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Hello Fellow ChartWatchers!

With headlines like "Rally in Trouble?", "Start of Correction?" and "VIX Stalls" you'd think that our technical analysts were trying to tell you something...

Regardless of what John, Arthur, Carl and the rest of the gang is hinting at, things could not be more bullish here at StockCharts with regards to a great crop of new features that that can help you get even more value for your online charting dollar.

Things like our new Market Summary page layout and our ChartCon DVD pre-sale are covered later on in the "Site News" section of this newsletter.  So I wanted to take a second and talk about the Heikin-Ashi support we added last week.

The "what-what" support?

Heikin-Ashi charts look very similar to regular candlestick charts, but there are several significant differences.  Heikin-Ashi candles filters out some noise in an effort to better indicate the prevailing trend. In Japanese, Heikin means "average" and "ashi" means "pace." Taken together, Heikin-Ashi represents the average-pace of prices.

Heikin-Ashi Candlesticks are not used like normal candlesticks. Dozens of bullish or bearish reversal patterns consisting of 1-3 candlesticks are not to be found. Instead, these candlesticks can be used to identify trending periods, potential reversal points and classic technical analysis patterns.

Let's compare a normal Candlestick chart with its Heikin-Ashi equivalent:

(The Heikin-Ashi chart is on the bottom.  Click charts for live versions.)

Notice that the Heikin-Ashi chart doesn't contain the gaps that the regular candle chart has.  Also notice that lower shadows are generally missing from the rising candles and upper shadows are missing from the falling candles.  All of these characteristics stem from how Heikin-Ashi candles are constructed.  For the gory details, please see our ChartSchool article.

The key takeaway is that Heikin-Ashi candles reduce raw volatility in favor of indicating the overall trend more clearly.

Just another tool to add to your charting arsenal.

Enjoy,
- Chip

P.S. People have asked if we can scan for Heikin-Ashi chart patterns.  The Scan Engine doesn't currently support Heikin-Ashi charts because, fundamentally, Heikin-Ashi charts use different data than the OHLC values that the Scan Engine is designed to work with. Unfortunately, that isn't going to happen any time soon.

NEW MARKET SUMMARY PAGE - We've updated our Market Summary page to better reflect the indexes, ETFs and Market Indicators that John and Arthur use on a regular basis.  The new version also automatically updates throughout the day.  You can use a dropdown at the top of the page to switch between several different collections of symbols including "Intraday", "End of Day" and "ETF-only".

FREE OFFER FROM DECISIONPOINT.COM! - StockCharts has been a proud partner with Carl Swenlin's DecisionPoint.com website for years.  Now, for the first time, we are offering one free month of service to all of our newsletter readers. (Hey! That's you!)  Simply click here and fill out the form that appears for one month of service.  When you get to the payment page, enter "LETTER10" in the Coupon Code field and press the blue arrow button.  Poof!  Your order total will be zero and you will get to enjoy Carl's great site for one month completely free of charge!  But hurry - this offer is only good for a limited time.  Click here to get started.

CHARTCON DVDs ARE ALMOST READY, PRE-ORDER NOW! - Our ChartCon conference last month in Seattle was a great success and now you can experience it even if you weren't able to attend.  We recorded over 16 hours of audio from the conference and matched it up with the presentation slides to create a 3-disk DVD pack that lets you see and hear everything that went on during the 3 days of conference sessions.  The DVDs are currently getting pressed by the DVD factory and should be in our offices by the end of the month, but you can make sure you get your copy as soon as possible by placing a pre-order for them right now.  Click here to learn more.

CHARTCON EXCERPT AVAILABLE ON OUR YOUTUBE CHANNEL - Click here to see a 5-minute snippet of video from these new ChartCon DVDs.  In this episode, taken from the StockCharts University sessions, Chip discusses the three key assumptions that underlie Technical Analysis.

ONE LAST THING... - All StockCharts.com subscribers should be sure and visit the "Members" page of our website sometime in the next couple of days.  I promise you it will be worth your time.

Two Thursdays ago (September 1) I wrote about the CBOE Volatility (VIX) having reached previous resistance formed during the spring of 2010 near 48. The chart below shows that the VIX has backed off from that overhead barrier which has helped stabilize the stock market (green arrow). In fact, the only time that the VIX moved significantly above the area around 48 was during the 2008 market meltdown when it reached 90. So this is an important test of whether the market is just in a normal downside correction or something more serious. Needless to say, a VIX close above 48 would have very negative implications for the market.

I also wanted to let everyone know that we've updated the StockCharts Market Summary page to better reflect the indexes, ETFs, and market indicators that I review on a regular basis.  StockCharts subscribers can hear an audio message I recorded last week that goes over those changes by clicking on the Market Message tab at the top on any page on our site.

