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


The bullish reversing head & shoulder pattern is not easy to see on a weekly chart, so take a look at this daily chart:
 

 
Keep one thing in mind here.  This bullish pattern does not confirm until we see a high volume breakout above the neckline.  I've drawn lines to indicate what this might look like as we move out over the next 1-2 months.  But first we need to see the breakout.
 
Strength in technology is definitely starting to surface.  I read Arthur Hill's Don't Ignore This Chart blog post from Thursday that showed how the technical rank had improved for Cisco Systems (CSCO) and Network Appliance (NTAP).  If you look closer at that "improved" list, you'd also find Salesforce.com (CRM) and JDS Uniphase (JDSU) in the top 5 as well.  Money is flowing towards technology and it's beginning to show on the charts.
 
Now let's take a look at the relative strength of technology.  In order to quiet the effect that AAPL has, I've chosen to use a technology equal-weighted ETF (RYT) and compare that to the S&P 500.  It's just broken a downtrend line on a relative basis.  Take a look:
 

 
Many technology stocks have been consolidating recently and we're just now seeing significant breakouts.  One such technology stock just broke out of a cup with handle pattern and is featured as my Chart of the Day for Monday, May 20th.  CLICK HERE for more details.
 
Happy trading!
 
Tom Bowley
Chief Market Strategist
Invested Central

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

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


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

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

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.

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

In my last article, I laid out several arguments why it would make sense to be more cautious as you approach the stock market.  I'm bullish for the balance of 2013 - at least as of now - but the short-term has definitely turned more dicey.  One of the ways that I evaluate the strength of a move to the upside in the S&P 500 is by looking to see what areas of the market are leading the charge.  As of Friday's close, healthcare and consumer staples were the two best performing sectors of 2013, indicative of a market that is tired.
 
The good news is that financials on a relative basis continue pushing higher.  Rarely do we see overall market weakness when financials are strong on a relative basis.  But here are a couple of things to watch for if our major indices break out to fresh new highs once again.  First, do financials make yet another relative breakout that coincides with an S&P 500 breakout?  If so, it would be a checkmark in the bulls' column for sure.  More importantly, however, is whether the defensive sectors take a backseat to the more aggressive sectors on such a breakout.
 
Check out the chart below:
 


 
The Dow Jones and S&P 500 have been showing relative strength vs. their more aggressive counterparts - the NASDAQ and Russell 2000.  Should we see a break to fresh new highs with index leadership from the Dow Jones and S&P 500 and sector leadership from healthcare, consumer staples and utilities, it'll be a breakout worth ignoring.
 
Healthcare stocks (XLV) broke out on Friday, but did so with a long-term negative divergence in play.  In the current market environment, please make sure that you identify potential trading candidates with strong reward to risk trading profiles.  I found one such healthcare stock and am including it as my Chart of the Day for Monday, March 4th.  If you'd like more information, simply CLICK HERE.
 
Happy trading!

I remain bullish for 2013 and believe we could see 1700-1800 on the S&P 500 before the year is over.  But I can't deny the short-term warning signs that are showing up everywhere.  Let's take the issues one at a time.
 
1.  Historical Tailwinds Have Ended
 
Since 1950, the months of November, December and January have been the three best consecutive months for the S&P 500 and have accounted for roughly 50% of all of this benchmark index's gains during this period.  That period just ended.  Unfortunately, February has carried an annualized return of -1.27% over the past 63 years on the S&P 500, making it the 2nd worst calendar month of the year.  Making matters worse, February has an annualized return of 5.02% from the 1st through the 15th, but has an annualized return of -11.47% in February AFTER the 15th.  Friday was February 15th.
 
2.  Momentum Has Slowed
 
We only have long-term momentum issues on a few indices that include biotechs and homebuilders.  But shorter-term negative divergences are popping up everywhere.  On Friday, I ran a StockCharts scan of POSITIVE divergence candidates and there were 30.  I then ran a scan looking for potential NEGATIVE divergences and my scan returned nearly 200.  Obviously, momentum is becoming an issue.
 
Over the past three months, financials (XLF) and industrials (XLI) have been the relative leaders with gains of 17.73% and 16.77%, respectively.  But slowing momentum is already very obvious on both of these daily charts.  Check them out:

The move higher has been great.  17% returns in 3 months - it's tough to beat that.  Yet both of these leaders are looking like they need a rest.  Higher prices with lower MACDs don't guarantee us that a correction is coming, at least not as far as I'm concerned.  What they DO tell me, though, is that risks are elevated and that is what technical analysis is all about.  Instead of shallow pullbacks to test rising 20 day EMAs, I'm beginning to think we're ready for 50 day SMA tests.
 
