ChartWatchers

Rising Volatility and Bearish Technical Patterns a Double Negative

Last week's gains may have been more about options expiration and an oversold bounce than anything else.  I have my eyes set squarely on the NASDAQ right now, waiting either for a resumption of the five year bull market or a breakdown of its current head & shoulders topping pattern that could spell LOTS of trouble ahead.  I believe we're going to see the latter.  Take a look at the chart:


NASDAQ 4.19.14

That was a powerful channel that NASDAQ prices remained in for 17 months.  Since the breakdown, however, the NASDAQ printed equal lows - February and April - to form a neckline.  The current bounce is a potential right shoulder forming to test the declining 20 day EMA and/or become a backtest of the broken trendline.  A failure at either and a subsequent break below neckline support at 3997 would likely result in much deeper selling.  The head & shoulders pattern would "measure" to the 3650 area.  That really wouldn't be too shocking if you consider that the NASDAQ rose more than 50% from November 2012 to March 2014.

The flight to safety in 2014 is rather obvious to see.  Since the S&P 500 hit its second peak at 1848 in mid-January, it's managed to tack on close to 1%, closing at 1864 on Friday.  Over that time frame, utilities have gained 12%.  Energy is up more than 8%.  Consumer staples and basic materials are each up approximately 4%.  The good news is that the S&P 500 is up year-to-date.  The bad news is that all the wrong sectors are leading the charge.  It's this rotation to defensive stocks that leads me to believe the current rally will be short-lived.  Over the past several weeks, we're seeing more and more impulsive selling take control of the market and volatility has soared.  The NASDAQ 100 Volatility Index ($VXN) spiked to test an intermediate-term resistance level as reflected in the chart below.  Should the NASDAQ lose the neckline support identified above AND the VXN close back above 23, we're likely to have a panicked market on our hands.  Unfortunately, we remember all too well what that means for our portfolios, so take necessary precautions if we head down that path.  Check out the VXN:

VXN 4.19.14

Note that the expected volatility began to rise BEFORE the NASDAQ 100 topped.  That expected volatility was a warning sign and now we have a topping pattern in the form of a head & shoulders formation.  The combination of a high volume, bearish breakdown of this pattern, accompanied by soaring volatility expectations would suggest at least the possibility of a very quick and significant selloff at some point in the not-too-distant future.

I believe it's better be to safe than sorry, and that's exactly the message the market is sending right now in terms of sector rotation.  My Monday Chart of the Day will focus on an ETF from the ProShares product line that concentrates on large companies paying and raising dividends - in other words, a more conservative and diversified income strategy that's been working well in the current market environment.  For more details, CLICK HERE.

Happy Trading!

Tom Bowley
Chief Market Strategist
Invested Central

Warning Signs Piling Up

In earlier 2014 articles, I've discussed warning signs that emerged from Volatility indices, behavior in the treasury market, relative weakness of banks and relative strength of defensive areas of the market like utilities and REITs.  In addition, the S&P 500 has shown a propensity to struggle during calendar years in which it shows January weakness - and we were very weak in January 2014.

Well, let's add a couple more concerns to this list - one a short-term concern, the other longer-term in nature.

The short-term concern relates to the 60 minute negative divergence that emerged on the S&P 500 as it pushed to an all-time high on Friday morning.  Check out this sign of slowing momentum just before the afternoon collapse on Friday:

SPX 4.5.14

The Dow Jones is not pictured here, but it too had a negative divergence appear on Friday morning as it was challenging major price resistance of 16577 (all-time high close from late 2013).

These are short-term issues.  Now for the more troubling problem.

In the consumer area, money has been rotating away from cyclicals and moving into staples.  That's a sign of overall market weakness as traders scurry to find safer alternatives.  In a bull market, the ratio of cyclicals to staples (XLY:XLP) normally pushes higher as the S&P 500 breaks out.  This indicates that traders remain in "risk on: mode and adds to the sustainability of a rally.

Before we look at the current state of consumer stocks, let's rewind back to 2007, just before the last bear market.  Check out how the shift in consumer stocks then was a precursor to market weakness ahead:
XLY vs XLP Ver 1

Now fast forward back to where we are today.  The S&P 500 just printed a fresh all-time closing high this past week, but the relationship between consumer stocks sent a very strong message to those watching.  Money over the past 4-5 weeks has shifted considerably towards the safer consumer staples (XLP) group.  In a bull market, we usually see the opposite.  Sustainable bull market rallies are accompanied by a strengthening cyclical group (XLY), but that's not the case now.  See for yourself:
XLY vs XLP Ver 2

We all have to recognize the changes that have been taking place below the surface of what appears to be a raging bull market.  If you simply listen to CNBC, you'll approach the market the same as you have since the start of this five year bull market.  But conditions are changing, highlighting the added risk of remaining long equities.

Next Saturday, I plan to discuss some of these market conditions in a 3 hour webinar, in addition to illustrating how finding the best stock candidates using the StockCharts scan engine - on both the long and short side - can benefit your trading results.  For more information on this event, CLICK HERE.

Happy trading!

Tom Bowley
Chief Market Strategist/Chief Equity Strategist
Invested Central/EarningsBeats.com

March Madness Underway

Nope, I'm not referring to college basketball.  Instead, it's this wacky stock market.  In my last article, I discussed several reasons why the 2014 advance is on shaky ground.  Since then, we've seen increased volatility and lots of whipsaw action.  Earlier in March, our major indices pushed to fresh 2014 and/or all-time highs and briefly even suggested money was rotating back into more aggressive areas of the market.  For instance, I had questioned the lack of leadership of banks ($BKX) just a couple weeks ago.  Well, that changed in early March and banks improved their relative strength standing.  Check this out:

BKX 3.15.14

Note however that while banks did begin to show strength again to open March, there was an obvious failure at price resistance just above the 71 level and banks have since been leading the push to the downside again.  One of the keys to a sustainable S&P 500 advance, in my opinion, is a relatively strong financial sector, especially banking industry.  Should the S&P 500 rally again and banks lead the rally, it would help to argue for higher prices near-term.  Short of that, though, I'd be very careful given the current market backdrop.

The Volatility Index ($VIX) is sending a warning message of its own.  Generally speaking as the S&P 500 rises, the VIX declines.  Market rallies are normally quite boring with little volatility from intraday highs and lows.  Nearly every significant S&P 500 rally has been accompanied by a downtrending VIX.  Check out this long-term chart:

SPX vs VIX 3.15.14

One common denominator at major market tops and bottoms the past 15 years is that the VIX has begun to change trend directions just prior to the directional change of the S&P 500.  Think about it.  We just broke out to an all-time high on the S&P 500.  We should see the VIX moving to near-term lows, reflecting the market's bullish belief that the rally will continue and volatility will be minimal.   But that's not the message the market is sending and we should take note.

Higher volatility can set up very big moves in riskier trading candidates and I'm featuring one as my Chart of the Day for Monday, March 17th.  If you'd like to see this Chart, you can CLICK HERE.

Happy trading!

Tom Bowley
Chief Market Strategist
Invested Central

Pardon The Interruption

Make no mistake about it, I prefer to be bullish.  History supports this notion because the stock market has always tended to move higher more than it moves lower.  Dating back to 1950, the S&P 500 has moved higher over 53% of trading days.  Did you know that the S&P 500 has finished lower only 6 of the past 32 calendar years?  Three of those down years were consecutive years from 2000 through 2002.  Of the other 29 years since 1981, only 3 were lower.  There's an undeniable bias to the upside in equities over the long-term, so you really have to pick your spots and limit your overall bearish views to periods where the market is literally beating you over the head with warning signs.  I don't yet have a concussion, but I have to admit I'm getting a little "woozy" from the recent market body blows.

