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.

METALS STILL BULLISH

Since the beginning of the year, we've seen both Gold ($GOLD) and her sister metal Silver ($SILVER) rally; but we've seen Gold under-perform during this rally. This is exactly what should take place in a metals bull market. But that said, the Gold/Silver Ratio remains at a very critical area in our opinion, for up to this point - it has tested its overhead 600-day moving average and turned lower. Again, this supports a metals bull market, for silver is the leader; and history bears this out.

But what if this changes,? Rightly or wrongly, we are concerned about whether this is simply a correction from the 600-day, upon which another assault and perhaps breakout above this level is about to take place. If so, then the current good bullish feeling in the metals market shall dissipate rather abruptly, with traders running for the hills as the probability would be higher that Gold would then test the $1300-$1350 zone where the 150-week moving average crosses (this dynamic was shown in the CWW publication two weeks ago).

Therefore, in taking into account where Gold prices are today at $1665, and the position of the ratio - we would need to see gold rally strongly over the 30-week moving average at $1687 - AND - we would need to see silver outperform. If these two circumstances were to take place, then we would expect new highs in both Gold and Silver in the months ahead.

Good luck and good trading,
Richard

HOUSING RECOVERY?

The market rally on Wednesday was driven in part by a surge in housing stocks, which was triggered by a favorable housing report. Since the fundamentals of the housing market are not too thrilling, regardless of short-term gains, my curiosity was piqued and I pulled up some charts.

The daily chart of the Dow Jones US Home Construction Index, which is one of a set of 100 Dow Jones US sector indexes we track, shows that Wednesday's rally was a small extension of a +78% up move that began after the Index hit rock bottom in October 2011. This is good but how does this rally present in a larger perspective?

I would normally zoom back to a weekly bar chart, but in this case the monthly bar chart is much more helpful, and the current rally looks rather insignificant compared with what has gone before. First, between 2000 and 2005 there was a parabolic advance of about 1,000%, perfectly depicting the frenzy of the housing bubble. Then between 2005 and 2008 we can see all the air coming out of the bubble. Since the bottom in 2008, the Index has entered what is called a basing pattern, and it typically becomes a "long base" because it can go on for many years.

Bottom Line: The purpose of the base pattern is to work out the excesses of the parabolic rise and collapse that preceeded it, a process that normally takes many years to complete. The range annotated on the chart probably represents the range of movement for the Home Construction Index for the next decade or more. There is money to be made playing the range, but I don't expect the top of range to be significantly exceeded any time soon.

Treasury Yields Surge ahead of Fed Meeting

The FOMC meets next Tuesday-Wednesday and will make its policy statement Wednesday afternoon. With stocks surging and recent economic reports buoyant, the bond market may be looking ahead to this meeting with trepidation.  The first chart shows the 10-year Treasury Yield ($TNX) rising sharply the last three day. Treasury bonds rise when treasury yields falls.  Overall, the chart shows $TNX forming a trough at 1.7% (17) in late September and surging in October, which is when the stock market surged. Note that long-term treasury yields and the stock market were positively correlated most of the last 12 months. This means they moved in the same direction most of the time. Turning back to the price chart. The 10-year Treasury Yield ($TNX) declined with a falling wedge in November-December and held above its October low. $TNX found support just above 1.8% the last few weeks and surged back above 2% this week. Despite this surge, $TNX remains just short of a breakout. Further strength above the early January high would produce a breakout to signal a continuation of the October surge. This would target a move towards the next resistance zone around 2.3-2.4%. This would be bullish for stocks - provided the positive correlation between stocks and treasury yields continues. Note that treasury yields and treasury bonds move in opposite directions. Therefore, an upside breakout in the 10-year Treasury Yield would be bearish for the 20+ Year T-Bond ETF (TLT).



Click this image for a live chart.

Good trading,

Arthur Hill CMT

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.

DOWNSIDE VIOLENCE IN THE GOLD MARKET

The downside violence in the Gold market as abated for the the time being given the reallocation and repositioning for the New Year. There are many the recent drop is sufficiently of the cathartic-type that will send prices to all-time highs, for we all know that "all the current roads lead to inflation - at some point" as the worlds' central bankers continue to print money. However, we are of the opinion that gold prices have further downside work to do before a strong bottom is formed that will indeed be sufficient for higher highs.

Our opinion stems from the gold chart, and the fact that gold has clearly broken below its 30-week moving average. In the process of doing so, a "head & shoulders" top pattern was confirmed, which now measures lower into $1280-*to-$1300 zone. This is currently where the 150-week moving average, which is where the 2008 correction feel to and then turned prices higher. Another interesting historic technical metric, the percentage below the 30-week moving average in which gold generally bottoms is between -12% and -17% below it - which would put prices in the range of $1476 to $1392. This zone was not tested on the most recent decline, so there is likely more downside forthcoming. .