3. The Volatility Index ($VIX) Bottoming?
 
On Friday, the VIX not only tested the January low, signaling perhaps a double bottom, but it also printed a doji candlestick.  Dojis are considered reversing candlesticks and it would make sense for the VIX to reverse at the current level.  If it does reverse and move higher, it'll likely come at the expense of a declining stock market.  You can check out the potential VIX bottom here:

4.  The Dollar Rising
 
There has been a strong inverse correlation in place for several years between the direction of the U.S. dollar and the direction of the S&P 500.  Lately, however, the S&P 500 has attempted to move higher while the dollar also moves up to test resistance.  Something has to give here.  A breakout in the dollar likely would increase the selling pressure on equities, so as we begin a new trading week, I'd keep an eye on how the dollar trades.  Look at the recent POSITIVE correlation:

5.  Major Price Resistance
 
The Dow Jones has been battling the 14000 level for two solid weeks without much success.  Just above that psychological price level is the Dow's all-time closing high on October 9th, 2007, of 14164.53.  In addition, more recent price resistance resides at 3194.86, which represented the opening price on September 21, 2012 on the NASDAQ.  While the NASDAQ was able to clear this level late last week, it's hard to call what it did a "breakout".  Check it out:

So, in addition to all of the issues above, throw in significant resistance on two of our major indices.
 
6.  Weak Friday Finish
 
I realize it's just one day, but our major indices have tended to finish much stronger than they did on Friday.  I understand the Dow Jones turned green at the close, but note how both the NASDAQ and Russell 2000 lagged and finished well off earlier intraday highs.  In addition, the three top performing sectors on Friday were all the defensive groups.  It seems to be that the market is prepping for a pullback sooner rather than later.
 
Given all the warning signs, I'd avoid most stocks as we head into a holiday-shortened trading week.  In particular, there are 5 S&P 500 stocks that look particularly vulnerable to selling this week.  CLICK HERE or more details on these stocks.
 
Happy trading!

Energy apparently has more fuel in the tank.  After underperforming the past couple years, it has rocketed higher to start 2013 and was the leading sector during what was a VERY solid January.  As a student of history, that January strength bodes well for the stock market during the balance of 2013.  Expect all-time highs on the S&P 500 later this year and those future gains are likely to be accompanied by a rapidly rising energy group.  In my last article, I showed a chart of the oil services index ($OSX) that reflected relative breakouts that were just barely taking place.  Given the action the past couple weeks, those relative breakouts are much more clearly defined now.  Take a look:
 

 
This is truly a perfect storm.  Energy (XLE) is breaking out relative to the S&P 500 ($SPX).  Oil services ($OSX) broke out of a symmetrical triangle on a long-term weekly chart.  The $OSX is breaking out on a relative basis vs. both the $SPX and the XLE.  Currently, I don't really see any better area in the market to trade than oil services.
 
Within the $OSX, check out Halliburton (HAL), one of the many oil services components with improving technicals:
 


So where else can we turn?  The market's overbought and chasing anything should be considered dangerous.  Well, technology has been the most disappointing sector the past few months as Apple's (AAPL) struggles have been well documented and have compounded the difficulties for the NASDAQ 100 ($NDX).  But let's not forget it was AAPL's strength that catapulted the $NDX on a relative basis prior to this latest period of disappointment.  Could the $NDX be ready to jump back into the fray?  Check this chart out and you be the judge:
 


Since 2006, this relative chart has been trending higher.  With every relative breakout, the previous relative support held during periods of tech weakness.  According to the chart above, we're going to find out a lot about the long-term relative strength of the $NDX.  Personally, I believe the group is now primed to outperform once again.  But I wouldn't rush into the first component that you come across.  In fact, on Friday, I listed 24 component stocks of the $NDX printing long-term negative divergences on their daily charts for the benefit of our members.  I would avoid them.  While that doesn't guarantee selloffs, it certainly increases the risk of holding or (gasp!) buying these stocks.  The good news is that there were 32 stocks in the $NDX that looked very solid to me technically.
 
On Monday, I'm featuring one of these $NDX component stocks in the midst of a VERY bullish ascending triangle pattern.  I expect it to lead to outsized gains, especially on a high volume breakout.  If interested, you can sign up for our FREE weekly newsletter (simply provide your e-mail address) and I'll be happy to send you my annotated chart.  CLICK HERE for more details.
 
Happy trading!

Technicals do change and I reserve the right to change my opinion as price action evolves, but the energy sector looks like THE ONE for 2013.  I remain bullish the stock market overall so I expect most sectors will perform well in 2013.  Keep in mind that money rotates from sector to sector to sector and last year's leaders tend to pass the torch in subsequent years.
 
First, let's recap 2012 performance.  Of the six "aggressive" sectors (financials, technology, consumer discretionary, industrials, energy and materials), energy was the only sector with a return below 10%.  The XLE finished the year with a 3.31% gain.  In the meantime, financials (XLF) and consumer discretionary (XLY) posted gains of 26.08% and 21.58%, respectively.  In 2011, the defensive groups led the action higher as the XLE tacked on just 1.29% for the year.  That's marked two years of relative underperformance for energy and I believe that's going to change in 2013.
 
In fact, it already has.
 
