StockCharts Blogs - ChartWatchers

Dow Hits Top of Channel

The Dow has been moving higher the last three months with surges early in the month and pullbacks later in the month. Notice how the Dow bottomed in early September, early October and early November. Also notice how the Dow peaked in mid September and mid October. Here we are in November with an early month advance and the Stochastic Oscillator overbought. As long as the Stochastic Oscillator remains above 80, it should be considered both overbought AND bullish. Notice how the indicator remained above 80 for two weeks in September and two weeks in October (yellow areas). Currently, the Stochastic Oscillator has been overbought for two weeks in November. The red dotted lines show the Stochastic Oscillator moving below 80. A similar decline below 80 would be short-term negative and argue for a correction within the bigger uptrend. Until such a move, expect overbought conditions to remain and the short-term uptrend to continue.


Click this chart for details.

LONG-TERM RATES MOVING BEFORE STOCKS

The 10-Year Treasury Yield ($TNX) is largely positively correlated with the S&P 500 - and also shows a propensity to lead the stock market. The chart below shows the 10-Year Treasury Yield peaking in July 2007 and stocks peaking in October 2007, three months later. Similarly, the 10-Year Treasury Yield bottomed in December 2008 and stocks bottomed in March 2009, again 3 months later. The 10-Year Treasury Yield now has peaks in early June and early August. In addition, the 10-Year Treasury Yield broke below its July low with a decline into early October. Should the current pattern hold, the stock market would be expected to peak between September and November. This period is three months after the June peak and three months after the August peak in the 10-Year Treasury Yield ($TNX). If we take the middle, then that means an October peak for the stock market. So far the S&P 500 remains above its early October low and the medium-term trend has yet to reverse.

Click this chart for details.

SHORT-TERM RATES AND THE DOLLAR

While there has been a negative correlation between the Dollar and stocks this year, there has been a positive correlation between the Dollar and short-term interest rates. The chart below shows the US Dollar Index ($USD) with the 1-Year Treasury Yield ($UST1Y). Both rose in January-February and then declined from March to October. Notice that stocks declined when these two rose and advanced when these two declined. While correlation is not the same as causation, there is clearly some sort of connection here. Therefore, we should be watching short-term rates for clues on the Dollar. A rise in short-term rates would be positive for the Dollar. Should the negative correlation between stocks and the Dollar hold, a rise in the Dollar would be negative for stocks. Right now, however, both short-term rates and the Dollar remain in clear downtrends, which is currently positive for stocks.

Click this chart for details.

QQQQ Tests the 50-day

With a sharp decline over the last eight days, the Nasdaq 100 ETF (QQQQ) is testing support from the rising 50-day moving average and RSI is testing support around 45-50. QQQQ broke the 50-day moving average briefly in July, but held the 50-day during the May, June, August and September pullbacks. Some bounces were bigger than others, but the moving average held for the most part. A clean break below the 50-day would be negative for the current uptrend.

Click this chart for more details.

The bottom indicator window shows 14-day RSI. Notice the support zone around 45-50. RSI held this support zone in May, June, August and September. Again, the only breach of support occurred in July (red arrow). This also coincided with the breach of the 50-day moving average. With RSI again in this support zone, a momentum test is upon us. Failure to hold this zone would be negative for momentum and possible signal the start of an extended correction.

BONDS AND GOLD LEAD THE WAY HIGHER

Intermarket analysis shows strength in bonds and gold, but weakness in the Dollar and oil. Strange days indeed. The Intermarket Perfchart below shows performance over the last sixty days, from June 11th to September 3rd. Relative strength in bonds is the first thing that jumps out. Performance for the 20+ Year Treasury ETF (TLT) has been positive the entire time (60 days). In contrast to bonds, oil is the weakest of the intermarket players. Except for a positive blip in early June, performance for the US Oil Fund ETF (light blue) has been negative since mid June. While bonds are up over 10%, oil is down over 10%. Could this be a sign of deflation? For one reason or another, money is clearly moving into bonds. It could be deflationary pressures, slower economic growth or a flight to safety. It is also interesting to note that oil moved lower even as the US Dollar moved lower. Oil usually benefits from weakness in the Dollar. The green line shows the Dollar Bullish ETF (UUP) working its way lower from mid June to early September. Weakness in the Dollar is, however, helping gold, which surged over the last few weeks (pink line).

