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ANNOUNCING OUR "EXTRA REALTIME FOR EUROPE" SERVICE!  We now provide realtime charts for stocks in the London Stock Exchange as well as the Euronext exchange.  This means we now have three new services - "Extra RealTime for North America" (our old ExtraRT service), "Extra RealTime for Europe" and the combination package "Extra RT+EU" that gives you access to both.  Click here for more information.

USE THE "YOUR ACCOUNT" LINK TO RENEW/UPGRADE/DOWNGRADE/SIDEGRADE YOUR SERVICE  We've changed how members make changes to their accounts.  Instead of going to the old renewal pages to renew, upgrade, downgrade or sidegrade your account, you now go to the "Your Account" page by clicking on the link at the top of any page.  There you will find choices relevant to your account.

Hello Fellow ChartWatchers!

Last week, we hosted over 300 enthusiastic StockCharts.com members here in Seattle for ChartCon 2011.  John, Arthur and myself cannot say enough about the great people we met.  Thanks again to everyone that participated.  Here's a link to more reviews and photos of the event.

One of the key goals of ChartCon was to build a sense of community amoung the participants. That began happening almost immediately during the first day and continued throughout the conference.  As part of that process, we announced a new resource for all StockCharts users that will allow them to ask each other for assistance - the StockCharts Answer Network (s.c.a.n.) at http://scan.stockcharts.com.

If you have a question that you'd like to ask other StockCharts users, s.c.a.n. is the way to do it.  It rewards people that ask relevant questions.  It rewards people that provide great answers.  And it does so in a way that ensures it will be a great resource for all StockCharts users for years to come.

To ask a question on s.c.a.n., just click the "Ask a Question" button.  You'll need to create an account on the s.c.a.n. server (those accounts are separate from StockCharts' accounts) as part of the process but don't worry, s.c.a.n. is completely free to use and has the same rock-solid privacy policy that StockCharts.com does.

It is in your best interest to take a little bit of time and make sure your question is well explained and is something that the StockCharts user community can actually help with.  Questions like "How can I...?"  and "Is there some way to...?" are usually answered very quickly.  Questions like "Why...?" and "What should I buy?" will probably fall flat.

It's also important to remember that billing issues, feature requests and bug reports are best sent directly to the StockCharts Support team since other end users can't really help with those issues.

My initial hope is that s.c.a.n. becomes a great source of answers for all StockCharts users - and not yet another site filled with irrelevant, spammy, off-topic questions.  However, we don't control what happens to s.c.a.n. - you do!  Let me say that again:

S.C.A.N. WILL BECOME WHATEVER YOU LET IT BECOME!

You - not us - are the curators of s.c.a.n.  You have to power to reward great questions and great answers.  You have to power to discourage spam, vagueness, misleading information, and irrelevantness. But in order to help, you must participate.  You must ask great questions.  You must provide great answers.  And you must vote for greatness.

So, help us help you by joining s.c.a.n. today!

- Chip

P.S. Be sure to read and understand the s.c.a.n. FAQ before posting or answering questions.  Also, be sure to search to see if your question has already been asked. 

If the stock market were a mental health patient, it would have been committed by now.  Major trend changes are occurring at points of wild volatility and extreme fear.  I've written many times in the past about my favorite sentiment indicator - the equity only put call ratio (EOPCR).  I take a different approach in measuring relative complacency and fear by using short-term and long-term moving averages of the EOPCR and expressing that difference using the PPO oscillator (thanks Chip!).  When the market sells off with the velocity it displayed recently, multiple technical support levels are wiped out without hesitation.  Market makers go on "vacation" as I like to call it.  It's as if technical indicators are meaningless.  Enter sentiment indicators.
 
It makes complete sense to me that when you're dealing with a wildly emotional market, that the only reliable type of indicator to predict a market reversal would be sentiment-based.  Therefore, I always urge our members to follow the relative pessimism levels and only consider acting when the market reaches pre-determined relative fear levels (-20% on the chart below).
 
