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"Distance not only gives nostalgia, but perspective, and maybe objectivity." - Robert Mogan

Perspective.  Do you have it?  Have you lost it?  How do you gain it back?

One of the best ways to gain perspective on the stock market is to use long-term market indicators.  One of the best long-term market indicators I know of is the Bullish Percent Index ($BPNYA).

The Bullish Percent Index is the percentage of tradeable NYSE-listed stocks that currently have a "bullish" signal on the right edge of their Point and Figure chart.  Click here for the gory details.

$BPNYA is a great indicator for quickly determining the overall "health" of the market.  If it is moving higher, life is good.  If it is moving down, hang on to your hats.

So where is the Bullish Percent Index now relative to where it has been in the past?  Here's a monthly chart of $BPNYA going back to 1987.  This chart is one of the best I've ever seen at telling "The Story of the Stock Market So Far..."

(Membes can click the chart to see a live monthly version.  Non-members will see a daily version.)

This chart shows that the important levels for $BPNYA historically have been 25%, 50% and 75%.  The index tends to stay between 25% and 50% (slow economic times) OR it tends to stay between 50% and 75% (good times).  The current 41.52 rating shows some improvement over September's reading of 23.15 however there is a long ways to go.  The indicator has also whipsawed above and below the 50% line many times in the past.  As you can see from recent action in 2004 and 2009, a move above 75 is what is really needed in order to have confidence things won't immediately fall back below 50.

Every day we publish Bullish Percent numbers for the NYSE as well as 22(!) other stock categoies every day on our Market Summary End-Of-Day page.  They are located at the bottom and all begin with "$BP".  Make sure to add them to your market analysis arsenal.

- Chip

Last Thursday I showed some traditional charts that suggested stocks and commodities were due for a rally. In the case of stocks, a lot of global stock and U.S. stock indexes had reached important support at their mid-2010 lows and were in oversold territory. In addition, I suggested that the S&P 500 had completed the fifth wave in a five-wave decline. That suggested to me that the stock market may have put in an October bottom which should pave the way for a fourth quarter rebound. I also showed the CRB Index testing two important support lines going back a year. I suggested that was a logical spot for commodities to attempt a rebound which would also be good for stocks, and especially stocks tied to commodities like energy and materials. Today, I'd like to show how those traditional chart signals are supported by intermarket trends. Chart 1 shows the inverse relationship that exists between the Dollar Index (green line) and the CRB Index (brown line). The May commodity peak coincided with a dollar bottom. Over the last week, those roles reversed. A sharp drop in the dollar (prompted mainly by a surge in the Euro) gave a boost to commodity prices just as they were testing important support. The 50-day "correlation coefficient" below Chart 1 shows a negative correlation between the dollar and commodities since the start of the year (except for a brief period during August). Chart 2 shows a positive correlation between the CRB Index and the S&P 500 (red line). Both peaked together at the start of May and troughed together over the last week. Both benefited from the falling dollar.

The market has spoken.  If you're looking for nice earnings surprises for the third quarter, or perhaps raised guidance on a forward-looking basis, look no further than the technology and consumer discretionary sectors.  This past week, we saw a very positive earnings report from Google (GOOG), while commodity player Alcoa (AA) and behemoth financial JP Morgan (JPM) both came up short of expectations.  Given the way that the various sectors have been trading, you might expect more of the same over the next few weeks.  While the overall market may seem directionless with wild swings higher and lower the last several weeks, technology and consumer discretionary have emerged as the relative leaders among the nine sectors.  That's where the money is flowing on a relative basis.  Utilities had been performing quite well, but the sudden surge in interest rates and equity prices the past couple weeks has lessened their appeal on a relative basis.
 
One look at the chart below and it's obvious what the market is expecting during earnings season:

Technology and consumer discretionary are outperforming and there's only one way to interpret this.  Those who research these companies and interview management believe these are the two areas where we'll see the best earnings reports and biggest positive surprises.  GOOG was the first example.  Financials are the primary laggard as money has continued flowing out of the sector during the third quarter.  JPM may have served as the poster child for the group with an underwhelming quarterly report this past Thursday.
 
The relative strength in banks and brokers can be seen in the next two charts:

Don't expect much out of these two industry groups as earnings are released because the market is pricing in some very poor results.  I want to see some relative strength (ie, improving technicals) before I'd consider the financial sector as a place to invest.
 
