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Hello Fellow ChartWatchers!

As I mentioned last time, we've recently started adding key economic datasets to our database so that you can chart them with our SharpCharts charting tool.  This week, we added the weekly Unemployment Indexes including the Initial Jobless Claims number.  The symbol for that index is $$UNEMPCIN.

$$UNEMPCIN behaves inversely to the stock market - when the market is doing well, initial jobless claims are falling and vice versa.  We can see this directly by charting the inverse index - $ONE:$$UNEMPCIN and overlaying that with the S&P 500.  Check out the following chart to see what I mean:

(Click here for a live version of this chart.)

This chart is a monthly line chart.  I'm using months instead of weeks to smooth out some of the noisyness of the data.

Now, in addition to the two overlaps price plot lines, I've also added the 12-month Correlation indicator and the 24-month Correlation indicator.  As you can see, both of those lines spend most of their time above the zero line in the middle of that plots.  That confirms what we can intuitively see - that the red and blue lines move more-or-less in unison (i.e., they are positively correlated).

What's interesting is that points in time where the correlation lines dip below zero.  That happens when the red and blue lines start moving in opposite directions.  Note that on the 24-month correlation line, those dips correspond with major changes in market direction.  Those same signals are on the 12-month Correlation indicator as well, but they aren't quite as easy to pick out.  Still, whenever the 12-month Correlation of these two lines dips below zero, it might be time to look for the market to change direction.

- Chip

The Equal-weight Consumer Discretionary ETF (RCD) and the Retail SPDR (XRT) hit 52-week highs in price and relative strength this week. New highs and relative strength in these two groups is very positive for the market overall. As its name suggests, the consumer discretionary sector is the most economically sensitive sector. Retailers feature prominently in this sector and retail spending accounts for some 2/3 of GDP. If performance of these two ETFs is indicative of consumer spending, then the economy and broader market are in good shape. Neither shows absolute or relative weakness for the moment.

Click this image for a live chart.

The first chart shows RCD within a large rising channel over the last 18 months. The ETF is now in the upper half of this channel and the upper trend line extends into the low 70s over the next few months. Support is marked in the 59-60 area. There is also a smaller rising channel taking shape since November. The ETF is nearing the upper trend line of this channel and getting short-term overbought. The second chart shows the Retail SPDR (XRT) with similar characteristics.


Click this image for a live chart.

Central Fund of Canada (CEF) is a closed-end mutual fund that owns gold and silver exclusively -- the metals, not stocks -- at a ratio of about 48 oz. of silver to 1 oz. of gold. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding precious metals.

The following chart shows CEF history going back to 1986, and the bottom panel shows the amount of premium (green) or discount (red) at which CEF shares were selling. It is amazing to see that there have been discounts of lower than -20% and premiums approaching +30%. I suspect that a good deal of this extreme behavior can be accounted for by the fact that some of the buyers and sellers simply did not know how closed-end funds work.

It is interesting to note that in the last two years, sentiment swings have held a much more reasonable range. The extended topping action probably had something to do with that. More to the point is that recent bearish sentiment has been fairly low, considering the sharp decline in precious metals prices. This does not tell us if prices are going to continue lower, but it does show us that bearishness has not reached the kind of extremes that would prompt us to start looking for a price bottom.

One of the hardest trades to make is the one you don't put on. Just sit. The martial arts practice Defence and Offence.

The 40 WMA (Weekly Moving Average) is roughly equivalent to the 200 DMA (Daily).  Lets call it the Black belt for today.  Many technicians employ a simple strategy of the price action being above or below the 40 WMA. If it is above they are bullish and below they are bearish.Depending on your investment strategy depends on how short or how long the timeline is for your long term MA.

John Murphy reviewed 2008 and remarked that the $SPX never spent 1 day above the 200 DMA all of 2008. Just sitting on your hands while it was below would have saved many accounts from the beating that ensued. So many investors could have been out of the market just using that strategy for the down turn. Here is what makes that difficult for Canadian investors. Every time the $TSX broke below the 40 WMA in the last 3 years, it surged back above, tested a higher level and then continued lower. So it's not as easy as it sounds. Here is the link to the $TSX chart. $TSX. If we use the slope of the red line it can be a guide. It is either pointed up or down while the market tests the 40 WMA.  This is not infallible either but it helps. Sometimes using Elliott wave theory can try to place us on the right part of the wave structure. It looks to me like we have had a 5 wave move down off the 2011 highs, to an ABC correction which we just completed if my marks are right. An equivalent move from the 5 wave down would have us finish this corrective wave at about 9500. That would be optimistic. The bearish views of EWI (Elliott Wave International) would suggest much lower than that.Let's just say I am not an elliottician. The bottom line is the pattern looks lower right now.