- John

I'm not buying this rally - not yet anyway.  This past Sunday night, I calculated max pain for the ETFs that track our major indices.  After staring at the numbers, I wondered "can they do it again"?  By "they", I meant the market makers.  You see, a month ago while I was in Seattle at StockCharts' ChartCon conference, an astute member of ours pointed out mid-week (August 10th) that max pain was WAY above current prices.  In options lingo, this simply meant there was a TON of net in-the-money put premium on the table just as EXTREME pessimism was kicking in.  Take a look at the chart below:
 


The green arrows highlight the EXTREME levels of pessimism.  Notice how each of these extremes marks a bottom on the S&P 500?  I've been noticing it for years, which is why sentiment analysis should be a big part of every trader's arsenal.  Now take a look at the blue circle highlighting the S&P 500 bottom the second week of August.  In addition to extreme pessimism, max pain suggested a SIGNIFICANT upward move was likely based on the imbalance of equity calls and equity puts.  Extreme pessimism hit the -20% threshold on August 8th.  The S&P 500 bottomed on August 9th.  More importantly, the S&P 500 rallied over 100 points from the August 9th low to the August 17th high.  I think that qualifies as a SIGNIFICANT upward move.  Chalk up more TARP for the financials (market makers).
 
So there I was last Sunday night, wondering if it could possibly happen again.  Could the "Goldman Sachs of the world" help to direct prices higher, thus minimizing option payouts for a second month in a row.  Depending on the index ETF I was looking at, potential gains for this past week were anywhere from 3% to 12% to eliminate net in-the-money put premium.  Needless to say, I really wasn't surprised to see our major indices tack on from 4-6% last week.  Call it manipulation, coincidence, or even another round of TARP for the financials if you like, but the bottom line is that many financial companies were able to make/save a BOATLOAD of money.
 
Knowing this, it's difficult for me to give the bulls their due in assessing the technical health of this rally.  I'm very skeptical.  Some parts of it look for real.  It's hard to ignore the huge rally of semiconductors as they tend to be a leading indicator of economic activity.  Check out this chart:
 


Semiconductors broke out on both an absolute and relative basis and I REALLY like to see that.  It's an "under the surface" type of development that can lead to much bullishness in the weeks and months ahead.  But I need to see more.  I rarely take index moves at face value, instead looking for "under the surface" signals to either corroborate or contradict what I'm seeing on the indices.
 
Happy trading!

- Tom

Over the past 6-weeks, we've seen the S&P 500 trade in a large sideways pattern between 1220 and 1100; we find this eerily reminiscent of a bearish pattern that will resolve itself to new lows. Certainly this is our viewpoint; and we believe the supporting technicals in the US Dollar Index ($USD)confirm our belief.

Quite simply, the USD rises when there is "stress" in the world as market participants move towards safety. Over the past year or more, USD has been in a downtrend, but that downtrend now appears to be over. Note the wide girth bullish wedge coupled with the breakout above the 200-day moving average. Our real focus is upon the 200-day, for history has shown that breakouts or breakdowns of this important, yet simple standard moving average - indicate a change in trend. This is what we see on the chart now, and thus it begs many questions?

Certainly the first should be that given the Euro is roughly 60% of the USD, then what should we make of the European debt crisis and shall it spiral out of control far worse than anyone is expecting at this point given the USD looks poised to make another run towards the 87-89 zone? Those trading USD now have the wind at that back from a technical perspective. This has negative implications for the stock market - regardless of last week's 5-day rally.

Thus, the current S&P 500 rally looks in trouble; and one must look to be aggressive in short positions.

Good luck and good trading,
Richard

In the last month or so gold has formed a double top that could be the start of a much needed correction for the metal.

Specifically the chart below shows an Adam & Eve double top. The first top is sharp and spiky, and the second is more rounded, depicting a labored attempt to reach the previous highs.

A neckline is drawn across the July price low, showing the support level that needs to be penetrated in order for the formation to "execute" (trigger expectations of lower prices). If it does execute, the minimum downside target would be about 1600. This target is estimated by measuring the distance between the first top and the neckline, and then projecting the same distance from below the neckline. It is interesting to note that the less accelerated rising trend line drawn across the January and July lows is rising at a rate that could provide support around 1600 if the correction proceeds. A steep rising trend line has been penetrated, increasing our expectation of further decline.

Gold is in a bull market, so bearish formations are less likely to execute; however, the parabolic rise seen on the monthly bar chart below is strong evidence that a correction is necessary -- a vertical ascent is not sustainable.