This is NOT a healthy market advance and unless it changes soon, I'd continue to grow more and more cautious.  The good news is that volume trends and momentum remain primarily in the bulls' corner and that could support higher prices in the very near-term.  Before we look at charts to see the issues visually, just consider the numbers.  Last week, the S&P 500 and Russell 2000 both set all-time closing highs, but I have to question the leadership of this rally.  Here is your sector performance leaderboard in 2014:

Healthcare +7.22%
Utilities +6.53%
Materials +1.86%
Technology +1.71%
Consumer Discretionary +0.01%
Industrials -0.38%
Financials -0.73%
Energy -0.97%
Consumer Staples -1.47%

I grow uneasy when the four aggressive horsemen - technology, industrials, financials and consumer discretionary - lag when the stock market moves to fresh highs.  It's an indication that there's really not a lot of faith in the move to the upside.  If those investing and creating the breakouts have no faith in the advance and are not willing to take big risks, why should I?  And why should you?

Money is flowing towards safety.  It's moving towards income-oriented investments.  I want to see money flow into areas where investors seek capital appreciation.  That's not apparent right now, however, as treasuries, healthcare and utilities are all attracting much more than their fair share of investment dollars.

While the S&P 500 gained 4.3% in February, the 10 year treasury yield ($TNX) didn't budge higher.  Put another way, a true equity market rally should see a selloff in treasuries (and higher yields), but it didn't happen.  In fact, the yield is significantly lower now than it was to start the year, despite a rise in the S&P 500.  Investors are keeping their umbrellas out.  They're not trusting this rally.  Check out the $TNX chart:


$TNX 3.1.14

Financials have significantly underperformed the defensive healthcare and utilities sectors in 2014.  What I find most interesting is that if you break down the industry groups within the financial sector, you'll see that financials are being held up by the REITs, which are big dividend payers, or safety stocks.   Look at this chart of the Dow Jones U.S. Financial Index and the relative performance of banks ($DJUSBK) and REITs ($DJR) vs. the S&P 500:

XLF 3.1.14

While the XLF (ETF that tracks the financial sector) remains in an uptrend, note that this influential group has not broken out like the S&P 500 and, if we dig a little deeper, we see that what strength the financials are showing, it's from REITs, not banks.  The relative charts in 2014 are eye-popping.  REITs, on a relative basis, lagged the S&P 500 badly throughout 2013 and that makes sense during a sustainable bull market rally because traders are seeking capital appreciation.  They take risks.  But fast forward to 2014.  The S&P 500 once again breaks out, but REITs are now in favor.  What does that tell you?  It tells me that there are a lot of investors that are not backing this rally in equities.

Finally, banks are the backbone of any period of economic strength because they provide the credit to businesses needed for expansion.  When banks struggle on a relative basis, I get nervous.  2014 has not been kind to banks.  Take a look at the relative strength line of banks vs. the S&P 500 over the past two months.  It made sense for banks to take a hit in January, but the February rally did little to get traders excited about banks again.  That's bothersome.

On Wednesday, March 5th, I'm hosting a FREE webinar to discuss ALL of the warning signs currently in play, along with potential future warning signs that could corroborate that a bear market is approaching.  For more information, CLICK HERE.

Mixed Signals Abound

Just two weeks ago, the stock market seemed on the verge of its first correction in a long time - all within the confines of a long-term bull market that began in March 2009.  Then came the breakdown I was looking for to confirm it.  Check out the head & shoulders breakdown that occurred earlier this month on the S&P 500:

SPX Vers 1 2.15.14

Generally speaking, confirmed head & shoulders patterns that lose neckline support on very heavy volume don't usually move right back through what should become solid price resistance at that neckline.  Yet that's exactly what the S&P 500 did - it lost neckline support, then regained it almost as fast as it had lost it.  Volume on the recovery was much lighter as well.

As traders, we must respect these ugly bearish breakdowns.  But we must also swallow our pride when the pattern resistance fails to hold back the bulls.  The reason?  There's a long-term bull market in play and sitting on the tracks as the bull market freight train approaches is the equivalent of financial suicide.  Let's go back into recent history and I'll show you a previous example where I was prepping for the worst just as the market bottomed.  Take a look at June 2010:

SPX Vers 2 2.15.14

It was another false head & shoulders top and I had to quickly admit my mistake and be prepared to follow the bull market higher.

So the bottom line is that I'm treating this bull market as though it remains in full force.  There are still issues that remain, so I wouldn't commit all my capital to the long side.  It certainly appeared to me as if a corrective phase had begun just a couple weeks ago given the high volume breakdown of a bearish head & shoulders pattern.  And the relative weakness in financials, especially banks, and relative strength in treasuries both argued for lower equity prices as well.  One thing I've learned over the years, though, is don't question a bull market too often or for too long.

Given these mixed signals, how's the best way to approach the market?  Well, I was looking for a short-term correction only so I still like longer-term money remaining fully invested.  I like to swing trade, however, so I'd keep position sizes fairly light, maintain a comfortable level of cash and trade primarily on the long side.  I'd look for companies that beat Wall Street top line and bottom line estimates and wait for solid reward to risk entry points.  Recently, I've mentioned candidates like Charles Schwab (SCHW), Alcoa (AA) and Lennar (LEN).  They've all performed quite well on a relative basis and, with patience, all hit nice solid support levels.

I'll feature another company with solid revenues and earnings as my Chart of the Day for Monday, February 17th.  CLICK HERE for more details.

Financials and Treasury Yields Offering Bears Some Motivation

Signs of a sustainable bull market rally include strong relative performance from financial stocks, especially banks, and rising treasury yields that result from rotation away from treasuries.  Both of these areas of the market are flashing warning signs right now, although technical breakdowns to confirm the weakness have not yet been made.

First, let's discuss financials and banks.  Below is a chart of the financial sector ETF (XLF) and how it's performed relative to the S&P 500 over the past several months:

XLF vs SPX 2.1.14

The bottom part of this chart shows that the financial sector has been rising and moving to fresh new highs, just like the S&P 500 (top part of chart).  But the middle chart shows that, on a relative basis, financials have been lagging since late summer.  This indicates that traders are looking to rotate their money away from the financial sector.  That money has recently been moving into defensive sectors like utilities and healthcare, both of which have outperformed their aggressive sector counterparts by several percentage points in 2014 thus far.

Also, note that the S&P 500 could be in the process of forming a topping head & shoulders formation.  A close below 1770-1775 on the S&P 500 with increasing volume would suggest a downside target/measurement somewhere in the 1690-1700 area.

The next chart below features the Bank Index ($BKX) and you can once again see that the relative strength in this group is lacking.  It's generally a good sign to see banks performing at least at the level of the S&P 500.  When they begin to lag, it potentially sends a warning signal about the sustainability of a stock market rally.  A strengthening economy should bolster bank profits so the BKX should rise if such an economy is anticipated.  Check out the BKX below:

$BKX vs SPX 2.1.14

Finally, let's take a look at the 10 year treasury yield ($TNX):

TNX 2.1.14

Traders have a choice whether to invest for income (treasuries) or growth (stocks).  If they choose safety and income, they buy treasuries - treasury prices move higher and the yield moves inversely, or lower.  By buying treasuries, those dollars cannot also buy equities.  The fact that demand slows on equities sends stock market prices lower.  So when treasuries are in favor, yields AND equity prices drop.  But many times in the past, you'll find that yields begin dropping before equity prices, providing astute traders with a potential warning sign regarding an impending drop in equities.

Take a look at that 10 year treasury yield chart again now.  Note that the S&P 500 tried breaking to fresh highs in mid-January, but did so with the yield dropping.  In my view, that's a form of a negative divergence from an intermarket perspective.  The precipitous drop in yields occurred just before a significant decline in equities.