The XLE was the best performer on Friday as our major indices finished strongly to close at new multi-year highs on the Dow Jones, S&P 500 and Russell 2000.  I understand that one day does not make a trend, but the XLE also led the action last week and has the highest return of all sectors year-to-date (5.70% vs. the S&P 500's gain of 4.19%).  Ok, that's all history.  How do the technicals look?  Well, the Oil Services Index ($OSX) is my favorite within the energy space as it has just broken out of a long-term symmetrical triangle pattern.  I put a lot more weight on breakouts on long-term charts.  They tend to establish the "big picture" from which a trading strategy can be developed.  Take a look at the $OSX weekly chart over the past 5 years:

 

In addition to the $OSX chart looking more bullish, I also studied the 15 component stocks that make up the oil services index and just about every one of them show improving technical strength of late.  In particular, I like Tidewater, Inc. (TDW).  For more information on TDW and the other oil services index components, CLICK HERE

- Tom Bowley

Happy New Year!!!  Here's to good health and good fortune in 2013!
 
Now is the time when market pundits give their predictions for the stock market for the upcoming year.  While it might be entertaining to try to figure out where the S&P 500 might finish in 2013, one of the best predictors of yearly stock market performance lies within January performance.  You wouldn't think that how the market performs in January could have a strong influence on what will happen the next 11 months, but history says it makes a HUGE difference.
 
Let's take a look at this "January Effect".  The basic premise of the January Effect is that "as goes January, so goes the rest of the year".  The numbers bear this out.
 
First, consider that the average annual return of the S&P 500 since 1950 is 8.71%.  Of the 63 years on the S&P 500 since 1950, 35 years have produced annual gains ABOVE 8.71% and 28 years have produced results that are below that 8.71% threshold.  Of the 35 "better than average" years, January was higher in 31 of those years.  By contrast, during the 28 "worse than average" years, the S&P 500 climbed only 8 of those years.  That's a pretty strong correlation between January strength and annual strength.
 
Now let's look at it from a slightly different angle.  Does January strength portend strength the balance of the year?  In the above paragraph, I broke down the results by "better than average" and "worse than average" annual performance of the S&P 500.  In this second approach, I will break down January performance into four quadrants - the top 25% of Januarys, the second 25% of Januarys, etc.
 
In Quadrant 1, the best 16 Januarys in terms of S&P 500 performance produced January gains ranging from 4.10% (1999) to 13.18% (1987).  These MONSTER Januarys averaged rising 6.92%.  Of these 16 years, the balance of the year produced gains in 15 of the 16 years.  In 13 of these 16 years, the S&P 500 rose more than 10% during the balance of the year (not including the January gain).  The average "balance of the year" returns were 17.07%.  So think about that for a second.  The years that produce the best Januarys go on to post ADDITIONAL gains that average 17.07% per year.  The average annual return during these strong January years is an astounding 23.99%.  Not too shabby.
 
In Quadrant 2, the next best 16 Januarys in terms of S&P 500 performance produced January gains ranging from 1.73% to 4.05%.  These 16 years also showed continuing strength over the balance of these years, averaging 9.73% gains over the balance of the year.  13 of these 16 years saw gains during the last 11 months of the year.  The average gain during the balance of the year is 9.73%, significantly below the 17.07% of Quadrant 1, but still very solid action.  The average annual return for Quadrant 2 is 12.62%, again a far cry from Quadrant 1's 23.99%, but still 4 percentage points above the S&P 500's average annual gain of 8.71%.
 
Quadrants 1 and 2 demonstrate the overall positive impact that strong Januarys have on how the S&P 500 trades during the balance of the year.  Januarys that fall in the top half of all Januarys have produced POSITIVE balance of year returns in 28 of 32 years.
 
As you might imagine, this is where the bullish part of the discussion ends.
 
Quadrant 3 January performance averages -0.45% and ranges from -2.53% to 1.56%.  The average balance of the year returns for this group of Januarys is 0.09% with nearly half of these years producing losses from January 31 to December 31.  The average annual return on the S&P 500 for Quadrant 3 years is -0.36%
 
Quadrant 4 covers the worst 25% of Januarys since 1950.  This covers January returns that range from -8.57% to -2.74%.  The average annual returns of the S&P 500 for Quadrant 4 years is -2.10%.  Of the 11 worst S&P 500 years since 1950, 5 of them are situated in Quadrant 4 and 5 more are included in Quadrant 3.  There is obviously a tight correlation between awful stock market years and poor January performance.
 
So while it's entertaining in early January to talk about where the S&P 500 might finish 2013, I'd suggest you wait until January 31st.  You'll have a much better idea then.  January 2013 got off to a great start - now we'll see if the bulls can extend the gains over the balance of the month.
 
Happy trading!
 