Historically, the market doesn't perform very well when the influential financial sector is underperforming.  That means that you'll need to be very selective on the long side within areas of the market where the money is currently flowing.  Given Friday's weak breakout volume, I'd remain quite cautious.
 
I write a daily Market Chatter piece that's provided to our members at Invested Central and covers such areas as price/volume analysis, MACD, other momentum oscillators, historical market tendencies, sentiment indicators (including my own equity only put call ratio - EOPCR - analysis), sector analysis, individual stock trade setups and a final summary.  I'm making the Market Chatter available to all ChartWatchers' readers through the end of October at no cost.  Click here to register.
 
I'm also very excited to announce that I'll be making my first trip ever to the Great White North to speak to the Calgary Chapter of the Canadian Society of Technical  Analysts on Saturday, November 5, 2011 and Tuesday, November 8, 2011.  Greg Schnell, author of The Canadian Technician Blog here at StockCharts and Director of the Calgary Chapter of the CSTA, will join me.  Everyone is welcome and I'll be providing details on our website very shortly.  Click here for our list of Events.  I'd love to see you there!
 
Happy trading!

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One of the ways we have of measuring sentiment is by tracking cash flow into and out of Rydex mutual funds through the use of our Rydex Cash Flow Ratio. The Ratio is calculated by dividing cumulative cash flow (CCFL) of Bear funds plus Money Market funds by the CCFL of Bull funds. We display the results on a reverse scale chart so that high Ratio readings coincide with price lows.

The chart below shows that at the October price lows the Ratio went lower than any time since the 1999 correction. Recent Ratio lows were more extreme than two previous bear market lows, and extremes like that are a sign that sentiment is getting very bearish. Unfortunately, the recent Ratio low exceeded the normal range of the last nine years, so we have to wonder if the limits of the range are expanding permanently.

The above chart displays our entire history of the Ratio, and obviously the range was much wider in the early days. The reason for this was that there were fewer assets in Rydex funds back then, which allowed for a more volatile Ratio.

The chart below shows the components of the Ratio calculation. Note that as the market was topping, Bull CCFL fell and Bear CCFL flattened. Then as the market crashed, Bull CCFL decreased, and Bear CCFL increased, as expected.

The really significant feature on the chart is the sharp increase in Money Market fund assets as people ran to safety. The next most interesting feature is that (see the thumbnail chart on the lower righ corner of the chart) all that recent inflow has moved out of the Money Market fund and, presumably, back into the Bull funds.

Bottom Line: The Ratio is well off its recent lows, but it is still reflecting very strong bearish sentiment, and this is confirmed by Investors Intelligence Advisor Sentiment and NAAIM Sentiment as well. This taken with other indicators we discussed earlier this week, we believe that the Ratio has signalled an important price low.

The US Dollar Index ($USD) was hit hard this week with a 2.2% decline. Weakness in the Dollar buoyed oil and stocks, which have been negatively correlated with the greenback. Dollar weakness and Euro strength is also associated with the risk-on trade. Despite this week’s decline, the bigger trend is still up and support is close at hand. The first chart shows weekly prices with a Double Bottom breakout in September $USD broke resistance with a strong surge that was confirmed by RSI, which broke to its highest level in a year.
 

Click this image for a live chart.

The second chart shows more details with a daily candlestick chart. There are three reasons to expect support soon. First, broken resistance in the 76 area turns into support. A “throwback” to broken resistance is not uncommon after a breakout. Second, a move to the 76 area would retrace 61.80% of the prior advance. Third, RSI moved into the 40-50 zone. This area acts as support during and uptrend.

Click this image for a live chart.

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"THE CANADIAN INVESTOR" BLOG ADDED - Please give our newest columnist Greg Schnell a big StockCharts welcome by visiting his new blog "The Canadian Technician" located under our Blogs tab.  Greg's blog is about technical analysis from a Canadian perspective and his first couple of articles have been very well received.  

Hint: If Greg's charts look too small on your screen, click on them once to see the enlarged version.

