StockCharts Blogs - ChartWatchers

S&P 500 AND NASDAQ CLEAR FOURTH QUARTER RESISTANCE

The U.S. stock market continues to lead the rest of the world higher. Charts 1 and 2 show the S&P 500 and Nasdaq Composite Indexes clearing their fourth quarter highs, which puts them in position to challenge the highs formed last summer and spring. The S&P is also clearing a eight-month down trendline (see circle). The fact that both indexes have been able to rise in the face of a rising dollar (falling Euro) is also impressive (see gray area in Figure 1). That raises a number of intermarket possibilities. One is that the market's "inverse" relationship to the dollar is changing. Another possibility is that the dollar rally is nearing an end (and the Euro is starting to bounce). Another possibility is that Euro weakness is making the dollar look stronger than it really is. One way to determine that is to look at the performance of other foreign currencies which are acting much better than the Euro.

NASDAQ INDEXES TEST OVERHEAD RESISTANCE

The Dow Industrials and S&P 500 indexes have already cleared overhead resistance barriers. The Nasdaq market may be next. Chart 1 shows the Nasdaq Composite Index trying to close above its 200-day moving average. That would be a positive development for it and the rest of the market. Chart 2 shows the PowerShares QQQ Trust (QQQ) challenging its early December intra-day peak at 57.45. The Nasdaq market has underperformed the rest of market since October as reflected in their falling relative strength ratios (below charts). The market usually does better when the Nasdaq is in a leadership role.

DRUG BREAKOUTS - ABBOTT LABS MAY BE NEXT

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

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

STOCK RALLY STALLS AT 200-DAY AVERAGE - EURO DROP ON FRIDAY MAY EXPLAIN WHY - COMMODITIES BOUNCE REMAINS BELOW RESISTANCE

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

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

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

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

LONGER-TERM INDICATORS ARE STILL NEGATIVE

I'm going to focus on some longer term indicators today. And, right now, the ones I'm looking at still warrant a lot of caution. Chart 1, for example, shows the % NYSE stocks trading above their 200-day moving average ($NYA200R). Generally speaking, the line has to be above 50% to be in an uptrend. In other words, more than half of NYSE stocks need to be above their 200-day averages. But I prefer to use the 60% and 40% lines. During market corrections, it's not unusual for the black line to drop to 40% before turning back up again. Drops below 40% usual signal a bear market. Moves back above 60% reinstate the major uptrend. That's especially true after a bear market. The green circles show that happening in spring 2003 and 2009. The red circles show the last two drops below 40% to be in late 2007 and this summer. The value of the indicator is only 30%. That's nowhere near bull market territory.

WEEKLY MACD LINE STILL BELOW ZERO LINE... When studying MACD lines, we generally plot two lines. When the faster MACD line crosses above the slower signal line, the trend is up. Those two weekly lines have turned positive for the S&P 500. Another way to use that indicator is to plot the MACD line by itself in order to see whether or not it's above or below its zero line. Chart 2 plots the MACD line by itself. The horizontal line is its zero line. The red circles show prior bear signals during 2000 and the end of 2007 when the zero line was broken to the downside. Bullish upside crossings took place in 2003 and 2009 (green circles). At the moment, the weekly MACD line is below the zero line. It has to cross back above to give a bullish signal.

GOLD STOCKS START TO SHINE AGAIN

My Market Message from Tuesday of last week (October 25) wrote about new signs of strength emerging from an oversold gold-mining group. It showed the Market Vectors Gold Miners ETF (GDX) bouncing off chart support along its 2011 reaction lows (see circles in Figure 1). In Thursday's trading, the GDX has moved back above its 50- and 200-day moving averages for the first time in three months. The GDX/SPX relative strength ratio (below Figure 1) is starting to bounce again as well. The upturn in the ratio took place in early August when the stock market started to weaken. After pulling back during the October stock market rally, the ratio is starting to bounce again. Chart 2 shows a longer version of the GDX/SPX ratio. The rising green trendline shows that the longer-range trend of the ratio is still up. The breaking of the falling trendline drawn over the December/April highs is also a positive sign.

INTERMARKET TRENDS CONFIRM CHART SIGNALS

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

UTILITIES THRIVE ON FALLING RATES AND RISING VIX

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

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

- John

VIX STALLS AT PREVIOUS RESISTANCE LEVEL

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

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

- John

EUROPEAN RALLY PROBABLY OVER

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

Have a great Labor Day weekend!