Thomas J. Bowley
Chief Market Strategist
Invested Central
http://www.investedcentral.com/

To historians, this doesn't come as a surprise.  Since 1987, the Russell 2000 has produced annualized returns during the month of December of 43.38%.  April is the next best month for small caps with its annualized return of 21.84%, a very distant second.  Over the past 25 years, the Russell 2000 has fallen during December only 3 times.  In 2007, they fell 0.23%.  In 2005, they fell 0.60%.  The only poor December that small caps have experienced came in 2002 when they tumbled 5.72%.  Certainly part of that decline resulted from the 8.80% climb a month earlier in November 2002.  The point here is that history does tend to repeat itself in the stock market and December 2012 appears to be no different for small cap traders.
 
Consider the month-to-date gains thus far by index:
 
Dow Jones:  +1.27%
S&P 500:  +0.99%
NASDAQ:  +0.36%
Russell 2000:  +3.16%
 
I'll admit that my background as a CPA qualifies me as a "numbers geek".  So let's take a look at the December small cap relative outperformance another way - visually:
 


This chart shows us the strength (and the relative strength) of the Russell 2000 over the past month.  But there's likely to be more relative strength in the days ahead.  From December 21st through December 31st, the Russell 2000 has racked up annualized returns of 96.19% since 1987.  The percentage of up days during this period is 69.36%, well ahead of the 55.40% chance of an up day throughout the year.
 
There's really no Santa Claus rally like the one we see on the Russell 2000 each year.
 
Happy Holidays and happy trading!

Homebuilders have been a leading industry group throughout the S&P 500 rally off the 2009 lows.  This strength has been particularly obvious over the past year.  Looking strictly at a shorter-term chart, technical indicators couldn't look much better.  Check it out:
 


While homebuilders did fall below their 50 day SMA a month ago and the most recent attempt to move back through that 50 day SMA failed, it looks strikingly similar to what we saw in early June, just before a huge 27% one month rally.  Trendline support continues to hold.  In addition, homebuilders consolidated in a short-term base in late August before breaking above 400.  The most recent selloff held support at 400 before rallying to test 50 day SMA resistance from underneath.  I'm eventually looking for this group to break to fresh new highs, possibly even before year end.
 
The short-term chart is not what's bothering me.  Instead, it's the long-term weekly chart where warning signs are just now starting to show.  Take a look at this 10 year chart:
 


The current technical pattern is quite similar to late 2003.  On the next high, in early 2004, a long-term negative divergence fomed and more significant selling followed.  On the chart above, I've indicated that with the next push higher in the price of the $DJUSHB, a long-term negative divergence is likely to print.  That is indicative of slowing momentum in the longer-term.  Generally, more significant selling follows.
 
I'm not quite ready to write off homebuilders.  In fact, I'm expecting them to lead at least one more push higher in equities.  After that move, however, we'll need to re-evaluate and perhaps lower our expectations for this industry.
 
Happy trading!
Thomas J. Bowley
Chief Market Strategist
Invested Central

http://www.investedcentral.com/

All the recent talk has centered around the effect of a potential fiscal cliff.  While we may or may not be subject to a fiscal cliff, each and every one of us has been subject to the recent technical cliff, especially the one since election day.  Things have gone from bad to worse in the past couple weeks.  We did see a series of potential reversing candlesticks print on Friday across our major indices, sectors, industry groups and leading individual stocks, however.  Will that be enough to turn the table on the bears?  Or will this simply turn out to be a temporary halt to the selling before another leg lower?
 
Take a look at the hammer that printed on the NASDAQ on Friday:
 


Short-term, the Friday reversal appears to be good news.  The daily MACDs that are sprinting lower carry a much more ominous sign, however, as they're screaming at us that the momentum remains firmly in the bearish camp and any short-term upside move will likely be just that - a short-term one.
 
There was much talk last week that sentiment had turned decidedly negative and that was pushing our major indices lower.  Ummmmm, I respectfully beg to differ.  In fact, I'm not sure what to make of the Volatility Index (VIX), which generally moves inversely to the S&P 500.  During market selloffs like the one we've seen lately, the VIX normally surges, reflecting the increased nervousness in the market.  But since election day, while the S&P 500 fell more than 5% over six trading days, the VIX also fell - more than 10%!  Check out the chart:
 


A lower VIX indicates the market is expecting lower volatility ahead.  If you study history, you'll clearly see that a falling VIX is synonymous with a rising equity market.  This begs two obvious questions.  First, will the VIX surge near-term to play "catch up" with falling equity prices?  Or is it telling us something about the duration of the wicked selling we've been experiencing - that it, in fact, won't last?
 
In the days and weeks ahead, we're going to learn more about both the fiscal cliff and the technical one.  Please be cautious and keep your stops in place.
 
Happy Thanksgiving and happy trading!
 
Thomas J. Bowley
Chief Market Strategist
Invested Central

One month ago, I discussed the increased risk of holding gold as key price resistance was being tested with a long-term negative divergence on the MACD present.  That was a sign of slowing momentum and that, combined with price resistance, simply tells us to grab profits and respect the resistance - at least until gold makes the breakout.  Well, the breakout was never made.  In fact, take a look at the following two charts.
 