Today we sit at that junction. We moved the major Canadian Index below the black belt or the 40 WMA. Now what? There are many moving parts to this chart. It feels like a thriller, and it should. The moves are straight out of 'Skyfall'. The $TSX is already 7.8% off it's highs from peak to trough. We've already had 200 and 300 point moves down in the last 3 weeks.  While investing in a firestorm is very tricky, the $TSX is a market riddled with cross currents. Our major trading partner is the USA. 80% of our trade is with America. But our index is filled with commodities and has traded closer to the growth markets rather than America. So assuming the USA is doing well, tells you  to stay long.  Most of the growth markets are testing the 200 DMA or just the opposite of America's charts.

An example would be growth markets like Shanghai daily. ($SSEC).

and India  daily.($BSE)

Both had 2% up days this week which may be indicative of at least a slowing of the downward trend if not a reversal. India moved below and is retesting the 50 DMA from the bottom. The multiple big candles suggest this move is not done. Notice that all three charts flirted with the 200 DMA this week. The $TSX made its high 6 weeks ago, roughly timing with the first test of the 50 DMA from the underside on the other two charts in March.

What we need to see now is a surge above the 50 DMA. For Canada, that is a long way above. I think watching these global indices will tell us if the frightful move to the downside in commodities is finished and we are going to reverse right here, or if we are entering into the strongest part of the major wave down. If we are entering the strongest part of the major wave down, sitting on my hands might just be the best trade I can put on. Or trade with a black belt. Defence is as important as offence. Many are enamoured with going short. It is not a game for the buy and hold either. The overnight bounces off major lows have been 150 points higher. That is hard to hold short positions through. The charts make it look easy but short time intervals are way more profitable than trying to catch the top and the bottom of the big move down. That is what I have found anyway. We are at a tricky part of the charts. Smaller positions can also help mitigate the risk.

Good Trading,

Greg Schnell, CMT

Of all the commodity markets, copper is viewed as the most closely aligned with trends in the global economy. Copper and other commodities have been lagging behind global stocks over the past year (largely owing to a stronger dollar and weakness in Chinese stocks). This week's plunge in copper, however, finally caught the world's attention, and not in a good way. Chart 1 shows the price of spot copper plunging this week to the lowest level since October 2011. It had already fallen below the lower line of a long-term "symmetrical triangle" which signaled that its trend was weakening. One of the worst performing stocks is tied to copper. Chart 2 shows Freeport McMoran Copper & Gold (FCX) tumbling to a two-year low this week. Its relative strength line (gray area) had been falling for the past year. [FCX is primarily a copper stock]. The copper breakdown calls into question the strength of the global economy which, in turn, is causing nervous profit-taking in global stock markets.

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:
 


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:
 


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

Hello Fellow ChartWatchers!

I'm very happy to announce that we've just added a new overlay to our system - the Chandelier Exit.  This overlay is a favorite of our good friend Dr. Alexander Elder.  He discusses it extensively in his books.  It is a trailing stop overlay meaning that it tries to determine a good price level for exiting an existing position.  In that regard, it is similar to Welles Wilder's Parabolic SAR overlay.  Here's what it looks like in action:

Notice that the red line on this chart could have been used effectively as a trailing stop-loss during the uptrend.

For more details on Chandelier Exits including how they are calculated and used, please see our new ChartSchool article on them.

- Chip

The daily chart shows the critical break below long-term support at about 1540. The bounce off the low is unlikely to be the beginning of a new rally, rather we think it is a short-term consolidation, like a reverse flag or pennant.

The weekly chart gives the best view of the trading range that has kept prices contained for over a year and a half. We thought that this was a price consolidation that would eventually lead to higher prices, so the failure of support was disappointing and has very negative long-term significance.

On the charts above you will notice that both the daily and weekly PMOs (Price Momentum Oscillators) are at the oversold side of the range shown on the charts, but a longer-term view below shows that neither PMO is challenging historical lows.