In my last article, I mentioned that I'd be looking for relative pessimism to mark the next bottom.  Take a look at how it did exactly that:

Please note that the above chart was as of Wednesday's close.  It would need to be updated for the activity on Thursday and Friday.  Also, intraday charts using this ratio can be misleading, so make sure you look at this AFTER the market closes.
 
On Tuesday, August 23rd, I will be hosting the next in our Online Trader Series.  These events are highly educational and designed to equip our members with the knowledge necessary to trade the stock market with success.  The upcoming event, "The Effect of Market Makers on Trading", will provide a background of the role of market makers and delve into the relative pessimism ratio of the EOPCR.  Market makers exacerbate the emotional swings in the stock market.  If you want to use this information to better your trading strategy and success, you can register for this event by clicking here.
 
Happy trading!

The recent volatility is enough to make one step back, put your money aside - and reassess. In fact, this is what both institutional and individual investors have done over the past 3-weeks as money withdrawn from funds has significantly increased - even more so than at the March-2009 panic low. Perhaps this is part and parcel of the "death of equities" genre that is needed for the next bull market to begin; but for now...the pullout appears prescient.

Technically speaking on the S&P 500 index, we should point out that two of our longer-term moving averages were violated in bearish fashion - the 15-month and 45-month moving averages. In fact, there are only two occurrences of the 45-month moving average being broken since 1980, which rather interestingly occurred during the past two bear markets - which suggests a bear market has indeed begun. In each of the previous cases, the S&P 500 bottomed -27% and -33% below this level. At present, the S&P stands a mere -4% below this level, which would lead one to believe that another 20% to 25% decline is in order. This is serious stuff to be sure.

Therefore, rallies are to be sold until further notice. If we are wrong, then we would use a breakout above the 15-month as a sign that new highs are ahead. But that isn't the preferred viewpoint at present.

On 8/2/2011 our mechanical Thrust/Trend Model generated a medium-term NEUTRAL signal for the S&P 500 Index just in time to avoid the market break on 8/4. (Neutral means to be market neutral -- in cash or fully hedged.) After the breakdown we believed we had entered a bear market, but we had to wait for the long-term component of the Trend Model to generate a mechanical SELL signal to make it "official", which it did as of 8/17/2011.

A long-term sell signal is generated when the 50-EMA of a price index crosses down through the 200-EMA (generally known as the Death Cross). At Decision Point we don't consider the long-term sell signal to be a demand for action. Rather it is a flag that says, "Hey, folks, we're in a bear market now. Act accordingly."

Below is a daily bar chart of the S&P 500 with the recent crossover circled on the right. Just to show that it is not a perfect indicator, I have also annotated on the left two 50/200-EMA crossovers that occured in August and September of last year, both of which were bad signals.

Am I concerned that this latest signal will be wrong? Not really. Its value is primarily in that it tells us to adjust our expectations from bullish to bearish. In a bull market it is best to stay positive and expect bullish outcomes, even during corrections. In a bear market, if we expect negative resolutions, we will be right most of the time.

It is a long-term sell signal, but it doesn't mean to go 100% short on the day of the signal, rather we should look for short- and medium-term opportunities to go short to develop. This is where we have a margin of safety when working with these long-term signals -- we look for opportunities. If we don't find many, our exposure will be limited.

Reviewing major market indexes I see that we have long-term sell signals on The S&P 500, S&P 100, NYSE Composite, Russell 2000, Wilshire 5000, S&P 400, and S&P 600. We are still waiting for the Dow, Nasdaq, and Nasdaq 100 indexes, but their prices are well below their 50-EMA and 200-EMA, which means sell signals are virtually inevitable.