The first chart is how gold looked one month ago:
 


Now let's fast forward to show that resistance did, in fact, hold back the bulls and the slowing momentum and overbought conditions resulted in an approximate 7% drop that has now sent gold back much closer to key price and trendline support levels:
 


After flirting with $1800 per ounce, gold has fallen back to Friday's $1679 level.  Note on the chart above that initial support resides at $1675.  If that level doesn't hold - and it may not - more significant price support and a key trendline both coincide in the $1615-$1640 per ounce range.  I'd expect that basic risk management would certainly begin to favor the bulls once again at those prices.
 
You can buy the metal or an ETF like the SPDR Gold Trust Shares (GLD) to attempt to profit from swings in the price of gold.  Another way to potentially benefit is to buy the stock of a gold miner.  One gold miner looks interesting to me and I'm including it as my Chart of the Day for Monday, November 5th, 2012.  It's provided FREE and you can learn more by CLICKING HERE
 
Happy trading!
Thomas J. Bowley
Chief Market Strategist
Invested Central

October has been a very strange month thus far.  While most of our sectors are trading close to the flat line for the month, financials and technology are heading in opposite directions.  I can't recall a two week period where the returns of these two influential sectors diverged by 8%, especially where one is performing with solid relative strength while the other completely falls apart.  Take a look at this chart:
 


Could these two sectors be any more opposite one another?  These are both "risk on" sectors, so they tend to head in the same direction.  After just a couple weeks of earnings season, it appears as though banks are producing much better quarterly results and are being handsomely rewarded for it.  I love to see relative outperformance by financials in general and banks more specifically.  Having spent a portion of my career auditing banks, I know firsthand that expanding profits in the banking sector ultimately leads to more credit availability.  Credit is a key driver to growth in other sectors and industries.
 
I'm a student of history.  Normally, when the financial sector performs as well as or better than the S&P 500, equity prices overall rise.  That seems evident to me when looking at the following chart:

The green shaded areas represent periods of time when the Bank index ($BKX) is outperforming the S&P 500.  Rarely do we see the market decline during such periods.  As you can see from the above chart, the relative strength of banks is moving higher and the outperformance of financials these past two weeks should be thought of as a bullish sign.  That doesn't mean we won't see additional short-term selling, however.  In fact, the upcoming week is the most bearish week of the year historically, dating back to 1950 on the S&P 500.  We don't see lower prices every year, but some of our worst weekly declines have occurred during this week.  My reasoning?  By the time 3rd quarter earnings come out, you can't keep making excuses as the year is running out.  All the dirty laundry comes out for all to see.  We finished last week on a VERY rough note and much of it was due to earnings (or lack thereof).  A huge number of earnings will be released in the week ahead, so unless a major change takes place, we could see more of the same in terms of selling.
 
History does tend to repeat itself in the stock market and there are several historical rules I live by as a trader.  I'll be discussing them in a webinar on Tuesday, October 23, 2012.  If interested, CLICK HERE for more details.
 
Thomas J. Bowley
Chief Market Strategist
Invested Central

To be honest, I'm not a big fan of providing outlooks too far into the future because prices change continually.  As a technician, I realize charts can change daily.  Therefore, I have to be willing to change my thinking on a dime and, if you're managing your own money, you should too.  But I do like to evaluate the likelihood that a trend, either up or down, is sustainable.  With that in mind, let's take a look at gold.  A little over a month ago, I wrote about the "gold rush" being on.  Since that time, gold has risen another $100 per ounce, or roughly 6%.  I remain bullish on gold for the intermediate-term - perhaps 3 to 6 months - but short-term gold now has a few technical issues to deal with.  Take a look:
 


 First, gold is definitely overbought, so a near-term unwinding of both the RSI and stochastic is to be expected.  Second, a fairly significant area of price resistance has been reached.  The reaction highs in November 2011 and February 2012 both failed between $1790 and $1810 an ounce.  We saw three intraday highs last week in the $1790s.  Finally, traders need to deal with slowing momentum.  Take a look at the chart above and check out the lower MACD reading with the higher price action.  That long-term negative divergence does NOT guarantee a pullback in price, but it does indicate the RISK of a pullback has increased.  The fact that this slowing momentum is occurring simultaneously with price resistance makes it difficult to take any further long position in gold until one of two things happens.  I either want to see (1) a 50 day SMA test and a MACD centerline test to "reset" this momentum oscillator, or (2) I want to see the breakout above price resistance.  I'm not going to assume gold will rally right through resistance, especially when technicals are telling me that upside momentum is slowing.
 
On Monday, October 8th at 4:30pm EST, I will be hosting Invested Central's "State of the Market" online webinar where I'll discuss the fourth quarter prospects of gold and equities in general.  This webinar is reserved for annual members of Invested Central, but we always provide new annual members a 7 day, no-questions-asked Money Back Guarantee.  So if you'd like to attend this event, CLICK HERE for further details.
 
Happy trading and Happy Thanksgiving Canada!
 
Thomas J. Bowley
Chief Market Strategist
Invested Central

Living in the Washington DC area, I'm not sure which was more exciting - QE3 or RG3!
 
