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The chart below shows the three strongest drug stocks in the PPH this year. All three have recently achieved upside breakouts. They include Bristol Myers (blue line), Pfizer (red line), and Eli Lilly (green line). The black line is the PPH. As you can see, the three drug leaders have outperformed the group as a whole. That makes them the strongest stocks in the strongest industry in one of the market's strongest sectors. BMY is the strongest of the three (+34% for the year) and is trading at the highest level in ten years. Pfizer (+28% for the year) is breaking out to the highest level in four years. Lilly (+22% for the year) is trading at the highest level in three years. By comparison, the PPH is up 12% for the year (versus 8% for the XLV and -3% for the S&P 500).

Another big drug stock that may be on the verge of a huge bullish breakout is Abbott Labs. The weekly bars in Chart 2 show that the stock has been essentially in a sideways holding pattern since 2008. That may be about to change. ABT appears poised to exceed its 2008 high around 54 which would put the stock at a new record high. The stock's relative strength (solid) line turned up during the spring and is still rising. The odds for an upside breakout are greatly increased by the fact that other drug stocks are doing the same.

On the daily bar chart below we can see that the rising bottoms line has been penetrated at the time this intraday snapshot was taken. This is not a decisive break, but it is a logical one, since the triangle formation is a continuation pattern, and a continuation of the larger down trend should be expected.

To determine if the October low has historical credibility as long-term support, let's look at monthly chart going back to 1943. As we can see, the long-term support is just above 2%. Hoisington Investment Management Company in their Third Quarter 2011, Quarterly Review and Outlook stated, "In view of the United States extreme over-indebtedness, we believe that 2% is a an attainable level for the long treasury bond yield."  Technically speaking, 2% looks attainable and likely.

Why would anyone want to commit their money for 30 years at 2% to 3%? Because U.S. treasuries are considered to be safer than other options, which is amazing given that we are borrowing 42 cents of every dollar we spend. Doesn't sound safe to me. I guess it speaks more to the sorry state of the global economy.

I always find myself turning my attention to "next year" in the stock market as we enter the December holiday season.  On many fronts, 2011 has been the most challenging year in equities that I've ever seen.  Sure, the losses in 2008 and the fear that accompanied those losses were worse, but there were many signs in 2007 and 2008 that told us a weak market was dead ahead.  2011 has been particularly difficult because many technical signs have changed mid-stream.  For a week or two, it appears we have one type of market only to find the next week it's completely different.  November 2011 was the perfect example.  There was a clear breakdown on our major indices as we fell beneath critical price support and moving averages.  The MACD fell beneath its centerline and the momentum was clearly bearish.  Then central bankers around the globe aided the bulls and the recovery was just as astonishing as the selloff.  Take a look:
 


The second half of November was simply crazy - huge breakdown followed by huge recovery.
 
Also included on the chart above is a comparison of the three defensive sectors - healthcare, utilities and consumer staples - and one of the aggressive sectors (technology), all of which have recently held up quite well on a relative basis.  The problem?  On Friday, technology broke down beneath a relative support level that previously held in both October and November.  This doesn't necessarily mean the market will move lower, but it certainly doesn't help.  By contrast, look at the relative strength lines of our defensive sectors.  Every one continues to print higher highs and higher lows, suggesting that the flight to safety and the "risk off" environment is alive and well.  I'd like to see this "below the surface" message change, but so far it's been a no-go.
 
Need more proof of the "risk off" environment?  Let's pull up a one year chart of the 10 year treasury yield:
 


The yield moves opposite of treasury prices.  Therefore, a breakdown in the yield means money is flowing INTO treasuries, a safe haven for investors.  On Friday, the yield closed at its lowest level since early October as money poured into treasuries.  The scary part is that treasury yields have led the S&P 500 by the nose for the last several years.  It's difficult to be overly bullish equities at a time when money continues to find its way into treasuries.
 