A recent CNBC article urges: "Don't Fear the 'Death Cross' in This Fast-Moving Market". In other words, keep right on thinking like a bull. That's just silly. We have objective evidence that the market has entered a bear phase, so we should take that evidence at face value until the evidence changes. The fact that we ahd two bad signals in 2010 is no reason to ignore the current signal because the model has a pretty good record over time. In 2010 Timer Digest ranked Decision Point #4 for Long-Term timing over a 10-year period, with a gain of +77.64% versus a loss of -4.74 for the S&P 500. (Past performance does not guarantee future results.)

Bottom Line: Long-term SELL signals abound on the major stock indexes, which means we are by our definition in a bear market. It is now time to pass our analysis through a bearish screen, to assume that most surprises will be to the downside, and to look for opportunities to sell short. This is a perfect example of technical analysis being a wind sock, and we have no choice but to plan our approach accordingly. If the wind changes, we will adjust.

Selling pressure since July 1st pushed the Consumer Discretionary SPDR (XLY) from a market leader to a market laggard. These Sector PerfCharts show the performance for the nine sector SPDRs relative to the S&P 500. The percentage change shown is the relative change, which equals the percent change in SPY less the percent change in the sector SPDR. If XLY is down 16.99% and SPY is down 16.13%, relative performance for XLY would be -.86% (-16.99 less -16.13 = -.86). Sectors with positive bars are outperforming SPY, while sectors with negative bars are underperforming. The first Perfchart extends from May 13th to July 1st. Notice that the Consumer Discretionary SPDR, Industrials SPDR and Basic Materials SPDR are outperforming the broader market (SPY). Also note that the Consumer Staples SPDR is underperforming, while the Healthcare SPDR and Utilities SPDR are slightly outperforming. 

Click this image for a live Sector PerfChart

Flash forward to the most recent 35 day period and there is a drastic change in the relative performance PerfChart. First, notice that the Consumer Discretionary SPDR moved from relative strength to relative weakness. The Industrials SPDR, Basic Materials SPDR and Energy SPDR also moved from positions of relative strength to relative weakness. Second, notice that the three defensive sectors now show relative strength. All sectors are down over the last 35 days, but utilities, consumer staples and healthcare are down less than the market. This shows a clear preference for defense, which is bearish for the broader market. The Technology ETF is a bit of an anomaly as it moved from relative weakness to relative strength. This indicates that the sector may lead if and when the market does bounce.

A 5% drop in German stocks is contributing to heavy selling in Europe which has spread to the U.S. Chart 1 shows the German DAX falling 5.3% to make it Europe's biggest loser. Most other European stocks are down 4%. Chart 2 EAFE Index iShares (EFA) gapping 5% lower after meeting resistance at its March low. Chart 3 shows Emerging Market iShares (EEM) gapping lower as well. Not surprisingly, U.S. stocks are following foreign markets lower. It certainly looks like the recent short-term bounce has run its course. Money coming out of stocks is moving into gold and Treasuries. Most other commodities are falling along with stocks. It looks like a bad day ahead for stocks.

With global stocks and commodities in a rout, most U.S. bonds are surging again. Chart 1 shows the T-Bond 20+Year iShares (TLT) continuing its recent surge (as bond yields tumble to the lowest level in a year). The only exception is high yield corporates. Chart 2 shows the Lehman High Yield Bond ETF (JNK) falling more than 2% and breaking its 200-day moving average. We've pointed out several times in the past that junk bonds are more closely tied to stocks than to bonds. Right now, junk bonds are following stocks lower.

Last week, and so far this week the stock market has traded rather dismal to be sure, with the S&P 500 trading lower in 8 of the past 9 trading sessions. However, regardless of this weakness, we've begun to see slow, but sure movements beneath the surface that warrant our trading attention. To wit, the S&P Energy sector appears ready to resume its upward trend against the S&P Consumer Discretionary sector. In other words, Energy is expected to outperform Consumer Discretionary. As for our chart target: we could very well see the ratio trade upwards of 2.3 to 2.4 in the months ahead.