A typical resolution for a parabolic ascent is a total collapse back down to the level of the basing pattern that preceded it, but, given the fundamentals supporting gold, I think other options are more likely. A healthy correction like the one in 2008 is an outcome that would satisfy the need to stunt the vertical advance. Another outcome would be a high-level consolidation, which is where prices move into a trading range, in this case say, between 1600 and 1900 over a period of years, but, again, I think the fundamentals argue against that.

Bottom Line: I wouldn't dare say that gold can't continue higher, but the recent vertical movement of gold cries out for a correction to digest the advance. The recent formation of a double top gives us hope that a correction is beginning.

Take care,
- Carl

P.S. Be sure to read the Site News section of this newsletter for a special coupon that you can use to get a FREE MONTH of DecisionPoint.com service!

The S&P 500 peaked in early July and declined sharply into early August. There has been a rebound from this low, but all sectors are still down since July 8th – except one. The Utilities SPDR (XLU) is the only sector SPDR showing a gain since July 8th. The first PertChart shows absolute performance for the nine sectors and the S&P 500 over the last 50 days. The S&P 500 is down 8.51% and the rest of the sectors are down from 2.84% (Consumer Staples) to 16.53% (Finance). The Utilities SPDR (XLU), which is the highest yielding SPDR, is up .65% since July 8th. It ain’t much, but it is better than a loss.




Click this image to see a live chart.

The second PerfChart shows the performance for these sectors relative to the S&P 500. Click the S&P 500 tab to move between absolute and relative performance. Sectors that are down less than the S&P 500 or up show positive relative performance. Sectors down more than the S&P 500 shows negative relative performance. Finance and industrials are leading the way lower and showing relative weakness. The consumer staples and utilities are holding up the best and showing relative strength. This shows a defensive oriented market that prefers safety and yield over return.

Take care,
- Arthur 

EUROPEAN STOCKS FALL ... This morning's weak employment report is having a negative impact on global stock markets. European stocks are down 3%. Chart 1 shows the German DAXto be the weakest of the three after having achieved a feeble rally over the last month. Chart 2 shows the French CAC Index failing at 3300 resistance. Chart 3 shows the London Times Index (FTSE) falling back below its mid-August peak at 5377. All three charts strongly suggest that the short-term rally in Europe has probably ended.

Have a great Labor Day weekend!

- John

Reminder: StockCharts now provides real-time charts for FTSE and Euronext stocks and indexes as well as delayed data for the DAX.  Click here for more information.

It is a concept that we stress on a periodic basis, and we got another illustration this week. Technical indicators must be interpreted within the context of the overall market trend.

On August 17 the S&P 500 Index 50-EMA crossed down through the 200-EMA, declairing by our definition that the long-term trend was down and that we were in a bear market. When this happens, we remind ourselves that "bear market rules apply," and that we should expect negative outcomes more often than positive ones.

As of yesterday many of our short-term indicators were overbought and topping -- the chart below shows what the STO-B and STO-V looked like yesterday. And even though prices had broken above the previous August top, we expressed doubts about the viability of the rally in our daily blog because internals were negative.

While we just recently had technical confirmation that we are in a bear market, the bear has actually been around since the May 2 top, and the coincidence of price and indicator tops was an early clue that the up trend had stalled and may have been in trouble. Since the price break in August we need to consider overbought indicator tops as being cracks in thin ice.

- Carl

Wednesday at noon, the Dow Jones and NASDAQ were both testing critical resistance.  Here's an excerpt from my daily Market Chatter mailed out close to noon EST on Wednesday:
 
"We certainly don't like the action thus far today. A rather significant reversal is possibly underway at major price resistance. The NASDAQ is showing a shooting star doji with the upper tail just beyond the 2600-2608 price resistance we've discussed. The earlier high was 2611 with the NASDAQ at 2584 at last check. A finish there today would be bearish short-term.

The Dow Jones is also testing very signficant price resistance at 11613. It failed on yesterday's close, then was well above that resistance earlier today at 11713 before tumbling over the past hour or so back near the 11613 level. Again, a finish beneath 11613 with a long tail above it would not be a good sign for the bulls in the near-term.
 
Those who favor the short side have a great opportunity to jump in on shorts with much lesser risk than we've seen over the past couple weeks. That's what a light volume rally will do."
 