Despite all the negative signs emerging, sentiment is quickly turning into a short-term positive.  The VIX closed at its lowest level since early August on Friday.  From an historical perspective, it remains elevated, but it is within the confines of a general downtrend since August.  A VIX that trends lower is normally a friend of the bulls.  A more powerful short-term bullish signal could be emerging in the form of my relative pessimism ratio.  With the information gleaned from the CBOE and the powerful charting tools here at StockCharts, I developed the following chart that has a very solid track record in predicting SHORT-TERM reversals.  I am emphasizing "short-term" because this indicator tells us when sentiment has moved too far in one direction.  Once it unwinds, the market is free to move in either direction.  So please keep in mind two things - (1) past results NEVER guarantee future success and (2) this is a short-term indicator by nature.  With that in mind, check out the following chart:
 


It will take more bearishness in options land on Monday to push this relative pessimism level to a -20% level, which is the level where we've previously seen market reversals.  But everyone should be aware that we're getting close as the ratio of puts to calls on a relative basis are higher than at any time since early August.
 
On Tuesday, December 20th, I will be leading my 2012 Market Outlook webinar, discussing areas of potential strength and weakness in the months ahead.  It will be educational, in addition to informative, and I'd love for you to join me.  CLICK HERE for more details.
 
HAPPY HOLIDAYS and happy trading!

The Retail SPDR (XRT) remains one of the strongest ETFs in the market. As a core part of the consumer discretionary sector, retail is one of the most important industry groups and Christmas is perhaps the most important season. A lot is riding on the consumer this holiday season. The chart below shows XRT bouncing off support in the 42.5 area and working its way back above 50. A rising channel has taken shape with support marked at 47.50. The bulls are in good shape as long as prices hold this rising channel. A move below 47.5 would break channel support and argue for a continuation of the summer decline. This would be a bearish development for retailers, the consumer spending outlook and the broader market. 


Click this image for a live chart.

The indicator window shows 14-period RSI. Notice that RSI broke above 60 in April 2009 to turn momentum bullish. Once bullish, RSI oscillated between 40 and 80 during the bull run. Andrew Cardwell, a noted RSI expert, notes that RSI oscillates in bull zones and bear zones. A bull zone extends from 40 to 80, while a bear zone extends from 20 to 60. Notice that RSI moved below 40 with the summer breakdown and is now hitting resistance in the 50-60 zone. This puts RSI in a bear zone and sets up a big test for momentum. A break above 60 would turn momentum bullish again, while a break back below 45 would be bearish.

Good trading   -- Arthur Hill CMT

Hello Fellow ChartWatchers!

This past August, something special happened in Seattle.  Over 350 charting enthusiasts gathered for the first ever ChartCon conference.  They listened as John Murphy, Arthur Hill and myself discussed technical analysis in depth, demonstrated their own analysis techniques and explained how to use the core features of StockCharts.com.  (They also had a ton a fun in the evenings!).  Click here to see what the attendees thought of their conference experience.

I am now thrilled to officially announce that we will be holding the second annual ChartCon conference next August in Seattle!

ChartCon 2012 will build on the lessons of ChartCon 2011.  There will be great presentations by John Murphy, Arthur Hill and myself but we will also be joined by the rest of our ChartWatchers contributors - Carl Swenlin, Richard Rhodes and Tom Bowley!  Each presentor will focus on the topic "How I analyze the markets using StockCharts" and they will all include lots of demos.

In addition to great presentations, we'll have some great evening events including a gala dinner at the Boeing Museum of Flight.  One of the wonderful things about ChartCon 2011 was the interactions between attendees and we want to make sure that happens again in 2012.

For more information, including dates, pricing, a detailed agenda, and our spouses-attend-free policy, please click here.  You'll also find a link there where your can register for the conference.

Don't delay - ChartCon 2011 sold out in less than one month.

Speaking on behalf for the presentors, we'd love to meet you in Seattle next August and help you get the most out of StockCharts.  I guarantee that you'll learn several new ways to use technical analysis and StockCharts to make better investing decisions.

