF JANUARY...

Because of the way hotels charge for conference space, after January 31st we have to raise the cost of the conference to $395.  It is still a great deal at that price - but it is a better deal now.  If you are considering attending, please don't delay and register now.

You can find all of the information about Seattle ChartCon 2011 on the ChartCon Homepage.  You can also use that link to register.  We've also created an FAQ page with additional details about the event.  Click here to see it.

I'm looking forward to meeting everyone in August,
- Chip

 

Technology SPDR Leads Sectors in 2011- Intel Lags

Even though 2011 has just begun, there are clear leaders and laggards among the nine sectors. In particular, the technology sector is getting off to a great start. The Sector PerfChart shows the nine sector SPDRs and the S&P 500. The black dotted line marks the performance for the S&P 500 at 1.1%. Sectors extending above this line are outperforming. Those falling short are underperforming. Technology, healthcare and finance are outperforming so far in 2011. Consumer discretionary is up for the year, but underperforming the S&P 500. While it is quite positive to see relative strength in technology, it is negative to see relative weakness in the consumer discretionary sector, which is dominated by retailers. Charting Note: users can change the time scale by hovering over the date tab, clicking the right mouse button and choosing a preset selection. The icons on the bottom left can be used to change the PerfChart from line to histogram format.


Click this image for a live chart.

A look at the top 10 components for the Technology ETF (XLK) shows Apple (AAPL), Microsoft (MSFT), Google (GOOG), Cisco (CSCO), Verizon (VZ) and QualComm (QCOM) up more than the S&P 500. Except for Verizon, all are up more than XLK as well. These are the early leaders in 2011. On the negative side, Intel (INTC) is showing both relative weakness and absolute weakness with a 1.76% year-to-date decline. The Semiconductor HOLDRS (SMH) is also underperforming with a .91% gain year-to-date. Click here for a CandleGlance chart showing these 10 stocks.


Click this image for a live chart.