- John

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

GERMANY LEADS GLOBAL STOCKS LOWER

A 5% drop in German stocks is contributing to heavy selling in Europe which has spread to the U.S. Chart 1 shows the German DAX falling 5.3% to make it Europe's biggest loser. Most other European stocks are down 4%. Chart 2 EAFE Index iShares (EFA) gapping 5% lower after meeting resistance at its March low. Chart 3 shows Emerging Market iShares (EEM) gapping lower as well. Not surprisingly, U.S. stocks are following foreign markets lower. It certainly looks like the recent short-term bounce has run its course. Money coming out of stocks is moving into gold and Treasuries. Most other commodities are falling along with stocks. It looks like a bad day ahead for stocks.

JUNK BONDS TUMBLE WITH STOCKS

With global stocks and commodities in a rout, most U.S. bonds are surging again. Chart 1 shows the T-Bond 20+Year iShares (TLT) continuing its recent surge (as bond yields tumble to the lowest level in a year). The only exception is high yield corporates. Chart 2 shows the Lehman High Yield Bond ETF (JNK) falling more than 2% and breaking its 200-day moving average. We've pointed out several times in the past that junk bonds are more closely tied to stocks than to bonds. Right now, junk bonds are following stocks lower.

WILL RISING COMMODITIES BOOST STOCKS?

The positive link between stocks and commodities doesn't always exist as shown in Chart 1. There have been periods in the past when they've trended in opposite directions like the second half of 2006 (see box). Stocks also have a history of peaking before commodities. Chart 1, for example, shows commodities rallying throughout the first half of 2008 as stocks started to tumble. Commodities eventually peaked in the middle of 2008. Since then, however, stocks and commodities have been closely linked. That's been especially true since the spring of 2009 when both bottomed together (see arrow). Chart 2 shows the close correlation between the two markets that has existed since last August when both turned up. The chart shows both correcting together in early March and rallying through April before peaking together at the start of May. Both have bounced since late June. If the upturn in commodities is for real (and it seems to be), that may carry good news for stocks as well. That depends of course on two things. One is that commodities keep rising. The other is that positive link between the two markets remains intact.

FALLING DOLLAR BOOSTS COMMODITIES

It was a good week for commodities and an even better week for stocks. But it all started with the dollar. We explained earlier in the week that the Dollar Index (UUP) appeared to be in a bearish consolidation pattern within a major downtrend. That view favored a lower greenback and higher foreign currencies (along with higher commodities). Chart 1 shows the UUP ending the week on the downside. Dollar selling came just in time for commodities. Chart 2 shows the DB Commodities Tracking Fund (DBC) bouncing off its 200-day moving average from an oversold condition. The commodity gains would have looked even better except for heavy selling of grains on Thursday on a report of a near record corn crop. The best commodity performers were base metals like copper. Chart 3 shows copper hitting a new two-month high. Base metals are probably the most economically-sensitive commodities. As a result, their rally this week shows more optimism on the global economy and stocks.

%NYSE STOCKS ABOVE 200-DAY AVERAGE STILL DROPPING

Last Thursday's message showed the point & figure version of the % NYSE stocks above their 200-day moving average in a downside correction. I suggested that the first sign of improvement would be a three-box reversal to a rising X column. We got that this week, but it proved short-lived. That's the bad news. The good news is the p&f chart now gives us a clearcut chart point to use to spot any market upturn. A traditional p&f buy signal requires a rising X column to exceed a previous X column. This week's high point was at 60. That means that the $NYA200R needs to hit 61 to signal a possible upturn. Why this indicator is worth watching is that virtually all major US stock indexes are now testing their 200-day moving averages and major chart support along their March lows. Chart 2 shows the % NYSE stocks above their 50-day averages still in a downtrend but dropping into oversold territory below 20%. That more volatile measure needs to rise to 25 to signal a possible bottom.

S&P 500 VIOLATED MAJOR UP TRENDLINE

Thurday's message showed the S&P 500 threatening two important support lines. Unfortunately, both have been broken. Chart 1 shows the SPX closing below its 100-day average (green line) for the first time since last August. The weekly bars in Chart 2 show the SPX ending well below an up trendline drawn under its August/March lows. Those downside violations leave little doubt that the market has entered a downside correction. The most logical downside target at this point is a drop to the March low near 1250 which also happens to coincide with the 200-day (40-week) moving averages which are the red lines in the two charts. There are at least three reasons why the March low is so important. First, it's the next major support level (and represents the bottom of Wave 4 in an Elliott Wave sequence). Second, it coincides with the 200-day moving average which is a major support line. Chart 3 shows another reason. The 1250 level represents a test of a two-year up trendline drawn under the 2009/2010 lows (see arrows). That means that prices need to stay above that level to keep the two-year bull market intact.