If you're bullish the stock market over the longer-term, which I still am for now, you'll want to see strengthening relative performance on banks and rotation OUT of treasuries, sending yields higher to challenge and eventually surpass the yield at the start of 2014.  In the near-term, however, please watch that head & shoulders pattern for possible breakdown.  Should the neckline support fail to hold, we could be looking at more weakness in February before technicals begin to improve.

Enjoy the Super Bowl and Happy Trading!

Tom Bowley
Chief Market Strategist
Invested Central

January Reflecting a Neutral to Bearish 2014 Forecast

This bull market has been humming along since March 2009, but we cannot ignore the storm clouds building on the horizon.  The technical conditions have slowly deteriorated with the highly influential banking industry ($DJUSBK) reversing hard last week with a long-term negative divergence present on its weekly chart.  Those weekly negative divergences tend to be much more significant than those found on daily or intraday charts.  Have a look at the momentum issue:

DJUSBK 1.25.14

You'll notice two things on this chart.  First, as prices on the DJUSBK move higher on the weekly chart, the MACD is actually moving lower, reflecting the convergence of the 12 week and 26 week EMAs.  This tells us that longer-term momentum on the buy side is slowing.  The other thing this chart tells us is that the bull market rally was being led by banks all the way through late summer.  That has changed and the latest overall rally by the S&P 500 actually saw banks underperform on a relative basis - a form of a negative divergence and this is generally a warning sign in my view.

I also view the bond market to be much smarter than the stock market.  If you look back at history, you'll see that the 10 year treasury yield and the S&P 500 tend to trend in the same direction.  Temporarily, during quantitative easing, that relationship changed and the two moved inversely to one another.  But over time, they've tended to trend together. You'll find that many times the 10 year treasury yield ($TNX) will change directions ahead of the S&P 500, providing us a hint of upcoming weakness in equities.  That's what happened in early January.  Take a look:

TNX 1.25.14

The reason for this relationship is quite simple.  Traders and investors have a choice to make where to put their money - either in more conservative bonds ahead of an economic slowdown OR in more aggressive equities to take advantage of an expanding economy.  The mentality of traders has changed over the past few weeks, especially on the heels of that awful jobs report a couple weeks ago.  This could be just a temporary setback and there are plenty of reasons to remain optimistic about equities.

I can tell you one thing, though.  History is NOT on the side of the bulls right now.  Since 1950, stock market performance from February 1st through December 31st is HIGHLY correlated to January performance within the same year.  It's that old Wall Street adage "as goes January, so goes the year".  The S&P 500 is currently down 3.14% year to date.  We still have a week to go in January, but if the S&P 500 ends January where it is right now, it would place January 2014 in the bottom quartile of all January's since 1950.  Since 1950, January has been lower 24 times.  Of those 24 years, half have been flat or lower over the next 11 months and the AVERAGE balance of year returns for those negative January years is -0.16%.

That's not a lot to look forward to.

On Tuesday evening, I will be hosting a webinar, "The January Effect", where I'll delve into history and how it's been shown to impact the direction of future equity prices.  For anyone interested, CLICK HERE for details.

Happy trading!

Tom Bowley
Chief Market Strategist/Chief Equity Strategist
Invested Central/EarningsBeats.com

Sizing Up Earnings Season

It's my favorite time of the quarter - as a trader.  I approach it like an offensive or defensive coordinator on one of the NFL playoff teams this weekend.  I study recent history to find strengths and weaknesses of the market and then I anticipate "plays" (price action) before they happen.  Let's talk about the planning phase first.

Analysts are constantly visiting companies throughout the quarter, discussing prospects, goals, outlooks, etc. with management teams.  They generally have a sense of how a company is going to report before they report.  They use this information to build positions throughout the quarter, usually leading to a rise in stock price (accumulation) into earnings.  Think of that old Wall Street adage "buy on the rumor and sell on the news".  Need a real life example?  Check out Alcoa (AA).  AA is the company widely recognized as the one that "kicks off" (another football term - sorry it's the Divisional Playoffs and I'm a HUGE NFL fan) earnings season.  Of all the Dow Jones industry groups, do you know which one has been THE best performer over the past month prior to AA's earnings report?  (drum roll please)

Aluminum.  

The Dow Jones U.S. Aluminum Index ($DJUSAL) had risen approximately 11% in one month before AA's report on Thursday evening.  That topped even the airlines industry ($DJUSAR), which is the group that seems to command the headlines.  But AA represents that "buy on the rumor and sell on the news" mentality so often exhibited on Wall Street.  Look at the AA chart:

AA 1.11.14

Alcoa disappointed traders after coming up a tad short on its quarterly EPS.  Technically, however, AA remains a very strong stock technically after holding both price and trendline support on massive volume Friday.  I expect to see AA back testing recent highs in the not-too-distant future.

Expect strong results in industry groups where prices have been soaring higher.  There's a reason for this outperformance into earnings season, although a "sell on the news" reaction cannot be dismissed.  That will likely set up the opportunities we'll be looking for.  Through Friday's close, and excluding aluminum, here are the best performing industry groups over the past month:

Tires - Consumer Staples - $DJUSTR +14.55%
Airlines - Industrials - $DJUSAR +12.75%
Platinum - Materials - $DJUSPL +10.71%
Home Construction - Consumer Discretionary - $DJUSHB +9.57%

That last name is intriguing.  The 10 year treasury yield ($TNX) has been rising since early May.  Home construction ($DJUSHB) is an interest-sensitive group that generally performs poorly during a rising interest rate environment.  Check out this chart:

DJUSHB 1.11.14

There was a clear inverse relationship in play between home construction stocks and 10 year treasury yields for much of 2013.  But the recent two month climb in yields has been met with buyers of homebuilders as we enter earnings season.  Home construction stocks were one of my least favorite industry groups moving into 2013, but with signs of economic improvement abounding, this is one of my favorites of 2014.  Recently, Lennar (LEN) posted excellent results, beating both top and bottom line estimates.  EPS came in at $.73 vs. $.62 estimates and revenues were $1.92 billion vs. $1.88 billion expected.  Technically, LEN made a significant breakout as well and appears poised for further gains.  Take a look:

LEN 1.11.14

EarningsBeats.com identifies stocks that reflect BOTH strong fundamentals and strong technicals and then allows these stocks to hit critical support areas just like LEN did for an opportunity to trade and profit - with less risk.  On Tuesday, January 14th I'll be hosting a FREE webinar to discuss the 60-70 EarningsBeat stocks from Q4 2013, going over the performance of each in detail to prepare for the next round of earnings season trading candidates.  You can register for this event by CLICKING HERE

Happy trading!

Tom Bowley
Chief Market Strategist/Chief Equity Strategist

Consumer Stocks Saying This Bull Market Is Sustainable

It's quite easy to look at the S&P 500 and see if it's rallying or not.  But not every rally is created equal.  Many rallies carry significant warning signs that should have you running for cover.  Others simply invite you to jump on the train.

Consumer stocks are telling us to jump on the train and ride this thing out.  As the S&P 500 closed at yet another record high on Friday, most "under the surface" signs remain quite bullish and suggest to me that this bull market still has legs.  Check out the following chart comparing the S&P 500, the XLY vs. the XLP and the 10 year treasury yield and then I'll explain it below:


XLY vs XLP 12.21.13 V1

The consumer discretionary sector (XLY) is considered the more aggressive component of consumer stocks, while consumer staples (XLP) represent the safer side.  Generally speaking, rallies should be accompanied by relative strength in "risk on" types of stocks such as consumer discretionary stocks.  So it stands to reason that as the S&P 500 rises, we want to see the XLY vs. XLP ratio rising with it.  On Friday, the S&P 500 closed at an all-time high on the heels of the XLY vs. XLP ratio breaking out to a new relative high.

Chalk one up for the bulls.