Click this chart to see details.

Keeping an Eye on Bullish Percent

The Bullish Percent Indices measure the percentage of stocks on a Point&Figure buy signal for a given index. In general, an index has a bullish bias when its Bullish Percent is above 50% and a bearish bias when below 50%. Stockcharts.com users can easily keep an eye on the bullish percent indices in the Market Summary page. In fact, the table below comes directly from the bottom of the Market Summary page. The major indices are at the top, followed by the sectors.

As you can see, the Bullish Percents are above 70% for all the major indices. No sign of weakness here. Of the ten sectors, six have Bullish Percents greater than 79%. This is a sign of broad strength. Of the remaining four sectors, two are in the low 70s, energy is around 59% and telecom is around 55%. Using bullish percent to measure relative strength, energy and telecom are the least strong sectors right now. Of the major indices, the Nasdaq 100 and S&P 100 are the strongest (large-cap and large-cap technology). The bulls are in good shape as long as the majority of these Bullish Percents holds above 50%. You can read more on Bullish Percent in the Chart School.

McClellan Oscillators Remain Bullish

The McClellan Oscillators moved from bearish to bullish with the July surge in stocks. Basically, the McClellan Oscillator is the 19-day EMA of Net Advances less the 39-day EMA of Net Advances (advances less declines). As the difference of two moving averages, this indicator oscillates above/below the zero line like MACD. Based on recent observations, a thrust above 50 is viewed as bullish for the stock market, while a thrust below -50 is viewed as bearish. Even though this breadth indicator is not perfect, it's level can help determine overall market direction and underlying strength.

Click this chart to see more details.

Click this chart to see more details.

The Nasdaq and NYSE McClellan Oscillators both turned bearish in mid June with thrusts below -50. Both stayed in bear mode until mid July. The NYSE McClellan Oscillator was the first to turn bullish with a thrust above 50 on 15-July. Also notice that the NY Composite broke above 6000 on 15-July. The Nasdaq followed suit a week later with a move above 50 on 23-July. Even though both oscillators slipped back this week, they remain comfortably in positive territory and bullish overall. Click here to read more on the McClellan Oscillator and Summation Index.

Majority of Stocks Still Above their 200-day SMAs

It is hard to argue with the bulls when the vast majority of Nasdaq and NYSE stocks are trading above their 200-day SMAs. Over 66% of Nasdaq stocks are trading above their 200-day moving averages, while over 77% of NYSE stocks are trading above their 200-day moving averages. There are two important parts to this indicator: absolute level and direction. Despite some stalling over the last 6 weeks, the overall direction is up for both breadth indicators. There have been pullbacks along the way, but the overall trend since late March is up. The bulls are in control as long as this uptrend holds. 

Both indicators moved above the critical 50% threshold at the end of May. There was some market weakness in late June and early July, but the moving average percents held above 55%. In fact, both established support at 55% with bounces in late June and early July (green arrows). This looks like an important support level for the indicator. The bulls are in good shape as long as both hold above 55%. A move below this support would argue for a correction or consolidation period in the market.

Consumer Discretionary Stocks Get Rocked

Non-farm payrolls declined 467,000 for June, which was worse than expected. Stocks took the news hard with a broad based decline on Thursday. The major indices were down 2-4% on the day, while all sector ETFs were down over 2% with the Consumer Discretionary SPDR (XLY) leading the way lower. On the chart, XLY is on the verge of breaking support from its mid-May lows. With a double top taking shape, a break below this support level would target further weakness towards 19. The height of the pattern is subtracted from the support break for a target. As the most economically sensitive sector, relative weakness in the consumer discretionary stocks is not a good sign for the overall market - or the economy. This sector includes retailers, auto manufacturers, restaurants and homebuilders.