THE MARKET'S HAD A FIVE WAVE ADVANCE

Determining Elliott Wave counts can be very subjective. One way to make it little easier is to employ a "ZigZag"overlay on the price chart. [The ZigZag is located in the same Overlays menu that includes moving averages]. The idea of the ZigZag overlay is to apply a percentage filter on market trends. The default setting is 5% which means that only price moves of at least 5% are shown. Anything smaller than 5% is ignored. You can change the percentage filter to make the lines more or less sensitive. I increased the ZigZag filter to 7% in Chart 1 to show the two 7% corrections from last August and this March without upsetting the 5% line count. The lines help eliminate some of the subjectivity when counting market waves. Chart 1 shows five clear lines since last summer's bottom. Three up lines and two down lines. [The numbers were added by me]. Elliott Wavers know that five-wave advance is usually a signal that an upmove has been completed and that correction within the uptrend is likely. I've also recently shown a number of negative divergences on daily and weekly indicators like RSI. Why that's important is that fifth wave negative divergences are usually more serious warnings of a market correction.

DROP IN BOND YIELDS MAY BE WARNING FOR STOCKS

Bonds have benefited from the plunge in commodities. Several bond ETFs have rallied to the highest levels in months. Rising bond prices are pushing bond yields lower. And that may be a warning for stocks. That's because bond yields (which are a barometer of economic strength) have been positively correlated to stocks.  The chart below, for example, shows the S&P 500 bars and the 10-Year T-Note Yield (green line) moving up together until April. Since mid-April, however, bond yields started dropping and have now fallen to the lowest level in five months. That divergence between falling bond yields and rising stocks isn't likely to continue. If bond yields are falling because of fears of economic weakness, that should start to pull stocks lower as well. My morning message today also showed some other technical divergences on the S&P 500 which are warning signs. I also wrote recently that the type of sector rotation we've seen since April out of energy and basic materials and into defensive groups like consumer staples, healthcare, and utilities is usually associated with a market correction.

THE SECTOR ROTATION MODEL

My Tuesday message talked about how sectors rotate near market tops. I explained that market leadership by materials and energy (which carries inflationary expectations) is often a sign of market that's in need of a correction or a consolidation. I also explained that money coming out of those two leading sectors usually rotates into defensive sectors like consumer staples and healthcare. Chart 1 is a visual representation of how that happens. The red line plots the stock market while the green line tracks the economy. Our main interest here is with sectors which are plotted along the top of the chart. You can see that Basic Industry (materials) and Energy are late cycle leaders. Tops in those two groups usually coincide with the start of a market correction or consolidation. When that happens, leadership swings to Staples and Services. [The Model is based on the work of Sam Stovall of Standard & Poors. In my 2009 book, The Visual Investor (Second Edition, p. 208), however, I changed Services to Healthcare which makes more sense]. As I explained on Tuesday, materials and energy were the two top sectors entering the month of April. Over the last week, energy and materials have reversed to the two weakest sectors. Right on cue, staples and healthcare have reversed to the two strongest. That doesn't necessarily mean that a major top is forming. It does suggest, however, that market sentiment has turned more defensive which usually suggests a market correction or a period of consolidation.

 

BOND YIELDS JUMP

This morning's March jobs numbers reported U.S. payrolls jumping by 218,000 which was higher than estimates. In addition, the unemployment rate declined to a two-year low of 8.8%. The result is a jump in stock futures which points to a higher open today. Bond yields are also climbing on the jobs report. Chart 1 shows the 10-Year T-Note Yield hitting a one-month high after clearing its 50-day line earlier in the week. Rising bond yields are bad for bond prices (which trend in the opposite direction of yields) but are generally good for stocks. That's because rising bond yields are symptomatic of a strengthening economy. Arthur Hill has shown the upside breakout in small cap stocks. Chart 2 shows the S&P 400 Mid Cap Index having also exceeded their February high. That greatly increases the odds that large caps will do the same. Developed markets are also getting a lot of help from strong emerging markets.