At the bottom of this chart, I've also shown the trend in treasury yields, namely the 10 year treasury yield ($TNX).  When equities rise, treasuries normally fall.  Falling treasuries send the yield lower as yields move inversely to treasury prices.  This makes complete sense as traders have options as to which asset class they want to invest.  During bull markets in equities, the proceeds from treasuries being sold generally find their way into equities.  If our economy is expanding, safety is usually the last choice for traders.  In a normal market environment, we should see the TNX rising to confirm the rally in equities.  That's exactly what we've seen as reflected on the chart above.

Chalk another one up for the bulls.

Now I want to take you down memory lane, just prior to the last two bear markets.  Let's take a look at what we DO NOT want to see.  The charts below are identical to the one we just reviewed - well, with one minor exception.  I think the difference in the charts below will be obvious.  Have a look:


XLY vs XLP 12.21.13 V2

XLY vs XLP 12.21.13 V3

The action on these charts was VERY bearish.  Yields were falling precipitously while the S&P 500 tried to push higher.  In my opinion, the bond market gets it right more often than the stock market.  It certainly did in these two cases.  Falling yields mean rising treasuries.  With the S&P 500 breaking to fresh highs, why would traders begin flocking to bonds?  There's one primary reason - economic weakness ahead.  The same holds true for the relationship among consumer stocks.  With the S&P 500 surging, why would traders begin to take the cautious approach and move into the higher-yielding, safe consumer staples stocks?

This is when you chalk one up for the bears.

Currently, I'm just not seeing the signs of an impending top in the stock market.  Believe me, I'm looking at various intermarket signs every day and every week.  But you can't force a bear market, nor do I want to.  Let's see where this train takes us.

I am featuring a consumer discretionary stock as my Chart of the Day for Monday, December 23rd.  It's poised technically to benefit from further upside in equities.  CLICK HERE for details.

It's been a great year for the stock market.  Thank you for your support, have a safe and happy holiday season and HAPPY NEW YEAR!!!  Let's make 2014 the best year yet!

Happy trading!

Tom Bowley
Chief Market Strategist/Chief Equity Strategist
Invested Central/EarningsBeats.com

Don't Forget Historical Tendencies

When I map out my trading strategies,  I consider fundamentals, especially quarterly earnings reports, but I FOCUS on technical indicators.  The study of price action helps to determine future price action, but note that it doesn't guarantee it.  The basic premise of trading is to set up the odds as best you can in your favor and manage the risk you take in order to achieve your trading objectives, whatever they might be.

In a recent article, I discussed the market's tendency to move higher from the October 27th close to the January 19th close.  Take a look at this visual on the semiconductors ($SOX):

SOX 12.7.13

The green highlighted areas shows the performance (roughly) of the SOX during that bullish Oct 27-Jan 19 period each year over the last decade.  The end of 2007 into 2008 was clearly a bearish period, not only for semiconductors, but for the stock market in general.  Most of these years, however, show significant gains during this bullish historical period.

It prompted me to do a quick study.

A little more than ten years ago on October 27, 2003, the SOX stood at 462.09.  After the recent rally, we're now at 515.63.  We're up a little more than 10% for the ENTIRE 10+ year period.  But check out the performance of the SOX during the bullish period I've identified during each of the last 10 years, plus what it's done thus far in 2013 in the table below:

SOX-Performance

To me, those historical tendencies are undeniable.  Why am I bringing this up?  Because the SOX just made a significant technical breakout with 6 weeks left in this bullish timeframe.  Check out the SOX breakout late last week:

SOX 6 Month 12.7.13

I've written a white paper on the Four Historical Rules Every Trader Should Know.  To claim your copy for FREE, simply CLICK HERE

Happy trading!

Tom Bowley
Chief Market Strategist/Chief Equity Strategist
Invested Central/EarningsBeats.com

Banks Surge As Bull Market Rages On

I rarely question a market move to the upside when banks are leading the charge.  And if you're wondering how the banks performed last week as the S&P 500 broke to a fresh all-time high, check out the Dow Jones US Bank Index chart:

DJUSBK 11.23.13

Banks consolidated since late summer while money rotated to other areas of the market, like industrials.  Over just the past three months, industrials have outperformed financials, gaining 12.1% while financials have risen just 7.6%.  Banks have been even weaker, rising just above 5.0% over the past three months.  But technically, that all changed over the past couple weeks.  Banks, while underperforming, had been consolidating in a very bullish inverse head & shoulders continuation pattern.  That pattern broke to the upside - as expected - and suggests this current rally has further to run.

In addition, the small cap Russell 2000 index had lagged for the past several weeks.  But surprisingly, just as the Fed minutes were released on Wednesday, and tapering was back on the table, small caps began outperforming.  From Wednesday's low through Friday's close, our major indices performed as follows:

Russell 2000:  +2.60%
NASDAQ:  +2.05%
S&P 500:  +1.55%
Dow Jones:  +1.26%

2-3 days do not constitute a trend, but it's at least suggests the possibility that traders have moved back to a "risk on" mode, a mode that generally accompanies sustainable market advances.  Given the release of the Fed minutes showing that tapering is back on the table, this is not the response I would have expected from the market.  If anything, this is suggesting that the ultimate tapering may not have the negative impact that many are expecting.  After all, if the Fed's candy store (quantitative easing) helped lead the equity markets higher, it only makes sense that closing the candy store will have the opposite effect, right?  Well, maybe not.  Improving economic conditions may trump the ultimate tapering of asset purchases.  And money flowing into riskier asset classes is all the proof I need - at least until it changes.

One last thing.  The Russell 2000 closed at an all-time high on Friday after lagging its larger counterparts since early- to mid-October.  This breakout is occurring just as we approach December, the strongest month historically for small caps since 1988.  The average annualized return for the Russell 2000 during the month of December over the past 25 years is 43.25%, more than double any other calendar month.

That leads me to feature one small cap stock as my Chart of the Day for Monday, November 25th.  It recently posted quarterly earnings that handily beat both top line and bottom line Wall Street estimates.  That earnings report resulted in a powerful, breakaway gap on massive volume that could result in significant gains in the weeks ahead.  If you'd like more information, CLICK HERE

Warning Signs or Another Seasonal Rally Opportunity?

I've maintained a bullish stance throughout this bull market, but I have to admit I'm beginning to get a little nervous.  As a stock market historian, it's difficult for me to think bearish thoughts as we enter November because November, December and January are BY FAR the best consecutive months to be invested in the S&P 500.  In fact, check this stat out.  Since 1950, the period from the October 27th close to the January 19th close has risen 53 times out of the last 62 years, including 18 years in a row from 1983 to 2000.  25 different years have seen gains of 7% or more during this bullish period.  This 10-11 week period has seen the S&P 500 rise MORE THAN 10% during 12 different years.  If you get bearish now, you'll have history fighting you.  It doesn't mean the market can't sell off, but the odds are clearly reduced.

Now that you have that bullish historical backdrop, consider the warning signs:

(1) We are violently overbought on weekly timeframes
(2) We have negative divergences on the weekly MACDs on 3 of our 4 major indices (NASDAQ is the exception)
(3) We are stretched on the daily charts with a reversing bearish engulfing candle printing at channel resistance
(4) The Russell 2000's relative strength has tumbled over the past two weeks
(5) Copper and crude oil prices - both of which normally correlate positively with the S&P 500 - are not supporting higher equity prices at this time
(6) Financials are now falling on an absolute and relative basis

Check out the following charts to support several of these red flags:

S&P 500 11.2.13

NASDAQ V2 11.2.13

Russell 2000 11.2.13

DJUSFN 11.2.13


I am maintaining my bullish forecast through year end, but I am also keeping one finger on the sell button just in case.  If you're long, hedging against your long positions in some fashion probably makes sense.  Selling covered calls or buying put insurance are a couple of options.