Therefore, we are most interested in the 150-week moving average, and where it trades as time goes forward.

VOLATILITY HITS SUPPORT WHILE THE S&P 500 AND BANKS HIT RESISTANCE

High volatility is generally associated with declining equity prices.  The inverse is true as a declining level of volatility emboldens the bulls.  Therefore, I follow the VIX continually to get a sense of DIRECTION.  Clearly, the volatility index (VIX) has been trending lower over the past few months.  So it should come as no shock that the fourth quarter of 2011 produced the best quarterly results on the Dow Jones in more than a decade.  But one week into 2012, the VIX is hitting support.  Check out the chart below:



A rising VIX is bad news for bulls.  And after the huge move lower in the VIX, it hit support on Friday.  A simple bounce off oversold VIX conditions would likely lead to selling in equities just as we near resistance on a couple key indices.  The following shows the near-term resistance that the bulls are facing on the S&P 500 as a new trading week unfolds:



It seems that each time that stochastics and RSI hit 90 and 60, respectively, the bulls run into trouble extending the rally.  Currently, that's where both of our momentum oscillators reside.

A key sector in the S&P 500 is financials and the performance of the banking industry is important to the overall health of the market.  Banks have also touched a critical resistance level that will need to be negotiated if the recent rally is to continue.  Take a look:



The banks have an opportunity here, as they did in late October, to build on strengthening relative momentum.  Banks failed in October, but will they be able to sustain their recent strength?  The MACD once again has crossed above the centerline, which hasn't happened often the past several months.  But more important than improving relative strength is the potential of an actual price breakout above key price resistance.  A price-volume breakout trumps all other technical indicators in my opinion.  Therefore, keep a very close eye on the 42 resistance level on the Bank index.

Many traders enjoy the prospects of higher returns by trading leveraged ETFs.  While I believe their use should be limited, there are occasions when significant support or resistance are hit where they make sense from a reward to risk perspective.  Given the level of resistance on the Dow Jones US Financial Index, we could be approaching a time to look at the UYG or SKF, depending on whether a breakout is made or not.  I've made the argument for considering a position in these financial juiced ETFs and am happy to share it with you.  Click here for more details.

Happy trading!

A TIMELY BOUNCE FOR GOLD

After reaching an all-time high in August, gold has corrected about -18%, but a recent bounce prompts us to take a closer look to see if the correction could be over. The most encouraging technical evidence is on the weekly chart.

Note how the recent low occurred just above the long-term rising trend line. From the beginning of the correction I thought that this trend line was a logical downside target. Whether or not the bounce off this line is the beginning of a new up leg destined to take out the August highs, has yet to be determined.

The fact that the support has held is very positive, but the weekly PMO (Price Momentum Oscillator) configuration is still negative -- falling below its EMA, and still somewhat overbought.

Shorter-term the daily PMO below is oversold and has bottomed, but the price line has encountered resistance at the 200-EMA.

Our Trend Model for gold is currently neutral (in cash or fully hedged), and a new buy signal will not be generated until the daily 20-EMA crosses up through the 50-EMA. That will probably take a few weeks if prices continue to rise.

Bottom Line: The correction has been of sufficient depth and duration that the bounce off long-term support presents a short-term buying opportunity for those anxious to exploit the next leg up, assuming that there will be one; however, not enough tumblers have fallen into place to justify anything but very tight stops.

 

NEW eBOOK FROM ALEXANDER ELDER, EUROPEAN COVERAGE ENDING MARCH 1st

NEW eBOOK FROM ALEXANDER ELDER AVAILABLE EXCLUSIVELY FOR STOCKCHARTS USERS - Dr. Alexander Elder has just published a new eBook called "To Trade or Not to Trade, A Beginner's Guide".  It is now available for instant download in the StockCharts Store for only $8.00.  This version contains information that is specific to the use of StockCharts.com and is only available here.  Dr. Elder has written several classic books on how to trade succesfully including Come Into My Trading Room and Trading for a Living.  This latest eBook can help anyone become a better trader and may be the best $8 you ever spent.  Download your copy today.

COVERAGE OF EUROPEAN STOCKS AND INDEXES WILL END ON MARCH 1st - As Chip announced in his blog yesterday, we have not had enough demand for our European charting services - ExtraRT/EU and ExtraRT+ - to justify continuing them.  Unfortunately the high cost of that data combined with the low number of subscribers means that we have to discontinue coverage of all LSE, Euronext and German stocks and indexes after March 1st. Please read Chip's blog post for more details.