DOLLAR INDEX DROPS TO THREE-YEAR LOW

Traders continue to sell the U.S. Dollar. In yesterday's trading, the dollar fell to a 20-year low against the Japanese yen. Today, it's falling against everything else. More importantly, the greenback is breaking important support levels. Chart 1 shows the PS Bullish Dollar Index (UUP) falling to the lowest level in three years. One of the side-effects of a falling dollar is stronger commodities and shares tied to them. Right on cue, both are bouncing. Chart 2 shows the DB Commodities Tracking Index Fund (DBC) bouncing off its 50-day moving average (blue line) and gaining 2%. Virtually all individual commodities are bouncing today. As are shares related to them. Chart 3 shows the Energy Sector SPDR (XLE) bouncing off its 50-day line. Precious metal shares are also rebounding.

FALLING DOLLAR IS CONTRIBUTING TO RISING COMMODITIES

In my Tuesday message, I agreed with the Fed chairman that commodity prices were rising against all currencies. That doesn't mean, however, that the falling U.S. Dollar isn't a major contributor to rising commodities. After all, global commodities are priced in dollars. Chart 3 shows that the latest surge in the CRB Commodity Index began last June just as the U.S. Dollar Index was peaking (see arrows). A dollar bounce during the fourth quarter coinicided with a modest commodity pullback. The dollar downturn during the first quarter of this year has contributed to another commodity surge. One of the most consistent intermarket relationships is that the dollar and commodities trend in opposite directions. The charts below all show a clear inverse relationship between the two markets and appear to contradict the view expressed by Mr. Bernanke that the lower dollar isn't a major reason that commodity prices are rising. Chart 4 shows them moving in opposite directions since 2007. Note their coincident turning points in 2008, 2009, and 2010. Every major turn in the dollar coincided a major turn in commodities in the opposite direction. Chart 5 gives an even longer view, and shows that the major upturn in commodities that started in 2002 coincided exactly with a major downturn in the dollar. A lot of the dollar weakness since 2002 is directly tied to aggressive Fed easing and, more recently, to the Fed keeping U.S. rates near zero. With rates in emerging markets already rising and Europe close to raising rates, it seems the dollar has nowhere to go but down (at least until the Fed starts raising rates). That should push commodity prices even higher and make the inflation problem even worse. That will be especially true in the U.S. which now has the world's weakest currency.

EMERGING MARKETS ARE 2011 LAGGARDS

I'm not a believer in global decoupling. On the contrary, I believe that global stock markets are highly correlated and usually trend in the same direction. That's especially true of the relationship between emerging and developed markets. Chart 1 shows a strong correlation between emerging markets (black line) and the Dow Jones World Index of developed markets (blue line). The main point is that these global markets usually rise and fall together. The chart also shows that emerging markets have risen a lot faster than developed markets since the 2009 bottom. In fact, emerging markets gained 130% from that bottom versus 90% for developed markets. Growth in the larger emerging markets like China and India is often cited as the engine driving global economic growth and uptrends in stocks and commodities. Problem is stock markets in those countries have been falling since last November.

GOLD STOCKS BOUNCE OFF 200-DAY LINE

My Tuesday message showed the Market Vectors Gold Miners ETF (GDX) testing long-term support at its 200-day moving average, and suggested watching it closely for signs of an upturn. Today's strong rally in precious metals assets may be the start of that upturn. Chart 1 shows the GDX surging more than 2% today and clearing its 20-day moving average (green line) for the first time this year. In addition, its 14-day RSI line (top of chart) has turned back up. The daily MACD histogram (below chart) has also turned positive (see circle) for the first time in two months. In my view, those signs of improvement increase the odds that the pullback in precious metal stocks is over. The Tuesday message identified IAMGOLD as the strongest gold stock and showed it having broken through the upper line in a bullish "symmetrical triangle". Chart 2 shows IAG exceeding its spring 2010 high to reach a new record. Its relative strength ratio (bottom of Chart 2) has turned up as well. Gold and silver stocks are rallying on the backs of their respective commodities.

VIX STARTS TO BOUNCE

Two Thursday's ago (January 6), I showed the CBOE Volatility (VIX) Index having reached a potential support level at last spring's low near 15, and warned that a bounce off that level could cause a stock market pullback. That's because the VIX and stocks usually trend in opposite directions as shown in Chart 1. The reason I'm coming back to the VIX today is because it's climbing 8% and beginning to look like it's short-term trend is turning up. Chart 2 shows the VIX action more closely. After bouncing twice off support near 15 since mid-December, the VIX is challenging its early January intra-day high at 18.63. A close over that initial resistance barrier would turn its short-term trend higher and could signal an overdue pullback in the stock market.