On Monday, November 4th, I'm hosting the latest in our Online Traders webinar series, "Gap Trading Strategies".  If interested in attending, CLICK HERE.

Happy trading!

Tom Bowley
Chief Equities Strategist
Invested Central/EarningsBeats.com

Gaps Created By Earnings Surprises

I've mentioned it before, but I'll say it again.  I LOVE trading stocks (in bull markets) that gap higher on better-than-expected revenues and earnings and very strong volume as it's a sign of great management execution and investor accumulation.  That combination is difficult to beat when owning stocks as it's proven to generate not only short-term outperformers, but also long-term winners.  I'm more interest in the former though - short-term outperformers.  That's what trading is all about - beating the benchmark S&P 500.  I'll get back to trading gaps in a moment, but first let's discuss what's going on in the BIG picture.

Last week, the more aggressive NASDAQ and Russell 2000 thumped the S&P 500 and Dow Jones.  That NASDAQ gained more than 3% last week, led by a stellar earnings report by Google (GOOG).  The Russell 2000's 2.81% was very nice as well, providing this small cap index with its first close above 1100 -  EVER.  The S&P 500 closed at an all-time high as well.  Unless bearish "under the surface" signals begin to emerge, it's difficult (and financially unwise) to bet against a raging bull market.  Some of you may be listening to all the negativity on CNBC and other media outlets and wondering how the market can continue to push to all-time highs.  STOP listening to the media.  They don't care (much) about your financial well-being.  They care about RATINGS.  Instead of listening to the media, simply listen to the market.  It talks to each of us every single day.  You just need to understand technical analysis and intermarket relationships to interpret what the market is saying.

There are a few "under the surface" signals that I follow extremely closely.  Check out Arthur's article this weekend on the recent relative outperformance of financials.  This argues strongly for a continuation of our 4 1/2 year bull market.  You want to short this market?  Have at it.  I won't be tagging along, though.  We'll certainly have normal pullbacks from time to time, but I fully expect we'll see further highs during Q4.  In addition to Arthur's excellent point about the surging financials, check out these next two charts:

SOX 10.19.13

XLY vs. XLP 10.19.13

In the case of the SOX chart above, note how well the NASDAQ performs when the relative ratio ($SOX:$COMPQ) is rising.  There's a dramatic difference in NASDAQ performance when it's being led by the very aggressive and highly volatile semiconductor industry.  During 2011 and 2012, semiconductors performed poorly on a relative basis and that impacted the NASDAQ's results.  But note how violently the NASDAQ has moved higher when being led by semiconductors.  I believe the two year relative underperformance in the SOX ended in late 2012.  Since that time, the SOX has performed quite well on a relative basis.  There is a level of relative resistance to watch closely, however.  It's at the 0.1375 level (red line on chart).  If this MAJOR relative resistance level is cleared, we could continue to see the meteoric rise in the NASDAQ that we've witnessed since October 2012.

The second chart shown is a very simple comparison of consumer discretionary (aggressive) stocks to consumer staples (defensive) stocks.  When this ratio rises, it suggests that traders have an appetite for risk.  Think "risk on".  This type of trader mentality generally results in higher stock market prices, as evidenced by the chart.

So now let's get back to gap trading for a moment.  I'm VERY bullish the stock market right now.  I've maintained a bullish stance throughout most of this bull market rally and I see not reason to change just yet.  This means I am looking at LONG candidates only.  I don't short anything in a bull market.  What's the point?  If you're on the tracks with a train coming right at you, what are your first instincts going to be?  I hope they're not to lower your head and run at the train! 

Let's try to further simplify this.  If you believe the stock market is going higher, would you rather own companies that just blew the doors off Wall Street estimates in terms of revenues and earnings or would you rather own companies that provide excuses for why they fell short?  I hope you don't have to think about this question for very long.  Below is an example of a financial company that just reported an excellent quarter.  I'm sure most of you have heard of Charles Schwab (SCHW).  They reported revenues of $1.37 billion in their latest quarter, ahead of $1.34 billion estimates.  Their bottom line earnings beat was $.22 per share vs. $.20 per share.  In an era of companies constantly disappointing on top line results, Wall Street responded much the way you'd expect - sending prices higher.  Take a look:

SCHW 10.19.13

Ten days ago, I opened a new service that I'm very excited about - EarningsBeats.com - to coincide with the start of earnings season.  EarningsBeats.com focuses exclusively on narrowing down the enormous number of stocks available to trade across all of the major indices to a more manageable list - companies that are executing their business plans to perfection.  Every company discussed at EarningsBeats.com will have recently reported better-than-expected revenues AND earnings.  In my experience, these are the types of companies that you want to consider trading/owning.  Next week is the biggest week for earnings reports as 30-35% of S&P 500 companies will be reporting.  I'll be sifting through every one of them, searching for the combination of solid earnings beats and strong technical patterns that we want to feature.  If you'd like more information on EarningsBeats.com, simply CLICK HERE.

Happy trading!

Tom Bowley
Chief Equities Strategist
Invested Central/EarningsBeats.com

Time For Earnings Season

As a trader, this is my favorite time of each quarter.  I love it when earnings begin to roll out because the increased volatility generally sets up excellent trading opportunities.  In early April, I wrote about the strong earnings report that Nike (NKE) enjoyed in March and I highlighted a strong reward to risk entry point.  For a refresher, take a look:

NKE100513

NKE posted better than expected revenues and earnings, then buyers bid the shares up immediately on massive volume.  I don't like to chase these moves, but once I see the accumulation, I wait for a pullback to relieve overbought oscillators and to test gap support.  That came just a week later.  There's a reason to wait past the opening bell to jump in.  Normally when stocks gap higher, market makers are on the other side of the trade providing liquidity.  Market maker activity is the primary reason that gaps usually fill back to the prior close.  When demand is too great, however, we see what happened with NKE.  Volume is massive and the gap fill to the bottom of the gap never occurs.

Here are two more recent examples - take a look:

BSX100513

CNQR100513

In both cases, revenues and earnings blew away consensus estimates on Wall Street, volume exploded higher and market makers couldn't stem the tide of buying.  Eventually, however, both of these stock returned to critical gap support areas, maximizing potential return for astute traders while minimizing risk.  Throughout earnings season, these are the types of individual stock setups you can find.  Believe me, they don't all work, but appropriate entry levels can certainly lessen risk significantly.

On Monday, October 7th, I will be hosting a FREE and LIVE event discussing how the combination of strong earnings and strong technicals can reward traders if they exercise patience to allow trades to set up for them.  Earnings season kicks off on Tuesday with Alcoa (AA) reporting.  I hope you can join me on Monday evening.  For more information, CLICK HERE.

Happy trading!

Tom Bowley
Chief Market Strategist
Invested Central

Bernanke Throws Wall Street A Curveball

Federal Reserve Chairman Ben Bernanke has had several mandates since the financial crisis began several years ago.  One was to keep interest rates extraordinarily low for an extended period of time.  Check.  Another was to make the Fed more transparent.  This one was humming along just fine....until Wednesday's Fed announcement.  Bernanke shocked the financial world by delaying the tapering of asset purchases.  Instead, the Fed Chairman left the current $85 billion monthly asset purchase plan intact.  Investors reacted as if they had received another dose of QE.  Check out the initial reaction at 2pm on Wednesday, September 18th, as the news was released:

$SPX 9.21.13

The reaction was quite positive - initially.  After all, it was more candy from the candy store.  The problem this time, in my view, is that Wall Street had seen enough economic evidence to view the tapering of asset purchases as likely.  In fact, just about every analyst on the planet expected a reduction in monthly asset purchases from $85 billion to $75 billion.  In effect, the Fed had a freebie and they blew it.  By week's end, the S&P 500 had lost nearly all of its Fed-induced rally.