LOS ANGELES SCU SEMINAR ALMOST FULL - Only a couple of slots are still open for our first ever StockCharts University (SCU) Seminar at the Marina del Rey Marriott in sunny Los Angeles this March.  Have Chip Anderson show you how to use StockCharts to analyze the market and find great stocks.  Click here for more information.

CHARTCON 2012 EARLY BIRD REGISTRATION ENDS ON JANUARY 31st - Don't miss our biggest event of the year, ChartCon 2012 with John Murphy, Carl Swenlin, Arthur Hill, Tom Bowley and Richard Rhodes this August in Seattle.  Early Bird pricing is in effect only until the end of this month.  Don't delay!  Click here for more information including dates and the agenda.

SECTOR ROTATION REVIEW 2011

Hello Fellow ChartWatchers!

Happy 2012!  During his ChartCon 2011 presentation on Intermarket Analysis, John Murphy presented a great chart showing the state of Sam Stovall's Sector Rotation model as of July 2011.  Let's take an interactive look at how things have changed since that time.

First off, a quick review:  Stovall's model says that the stock market tries to anticipate the business cycle which results in certain sectors outperforming the market at different points of that cycle.  By reversing that process, we can determine where we are in the two cycles by seeing which sectors are out performing the rest of the market.  Here's the diagram that shows those cycles and sectors:

So the order - moving from Market Top to Market Bottom and back to Market Top again - is:

• Energy
• Staples
• Healthcare
• Utilities
• Finance
• Cyclicals (aka Consumer Discretionary)
• Technology
• Industrials
• Basic Materials

If you want to know where the market is going next, you need to study the relative performance of those sectors while keeping that order in mind.

Fortunately StockCharts.com has a great tool for doing just that, our S&P Sector PerfChart.  You can find a link to that tool in the middle of our home page just below the list of "Consistently Popular" ticker symbols.  Since this is going to be an interactive look at sector rotation, you might as well take a moment, open a new browser window, find that link now, and click on it.  (Printing out this article might also be helpful.)

So... what point are we currently at in the sector rotation model?

Here is what you should see when our S&P Sector PerfChart first appears:

It's a bit messy at the moment - we'll clean it up in a second - but this is showing you the percentage performance of the nine S&P Sector ETFs over the past 200 days RELATIVE TO the S&P 500 Large Cap Index.  The S&P 500 index is both hidden (see the white box beside its name in the upper left corner?) and the "baseline" for the chart - meaning that the performance of the S&P 500 has been subtracted from the performance of the other lines.  (The fact that its name is surrounded by gray indicates that the S&P 500 is the baseline.)

So, for example, this chart says that over the past 200 days the Utilities ETF (orange line) has outperformed the S&P 500 by roughly 17.5% while the Financials ETF (brown line) has underperformed $SPX by about 14%.

So, how can we relate this chart to Stovall's sector rotation model?  With one simple click.  Take your mouse and click on the "Histogram Mode" button in the lower left corner of the chart.  It's the button that looks like this:    You should then see this chart:

Notice that the bars on this chart are in the same order as the sectors in the Sector Rotation model.  In fact, in a perfect world, these bars would form a cycle wave similar to what we show on Sector Rotation picture above.  That rarely happens but this picture is still very useful.  What is it telling us?

It is telling us that the three key RECESSIONARY sectors - i.e. Consumer Staples, Healthcare, and Utilties - have outperformed the other sectors significantly over the past 200 days.  Those sectors are clearly shown on this chart to be doing better that the rest.  Based on this chart, we could conclude that the economy is still mired in a recession and the stock market can be expected to head lower as a result.

But there's a "catch" to Sector Rotation analysis.  Did you spot it yet?  Why use 200 days?  Does simply looking at the performance of S&P 500 stocks between March 24, 2011 and now give us a complete picture of things?  Of course not.

The timeframe that you choose to look at is critical when doing Sector Rotation analysis.  There are three general approaches for selecting a good timeframe:

• Choose a standard interval like 200 days.  100-days and 45-days are also commonly used as are 12-months and 6-months.
• Choose an interval with "significant" calendar-based start and end dates such as Year-to-Date, a fiscal quarter, or January 1st to June 30th.
• Choose an interval that spans "significant" changes in the market.  We'll use this approach in just a moment.

As you might remember, three days before John gave his ChartCon talk in August of 2011, the stock market had a significant drop and the market started behaving differently.  You can see that on your Sector PerfChart by following these steps:

1. Click on the "Line Mode" button in the lower left corner of the chart to show us the lines again.
2. Click on the gray "S&P 500" button in the upper left corner of the chart to show us the absolute performance lines rather than the performance relative to $SPX.