Utilities have emerged as the year's strongest sector. The chart below shows the Utilities Sector SPDR (XLU) trading near a new 52-week high while the S&P 500 (solid line) is closer to a new lows. The rising XLU:SPX relative strength ratio (below chart) also shows the superior performance of utilities this year. That's not surprising since utilities are a defensive stock group that usually attracts money during a market downturn (as do staples and healthcare). But there's another dynamic driving money into utilities -- falling bond yields. The falling green line shows the 10-Year T-Note Yield (TNX) falling all year. With bond yields having fallen below 2% for the first time in 60 years, the utilities' yield of 4.3% looks pretty attractive. Falling bond yields are also symptomatic of economic weakness which is bad for the rest of the stock market. In a climate of a weak stock market and falling bond yields, utilities offer a relatively safe haven. People still have to use electricity in good times and bad. And, as I suggested a couple of weeks ago, defensive stocks do better when the VIX is rising.

Just a quick reminder to all StockCharts subscribers.  Be sure to visit the "Market Message" area of our website at least once a week.  In addition to seeing all of our Market Message articles, you'll find additional commentary from Arthur Hill, an audio update from myself, and video versions of things by Arthur.

- John

The month of September has not been kind to Gold; and the question before everyone is whether or not gold has seen its highs for an intermediate period or whether a brief pause before higher highs are forged. We are of the opinion of the former rather than the latter, but we remain gold bulls – but from probably lower levels than most are looking for at this juncture in the cycle.

From a technical perspective, we should note that Gold has forged a “monthly bearish key reversal” pattern to the downside. Now, monthly reversals tend to much more important than daily or weekly varieties and we think of this one as no different. Having said this, many analysts are looking for Gold to hold the $1535 lows forged recently, but we are looking for something a bit lower – to perhaps between the 20-month and 40-month moving averages at $1382 and 1164 respectively. In doing so, this would not destroy the bull market whatsoever, but it would be a “gut wrenching” period for the “super gold bulls”, of which we know many. The last major correction took place under the aegis of the 2007-2009 bear market for stocks and commodities, and saw gold prices fall over the course of 9-months from $1053 to $681 or -35%. And putting pencil to paper and using the recent highs at $1924…and dropping prices by -35%...we get a round number of $1250…which is square within our target range.
 
Therefore, while we do like Gold long-term – there is a technical case to be made that a larger correction is unfolding upon which we can be aggressive buyers sometime next year. But for now – it would seem wise to stand aside and allow the market to wreak havoc upon those late longs.

The weekly moving average convergence divergence (MACD) has always been a favorite indicator of mine. It provides a "big picture" outlook of the market and helps me take a step back from the day to day swings of the market. With the Volatility Index (VIX) in the stratosphere and closing close to 43 on Friday, the whipsaw action is quite unnerving. Taking a step back and looking at the big picture helps to ease some of that daily stress and makes it easier to focus on an appropriate trading strategy. I realize the MACD is only one indicator, and it won't always be right, but it does increase the odds of a particular move and helps me determine when it makes sense to take on more risk.

Below is a chart of the S&P 500 on a weekly basis for the past 5 years:

Note that all the MAJOR moves over the past 5 years were preceded by either a long-term positive or negative divergence. Currently, the weekly MACD is pointing straight lower and is clearly bearish. This tells us that the 12 week EMA is diverging from the 26 week EMA, a sign of accelerating bearish momentum. While it's not impossible for the market to bottom during such accelerating bearish momentum, I'd say it's rather unlikely.

There are a number of critical "below the surface" types of signals - like the weekly MACD - that will tell us ahead of time when the market has bottomed or is approaching a bottom and is poised to move higher. Those signals are a MUST for anyone who seriously trades the market. I've developed a new educational video series that will enable you to spot these reversals BEFORE they happen. CLICK HERE to register for this series.

Happy trading!

- Tom

Hello Fellow ChartWatchers!

Simpler is usually better and that is definitely true when you are looking for a chart to put the month of September into perspective.  Voila!

Members can click the chart to see a live version.

The Dow finished September over 6% lower than the previous month.  That's the 5th straight month $INDU has moved down - and it did so on above average volume.  MACD momentum is still headed down having just crossed its signal line.  Don't get fooled by all the over-analysis going on these days in the main stream financial press, the technical picture is simply not that good right now.

OUR THREE MOST COMMON SUPPORT QUESTIONS

1.) Why am I seeing filled red and filled black candlesticks on your charts?

Usually with our default candlestick settings, filled candles will be colored red.  Filled black candles appear when the a stock gaps up overnight (opening mich higher than yesterday's close) but then falls during the day but still manages to close higher than it did yesterday.  In that case, the stock moved higher when comparing the close to yesterday's close HOWEVER it moved lower when comparing the close to the open.  The candle is filled because the close is lower than the open, but it is colored black because the close is higher than yesterday's close.  The chart above shows several examples.