See you then!
- Chip

HOLIDAY SALE ENDS MONDAY - Our December Holiday Special ends on Monday, the 19th.  If you are a member, do yourself a favor and visit the Your Account page to see when your account expires.  If it expires anytime between now and June 2012, you should really consider renewing for 6 or 12 months right now.  Renew for 6 months and you'll get 1 additional month for free.  Renew for 12 months and you'll get 2 additional months for free.

Members: Click here and then click the yellow "Extend" button to get started.

Not a member yet?  Thinking about joining?  Join before Monday and you'll get the same deal as the members.  Click here to learn more.

SCTRs INVADE STOCKCHARTS HOMEPAGE, SCAN ENGINE - We are now posting top 10 and bottom 10 lists for our three most popular SCTRs on our homepage.  If you haven't heard yet, the "StockCharts Technical Ranks" are a new rating service we provide that assigns a number between 0 and 100 for each stock in a given group.  The higher then SCTR, the stronger the stock is technically.  For more info, please see our ChartSchool article.

Here's a easy way to see the value of SCTRs (pronounced "Scooters"):  Click on the "PerfChart" link in the S&P 500 SCTR area of our homepage.  You'll see the performance of the stocks with the Highest current SCTR rating on an interactive PerfChart.  Very cool!

By the way, SCTRs are now also integrated in with our Scan Engine.  Extra members can now add SCTR ratings to their scan criteria.  For example:

  [daily sctr.sp5 > 70] and [close > Upper BB(20,2)]

This scan will find all stocks in the S&P 500 with a SCTR rank above 70 that are also above their upper Bollinger Band.  Strong performers indeed!

UPCOMING CHANGES TO THE PUBLIC CHARTLIST REWARD SYSTEM - Starting on January 1st, we will be making some changes to how the Public ChartList reward system works.  As of January 1st, the following changes will occur:

• All current Hall of Fame designations will expire
• In order to earn Hall of Fame status, a Public ChartList must win the monthly voting contest 6 times and be approved by the StockCharts president.
• The winner of the montly voting contest will receive 1 free month of service.  2nd place will receive 2 free weeks, and 3rd place will receive one free week.

The goal of these changes is to ensure that the Hall of Fame designation remains meaningful to the people that are browsing the Public ChartList area.

Hello Fellow ChartWatchers!

First off I wanted to make sure you knew that our Holiday Special is now underway!  Long time members will tell you that if you are a StockCharts fan, the best time to join or renew is during our Holiday Sale Special.  If you renew right now for 12 months, we'll give you 2 additional months for free.  If your account expires within the next 6 months, now is definitely the time to renew.  If you have been thinking about becoming a StockCharts member, now is the time to join.

Members: To renew, login and then click the "Your Account" link at the top of the page.

New Subscribers: Click here and select your service level to get started.

Do not let this opportunity pass you by.  This sale only lasts through December 19th!

Also, we've inserted a longer article by John Murphy into this newsletter because John has some important, timely observations for everyone right now.  Feel free to forward this email to your friends using the link at the top of this email message.

AVERAGE TRUE RANGE COMPARISON

The other day, someone wrote in and asked why our ChartSchool formula for Average True Range (ATR) was different from what they saw on other websites.  Curious, we looked into the issue and were very surprised to discover that several other websites were describing ATR incorrectly.

ATR was created by J. Welles Wilder - the creator of the RSI indicator, the ADX indicator, the Parabolic SAR indicator, and several others.  He first described it in his amazing book "New Concepts in Technical Trading Systems."

The first part of the equation involved computing something called the "True Range."  Everyone gets that part correct.  (You can see the details for yourself here.)  It's the second part - the "Average" part - that many other websites are getting wrong.