You should now be looking at this chart:

Notice how the sector lines appear to diverge differently after the August 10th drop?  That's a signal to us that something may have changed and we should look at the period from then until now to see if anything did change.

If you are following along at home, click the words "S&P 500" in the upper left corner of the chart to re-enable baseline mode with $SPX as the baseline.

Next we want to move the starting date of the chart from "24 March 2011" to "10 August 2011".  You can change the date with your mouse however it is much more precise to change dates using your keyboard.  Here's how:

1. Click your mouse once anywhere in the middle of the chart (this is a precaution to make sure that your keyboard is "connected" to the PerfChart tool).
2. Press and hold down the SHIFT key on your keyboard.
3. Press the RIGHT ARROW key on your keyboard once.  You should see the starting date of the chart (upper left) change to "25 March 2011" and the duration slider (lower right) change to "199 days"
4. Now, with the SHIFT key still held down, press and hold the RIGHT ARROW key until the start date says "10 August 2011".  Again, this is a slower but more accurate way to change the date.

Your chart should now look similar to this:

Now, let's "zoom in" on just the recession-oriented sectors.  Click on the small, colored boxes at the top of the chart to turn off the lines for Consmr Discr, Technology, Industrials, Materials, Energy and Financials.  You should end up with something like this:

So this shows us the while Staples, Healthcare and Utilities are still in positive territory, they have not been as strong during this time period as they were over the 200-day period.  That might be good news for the market as these sectors need to weaken before another bull market can begin.  We need to dig deeper however before we can make that conclusion.

Now, let's add each one of the other sector lines back onto the chart one at a time and see if any other stories emerge.  Click on the small box for the Financials SPDR.  The brown line for the Financials should reappear:

The Financials are still underperforming.  An optimist might point to the uptrend in December, but that still has a ways to go in order to prove itself.  Now click on the small brown box again to turn off the Financials line, then click on the small box for "Consumr Discr SPDR" (aka the Cyclicals):

Now this is more promising.  The Cyclicals have to strengthen in order for any market bottom to be taken seriously and what the blue line on this chart is saying is that things are s-l-o-w-l-y getting better in terms of consumer spending.  The progress is fragile however and not strongly convincing.

Now turn off the blue Consumer Descretionary line and turn on the green Technology line.  You'll see that Tech stocks are all over the place and, on average, have moved sideways over the past 100 days.

Turn on the pink Industrials line and you'll see that it is a bit of a conundrum.  It's been relatively strong over the past 100 days which goes against what our Sector Rotation model says should be happening.  Industrial stocks should not be consistantly strong until a recovery is well under way.  It is not that unusual for these kind of things happen however when doing Sector Analysis.  You - a human being - need to consider all of the evidence and decide "Is there something other than sector forces that could be causing this 'rogue' sector behavior?"

The light blue line for Basic Materials is very weak - which is what our model expects.  The black Energy line has been very volatile during this period - something that's not unexpected since the market is rotating away from that sector.

All of this information points to an economy that is trying to recover but hasn't really gotten started yet. These lines and the relationships between these sectors needs to be watched closely over the next couple of months to see if more signs of recovery appear or to see if things regress.

Recently, several people wrote in and said that they were not renewing their StockCharts subscriptions because "the market is not worth watching right now."  I couldn't disagree more strongly.  NOW is the time to be watching the market like a hawk because if things do pick up, your first signal will come from technical charts like these.

Take care,
- Chip

P.S. To hear John's 2011 ChartCon presentation for yourself - along with a ton of other great presentations - pick up a copy of the ChartCon 2011 DVDs from our online store.

QQQ Starts the Year Showing Relative Strength

The Nasdaq 100 ETF (QQQ) is showing relative strength this year with a triangle breakout and surge above its early December high. On the daily candlestick chart below, QQQ surged in October and then consolidated in November-December. This consolidation started wide in November and then narrowed in December as a lower high and higher low formed. This year’s triangle breakout signals a continuation of the October surge with the 2011 highs in the 59-59.5 area marking the next resistance zone. The gap and the lower trendline of the triangle mark support in the 55-55.5 area.

Click this image for a live chart.

The indicator window displays the price relative (QQQ:SPY ratio), which shows the performance of QQQ relative to the S&P 500 ETF (SPY). QQQ outperforms when this ratio rises and underperforms when this ratio falls. Notice how QQQ underperformed from mid October to late December. The ratio turned up at the end of December and broke the trendline extending down from the October high.  This upturn shows the QQQ is outperforming SPY in 2012 - all four trading days of it!