I saw the initial reaction, but I'm not buying it either.  Think about WHY the Fed left the purchases at $85 billion.  They clearly don't like what they're seeing ahead in terms of economic growth.  They almost certainly don't like what's been happening to home construction stocks during the interest rate rise since May.  Check out the rise in the 10 year treasury yield since May and the impact it's had on home construction stocks:

TNX 9.21.13

Housing is a key component of our economy.  The Fed has to pick its next battle.  Beginning on the path of tapering would send interest rates rising further, almost definitely causing a further freefall in housing.  The problem is that the Fed knows our economy is not strong enough right now to handle a further rise in rates and further decline in housing.  And a rapidly declining home construction index would destroy confidence.  So apparently their choice was an easy one.  But this REALLY muddies the waters for equities and this is occurring just ahead of a likely showdown between Democrats and Republicans.  Oh joy!  (sarcasm)

Most of the reaction to the Fed's decision was expected.  Interest-rate sensitive areas of the market did very well - again, at least initially.  Utilities, REITs and home construction stocks soared.  The dollar fell precipitously, spurring a rapid rise in gold prices.

The biggest surprise of all for me, though, was the negative reaction of one key industry group that benefited from all of the prior quantitative easing - banks.  For a detailed chart on banks and my interpretation of what this could mean near-term in the stock market, CLICK HERE as this will be my Chart of the Day for Monday, September 23rd.

Happy trading!

Tom Bowley
Chief Market Strategist
Invested Central

Financials Suggesting This Bull Market Is FAR From Over

The past 5-6 weeks have not been overly kind to the bulls.  In fact, since topping at 1709.67 at the close on August 2nd, the S&P 500 has lost more than 50 points or roughly 3%.  Many are calling for the end of the four and a half year bull market...for the umpteenth time.  Eventually, just like a broken clock, they'll get it right.  I don't believe we're there yet and the relative performance of financials is backing me up.  I'll get back to this in just a minute.  But first....

Those who follow my column every couple weeks know that I'm a huge fan of history in the stock market.  September is not the month to be particularly bullish and I am cautious in the very near-term.....and for good reason.  September is the only calendar month where the S&P 500 has fallen more than it's risen.  The annualized return during September on the S&P 500 since 1950 is a NEGATIVE 6.14%.  The bad news is that we're already halfway through the first half of September and that's the good half of the month.  September 1st - 15th has produced annualized returns of +3.70% since 1950.  Now for the worst news.  September 16th - 30th is obviously the bearish half of September where we've seen annualized returns of -15.82% over the past 63 years.  It's hard to get excited about that from a bullish perspective.

History tells us to be cautious as we approach the next few weeks.

I always like to take a step back from the day to day charts and view the longer-term relative charts of key sectors/industries.  These charts are much more powerful in signaling to us when major shifts are taking place "under the surface".  In my opinion, there's no better place to look than the financials.  Our economy is dependent on a sound financial structure.  We saw what happened to the stock market when our financial system imploded in 2008.  It's very difficult for the overall stock market to move higher when the critical financial space is struggling.  So one simple chart I like to follow is the XLF (ETF that tracks the financial sector) and how this ETF is performing relative to the S&P 500 as a whole.  Take a look:

XLF 9.7.13

Not only is the S&P 500 in the midst of a powerful uptrend, but financials (XLF) are among the leaders of the rally.  On the chart above, you can see that the "Financials vs. S&P 500" line continues to print higher highs and higher lows.  This tells us that financials aren't just going higher, they're going higher faster than the overall market, a sign of a sustainable rally in my humble opinion.

If the S&P 500 is likely to move higher later this year and financials are showing relative strength, it would make sense to look for beaten down industry groups in the financial space to lead the market as we wrap up 2013.  I think I've found a very strong group to focus on - asset managers.  When the stock market consolidates in a bull market, I look for bullish continuation patterns - cups with handles, triangles, inverse head & shoulders, etc.  Check out the ascending triangle pattern on the Dow Jones U.S. Asset Managers index ($DJUSAG):

DJUSAG 9.7.13

Taking this one step further, there's a stock within the asset manager space that rallied more than 30% from the June 24th low to the early August market high.  Since that time, however, it's fallen back as profit taking has kicked in.  It's beginning to find some support at its 20 day EMA, 50 day SMA and 20 week EMA.  In addition, it recently tested a significant price support level.  While the balance of September may be difficult for equities, this stock candidate beat Wall Street estimates on its top line and bottom line recently and is poised to advance into year end.  I'm providing it as my Chart of the Day for Monday, September 9th.  CLICK HERE for more details.

Software Stocks Lagging

Most areas of the stock market have enjoyed the past few months, especially since the lows of June 24th.  Don't count software as one of those groups, however.  At first glance, this might seem like an area of the market to avoid because of poor relative strength over the past couple years.  Check out this relative chart showing software lagging the S&P 500 since late 2011:

DJUSSW 8.3.13

So why might this be an industry group worth considering?  Well, first consider that technology is regaining relative strength.  A couple months ago, I featured an equal weighted technology ETF (RYT) that was just making a relative breakout vs. the S&P 500.   That relative breakout is now much more obvious.  Take a look:

RYT 8.3.13

Another reason to like software stocks here is that they appear to have hit an area of relative support where we might begin to see relative strength once again.  Money flowing away from overbought areas could easily look to software as a lower risk area within the technology space.

Equities overall are quite extended and I try not to make a habit of chasing extended areas of the market.  Rotation is a key part of any bull market, so I look for areas that are technically healthy that might be poised to benefit from temporary selling in other sectors and industry groups.  Software is clearly in an uptrend and technically sound, but it's been consolidating since May and may be ripe for another advance.

I like several stocks in the software space, but am featuring one in particular for my Chart of the Day for Monday, August 5th.  This stock just blew away consensus estimates on both the top and bottom line with its latest quarterly earnings results and I expect it to be a leader over the next few months.  CLICK HERE for more details.

Happy trading!
Tom Bowley
Chief Market Strategist
Invested Central

Transports Lagging Amid Signs of Slowing Momentum

Transportation stocks helped lead the market rally from October 2012 through March 2013, but since that time it's been a struggle on a relative basis.  Check out this relative chart:

TRAN vs SPX 7.20.13

Relative support resides near the 3.80 level in the chart above - a relative close beneath this level could be an additional warning sign.
 
The biggest problem for transports, however, is the sign of slowing momentum on the longer-term weekly chart.  The last two breakouts in transports have occurred with MACDs much lower.  While this guarantees us nothing, it certainly suggests the risks of remaining long this group are spiking.  Take a look at the chart:

TRAN 7.20.13

It's looking eerily similar to the summer of 2011 when transports rose to fresh highs in July with a nasty long-term negative divergence.  That evidence of slowing momentum eventually resulted in a significant selloff throughout the balance of the summer.  We may not see a repeat in 2013, but the warning is there nonetheless.
 
There's one component of the transportation index that has printed negative divergences in each of the last two summers and then subsequently lost 30% (2011) and 15% (2012) in the following three months.  It's set up in a very similar bearish pattern in 2013 and I'm including it as my Chart of the Day for Monday.  CLICK HERE for more details.

S&P 500 Warning Signs Emerging for Summer - Again

In the very near-term, it's difficult to predict which way the S&P 500 is heading.  Recently, we saw the Volatility Index ($VIX) spike to nearly 22 and the multi-month uptrend line on the S&P 500 was violated.  Take a quick look:

VIX 7.6.13

The biggest technical issue wasn't necessarily the VIX rising to 22 as we saw it move above that level in late December 2012.  Instead, breaking that 5-6 month trendline that already had four successful tests was the bigger story.  In my view, it changed the "cloudy" outlook for equities from a short-term concern to a more intermediate-term issue.  It also happened just as we approach the worst 2-3 consecutive months of the year historically.