On page 23 of Wilder's book it says:

"The equation for the AVERAGE TRUE RANGE is as follows:

ATR(latest) = ( 6 x ATR(previous) + Today's True Range ) / 7

To get the ATR initially, add the true range, as defined, for the past seven days and divide by seven. The answer from this will be used as the ATR(p) in the equation for the next day."

On page 26, Wilder reiterates the steps:

"2. ATR -- AVERAGE TRUE RANGE

A. Initially obtained by adding the true ranges for seven days and dividing by seven. 
B. The latest ATR is obtained by multiplying the previous ATR by six, adding today's true range and then dividing the total by seven."

Those discussions are in the context of creating a 7-day ATR. To create the more typical 14-day ATR, you would use 13 instead of 6 and 14 instead of 7 in the above formula. That's the same as the information we present in our ChartSchool article and it's what we use in our programs.

Unfortunately, other website just take the 14-period Simple Moving Average of the True Range values and call that average the ATR.  That is a huge mistake on their part caused - we guess - by laziness.

To see why, lets look at the current ATR value of the Dow Jones Industrial Average using our website and a popular competitor's site:

So we show that the Dow's ATR(14) should be 221.762 whereas our competition shows it at 206.98.  That's a HUGE difference!  Why is that?

The answer is obvious if you look at the following Excel spreadsheet that calculates ATR using both Welles Wilder's way of averaging things and the simple moving average method.  Here's a screenshot of the bottom of that speadsheet:

And there you go - If you use the Wilder averaging method you get 221.76 which is what our chart shows.  If you don't do your homework and assume that "Average" means "Simple Moving Average", you get 206.98 just like our competitor does.

(BTW, our chart shows the 200-day EMA at 11695.15 whereas the competition has it at 11703.14.  Here a link to an article explaining why our number is correct in that case as well.)

The bottom line here is that StockCharts.com is 100% dedicated to accurate calculations and we take the time to go to the authoritative source for our formulas.  Not everyone does that and, if they can't get ATR correct, what else do they have wrong?

Happy Holidays!

- Chip

ANNOUNCING SCTRs, AN IMPORTANT NEW TOOL FOR CHART WATCHERS - Stock ranking systems are nothing new.  Investors Business Daily has had their well-known RS Rank system in place for years.  Today, we are announcing our own stock ranking system called the StockCharts Technical Rank (SCTR) - "Scooters" for short.

Like all ranking systems, SCTRs take a predefined universe of stocks (initially the S&P 500) and calculate a score for each stock.  The stocks are then sorted based on that score and assigned a rank - a number between 0 an 100 based on their position in the sorted list.

SCTR scores are based exclusively on straightforward technical conditions championed by John Murphy in his books and presentations.  They were inspired by John's "10 Laws of Technical Trading" essay.  We'll have a ChartSchool article with the exact formula available in a week or so but essentially we are looking at 6-month performance, 20-day performance, distance from the 200-day moving average, distance from the 50-day moving average, the slope of the MACD histogram, and the RSI's value.  Each one of those factors is weighted based on John's opinion of its importance and then added together to achieve the final score for each stock.

At this point we are only creating SCTRs for just the S&P 500 stocks and presenting them in table format on this page.  We consider this to be a "Beta" test of sorts and would like feedback from everyone over the next couple of weeks about the rankings.  Do the stocks with a 90+ SCTR rank have "good looking" charts?   Do the stocks with low SCTR ranks have weak looking charts?  Are the stocks with large SCTR changes from the previous day deserving of those large changes?

Down the road, we intend to add SCTRs to a wide variety of things throughout the website including:

• Allowing members to see the SCTR tables update in real time during market hours
• Allowing members to use SCTRs in their custom scans
• Creating SCTR rankings for additional stock universes including Canadians stocks, ETFs, Mutual Funds, Small Cap stocks and Mid Cap stocks
• Allowing members to add the SCTR line as an indicator on their charts
• Allowing members to use a MarketCarpet based on SCTR values

We hope you find SCTRs useful.  Please take a look at them and send us feedback about how you might use them once they are fully deployed.