From a technical point of view, let's note that prices have consolidated in bullish fashion since January-2011, and have done so with prices faltering from the longer-term 130-week moving average and back into the more medium-term 40-week moving average. Moreover, this bullish consolidation implies higher prices ahead towards the 2.3 to 2.4 level beneath trendline resistance, especially given the ratio continues to hold at the 40-week moving average. But the gains could be even more material given prices will have broken out above the larger 130-week moving average, solidifying the trend higher for months and perhaps years ahead. Lastly, the 20-week stochastic has turned higher in bullish fashion through its trigger point; confirming momentum is rising.

Therefore, given the developing evidence: we believe being equal buyers of energy stocks and equal short sellers of consumer discretionary shares makes sense...regardless of market direction. The beauty lies in the relative trade.

Good luck and good trading,

Richard Rhodes

If you recall, stocks were mired in an ugly bear market from 2000 through 2002.  At the end of that bear market, however, the S&P 500 staged a huge advance, running specifically from 789 in March of 2003 to 1163 by March 2004.  After that big climb, there were several scary points during the ensuing decline.  Take a look at what transpired back then:
 


 The key points were as follows:
 
(1) In March 2004, a swift selloff took the S&P 500 below its 50 day SMA with a lot of force and the 50 day SMA rolled over.
(2) A reversal was seen 2-3 weeks later in late March as relative pessimism reaches an extreme level (-20%+).
(3) The next rally carried the S&P 500 above its 50 day SMA, but a break above recent highs was never achieved.
(4) The next low occurred about six weeks later, until once again relative pessimism marked a short-term bottom.
(5) Another bounce followed, again printing a lower high.
(6) One more selloff followed until sentiment again approached what I consider to be extreme pessimism.
 
The pattern in 2011 is a work-in-progress, but it seems to be following almost an identical path.  Have a look:
 


Check out the key points:
 
(1) In late May, a swift selloff took the S&P 500 below its 50 day SMA with a lot of force and the 50 day SMA rolled over.
(2) A reversal was seen 2-3 weeks later in mid-June as relative pessimism reaches an extreme level (-20%+)
(3) The next rally carried the S&P 500 above its 50 day SMA, but a break above recent highs was never achieved.
(4) The next low is occurring now, about six weeks later, as we await relative pessimism to likely mark another bottom.
(5) and (6) have not occurred yet, but are likely.
 
In addition to similar paths in 2011 vs. 2004, market participants today must also deal with a HEAVY volume breakdown of a head & shoulders pattern.  Bounces will be likely, but strength can be shorted in the near-term, especially if the neckline of the head & shoulder is approached.  Measurements vary by index, but I'd look for 1150-1175 on the S&P 500, at a minimum.
 
Declines always seem to take place so much quicker than advances, and there's a reason for it.  When the selling volume becomes too large, market makers temporarily cease their role as liquidity providers, leaving fewer buyers.  In fact, as traders, many of these market making firms join in on the sell side, swamping buyers and creating an avalanche effect.
 
Later this month, I'll be discussing the effect of market makers and the impact they have on traders like you and me.  Without a thorough understanding of the forces that take place in the stock market, successful trading is likely to remain a mystery.  If you're interested in gaining a better understanding of market makers, you can CLICK HERE to register for this event.
 
Happy trading!

READER COMMENT: I have written to you before regarding your comments on volume ("where is the volume?”) which imply that volume "confirms" a move.  To me, like many others, volume no longer means anything, or at least not what it used to mean.

 See the recent speech by Andrew Haldane at the International Economic Association Sixteenth World Congress, Beijing, China, 8 July 2011, courtesy of the  the Bank of England; the speech addresses trading volumes here and Europe in the last decade, with special reference to the Flash Crash.  

Q: Where is the volume?  A:  It is whatever the quant algorithm says it will be---at least until the algorithm changes.