The monthly chart below gives the best perspective for gold's long-term prospects. While the top is broader than usual, we believe that we are seeing a collapsing parabolic. The "parabolic" is the gradually steepening curve as prices rose from the 2001 lows to the 2011 top. Typically, parabolics collapse back into their original basing range. For gold this range (based upon the price history visible on the weekly chart just above) is between about 250 and 500. I agree that doesn't sound reasonable, but it does fit normal expectations for a parabolic collapse.

In our opinion, the most obvious support level at this point is at about 1000. Support could easily be found higher than that, but for now let's stick with the obvious when estimating where a solid bottom could be found.

Conclusion: Long term, the trend for gold is down, and the condition, based upon the monthly PMO, is very overbought; therefore, we have to assume that outcomes will be negative until some improvement is seen.

Our attention has turned to the crude oil market, where a rather large "head & shoulders" top pattern is in development. The focus is upon how prices challenge and hold the 300-week moving average, and if not...whether neckline support is violated. A breakdown of these levels would lead to a virtual free-fall in prices towards the $51 target level.

Of course we are ones to wonder what the world economy and the world's stock markets would look like under such a scenario. If past is prelude, then we should expect a rather nasty correction...and it very well may be quick and sharp. Aware is prepared.

Good luck and good trading,
Richard

The 7-10 YR Treasury Bond ETF (IEF) is challenging resistance and a breakout would have negative consequences for stocks. Stocks and Treasury bonds are negatively correlated because they march to the beat of different drummers. Treasury bonds move higher because of deflationary pressures, signs of economic weakness or both. We could be getting a little of both recently. Gold, oil and copper fell sharply in April and this is more deflationary than inflationary. Economic reports have been soft over the last few weeks and first quarter earnings have largely disappointed. After earnings season, our next big batch of economic reports will hit in early May.


Click this image for a live chart

The first chart shows the 7-10 year T-Bond ETF (IEF) moving to the top of a trading range that extends back to June 2012. The ETF moved sharply higher from February 2011 to June 2012 and then traced out a flat trading range. Technically, a flat range after an advance is a bullish continuation pattern and a breakout here would signal a continuation higher, which would be negative for stocks. The indicator window shows MACD turning up, breaking its signal line and moving into positive territory. Momentum is bullish. The second chart shows the 20+ Year T-Bond ETF (TLT) breaking above the upper trend line of a falling wedge. This surge and breakout signal a continuation of the bigger uptrend. It would take a quick move below 120 to negate this breakout.


Click this image for a live chart

Good Trading!
--Arthur Hill CMT

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:

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.

Hello Fellow ChartWatchers!

StockCharts continues to grow and expand, providing more value for its users (hey! that's you!) for free.  Here are three great improvements we rolled out last week:

1.) Stocks & Commodities Articles for StockCharts Members

Our "Search" feature now automatically includes results from the complete archives of Stocks & Commodities magazine.  Members can click on any of those results to see a PDF version of the article in question.  Some of these go back as far as 1982!

In addition, members can now click on the "Stocks & Commodities" link on the right side of the "Members" page for free access to the current editions of S&C as well as the companion magazine Working Money.

And soon, watch for relevant S&C links to be included at the bottom of our ChartSchool articles!

Thanks again to Jason Hutson and his crew for making this happen.  S&C has been an amazing resource for the technical analysis community for decades and we are thrilled to have this new partnership.

2.) Economic Indicators Added -

We've started rolling out the first of many economic indicators on our website.  These new symbols all start with two dollar signs ($$).  Most are monthly datasets from the FRED website.  Here's an example that uses the new $$GDP symbol (the gray area plot):

(Click the chart for a larger version.  PRO users click here for a live version.)

To see the complete list of the economic datasets we currently have, just type "$$" into the "Create a Chart" box at the top of any of our pages.  Here's the current list (but keep in mind it will be expanding over the next couple of days and weeks):

3.) Extra Members Can Now Create and Chart Their Own Personal Data -

Last year we rolled out our User-Defined Index feature to our PRO subscribers.  We've now made a limited form of UDIs available to all Extra and ExtraRT members.  Those members can now create and use a single UDI called "@MYINDEX" by clicking on the new "User-Defined Index Workbench" link on the "Members" homepage.

A User-Defined Index allows you to upload and chart data from a spreadsheet.  The data can contain any time-series information you want.  It is a really powerful feature.  Here are some articles that illustrate how it can be used. 