VIX BREAKS A TRENDLINE

A downtrend in the S&P 500 Volatility Index ($VIX) underpins the current rally in the S&P 500. After all, decreasing fear gives way to confidence. The chart below shows the VIX as a 3-day SMA to smooth out daily fluctuations. The VIX broke support on 12 March and this coincided with the March surge in the S&P 500. The VIX continued to trend lower as the S&P 500 extended its advance. While the S&P 500 hit a new high for the move in June, the VIX recorded a new reaction low to keep pace. With the sharp decline early this week, the VIX surged off its June low and broke the March trendline. This is a warning sign, but not quite enough to call for a new uptrend in the VIX. Look for further strength above the late May high signal a trend reversal and increase in fear that would be bearish for stocks.

OVERBOUGHT AND BULLISH

Even thought the Dow Diamonds (DIA) is overbought medium-term, the recent breakout is short-term bullish and this breakout is holding. On the daily chart, DIA broke above flag resistance with a surge on Monday. This move pushed CCI above 100 to turn momentum overbought. Even so, I would consider the trend both overbought and strong as long as CCI holds above 100. Notice how CCI bounced off the zero area in late May. Medium-term momentum should be considered bullish as long as CCI stays positive.





The second chart shows 60-minute candlesticks to focus on the recent breakout. This chart features a consolidation, a breakout and a support zone (yellow area). A key tenet of technical analysis is that broken resistance turns into support. In other words, a strong breakout should hold. Failure to hold this breakout and a move below the yellow support zone would be short-term bearish. As such, this is the first support area to watch for signs of a trend change.

DOW HITS RESISTANCE

After a massive 9 week advance, the Dow ran into resistance with its biggest weekly decline since early March. There is a resistance zone coming into play around 8700-8800 from the falling 40-week moving average and the Oct-Nov consolidation. After establishing support in Oct-Nov, this triangle consolidation now turns into a resistance zone. In addition, notice that 14-week RSI is trading in the 50-60 zone, which acted as resistance in April 2008.

Prior to this week, the Dow was up eight of the last nine weeks and advanced around 2000 points. We do not need a momentum oscillator to figure out that this rally is overbought. With the Dow at resistance and overbought, the odds favor some sort of consolidation or correction. A consolidation would involve a flat trading range over the next few weeks, while a correction would involve a retracement of the March-May advance.

IT'S ALL RELATIVE

The PerfChart below shows the percentage change for the S&P 500 and the nine sector SPDRs. The S&P 500 acts as the benchmark for relative performance. Sectors with greater percentage gains are outperforming the S&P 500. Sectors smaller percentage gains are underperforming. Defining the leaders and the laggards can tell us a lot regarding the quality of the rally. Relative to the S&P 500, the Financials SPDR (XLF) is the leader of leaders since early March. Other leaders include the Consumer Discretionary SPDR (XLY), Industrials SPDR (XLI) and Materials SPDR (XLB). Surprisingly, the Technology SPDR (XLK) is simply performing in line with the S&P 500. Leadership from the consumer discretionary sector is probably the most important aspect of this rally. This is the most economically sensitive sector and leadership here bodes well for an economic rebound.
 

DIA MAINTAINS UPTREND

The Dow Industrials ETF (DIA) shows a classic case of becoming overbought and remaining overbought. I featured DIA in ChartWatchers two weeks ago as it hit potential resistance around 80. The song remains the same as DIA finished at 81.31 on Friday.

Let's review resistance. First, the middle of the prior consolidation (yellow area) marks resistance in the lows 80s. Second, the Mar-Apr advance retraced around 62% of the Jan-Mar decline. In addition to resistance, the Commodity Channel Index (CCI) moved above 100 (overbought) for the fourth time in the last four weeks. Even though overbought conditions and resistance argue for a pullback, DIA refuses to cooperate with the bears right now.

This calls for another indicator that is more sensitive to the actual trend, which is clearly up. Enter the Percentage Price Oscillator (PPO). As the difference between two moving averages, the Percentage Price Oscillator (PPO) is a rare breed that offers the best of both worlds: a little trend and a little momentum. Moving averages measure trend, while oscillators measure momentum.