The market was set up for higher prices as traders anticipated more quantitative easing.  Fed Chairman Bernanke did not disappoint.  By providing a third round of quantatative easing, the Fed aims to stimulate our sagging economy and boost employment.  Traders saw an opportunity and endorsed the plan by buying equities and commodities and bailing out of the dollar and treasuries. 
 
When QE1 was announced in 2008, the treasury market was caught off guard and rates fell precipitously after the Fed announcement with traders flocking into treasuries.  A few months later, when QE1 was increased, again traders flocked into treasuries with the yield tumbling 50 basis points the day of the announcement.  Take a look:
 


Traders did a much better job anticipating QE2 and QE3, however, with rates tumbling BEFORE the announcements.  Check out how far yields had fallen ahead of the QE2 and QE3 announcements:
 


I've been expecting QE3 for months.  The money that poured into treasuries and equities simultaneously nearly guaranteed it.  Both the treasury market and stock market sent the Fed the message that further help was needed.  And on Thursday, the Fed delivered and global markets soared.
 
Nearly every area of equities benefitted, but the falling dollar had an exceptionally bullish effect on energy and materials.  If QE3 works as intended, our economy should improve and riskier areas like technology should see rapidly rising EPS.  And it's a subcomponent of technology - networking - where I saw confirmation of a bottoming pattern this past week.  Technically, few areas have as much upside as networkers because they haven't really participated in prior 2012 rallies.  Here's the bottoming pattern:
 


Several networking stocks look solid technically, but I have my eye on two in particular.  For more details on these two stocks, CLICK HERE.
 
Happy trading!

Before I take a look at the bigger picture, there were a couple rather bullish signs on the one year chart for gold the past few weeks.  Take a look:
 


 After testing descending triangle support (you'll see that in the 5 year chart below) in mid-May, gold began its ascent.  Higher lows continued to print and the reaction high near 1640 in early June served as solid price resistance for the last few months.  But you can see the subtle improvement in technicals in late July and early August (blue circles).  The first blue circle highlights the 20 day EMA crossing above the 50 day SMA (golden cross).  The next two blue circles show that the moving averages are acting as support - a bullish development as well.
 
Momentum has clearly swung to the bullish side.  The daily MACD broke above centerline resistance in late July and it's continuing to push higher with higher prices, a classic case of accelerating momentum.
 
The best news of all, however, is that the long-term five year weekly chart has been in a bullish continuation pattern that has now confirmed a breakout to the upside.  Check this chart out:
 


From this chart, it's much clearer to see how important that kicksave at support in mid-June was.  It enabled gold to remain in its descending triangle pattern.  I'd much prefer to see an ascending triangle vs. a descending triangle, but triangles represent continuation patterns.  Because the prior trend was UP, I've been awaiting a breakout to the upside and it appears that's exactly what we've seen from gold.
 
Happy trading!
 
Thomas J. Bowley
Chief Market Strategist
Invested Central

http://www.investedcentral.com

First, let me say that it was AWESOME meeting so many of you at Chartcon 2012 in Seattle last week.  It was also great to finally meet several of the co-authors of ChartWatchers.  I've been to a LOT of trading conferences and this one surpassed all of the others on so many levels.  If you weren't able to make it, please mark your calendar for August 2013 in the event that Chip decides to host the ChartCon 2013.  ChartCon 2012 was truly outstanding.

My background is in public accounting and while my first choice is always to believe the technicals, it's difficult to stray from solid fundamentals.  Accordingly, each quarter I search through hundreds of earnings reports and charts to find that rare combination of "out of the park" earnings results and just the right amount of uncontrollable buying interest.  Generally speaking, here's my formula:

Beat on revenues, beat on EPS, raise guidance and print a marubozu candle (or at least a very strong candle) on MASSIVE volume.

Ok, so you might be asking what is a "marubozu" candle?  A bullish marubozu candle shows buying interest the entire trading day.  There are either no tails (shadows) or very small tails on the candle.  It opens with a gap up and the buying interest never slows, trending higher all session long and finishing at or very near its high of the day.  Normally, gaps get filled.  As everyone jumps on board at the opening bell, market makers provide liquidity and complete the other side of the trade.  This explains why so many gaps fill.  Market makers generally make their money one way or the other.  But a marubozu candle in essence paints a picture of unrelenting demand - even after a HUGE gap up.  Even the market makers can't slow demand.

In the last two quarters, I've been able to find a couple stocks where demand swamps supply and I'll highlight them both below:

First, check out Multimedia Games (MGAM):

Next, take a look at Mellanox Technologies (MLNX):

There are differences in how the two traded shortly after their blowout earnings reports, but ultimately both stocks soared much, much higher.  Identifying these stocks when "game-changing" candles print can make a big difference in your trading success.

Unfortunately, marubozu candles are not particularly common.  But I do still look for gaps to the upside after solid earnings where momentum continues on the long side after the gap higher.  I have one such stock that appears poised to me to move much higher over the next quarter.  For more details, CLICK HERE.