By the way, the opposite situation leads to hollow red candlesticks - but we don't get many questions about them because they are not as noticeable.  There are at least 8 on the chart above.

These "contradictory candles" often happen when the market is unsure about the stock in question and can indicate an upcoming change in direction.  Recent market indecision has made them plentiful on the chart above.

2.) Why is your historic data different from the data on some other website?

We adjust our historic data to eliminate the artificial, misleading effects of splits, dividends and distributions on our charts.  For more information, check out this video explanation I gave at our recent ChartCon conference in Seattle.

3.) How can I overlay things on your charts?

To overlay things, you need to use the "Position" dropdown that's associated with each indicator on our charts.  Normally, "Position" is set to either "Above" or "Below" which means that the indicator will appear either above or below the price bars in its own separate area.  Notice however that there are two additional settings for "Position" - "Behind Price" and "Behind Ind."

"Behind Price" means that the indicator will appear in the price panel area as an overlay.  "Behind Ind." means that the indicator will appear in the same panel that previous indicator is using.

I urge you to experiement with those two settings - they are the keys to creating some really powerful charts.

- Chip

QUESTION: Carl, I have read a lot of articles recently indicating gold miner stocks should go up and outpace gold. So far nothing but a drop in goldminers. Would it be possible for you to show charts of GDX and GDXJ with your comments on one of your daily posts? Thank you for a great website.

ANSWER: Back in the day before precious metals ETFs, gold mining stocks were considered a convenient surrogate for exposure to precious metals. The XAU (Gold & Silver Mining Index) is composed of large-cap members of this group. First let's compare a long-term chart of the XAU with one of gold. Note that the XAU and gold ran pretty close together from 1984 until about 2000. Then from the lows of 2000 gold rallied about +1400% versus only +125% for the XAU. (The Price Relative line has been trending down since 1996.) An interesting point is that both indexes had major corrections in 2008 -- about -70% for the XAU and -25% for gold.

I think we can say that in the past there has been a passing similarity in price movement between the two indexes, but it has been a similarity in direction, not magnitude. Why the difference in performance? Well gold is a commodity, and gold stocks are, well, stocks in companies that mine gold. As stocks they carry all the baggage of the companies they represent, and they tend to be affected by the movement of the broad stock market as well.

As an aside, let me say that I have a strong dislike for gold mining stocks as trading/investing vehicles. They tend to trade in broad, volatile trading ranges, and they defy my attempts at trend following. This can be seen on the charts of the two ETFs you requested.

As for specific issues, GDX recently had a failed breakout attempt, a bull trap, and is about to challenge the bottom of the one-year trading range. GDXJ has executed a classic head and shouders pattern and has a minimum downside target of about 22.25.

Bottom Line: The price of gold is already 'baked into the cake' of gold mining stock prices. There could be some future management initiatives that may take better advantage of higher gold prices as regards the bottom line, but I wouldn't count on a major rise in gold stocks driven by a move to correct the lag in gold stocks versus the price of gold.

There are plenty of opinions available on stocks, sectors and markets. Take them all with a grain of salt, then look at the chart!

After hitting resistance at a key retracement this month, the Technology ETF (XLK) fell with what looks like a continuation of the bigger downtrend. First, notice that the ETF formed a massive Triple Top that extends from January to July. XLK became oversold with the July-August breakdown and then retraced 61.80% with the bounce back to the 25.25 area. Even though XLK moved back above broken support, a 61.80% retracement is normal for a counter trend bounce.

This advance looks like a Rising Channel on the daily chart and a Rising Flag on the weekly chart. These are also typical for counter trend advances. Regardless of the pattern interpretation, a move below the lower trendline and the late September low would signal a continuation of the July-August decline. This would target further weakness towards the 21 area. Using a Flag or Measured Move technique, the length of the prior decline (26.75 – 22.50 = 4.25) is subtracted from the September high for a target (25.25 – 4.25 = 21).


Click this image for a live chart.

The technology sector showed relative strength in September and was the market leader. The indicator window shows the Price Relative moving higher since late June. The Price Relative is the XLK:SPY ratio. This ratio rises when XLK outperforms SPY and falls when XLK underperforms SPY. Even though the Price Relative remains at high levels, a breakdown in this leading sector would be quite negative for the broader market.