The bottom window shows the Percentage Price Oscillator (5,35,10) with its 10-day EMA (red signal line). Even though the indicator flatted over the last three weeks, it never broke below its signal line. The histogram shows the difference between the indicator and the signal line. While upside momentum may be waning, DIA is still edging higher and I will be watching the Percentage Price Oscillator (PPO) for break below its signal line that could signal the start of a correction. Expect DIA to continue higher as long as the Percentage Price Oscillator holds above its signal line.

DIA SURGES OFF 50-DAY

The Dow Industrials ETF (DIA) surged off its 50-day moving average with a big advance on Wednesday and a gap on Thursday. While the four-week surge is most impressive, the ETF is running into a resistance zone and becoming overbought. First, broken supports around 80 turn into resistance. This level is equivalent to 8000 on the Dow. Second, DIA retraced 62% of the prior decline and this key retracement can act as resistance. Third, the consolidation from late January to early February also acts as resistance (yellow area). Finally, DIA has advanced four weeks straight and is now up 23% since early March. This makes it overbought by most yardsticks. While securities can become overbought and remain overbought in strong uptrends, the chances of a correction are increasing. The bottom indicator shows the Percentage Price Oscillator (5,35,9), The bulls are in good shape as long as this indicator rises and remains above its signal line. A dip below the signal line could signal the start of a correction.

SPY HITS RESISTANCE

After a sharp advance the last two weeks, SPY hit a classic resistance zone and pulled back over the last two days. Three items confirm resistance in the low 80s. First, broken support around 80-81 turns into resistance. Second, the falling 50-day moving average marks resistance. Third, the advance retraced 50% of the Jan-Mar decline, which is typical for a retracement.

In addition to resistance, there were also signs that SPY was overbought. The bottom indicator shows the Commodity Channel Index (CCI) moving above 100 for the third time this year. The first two overbought readings marked the early January peak and the early February peak. Also notice that the 7-day Rate-of-Change surged above 17%. This was the biggest 7-day surge in over six months. While such a sharp advance shows strength, it also reflects overbought conditions.

Overbought conditions can be alleviated with a correction or consolidation. SPY could retrace 38-62% of the prior surge with a pullback or we could see a choppy trading range evolve to consolidate the gains. Either way, it looks like the market is ready for a rest after such impressive gains.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

TECHS TAKE A PUNCH

Two weeks ago I featured the Nasdaq 100 ETF (QQQQ) with a triangle breakout, strong OBV and relative strength. The ETF surged to resistance from the early January high, but ultimately failed to break above this key level. With a sharp decline over the last eight trading days, the trading bias has quickly shifted back to the bears. The failure at resistance, gap down, trendline break and MACD crossover are all bearish until proven otherwise. At the very least, QQQQ needs to fill Tuesday's gap to merit a reassessment.

The second chart shows the Nasdaq with similar characteristics. There are, however, two notable differences. While QQQQ reached its early January high and broke the triangle trendline, the Nasdaq fell short of this high and did not break the triangle trendline. The Nasdaq is a much broader index than
the Nasdaq 100 (QQQQ) and shows relative weakness. With a gap down, trendline break and MACD crossover, the bulk of the evidence is currently bearish for the Nasdaq as well. Before getting too bearish, notice that trading has been extremely choppy since October. Both the Nasdaq and QQQQ have traded on either side of their October lows the last four months. While the bias is currently bearish, the seas remain treacherous for both bulls and bears.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

OBV AND RELATIVE STRENGTH DRIVE QQQQ

The Nasdaq 100 ETF (QQQQ) is breaking out of its trading range. The chart below shows QQQQ stuck in a trading since 10-Oct. Focusing on the blue dotted line marking the mid October lows, we can see that QQQQ traded above and below this line numerous times the last four months. In essence, QQQQ went nowhere from 10-Oct until early February. A triangle formed from early November as the trading range narrowed over the last two months.