4.) Bonus Improvement #4 - More Speed!

As I mentioned last time, we are continuing to upgrade our datacenter and the new servers are making a noticable improvement in the time it takes to generate charts during market hours.  Check out these charts from our independent monitoring service Pingdom:

The top chart shows the average time it took for us to generate charts during March.  The bottom charts shows the times during the first days of April.  See the nice drop on March 30th and 31st?  It represents a roughly 20% improvement in the time it takes for us to send out a SharpChart!  That improvement has continued in April as well. (Click here to see for yourself.)  And we're not done yet - hopefully we can squeeze out even more speed soon.

Do you want even more improvements?  Trust me, we're working on some doozeys.  Just stay tuned!

- Chip

 

P.S. If you are feeling overwhelmed by the sheer number of features StockCharts offers, why not join me for a personal tour of everything we have to offer?  I'm personally giving our SCU 101 seminar in several locations throughout the country this year including Long Beach, Seattle, Toronto, New York and Dallas.  Click here for more info.  I hope to see you at one of these events soon!

 P.P.S.  Oh yeah, one more thing...  Have you picked up your copy of Arthur Hill's first book?  What?  You didn't know Arthur Hill published a book?  OK, that's my fault for not making a bigger deal of it.  But now that you know, why not take advantage of our 50% special on Art's book?  He'd really appreciate it!  Just click here for details.

This is the same headline used in my March 21 message which showed how falling commodities were hurting stocks of countries that produced commodities. A rising dollar causes foreign stocks to underperform U.S. stocks, which has been the case since the dollar bottomed during 2008. A rising dollar hurts commodity prices. As a result, foreign countries that produce and export commodities take a double hit. The March 21 message showed the close positive correlation between commodity prices and Brazil and Canada. Today, I'm adding Russia to the mix. Chart 1 compares the trend in the CRB Index (bottom line) to Brazil (blue line), Canada (red line), and Russia (green line) iShares since 2009. You can see the visual correlations. All four markets rose together until the spring of 2011. The CRB Index peaked that spring (thanks to a rising dollar), and has continued to weaken. Brazil, Canadian, and Russian stock ETFs peaked at the same time and have continued to weaken along with commodities. Russia's stock market is especially sensitive to trends in energy, which is its biggest export market. Relative weakness in the Chinese stock market (which is the world's biggest importer of commodities) has also hurt demand for commodities and country stocks that produce them.

April has not thus far been very kind to the economic bulls. The various world and US PMI reports have been "less-than-anticipated", while employment is showing weaker-than-expected figures via the weekly jobless claims, ADP private payroll and non-farm payrolls. This economic deceleration is simply part and parcel of the lagged effects of the payroll tax and the sequester. Moreover, this weakness has pushed down  10-year yields down to 1.69% from its recent highs of 2.06%, a rather large percentage move to be sure, and not far off the lows at 1.394%. Ultimately, 10-year note yields are headed to new lows below this level; and this "should", and we stress "should" be the "final move" that will provide for a generational low in yields.

Technically speaking, the downtrend in 10-year yields remains in place, with the 20-week stochastic having turned lower from overbought levels. This rollover supports a decline yields into lower trendline support, which at this point has three very clear touches...thereby solidifying its importance as major support. Too, we should note that 10-year yields tend to bottom out at -50% below the 200-week moving average, which given its current reading of -32%...leaves roughly -18% of a decline before major support is found. This figures to be at 1.38%...slight new lows. However, we do believe that once these new lows do print - then an a minimum upside mean reversion target of 2.65% lies in the future.

So, as we enter the "sell in May and go away period", then perhaps one of the "biggest" trades on the technical landscape will see 10-year note yields finally rise on the order that everyone has expected over the past several years...but only after new lows print. And, it is an inevitability that prices will trade back to, and then above the 200-week moving average (only rarely in the past 12-years); and our bet it that the move off the lows will begin in 2013.

Good luck and good trading,
Richard

We have a few wonderful indicators we can use to judge the overall health of the market. The problem for the technician is when to say, "I'm Out!"
Lets compare the $TSX to the $SPX using these two charts to analyze the broader picture. Here are the links. $TSX, $SPX

The blue vertical lines are placed when the index fell below the 10 week or approximately the 50 DMA line.  The $TSX looks like it is ready to breakdown here, with the exception of the stocks above the 200 DMA.   That still looks strong as does the Bullish percent. But both are at levels where markets have broken down before.