Any time the S&P 500 moves to fresh new highs, I try to determine the likelihood that the move is a sustainable one.  Traders need to be in the right mindset to carry prices further.  They need to be aggressive in terms of where they place their trading dollars.  If sector leadership comes from financials, technology, industrials and consumer discretionary, it's a sign that it's a risk-on environment, which generally is quite bullish.  But as we saw in May 2011, it's never a good sign to break out with defensive areas of the market leading the way.  In my opinion, market participants are not "committed" if they're only willing to invest in defensive groups.
 
The Russell 2000 is one of the more aggressive areas of equities to invest in.  Take a look at how this group is lagging on an absolute and relative basis:

From a longer-term perspective, you can see the S&P 500 broke out in the first quarter of 2012 above the 2011 highs, but note the Russell 2000 never made that same breakout.  Therefore, the bottom chart shows the relative performance of the Russell 2000 to be abysmal.  On a shorter-term basis, the S&P 500 and Russell 2000 are going in nearly opposite directions with the S&P 500 climbing and the Russell 2000 weakening.  What gives?
 
The other problem is that defensive groups are leading this rally to the upside on the S&P 500.  The last time we saw this scenario in April/May 2011, it preceded a significant drop in our major indices.  Check out this chart:

It's very unusual to see the relative strength of defensive sectors moving in the same direction as the S&P 500.  If you study a chart like this over time, you'll see there is almost always a direct NEGATIVE correlation between the two.  When they're both rising, we MUST take note.  Will this again mark a top?  It's hard to say.  I remain bullish and believe we'll see another leg higher into the end of 2012 or early 2013, but short-term it's dicey with this type of relative leadership, especially since we're in the historically weak August-September period.  Stay on your toes!
 
Listen, even in uncertain markets like the one we're in now, there are trading opportunities.  We just need to make sure we monitor the reward to risk on every trade and keep our stops in place to minimize losses.  One nice reward to risk trade (long-term positive divergence) to consider is featured as our Chart of the Day for Monday, August 6th.  CLICK HERE for more details.
 
Happy trading!

I know many traders view the MACD to be a lagging indicator and technically it is.  After all, the calculation of the MACD uses historical price data so how could it not be a lagging indicator?  Well, I can only tell you that I use the MACD for advanced calls quite a bit.  Recently, when crude oil was plummetting, it flashed a long-term positive divergence and VOILA! prices rebounded.  You can check out my last article to see the lower crude oil prices accompanied by a higher MACD reading.  The interesting part is whether the positive divergence means the selling has ended for a long period of time or just temporarily.  In my opinion, the long-term divergence tells you that momentum has slowed in the direction of price TEMPORARILY.  We must await additional technical signs that a more significant bottom has formed.
 
Let me give you a recent example.  Take a look at the positive divergence that formed on Mosaic (MOS):

This chart is almost a picture perfect example of what I look for.  First, note the hammer that formed on the bottom as the long-term positive divergence printed.  That reversing candlestick adds to the bullishness of the technical picture.  Second, once the rebound begins, I look for a move toward the 50 day SMA (point 1 on the chart), then a higher low (point 2 on the chart) before a breakout move to confirm the bottom is in.  Since that pattern, MOS has been in a very bullish uptrend.
 
A long-term negative divergence can do the same thing, only in reverse.  Once a negative divergence prints, I look for that 50 day SMA test and then see how the stock reacts.  There are few areas of the market where I've seen long-term negative divergences, but the home construction area is close.  Check out this chart:

Technically, a negative divergence hasn't printed because we don't have a higher CLOSE to accompany the lower MACD.  The recent highs were intraday highs and do not create the negative divergence.  Remember that MACD's are calculated on closing prices, not intraday prices.  But what this chart tells me is that if home construction moves to a new closing high, we should be on the lookout for a potenial near-term top, possibly more.  But we'll let the technical action after the divergence forms answer that question for us.

Happy trading!

Thomas J. Bowley
Chief Market Strategist
Invested Central

www.investedcentral.com

Reasonably bullish signs have emerged, the latest being that crude oil prices (finally!) found support at 2 year lows near $76-$77 per barrel.  Not only was price support tested, but slowing momentum was obvious in the form of a long-term positive divergence.  It's always nice to see corroborating technicals align bullishly and that's exactly what we saw with crude oil prices.  Take a look:

After a long-term positive divergence prints on a daily chart, I look for a test of the 50 day SMA.  Many times this coincides with a centerline test, or MACD "reset".  As you can see above, crude oil surged very close to its 50 day SMA and the MACD is currently rising and approaching a key MACD centerline test and reset.  A long-term positive divergence doesn't have to mark a long-term bottom, although many times it does.  What happens after this 50 day SMA test is critical technically.  The printing of a higher low and a later breakout above $89 per barrel would signal not only higher crude oil prices, but also resumption of the S&P 500 uptrend.  Alternatively, a breakdown beneath $76 per barrel would indicate slowing global demand, which in turn would likely send the S&P 500 spiraling down close to 1200.  Currently, I'm banking on the former because of the longer-term bullish backdrop.