QQQQ could be finding direction now. With an advance over the last five days, QQQQ broke the triangle trendline and is closing in on resistance from the early January high (red line). A breakout here would be quite positive and argue for a counter-trend rally. The big trend remains down, but bear market rallies are perfectly normal. QQQQ could possibly make it to the falling 200-day moving average.

 

Relative strength and On Balance Volume (OBV) confirm the triangle breakout. The first indicator shows QQQQ relative to SPY. This relative strength comparative rises when QQQQ outperforms SPY and falls when QQQQ underperforms. QQQQ has been outperforming since the second week of January because that is when the relative strength comparative broke resistance. On Balance Volume (OBV) is a cumulative indicator that adds volume on up days and subtracts volume on down days. Granville theorized that volume leads prices. If this is the case, then OBV suggests that QQQQ will break its January high soon. Notice that OBV broke its December and January highs this week.

Click here for a video presentation of this information.

EURO FINDS SUPPORT AS DOLLAR HITS RESISTANCE

With a bounce on Friday, the Euro Trust ETF (FXE) found support from a confluence of indicators and chart features. First, broken resistance turns into support in 130-132 area. Second, there is support in this area from the 50-day moving average. Third, the decline over the last few weeks retraced around 62% of the prior advance. The ETF was also oversold after a rather sharp decline from 145 to 130. This combination of conditions and chart features made FXE ripe for a bounce.

With the Euro bouncing, the US Dollar Index Bullish ETF (UUP) came under pressure on Friday. Notice that these two charts are mirror images of each other. After a surge over the last few weeks, UUP met resistance near broken support and the 50-day moving average. The advance in UUP looks like a rising flag, which is potentially bearish. For now, the flag is clearly rising as the trend has yet to actually reverse. A move below the early January low would break flag support and call for a continuation of the December decline.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

QQQQ BREAKS CONSOLIDATION RESISTANCE

QQQQ broke consolidation resistance with a big surge on the first trading day of the year. After surging in late November and early December with two gaps, QQQQ stalled for most of December with a flat trading range. The consolidation pattern looks like a flag and the upside breakout calls for continuation of the Nov-Dec surge. For an upside target zone, the October-November highs mark the next resistance area around 34-36.

As expected, QQQQ volume levels have been low throughout the holiday season. In fact, QQQQ volume has been uninspiring throughout most of December. Volume was even below average on Friday's big move. While low volume advances are suspect, price action is first and foremost. The consolidation breakout should be considered bullish until proven otherwise. Volume will likely return in early January and it is important that the consolidation lows hold. A break below these lows on expanding volume would be bearish.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

GOLD BENEFITS FROM WEAK DOLLAR

After surging from the low 70s to the upper 80s, the U.S. Dollar Index ($USD) experienced its sharpest decline in years. In fact, this week's decline was the sharpest in over 10 years. The bottom indicator window shows the 1-week Rate-of-Change dipping to -3.89% this week. While this may seem like a trend changing event, keep in mind that the Dollar was quite overbought after the prior advance. Some sort of correction is normal and the index could very well retrace 50% of the prior advance.

Weakness in the greenback sparked a rally in gold this week as the streetTRACKS Gold ETF (GLD) gained over 8%. The surge off support looks impressive, but GLD remains in a falling price channel for the year. This pattern, however, could be bullish because it looks like a massive flag. Flags are corrective patterns that form after a big advance. A break above the 40-week moving average and upper trendline would signal a continuation of the prior advance (55-100).

There is also a video version of the this analysis available at TDTrader.com - Click Here.

DOW BATTLES SUPPORT

The Dow Industrials surged off support for the fourth time in five weeks. Will this bounce produce a breakout or failure? As the candlestick chart below shows, the Dow Industrials is locked in a volatile trading range with support around 8000 and resistance around 9700. The Dow dipped below 8250 least four times and surged above 9250 at least three times. Talk about a yo-yo.