The $SPX appears stronger. Period. The only signs of weakness are the stocks above the 50 DMA appear to be making lower highs.  The Ratio of Stocks above the 50 and the 200 DMA seems to be weakening to a level where things normally break down from.

Looking back up at the stocks above the 200 DMA (black) area, you probably don't want to wait until that number starts falling.  But a drop below 80% would be ending a trend I think.  The % of stocks still above their 50 DMA is strong.  The level was almost 10 % lower midweek so there is some weakness.

Good Trading,
Greg Schnell, CMT

The Directional Movement Indicators have equalized as trading turns flat for the Dow SPDR (DIA), but the overall trend remains up as the ETF tests its first support zone. Let's look at support first. DIA hit 144 on March 11th and then traded flat the last few weeks with several crosses of this level. DIA dipped to 144.05 in early trading on Friday, but rallied after the weak open and closed above 145. Support in the 144 area extends from the mid March consolidation. A move below the consolidation lows would break support and argue for a deeper correction, perhaps to the 138-140 area. 


Click this image for a live chart.

The indicator window shows the Average Directional Index (ADX) along with Plus Directional Movement (+DI) and Minus Directional Movement (-DI). +DI (green) crossed above –DI (red) on December 5th and exceeded +30 to kick off the current uptrend. I am using 30 to confirm crossovers and reduce whipsaws. Notice how +DI has moved above/below 30 since December, but –DI has yet to exceed this level. Most recently, the indicators converged in the low 20s as directional movement flattened and –DI crossed above +DI this week. Even so, the bulls still have the edge because +DI was the last one to exceed 30. –DI would have to break above 30 to confirm this crossover and reverse this edge. You can read more about these indicators in our ChartSchool.

Made in Manhattan!
--Arthur Hill CMT

A quick look at the weekly gold chart shows that the metal is holding above a line of support that goes back over a year.

In contrast, the XAU (gold mining stocks) has formed a bearish head and shoulders pattern, which executed when price dropped below the neckline earlier this year. We can see that the breakdown was followed by a brief snapback before the decline continued. At this point the minimum downside target would be the support line drawn from the October 2008 low.

It would be useful to note how dissimilar the two price lines are. One would think that the stocks would be closely related to the metal, but the charts will quickly clear up that misconception. (Prices are intraday.)

Conclusion: While for the time being gold has bounced off long-term support, the XAU has signalled that there are still lower prices ahead for gold mining stocks.

Hello Fellow ChartWatchers!

We're starting to get "Spring Cleaning Fever" here at StockCharts.  Can you tell?

Exhibit #1:  This!  This new newsletter design!  What do you think of it?  We reworked things to make the newsletter more readable, more printable and more informative overall.  In addition, we'll be converting all of our old newsletters into this new format and putting them in a huge archive section of our site for posterity.  Watch for that in the next month or so.

Exhibit #2: Did you notice the speed-up in our servers last week?  Probably not - our site has always been very fast - but we did install a new collection of 28 super-fast servers from IBM and they are going to ensure that things remain super-fast for the foreseeable future even as our membership continues to grow.  For example, these new servers have made the Scan Engine 16 times faster than before!

Exhibit #3: Finally, we're cleaning off another spot on our shelf for the latest "Best Technical Website" award from the readers of Stocks & Commodities magazine - for the 12th year in a row!  We are very, very honored to receive this award again and - unlike Google - we pledge to continue improving things (for example, Exhibit #2 above) for the foreseeable future.

So, I know it is still early in the year, but spring is in the air here at StockCharts.  Again, we hope you like the new email format for the newsletter.  Click here and let me know what you think!

- Chip

 

 

Personally, I love the MACD.  It's one of my favorite technical tools when trading.  It's not perfect - nothing is - but it does provide us a snapshot of momentum of a stock or index.  The MACD is nothing more than the difference between two exponential moving averages, with the standard being the 12 period and 26 period EMAs.  I follow this standard MACD.
 
As a refresher, here's a daily 6 month chart of Apple (AAPL) with the standard 12 day and 26 day EMAs reflected on the chart:
 

That is a static look at AAPL's MACD as of Friday's close.  By changing the settings on the moving averages to the 12 day EMA and 26 day EMA, you can see clearly how all of the MACD-related numbers tie together.  But it's the ebbs and flows of the MACD (momentum) that really grab my attention in order to assess risk.
 