Happy New Year and Good Trading, 

Arthur Hill CMT  

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.

LONG-BOND YIELD: HOW LOW CAN IT GO?

The 30-year bond yield has dropped below three percent many times this year, dropping as low as 2.694% in October. It has been trending up since then, but today it looks as if the October low could be retested.

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

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

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

2012 MARKET OUTLOOK

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


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


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


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

RETAIL SPDR COULD HOLD THE KEY IN 2012

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


Click this image for a live chart.

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

Good trading   -- Arthur Hill CMT

ANNOUNCING CHARTCON 2012! THE SECOND ANNUAL STOCKCHARTS USER'S CONFERENCE

Hello Fellow ChartWatchers!

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

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

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

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

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

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

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

See you then!
- Chip

HOLIDAY SALE ENDS MONDAY - SCTRs INVADE STOCKCHARTS HOMEPAGE, SCAN ENGINE

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

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

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

 

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

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

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

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

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

 

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

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

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

 

AVERAGE TRUE RANGE COMPARISON SHOWS STOCKCHARTS IS ABOVE AVERAGE

Hello Fellow ChartWatchers!

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

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

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

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

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

 

AVERAGE TRUE RANGE COMPARISON

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

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

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

On page 23 of Wilder's book it says:

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

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

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

On page 26, Wilder reiterates the steps:

"2. ATR -- AVERAGE TRUE RANGE

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

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

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

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

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

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

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

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

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

Happy Holidays!

- Chip

 

"SCOOTERS" INVADE STOCKCHARTS!

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

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

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

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

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

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

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

STOCK RALLY STALLS AT 200-DAY AVERAGE - 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.

DOLLAR STARTING DOUBLE TOP?

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

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

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

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

SILVER POISED TO OUTPERFORM AGAIN

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

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

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

Good luck and good trading,
Richard

DEFENSIVE SECTORS HITTING RESISTANCE BUT REMAIN RELATIVE LEADERS

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

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

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

Happy Trading!

QQQ Forms Island Reversal with Big Move

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


Click this image for a live chart.

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

Good trading!

Arthur Hill CMT

ANNOUNCING THE 2012 STOCKCHARTS UNIVERSITY SEMINAR SERIES

Hello Fellow ChartWatchers!

We have a jammed-packed edition of ChartWatchers for you this week.  With the holiday season approaching fast (too fast if you ask me!) we're announcing several great Store specials that I urge you to look into to.  Click here for more details (or just skip down to the "Site News" section of this email).

STOCKCHARTS UNIVERSITY SEMINAR SERIES

In addition, I am thrilled to announce the next step in the evolution of StockCharts University, the SCU Seminar Series.  In 2012, we're going to hold three one-day SCU seminars - one in Los Angeles, one in Seattle and one in the New York area.  Things will kick off with the Los Angeles seminar on March 24th, 2012 at the Marina del Rey Marriott.

A StockCharts University seminar is a one-day training session focused exclusively on helping you use the tools on StockCharts.com more effectively.  We'll start with the basics and then dive into how each tool was designed to be used and why it was designed that way.  We'll then go over how experts like John Murphy use those tools every day to gain a complete understanding of what the market is doing.  

I'm going to teach these first three seminars and I'm really looking forward to meeting the participants.  We'll start at 8:30 and go all the way until 5pm.  I won't leave until I'm sure everyone has all of their questions answered.  Class size will be limited to around 50 to ensure everyone learns what they need to.

The seminars will cost $199 per person.  All of that money will go to offset the costs of holding the events.  We're not doing this to make a profit - we want you to be better investors.  That said, there are two things we're doing to help increase the value of these seminars to attendees:

1. People that register early will receive a significant discount - only $179
2. All attendees will receive 3 free months of our Extra service - a $75 value!

Continental breakfask and a great lunch is included.  So that drops the "cost" of the seminar to around $80 - not bad considering what you'll learn!

We held a "beta" version of this seminar recently and the response was overwhelmingly positive.

For more details, please click this link.

Right now, we're accepting early bird registrations for the Los Angeles event.  We're still finalizing the venues for the Seattle and New York events and will announce open registration for those events by the end of December.

Finally, we're asking everyone who can't make it to one of those events to VOTE for where they'd like us to hold event #4.  There's a link to the voting page on the main SCU page.

I really hope you can make it to one of these events - either next year or in the coming years.  I'd love to meet you and personally show you how all of the tools on StockCharts can make you a better investor.

- Chip

P.S. In case you're wondering, these seminars will NOT replace ChartCon.  Watch for a big ChartCon announcement coming in December.