In an effort to weed out some of this volatility, I am also looking at a close-only chart. There are three dips below 8500 and a broadening formation is taking shape. These patterns are normally associated with tops, but we can probably apply some reverse logic with one forming after the Sept-Oct decline. Currently, the Dow is moving from the upper trendline towards the lower trendline, which targets further weakness towards 7800-8000. Thursday's big bounce looks impressive, but it is not quite enough to reverse the two week downswing. Sorry for getting so short-term, but these are big swings we are dealing with. While I was impressed with Thursday's surge, it was just one day and Friday proves that some follow through is needed for confirmation. A close above minor resistance at 9000 would provide such follow though.

The bottom indicator shows On Balance Volume (OBV) moving to new lows this week. Joe Granville theorized that volume leads price. If this is the case, then OBV is pointing to new lows for the Dow. Look for a break above the blue trendline and early November high to reverse the downtrend in OBV.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

AIRLINES TAKE OFF

The Amex Airline Index ($XAL) is leading the market higher with a break above two key moving averages this week. XAL produced one of the sharpest October recoveries with surge from 14 to 25 over the last three weeks. This surge carried the index above the 50-day moving average and 200-day moving average. Both moving averages are still moving lower, but this October surge shows extraordinary strength. Not too many indices are currently trading above their 200-day moving average. For example, the S&P 500 is some 30% below its 200-day moving average.

In addition to these moving average breakouts, XAL shows relative strength versus the S&P 500. First, the S&P 500 broke below its July low, but the Airline Index held above its July low. Second, the S&P 500 tested its mid October low last, but the Airline Index held well above its mid October low. These two higher lows show that the Airline Index is holding up better than the S&P 500. Third, the bottom indicator window shows the Price Relative, which shows the performance of XAL relative to SPX. This indicator formed a higher low in October and broke above its September high this month. A breakout in the price relative confirms relative strength in the Airline Index.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

DIA RETURNS TO THE GAP

In a volatile week with huge swings, the Dow Industrials ETF (DIA) returned to Wednesday's gap with another 10% move. The magenta lines on the 30-minute chart show the zigzag indicator, which measures movements that are 10% or more. As you can see, there was an advance greater than 10% on 12-13 October, a decline greater than 10% on 14-16 October and an advance greater than 10% on 16-17 October. Wow, what a week for day traders. There was a day when these swings would look impressive on a weekly chart. Obviously, this is not your father's Dow.

With these big swings, the Dow Industrials ETF (DIA) remains stuck in a volatile range and short of a breakout on the daily chart. I am watching two items to signal a trend changing breakout. First, the pullback on Tuesday-Wednesday established key resistance around 99. Mondays' surge was impressive and Thursday's recovery affirms support, but we have yet to see follow through and a resistance breakout. Second, the Commodity Channel Index (CCI) moved below -100 in early September and momentum remains bearish overall. At the very least, CCI needs to break into positive territory. However, I would like to see a surge above +100 to show some real strength and turn momentum bullish. Be sure to check out the corresponding video for more details.

There is also a video version of the this analysis available at TDTrader.com - Click Here.

FILTERING THE NOISE

September was one of the most volatile months in recent memory. Bar charts and candlestick charts are great, but the wild high-low swings can interfere with basic trend analysis. Moving averages provide a good means to smooth this volatility by cutting through the daily noise. For those who want it all, a combination of high-low-close bars and a short moving average may even be appropriate. This combination shows the high-low range, but also focuses on average prices to discern a trend.

The accompanying chart shows the S&P 500 ETF (SPY) with bars in gray and a 5-day EMA in blue. Even though September has been exceptionally volatile, the 5-day EMA shows a steady downtrend. In fact, the 5-day EMA does not look any more variable than the prior months. Despite Tuesday's big rebound, this EMA hit a new low to affirm the downtrend that began August.

The second chart shows the 5-day EMA without bars or candlesticks. It is a pretty empty chart, but it sure cuts through the clutter. There are four trendlines that denote the swings over the last six months. The current swing is down and the decline even accelerated this week. SPY may be oversold, but it is clearly in the falling knife category as the 5-day EMA dropped over 5% this week. As this trendline now stands, the 5-day EMA needs to move above 119 to reverse this down swing (break the trendline).

There is also a video version of the this analysis available at TDTrader.com - Click Here.