STOCK RALLY STALLS AT 200-DAY AVERAGE... This past week's impressive stock rally ran into some profit-taking on Friday just shy of 200-day moving averages. Charts 1 and 2 show the S&P 500 and the Nasdaq Composite closing near the their daily lows after nearing that important resistance barrier. The daily stochastic lines below Chart 1 turned up from a short-term oversold reading (below 20) which helped support this week's strong rebound. The two lines, however, are already nearing overbought territory over 80. Needless to say, those market indexes need to clear their 200-day lines if this week's rally is going to turn into something more meaningful.

DOLLAR BOUNCES OFF 50-DAY LINE ... Part of Friday's stock selling may be the result of a bouncing dollar. Chart 3 shows the DB Bullish Dollar ETF (UUP) bouncing off its 50-day average on Friday. The main reason for that was a drop in the Euro (which accounts for 56% of the UUP). Chart 4 shows the Euro selling off on Friday and remaining below its 50-day line. Global markets may need to see more of a bounce in the Euro to continue this week's central bank-inspired enthusiasm.

COMMODITIES TRACK STOCKS CLOSELY... Commodities rallied this week along with stocks, which continues their yearlong pattern of trending together. Chart 5 shows the DB Commodities Tracking Fund (DBC) ending the week above its 50-day average, but well below its November high. A trendline drawn over the July/August highs also comes into play near the November high as well. The DBC would have to clear both barriers to turn its trend higher in more decisive fashion. The line below Chart 6 shows how closely the S&P 500 has been tracking commodities.

VIX DROPS TO 200-DAY LINE... This week's stock rally pushed the CBOE Volatility (VIX) Index sharply lower during the week. That makes sense since the VIX and stock market trend in opposite directions. Interestingly, the VIX is now testing potential support at its 200-day moving average (just as the S&P 500 is meeting resistance at its 200-day line). What the VIX does at that support line will help determine if this week's stock rally has any real staying power.

The US Dollar Index appears to be setting up for a medium-term double top. This week it broke down through a short-term rising trend line drawn from the October low after reaching a level equal to the October top. The PMO made a lower top, creating a negative divergence.

The 20-EMA crossed up through the 50-EMA in early September, generating a Trend Model BUY signal. The 50-EMA crossed up through the 200-EMA signaling that The Dollar Index is now in a long-term bull market. Since the EMAs are in a bullish configuration, it is less likely that a full bearish outcome will transpire, but we could see a decline to suport at the 200-EMA or the rising trend line drawn through the August and October lows.

The Weekly chart presents a positive picture with a rising PMO and positively configured EMAs.

Bottom Line: The Dollar Index has been particularly vulnerable to the alternating extremes of attitude within the investing community of panic and relief brought on by the global debt crisis; however, while the charts refelct this volatility, they also seem to reflect a tendency toward a positive outcome in the long run.

Last week, the world's stock markets cheered the coordinated central bank efforts to supply dollar liquidity to the world banking system via lower than market rates. This clearly resulted in a "risk-on" trade across the board, and we expect more to follow in the weeks ahead as the ECB lower rates, and China moves quickly to halt its declining economy.

Our interest in this new round of money printing and stimulus stands in the precious metals again such as gold, silver and platinum. We can make a very bullish case for each at this point, but we'll focus on the "high-beta" silver futures contract. All healthy precious metal bull markets are led by silver; and we sense that silver is now poised to outperform once again - with new contract highs forging above the $50/oz level.

The techncials of the trade are rather simple: silver has traced out a rough 9-month bullish "flag pattern", which tends to resolve itself in the direction of the major trend, which is higher given the pattern of higher lows. Also, we point out that the 20-week stochastic is back to levels that in the past have coincided with rather major bottoms. The only caveat is the rolling over 250-week moving average, which on many occassions has shown its bullish and bearish worth. We are of the opinion, that once the 250-week is violated to the upside at $35.50 - this a rally of massive proportion shall be upon us. Lest we not add that that Wednesday's daily trade put in place a key reversal higher - which in our mind is sufficient to consider long positions at current levels.