Any time the price of a stock moves up, you should expect the short-term moving average to rise quicker than the long-term moving average.  To the contrary, a declining stock price should see its short-term moving average falling faster than its long-term moving average.  Once that relationship changes and divergence turns to convergence, it's a warning that the momentum could be waning and the RISK of a quick shift in trend direction should be considered.  That's the real beauty of the MACD.  It's not just a lagging indicator.  It also can become a very strong PREDICTIVE indicator.
 
In my February 16th article, I discussed the potential risks of long-term negative divergences and how they might potentially influence the short-term direction of 5 S&P 500 stocks that were moving higher.  The problem was they possessed the signs of slowing momentum - ie, long-term negative divergences.  All 5 of these stocks suffered temporarily as their price fell and their MACD began moving back towards centerline support.  In my view, that's all I'm looking for to the down side - a 50 day SMA test and/or a MACD centerline "reset".  Below is the chart of one of these 5 stocks, Tenet Healthcare (THC), which also happens to be one of the strongest stocks in the market of late.  Its SCTR rank is among the highest in the market.  But check out its chart:
 


This is a perfect example that shows a long-term negative divergence offering us a warning of potential weakness ahead.  In addition to the weak momentum in price action, look at the lack of volume that accompanied the breakout of THC in the first couple weeks of February. Light volume breakouts are another sign of slowing momentum and further corroborates the negative divergence on the MACD.  Taking a more cautious approach to THC in mid-February - either by selling shares and moving to cash or possibly selling a covered call - would have reduced the risk of holding and enabled a long trader to hold onto profits generated through mid-February.  Re-entry on the subsequent 50 day SMA test would have saved perhaps 8-10%.
 
Remember, long-term negative divergences are not necessarily a bearish development, especially in an otherwise bullish market environment.  But they do signal that short-term risks are elevated and that it's time for the short-term trader to alter his or her trading strategy accordingly.  And for those looking to take an initial long position in such a stock, it would probably behoove them to wait until a 50 day SMA test and/or a MACD centerline approaches before committing capital.
 
Happy trading!
 
Tom Bowley
Chief Market Strategist
Invested Central

The stock market's uninterrupted gains in recent months is giving rise to talk of a bubble, and perhaps this is the case within the scope of time. It is still far too soon to determine this, although further gains will cause us to consider sharply higher prices within the context of anemic economic growth. With this said, we are watching the Crude Oil futures market rather closely, for on a monthly basis - a bullish pennant pattern is forming that projects sharply higher prices...to new highs above the $150/barrel level. This would come as a surprise to many, but the fact of the matter is that there is likely to be a series of rolling euphoric moves across all asset classed stocks, commodities and bonds. Right now, it is simply stocks. But we are starting to see signs of more interest in the commodity groups than we have previously.

Therefore, we are interested in various energy stocks to participate in this rally, which by-the-way can occur within the context of a lower stock market just as occurred in 2007-2008. Our choices are several of the "laggards" such as Apache (APA), National Oilwell-Varco (NOV) and others. If there is risk in the long energy trade, then we would look for a monthly close below the 50-month moving average at $85/barrel level. In effect, this would suggest a mean reversion exercise towards the 200-month moving average that occurs roughly every 7-years. In this environment, we hate to think of what the world economy looks like, but suffice to say there will likely be very few long hiding places.

Good luck and good trading,

Richard

The monthly bars in Chart 1 plot the U.S. Dollar Index since 2001. Two major trends are seen on the chart. The first is the major downtrend in the dollar between 2002 and 2008. During 2008, the USD broke its six-year down trendline which ended its bear market. Since then, the USD has trended sideways in what appears to be a major bottoming pattern (see parallel lines). To complete that bullish pattern, the USD would have to clear its 2009-2010 highs. Although that hasn't happened yet, it isn't too soon to consider the possible implications of the dollar becoming the world's strongest currency for the first time in more than a decade. The most obvious implication is that the dollar will do better than most foreign currencies. That makes the dollar a much better bet. Chart 2 shows what has happened to the world's two biggest foreign currencies since the dollar bottom during 2008. The Euro peaked that year and has fallen since then. [The Euro has the biggest weight in the USD]. The orange line shows the Japanese Yen peaking during the fourth quarter and tumbling during this quarter. Forex traders have been buying the dollar and selling the Euro and yen (as well as most other foreign currencies). Currency trends reflect how the world views economic prospects for the various economies. Dollar strength suggests that the U.S. economy is in better shape than most foreign markets. There are other intermarket implications of a stronger dollar. One of the most obvious is its impact on commodity markets.