Take a look at the two charts below and then I'll discuss some of the comments above:
 




The NASDAQ lost critical neckline support in early August on massive volume.  Yes, the bounce was nice.  But we cannot assume that a critical resistance level like 2608 will be cleared.  We have to SEE it first.  The assumption is that it will fail until proven otherwise.  Note the declining volume on both of these charts as prices moved higher to test resistance.  Volume trends are horrible.  It felt as though the market was being manipulated this past week.  On Tuesday, consumer confidence fell from 59.2 to 44.5, one of the largest month-to-month declines I've seen.  Yet the market's bounce continued almost unabated.  Then on Wednesday, the bulls had their big chance.  While the ADP employment change report missed estimates slightly, both Chicago PMI and factory orders absolutely blew past estimates.  An intraday breakout resulted, but could not be sustained.  Again, volume was light on the buying.  On Thursday, the ISM index stayed above 50, beating consensus estimates (48.5).  Once again, the market exploded higher intraday, moving past resistance only to fail into the close again.  Volume remained light.
 
On Wednesday, the Dow Jones even managed to close EXACTLY at 11613.  It wasn't 11614 or 11615.  It was EXACTLY on resistance at 11613.  We're left scratching our heads when the close occurs right on the biggest price resistance level on the chart.  Thursday and Friday belonged to the bears, especially Friday after a dismal jobs report.  Now the bulls can only tip their caps to the bears.  The bears did at resistance what the bulls did at support - in tennis terms, they held serve.  The problem for the bulls is that we're in a confirmed downtrend with very negative volume trends.  Daily MACDs remain well below the centerline.  That tells us that momentum remains bearish.  It also suggests that the current range that we're in is most likely to break to the downside, in the direction of the prior downtrend.
 
It's going to be extremely important to follow the "beneath the surface" signals and sentiment.  The S&P 500 topped when signals alerted me to the fact that the upside move was not sustainable.  We're likely to see reversing signals ahead of time to the downside as well.
 
Happy trading!
- Tom

"BOOK BASH 2011" IS HERE!  SAVE 33% OFF ALL ITEMS IN OUR ONLINE STORE!  From now until Labor Day, everyone can save 33% off all items in our online store.  Books, logo merchandise, videos and bundles - all for 1/3rd off!  This is the first time we've EVER run this kind of sale so be sure to take advantage of it now before it ends on Monday.  Click here for details.

NOW EARNING A FREE MONTH OF SERVICE IS EVEN EASIER - We're now offering a free 10-day trial for all StockCharts account types.  That means that it is even easier for members to earn a free month of service simply by having their friends join.  Just point your friend to our sign up page and have them test drive us free for 10 days.  If they join up after that, you'll get a free month of service!  You can start by forwarding this newsletter to them right now.  :-)

Hello Fellow ChartWatchers!

Last month, we announced the opening of a new User-to-User help website called "s.c.a.n." - the StockCharts Answer Network.  Hopefully, you've had a chance to check it out - if not, I strongly encourage you to do so.

s.c.a.n. has been a huge success so far.  Almost 150 different questions have been asked and over 360 different answers have been given - as you can see, the s.c.a.n. community is ANXIOUS to help!

Remember, anyone can browse s.c.a.n. for free just by visiting the s.c.a.n. website.  Here's just a sample of some of the great things you can find over there right now:

• Six great ways to import a list of ticker symbols into StockCharts from some other website.
• How to discover the indicator settings for ANY SharpChart, even if they aren't displayed on the chart.
• Several great local Technical Analysis user groups.
• Why and how to set Stops accurately in your trading.
• Which web browsers people use with StockCharts and why.
• How to shade the area between the Bollinger Bands with a translucent color.
• How to chart the percentage a stock is above or below a moving average.
• ...and much, much more.

s.c.a.n. is free, useful, rewarding and full of great advice from other StockCharts users.  You owe it to yourself to take some time over the holiday weekend and look at all of the content there.  Hopefully you will also decide to join in by asking the s.c.a.n. community a StockCharts question that has been bugging you forever!

Happy Labor Day!    (US markets closed on Monday.)

- Chip

The Euro Currency Trust (FXE) opened strong on Monday, but moved lower throughout the week and closed near its low for forge an outside reversal. An outside reversal occurs when the high is above the prior high and the low is below the prior low. A close below the prior open reinforces the reversal. While the overall trend remains up, chartists should watch support from the May-July lows for a potential trend reversal. The chart below shows FXE forming a big outside reversal in early May and then stalling the next 3-4 months. The May-July lows mark support at 139. A move below these levels would forge lower lows and break the June 2010 trendline. This would clearly reverse the uptrend.


Click this image for a live chart.

The indicator window shows StochRSI with horizontal lines set at .40 and .60. Instead of using crosses above the midpoint (.50) to generate signals, I applied at .10 buffer to bullish and bearish signals. A move above .60 is momentum bullish until there is a counter move below .40. A move below .40 is momentum bearish until there is a counter move above .60. Notice how StochRSI moved below .40 in early May and has yet to produce a counter signal. This indicator is in bear mode until a break above .60. You can read more about StochRSI in our ChartSchool.