Here are the historical numbers - you decide if they'll impact trading in the next few months:

S&P 500 annualized return since 1950:

July 1st through July 17th:  +21.48%
July 17th through September 28th:  -2.04%

Since 1950, that July 17-September 28 period has covered 3140 trading days, or roughly 12.4 years worth of data.  That's a lot of data and certainly should be considered a "representative sample" by statisticians.  And it trails the AVERAGE annual return of the S&P 500 by more than 10 percentage points.  Based on these FACTS, there is no doubt that the market has an historical "tendency" (not a guarantee) to struggle throughout this period, some years much worse than others.

Why else should we be concerned?  Well, let's take a look at the weekly chart of the S&P 500:

SPX 7.6.13

Check out the black circles on the chart above.  It shows that over the past decade, we've seen a handful of times where the weekly PPO (percentage price oscillator - similar to the MACD, but expressed in percentages rather than dollars) is stretched to the 3-4 level and the weekly RSI hits 70 (overbought) simultaneously.  In every case, we've seen selling take us AT LEAST to rising 50 week SMAs over the next 2-3 months.  To be honest, it makes perfect sense.  A stretched PPO tells us that the market has been running HOT for an extended period of time and the overbought RSI confirms it.  A pullback really is to be expected.

But before you go running for the hills, you should also realize that key sectors/industries are performing exceptionally well on a relative basis, suggesting the longer-term bull market remains intact.

So what does all this mean?  Well, it tells me that short- to intermediate-term risks are rising if you're on the long side.  I combat that by trading less often and fewer shares.  You can further reduce risk by selling calls or buying put insurance on the S&P 500.

Please don't misunderstand my overall view, however.  I remain BULLISH over the longer-term (6-9 months) but realize the market is likely to continue its recent choppy pattern, perhaps turning more bearish later this summer.  I believe we'll see 1530 on the S&P 500 at some point over the summer, possibly even the 1465-1485 area.  I do not plan to short, however, as these levels are not guarantees and as I said before, I remain bullish in the longer-term.

My Chart of the Day for Monday highlights a few of the reasons for my bullishness later in 2013.  You can CLICK HERE for details.

Happy trading!

Tom Bowley
Chief Market Strategist
Invested Central

Is this a VIX Top and a Market Bottom?

Volatility plays a role in any market environment, but I always look to key areas of resistance on the VIX to help identify tradable bottoms on the S&P 500.  In my last article on June 1st, I suggested that the 18-19 resistance on the VIX could prove to be key.  Thus far, it has been.  The VIX has hit this resistance level with the S&P 500 also sitting almost squarely on trendline, price and moving average support.  If the S&P 500 were to lose these support levels, we could see the VIX push up to the 22-23 area, a much bigger level in my view.
 
Check out the confluence of support on the S&P 500:
 
$SPX 6.15.13

 As all of this support comes together on the S&P 500, take another look at the VIX:
 
VIX 6.15.13

An area of the market I follow closely to suggest whether a stock market rally (or decline) is sustainable or not is the semiconductor ($SOX) group.  The SOX had issues recently as daily momentum showed signs of slowing.  The MACD clearly printed lower lows while the index itself was moving to fresh highs.  Check this out:
 
SOX 6.15.13
 
While this chart may look ominous, I'm featuring a much more bullish SOX chart as my upcoming Chart of the Day.  One critical move there could begin the next leg higher in the S&P 500.  CLICK HERE for more details.

Slowing Momentum Could Pose a Threat to this Rally

That's the bad news.  The good news is that momentum issues are more of a short-term nature than a long-term one.  Still, as traders, we need to respect them just the same.
 
First, let's take a look at the benchmark S&P 500 index on a weekly basis (think BIG picture):

SPX 6.1.13 weekly chart

The MACD couldn't be much stronger.  As S&P 500 prices have risen to new heights, so too has the weekly MACD.  That suggests that the longer-term rally hasn't ended, so keep this in mind during any short-term periods that are more bearish and frustrating.  The short-term may prove to be troublesome.  While the long-term weekly MACD looks great, that's not the case on the daily MACD.  Check out the S&P 500's daily chart and take a look at the hit the MACD has taken lately:

SPX 6.1.13

Last week saw a big spike in the Volatility Index ($VIX).  Determining where the VIX will top is a big piece of the puzzle in determining where the S&P 500 will bottom.  Take a look at this chart of the VIX and note how recent tops have marked short-term bottoms in the S&P 500:

VIX 6.1.13

I would look for a top in the VIX in the 18-19 area.  If selling really escalates and fear spikes, perhaps we'll see a test of the downtrend line closer to 21.  Over the past year, nearly every short-term bottom in the S&P 500 has occurred with a VIX somewhere in the 18-21 range.  The late December 2012 period was an anomaly as fiscal cliff talks spooked investors.  Once the VIX tops, though, I do expect another rally in equities based on a number of factors, but certainly that strong weekly MACD won't hurt.
 
I've recorded a video lesson on the MACD and would be happy to share it with anyone interested.  CLICK HERE for details.

- Tom

Technology Turning a Corner

So much for "Go away in May"!
 
I've written in the past that this is VERY misleading information that's routinely provided to the investing public.  For example, the month of May is one of the best months of the year to invest in small caps.  The Russell 2000 has an annualized return of more than 14% during May since 1988.  The NASDAQ's annualized return in May since 1971 is close to its annualized return throughout the year.  Only on the S&P 500 do we see below average returns during May - and most of that weakness has generally been seen in the middle two-thirds of the month.  The first and last weeks of May tend to be very bullish, even on the S&P 500.  There are also very bullish parts of both June and July.  The truly bearish period of the year runs from mid-July through late-September.
 
Financials have been leading this bull market rally on both an absolute and relative basis and that generally portends quite well for a further advance.  The problem at this point is that many financial stocks are extremely stretched in the near-term and I try to avoid chasing stocks that have run too far.
 
Which brings me to technology.
 
Technology stocks have been lagging the S&P 500 on a relative basis for quite some time.  I believe that technology will lead the stock market in the second half of 2013.  Here are my reasons:
 
(1) Apple (AAPL) has bottomed in my view.
(2) Technical improvement in various areas of technology
(3) There's been a break in the relative downtrend line in technology-related stocks vs. the S&P 500.
 
Let's take these one at a time.  First, AAPL.
 
Let me explain what's happened to AAPL and then show it to you visually.  AAPL made a parabolic move higher that culminated with its share price reaching 700 in September 2012.  The first warning sign was the emergence of a long-term negative divergence on AAPL's weekly chart.  From there, a topping head & shoulders pattern formed.  It then was corroborated by a high volume breakdown that measured to 390.  When it reached 390, a long-term POSITIVE divergence formed and now we're in the midst of a bottoming reverse head & shoulders pattern that will confirm on a breakout above 465.
 
Confused?  Maybe a visual will help:
 
AAPL Weekly 5.18.13

The bullish reversing head & shoulder pattern is not easy to see on a weekly chart, so take a look at this daily chart:
 
AAPL daily 5.18.13
 
Keep one thing in mind here.  This bullish pattern does not confirm until we see a high volume breakout above the neckline.  I've drawn lines to indicate what this might look like as we move out over the next 1-2 months.  But first we need to see the breakout.
 
Strength in technology is definitely starting to surface.  I read Arthur Hill's Don't Ignore This Chart blog post from Thursday that showed how the technical rank had improved for Cisco Systems (CSCO) and Network Appliance (NTAP).  If you look closer at that "improved" list, you'd also find Salesforce.com (CRM) and JDS Uniphase (JDSU) in the top 5 as well.  Money is flowing towards technology and it's beginning to show on the charts.
 