The speech can be found at http://www.bankofengland.co.uk/publications/speeches/2011/index.htm.  It is the 08.07.11 speech, entitled The Race to Zero.

RESPONSE: First let me recommend that our readers read the referenced speech. It offers great insight into the Flash Crash, and offers the conclusion that there is still nothing that can stop another one. This is a conclusion to which I had come because of the absence of anything but speculation on the subject.

If I understand correctly, you assert that high-frequency trading (HFT) has changed the nature of volume and has rendered useless. In part I agree -- I don't think volume has the same strength of meaning as when we were all charting with a pencil on graph paper, and we were able to say with some certainty that expanding volume confirmed the price move. Now we have to say that this may or may not be the case.

Nowadays I don't necessarily look for volume to confirm daily moves, because volume doesn't play a primary role in my decision making, but overall I do expect a bull market to have a level of volume that reflects broad market participation. Specifically, I watch a number we call Percent of Average Daily Volume. This is the result of dividing the 250-EMA of daily volume (the average of about a year's volume) by today's volume.

Here is a chart of the 2003-2007 bull market. Note how consistently the volume bars exceed the 250-EMA of volume line. Also, volume steadily expanded from the bottom to the top.

Now, here is a chart of the 2009-2011 bull market. Note the frequency with which the volume bars failed to reach the 250-EMA line, and the persistent down slope of the volume bars over the last two-and-a-half years. This has been the source of my complaint about volume. It has reflected that something was wrong (at least radically different) internally.

The final chart makes your point regarding HFT. Note that the volume for this bull market has actually been much higher than that of the prior bull market. So while I have been asking, "Where's the volume?", it is because of daily evidence that volume has been contracting away from the 200-EMA. I failed to look at the bigger picture.

Bottom Line: The 2009-2011 bull market was a confusing creature based upon consistently weak volume relative to the 250-EMA of volume, and because of gradually fading volume as prices rose higher. Absolute volume is now much higher than in the past because of HFT, which can represent as much as 80% of daily volume; however, in my opinion, the downslope of volume is still an indication of fading participation and is useful input for our analysis.

Step 1 - Create a Chart with the Settings you Want

Step 3 - Add the New ChartStyle to Your Account

Step 4 - Test the New ChartStyle

We can use the "ChartStyles" dropdown to test our new style. It contains all of our saved ChartStyles as well as our ">>Default<<" style and seven predefined styles. To test our new style, first select the "SCC Default" setting from the dropdown. You should see the standard RSI/MACD chart appear. Then select "Trend/Oscillate Study" and our Aroon/ADX chart should reappear. Success!

You can now apply that study to ANY ticker symbol just by selecting that entry from the ChartStyles dropdown. I bet you can think of 10 more studies that you'd like to create. Why wait? Go for it. Every ChartStyle you create makes StockCharts that much more powerful for you. Enjoy!

If you get confused by any of this, click the yellow "Instructions" link for more information.

--Chip

Based on the writings of Charles Dow, Dow Theory utilizes the Dow Industrials and Dow Transports to generate buy and sell signals for the broader market. The market trend is up when both forge higher highs. The market trend is down when both forge lower lows. A non-confirmation is present when only one forges a higher high or lower low.

The first chart shows the Dow Industrials within a clear uptrend from late August to early May. This uptrend started to falter when the Average failed to exceed its prior high and formed a lower high in July. A clear trend reversal occurred this week as the Average broke below its June low.





The other chart shows the Dow Transports with an uptrend from August until early July. Notice the difference? The Dow Transports exceeded its May high to forge a higher high in July. The Dow Industrials failed to confirm this new high in the Dow Transports. This non-confirmation was a warning sign, but not a sell signal. The Dow Theory sell signal did not materialize until both Averages broke below their June lows. How long will this sell signal remain in effect? Until there is a Dow Theory buy signal with higher highs in both Averages. There is no timeframe for these signals. They are simply in force until proven otherwise.