Good luck and good trading,
Richard

With one week left to go, the S&P 500 was on the verge of its worst November in the last sixty years.  Then the Fed and other central bankers came to the rescue of global markets last week and everything was just peachy again (sarcasm intended).  November turned out to be a flat month with the S&P 500 falling approximately 0.5%.  If you're on the short side of the market, Ben Bernanke is likely your biggest enemy.
 
Despite the huge rally last week, technical obstacles remain.  Key price resistance is now evident on all three of the defensive sectors.  Let's look at the ETFs that track these defensive groups - healthcare, utilities and consumer staples:

The resistance on each of the above charts is fairly obvious.  But price resistance isn't my biggest concern.  Did you notice the relative strength line on each of these defensive sector charts?  They all are printing higher lows.  The rising relative strength line in defensive stocks was one of the biggest warning signs the market flashed back in late April as our major indices topped.  It's NEVER a good sign to see money flowing towards safety.  That's the kiss of death for the stock market.  We want to see investors and traders willing to take on MORE risk, not less.
 
In another startling move to safety, the bond market reversed course on Friday, just as it appeared we were seeing a key technical breakdown.  Bond yields, which move inversely to bond prices, had broken out on Friday morning after the news that the U.S. unemployment rate had unexpectedly fallen to 8.6%.  It turned out to be a head fake, however, as the yield tumbled back beneath closing resistance by day's end.  Check this out:

The 10 year treasury yield posted a reaction high in early September at 2.11%, then proceeded to mark a significant low near 1.70%.  That became the trading range until the breakout in the second week of October.  Upon that breakout, 2.11% became the support on the yield.  But the yield began tumbling in late October and 2.11% support was lost.  We have yet to rebound back above that technical level, though we had great opportunities on both Thursday and Friday to do just that.  We failed miserably on Friday with a very ugly long red candle.  Yields have had a strong history of leading stock market action the past several years.  We can't take the yield's failure last week too lightly.
 
The November flight to treasuries and the continuing relative strength of defensive sectors paint a not-so-great picture of our current market environment.  Throw in the volatility and daily gaps because of uncertainty in Europe and it simply spells trouble for equity investors and traders.  Don't believe me?  Ask the MF Global traders.  Or the Goldman Sachs market making unit.  Or John Paulson, hedge fund manager extraordinaire, who last week issued an apology for losing investors 44% year-to-date in his Advantage Plus Fund.  This market is taking down EVERYONE.  In my view, the best strategy of late has been to take up bowling.
 
There are signs to look for in determining when the market is primed for a sustainable rally.  Those signs haven't emerged.  Studying the behavior of ETFs and their relative strength can provide us valuable clues, however.  That is the subject of a FREE ETF webinar that I'll be leading on Tuesday evening.  If you're interested in more information, CLICK HERE.

Happy Trading!

While gaps are not what they used to be, there were a few island reversals on the charts this week. The chart below shows the Nasdaq 100 ETF (QQQ) with a large island reversal over the last three weeks. A bullish island reversal forms with a gap down, a consolidation and then a gap up. The two gaps match, which makes the price data in between appear detached – like an island. Traders establishing short positions between the gaps are trapped on the island with losses.


Click this image for a live chart.

The chart above shows QQQ with a bullish island reversal. The ETF gapped down on November 21st, consolidated and then gapped up on November 30th. Actually, there was even a reversal within the consolidation. QQQ formed an inverted hammer on Friday and then gapped up on Monday. Follow through with Wednesday’s big gap completed the island reversal. In general, a gap up is considered bullish as long as it holds. The gap zone turns into the first support zone to watch. A bullish gap should hold. Failure to hold this gap would be bearish.

Good trading!

Arthur Hill CMT