Strolling through the the mid month charts, I came across this ETF.

This ETF represents Municipal Bonds.  MYI

It has only moved below its 40 WMA twice in the last 5 years. Till this week. It marks the third time.
In 2007 it marked a drop early in the year and could not stay above the black line.
It tried twice in 2008 to get back above but failed in June and July. It was important.
In late 2010, it plummeted below the line, while the stock market went on a final run into April before correcting 20% in 2011.

This fund has shown more red in the last 3 months than at any time in the last 2 years.
At this point, its a heads up that something is going on in the Municipal Bond Market. We'll stay tuned to see if it has broader implications.

Good Trading,
Greg Schnell, CMT

The Nasdaq 100 ETF (QQQ) and the Technology SPDR (XLK) have been underperforming the broader market, but both remain in uptrends since mid November and are holding their March gaps. Relative weakness stems from Apple, which is the biggest component for both ETFs. Microsoft, which accounts for over 7% of each ETF, has also been underperforming the broader market for several months. The first chart shows XLK breaking above resistance at 30 with a gap-surge in early March. This breakout is holding with broken resistance and the gap marking a support zone. A move below 29.75 would fill the gap and negate the breakout. RSI confirms that the cup is half full. Notice that this momentum oscillator held the 40-50 zone in December and again in February. Momentum favors the bulls as long as RSI holds above 40. I suspect that RSI would break 40 if/when XLK breaks the December trend line.




The second chart shows QQQ with similar characteristics. A small flat consolidation formed after the surge. This looks like a flag, which could be flying at half-mast. A breakout would signal a continuation higher and target a move to around 70. The flagpole extends 3 points (±66 to ±69) and this amount is added to the flag low (±68 + 3 = 71).

Happy St Paddy's Day!
Arthur O'Hill CMT

As Yogi Berra once said, "You can see a lot by just looking," and there is a lot to see on the following chart which shows the S&P 500 Index advance-decline lines for breadth and volume. I have annotated some of the variations of divergences and confirmations which can occur. Let me briefly discuss them.

First, I generally limit comparisons to periods of no more than about a year, because I don't think that comparisons over long periods are valid. For example, I am not concerned that the current volume level has not exceeded the 2007 volume top.

1999-2000: We had mixed signals. Breadth diverged negatively, while volume confirmed the price high.

2002: There was a reversal divergence on breadth and a negative divergence on volume - a thoroughly negative picture.

2007: There were negative divergences on both breadth and volume. Not a good outcome.

2011: A reversal divergence on breadth and a negative divergence on volume.

The down-pointing arrows identify some of the times where a new high was confirmed by one or both of the advance-decline indicators. In those instances the price top was followed immediately by a price decline, or the confirmed top was followed shortly by a slightly higher top, marking the high before a significant decline. (Note: There are many other confirmations that resulted in positive outcomes. I'm only trying to illustrate that this not always the case.)

Conclusion: Indicator divergences should always inject a note of caution into our outlook, and it is best when the indicators confirm new price highs, but a confirmation doesn't always mean that there is no immediate danger.

The past two trading weeks in the gold market has been rather dramatic:  a sharp decline followed by a sharp rally and then a recent test of the lows. The end result - quite a bit of wailing and gnashing of teeth. And, we think the wailing shall become louder before gold finally bottoms and turns higher towards new all-time highs. Quite simply, gold is in the process of providing those longs accumulated over the past 2-years with losses, and a resultant "puke point" lies ahead.

Technically speaking, we are looking for a test of the rising 150-week moving average at $1539 - much in the same manner as was seen during late 2008. However, one need understand that this moving average is likely to be violated for a short period of time, and it is likely to test the rising 40-month moving average currently trading at $1494. So, we have a zone in which to consider buying gold for an initial position; and then we would use a breakout above the 30-week moving average to add to the trade and get very very aggressive. Until then, we can wait for the yellow dog to bark.

Good luck and good trading,

Richard Rhodes