Now let's take a look at the relative strength of technology.  In order to quiet the effect that AAPL has, I've chosen to use a technology equal-weighted ETF (RYT) and compare that to the S&P 500.  It's just broken a downtrend line on a relative basis.  Take a look:
 
RYT vs. $SPX 5.18.13
 
Many technology stocks have been consolidating recently and we're just now seeing significant breakouts.  One such technology stock just broke out of a cup with handle pattern and is featured as my Chart of the Day for Monday, May 20th.  CLICK HERE for more details.
 
Happy trading!
 
Tom Bowley
Chief Market Strategist
Invested Central

Earnings Really Do Matter

Every quarter, my goal is to identify the absolute best stocks that I can find from both a technical and fundamental standpoint.  I am a firm believer that stocks beating expectations, raising guidance, trading extraordinarily high amounts of volume and printing bullish candlesticks have much better odds of trading higher than stocks that don't fit this category.  For me, once the stocks are identified, it becomes a game of patience and discipline, identifying high reward to risk entry points.  Great earnings do NOT necessarily mean you simply run out and buy a stock.  For readers of my early April article, I provided a link to Nike, Inc. (NKE), which was my Chart of the Day for Monday, April 8th.  NKE had posted strongly quarterly results, gapped higher, then pulled back to retest key gap support - an excellent entry point.
 
Take a look at the chart:

NKE 5.4.13

The gap up is where market makers opened NKE after they reported their strong earnings.   Most gaps are filled and the reason is simple.  When everyone is on one side of the trade, guess who's on the other side?  Market makers.  We know they're generally going to make their money at the expense of the retail trader.  So once the initial buying takes place, stocks tend to reverse - at least temporarily - as market makers are on the short side.  Gaps get filled and price support levels are reached, then market makers work off their short position and stocks are more able to move freely once again.  In the case of EXTREMELY heavy buying interest, many times market makers are overwhelmed with demand and after the nice gap up, prices continue rising.  From a bullish perspective, maribozu candles (opens on or near the low, closes on or near the high) with massive volume are powerful indications of accumulation after a strong earnings report.  You can see what happened to NKE after it quickly fell back to test opening gap support.  It's been straight up ever since, far outperforming the S&P 500.
 
One industry group that's been seeing very strong results of late and just made a significant price breakout is the Dow Jones US Gambling Index ($DJUSCA).  Take a look at the technical strength below:
 
DJUSCA 5.4.13

One component of this index just blew out earnings estimates a little over a week ago, received a very strong technical response, but has since pulled back to a key technical support area - very similar to the technical pattern on NKE a month ago.  I'm featuring this component stock as my Chart of the Day for Monday, May 6, 2013.  CLICK HERE for more details.

VIX Soars But Remains Postured in Downtrend

At its highest level last week (Thursday afternoon), the VIX was up 50% from its prior Friday close.  That's a HUGE spike in volatility.
 
Volatility, as measured by the CBOE Volatility Index (VIX), provides us a gauge of fear in the stock market.  The VIX measures the market's expectation of stock market volatility over the next month.  It represents a weighted blend of prices for a range of options on the S&P 500 index.  As the market begins to price in higher volatility, premiums on S&P 500 options rise.  Theoretically, as S&P 500 prices show increased volatility, option premiums rise.  Therefore, the VIX becomes a bit of a lagging indicator.  I like to use it as a confirming indicator, however, as it tends to trend higher in bear markets and lower during bull markets.  Many popular technical analysis tools designed to help traders with indexes and stocks simply don't work when analyzing the VIX.  Why?  Because volatility rises and falls very quickly based on investor mentality.  The use of moving averages is rendered almost useless.  The key for me is whether the VIX confirms the trend taking place on the S&P 500.  Think about it.  If the pricing of the VIX is based on the behavior of options that track the S&P 500, then it makes sense that the VIX should follow the S&P 500.  It actually follows it INVERSELY.  When the S&P 500 drops, fear in the market rises.  That sends the VIX higher, reflecting this expected increase in volatility.  Therefore each new low in the S&P 500 should be accompanied by a higher VIX - in theory.  And a new high in the S&P 500 should be accompanied by a lower VIX - again, in theory.
 
The two don't always move together, however, and that's where we can glean some possible clues to help us from an S&P 500 directional standpoint.
 
Take a look at recent action in the VIX and the accompanying price action in the S&P 500:
 
VIX 4.20.13 V1

As expected, the VIX continued to fall with every movement higher in the S&P 500.  This makes perfect sense because volatility tends to dry up during a period of rising equity prices and this creates a narrowing of price movement.  That's the general rule, although the late-1990s proved to be one exception.  But as you look at the VIX chart above, note that the last rise in the S&P 500 was accompanied by an INCREASE in expected volatility (VIX).  Increases in expected volatility normally are associated with declining equity prices, so was it a precursor of a drop in the S&P 500?  Well, hindsight is 20/20, but we do know there is a clear relationship between the movement in the S&P 500 and the behavior in the VIX so, if nothing else, it should have at least raised a few eyebrows.
 
I indicated above how the moving averages tend to prove virtually useless when trying to determine which way the VIX is heading.  As an illustration, check this chart out:
 
VIX 4.20.13 V2

I've highlighted (red circle) the late-March and early-April period as it shows how many false signals you can receive in a very short time frame.  Instead, focus on the overall TREND in the VIX - that's what I use to determine whether the VIX is confirming price behavior in the S&P 500 or suggesting that a change in direction may occur.
 
The interesting part right now is that there's been significant rotation into defensive areas of the stock market.  For the month of April alone, utilities, healthcare and consumer staples have all gained more than 3%, while energy, materials, industrials and technology have all lost more than 3%.  That's more than a 6 percentage point swing in just three weeks between these two very different groups of stocks.  Clearly, traders are nervous as they're willing to commit to equities, but only the defensive groups.  Defensive sector outperformance should be interpreted as increased fear by market participants.  But the longer-term signal in the VIX doesn't confirm that increased level of fear.
 
For Monday, April 22nd, I'm including a long-term chart of the VIX as my Chart of the Day to illustrate one reason why I believe the bulls may return in full force sooner rather than later.  CLICK HERE for more information.
 
Happy Trading!
Tom Bowley
Chief Market Strategist
Invested Central

Earnings Season Brings New Opportunities

This is my favorite time of the quarter.  Being a "technifundamentalist", I like finding companies that look solid both technically and fundamentally and concentrate my trading efforts there.  For me, it all begins with volume.  If a company reports earnings and receives a ho-hum response in terms of volume, I'm not interested.  High volume is still a necessity during any "accumulation phase".  Therefore, consider narrowing your trading choices down to stocks that report earnings and produce extremely heavy volume that accompanies a surge higher.  A maribozu candle (one that opens on the low and finishes on the high) is perhaps the best indicator of uncontrollable buying interest, or accumulation.  It doesn't mean I'd chase the stock, but it's one that could easily be kept track of at StockCharts using a ChartList.  Wait for a pull back to price support, gap support or a key moving average and seize the opportunity.
 
Here's a very simple illustration on how to first find stocks that produce heavy volume:

Diamond Scan Screen

Notice that my primary concern on this scan is volume - lots of it.  I don't even consider a stock unless it produces daily volume 3 times its average level over the past 90 days.  I also filter out less liquid stocks by requiring that the 90 day average be at least 200,000 shares.  I run this scan every day during earnings season to identify stocks that are both technical and fundamental winners.  Then comes the patience and discipline, allowing a trade to set up.  On this particular scan, I'm looking at stocks that met my criteria 7 days prior.  That gives me an opportunity to see how they've traded since the big volume day.
 
I've identified one stock that reported earnings recently that fits the bill and I'm including it as my Chart of the Day for Monday, April 8th.  You can CLICK HERE for more details.

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