In addition to the short-term bullishness, the longer-term 5 year weekly chart is also arguing for higher equity prices in the days and weeks ahead.  Crude oil prices and the S&P 500 tend to move together.  Crude oil prices move higher in anticipation of greater global demand.  Higher demand usually results from strengthening global economies.  Strengthening economies normally produce higher corporate profits, which in turn send S&P 500 prices higher.  Take a look at the fairly tight correlation between crude oil prices and the S&P 500 on this chart:

If oil prices and the S&P 500 do eventually move higher, energy stocks will certainly benefit.  I've highlighted one such stock poised technically for appreciation as my Chart of the Day for Monday, July 9, 2012.  CLICK HERE to view the Chart.

All traders must decide whether to invest their dollars aggressively or conservatively.  It's a basic principle, yet following the flow of such dollars can provide us valuable clues about the likely direction of the stock market.  For me, it's a simple case of tracking the 10 year treasury yield vs. the S&P 500.  Before I show you any charts, it's important to understand the relationship of the PRICE of treasuries and their corresponding YIELD.  When treasuries are bought, it makes sense that the PRICE will move higher.  But because the coupon rate is fixed, the yield actually falls as treasury prices rise.

Using a very simplistic approach, a dollar invested in treasuries is one dollar not invested in equities.  Therefore, it would also make sense that the relationship between treasuries and the S&P 500 would be an inverse one.  Taking this one step further, if both the S&P 500 and the 10 year treasury yield move inverse to treasury prices, then it makes sense that the S&P 500 and treasury yields should move in direct correlation to one another - and they generally do.

Now let's look at a chart that confirms it.  Below is a 10 year chart of the S&P 500 with the 10 year treasury yield reflected behind the price of the S&P 500:

There isn't a 100% direct correlation between the two, but they do generally move in the same direction.  Over the past five years, however, there have been periods where they've actually diverged, moving opposite one another.  Every time, the treasury market seems to get it right with the S&P 500 reluctantly following the trend reversal in the $TNX.  In other words, those investing in treasuries seem to be a bit smarter than equity investors.

I don't believe there's any doubt which way the $TNX is trending now.  Yields on the 10 year treasury broke to new all-time lows last week.  Money flowing INTO treasuries is driving the yield lower.  The primary reason that money flows into treasuries is for safety as traders expect our economy to weaken (or possibly another round of quantitative easing).  You don't want to be in equities when the music stops.  Therefore, I always keep a very close eye on the direction of the yield.  I have drawn a black vertical line on the chart above, however.  It appears as though the mostly direct correlation between the S&P 500 and the $TNX ended in early 2010.  My belief is that quantitative easing has been driving both higher.  Knowing that the Fed has their collective backs, treasury traders have poured into the safety of U.S. debt instruments.  At the same time, equity traders have bid share prices higher knowing that either the economy will continue expanding OR the Fed will step in and HELP it expand.

Currently, both the S&P 500 and the $TNX are moving lower.  Check out the 3 month chart below:

The yield on the 10 year treasury and the S&P 500 are now in lockstep with one another again.  That's BAD news for equities as the yield has broken down and is reflecting the belief that our economy is putting on the brakes, possibly even signaling an upcoming recession.  Economic reports are supporting this theory.  The best performing sector in equities has been utilities, which makes perfect sense.  First, it's a reflection of the risk off trade.  Also, investors dependent on income are likely finding the 10 year treasury yield very unattractive vs. yields on utility stocks, not to mention that lower rates can have a positive effect on the earnings of utility stocks that have debt with variable interest rates.

The falling yields and strong relative performance of utilities are SCREAMING that investors do not want to take any risk.  That risk off mentality leads to lower equity prices.  For equity traders, the Fed's next round of quantitative easing (QE 3) can't arrive soon enough.  In my opinion, the behavior of treasuries and equities are begging the Fed to act sooner rather than later.  Will they or won't they?  I believe the Fed will act sooner rather than later.  You be the judge.

The action in treasuries is just one MAJOR warning sign I see for equity traders right now.  I held a webinar on May 23rd and invited our community to attend free of charge to discuss all of these warning signs.  It turned out to be quite timely as the selling has escalated.  Unfortunately, all of these warning signs still apply today.  You can watch the recorded webinar free of charge by CLICKING HERE.

Happy trading!
Tom Bowley 

 

The long-term negative divergences that printed in February and March provided us clues that we'd at least see some near-term trepidation and possibly something much worse.  Well, the "much worse" has arrived.  There is no technical sign - bullish or bearish - that ever provides us a guarantee so a bit of cautious skepticism can go a long way for a trader.  But things have changed and from a risk perspective it's certainly time to consider changing your investing or trading strategy.

When a market trends higher and the MACD gives us the "full speed ahead" sign, I tend to be more aggressive on the long side.  When warning flags go up (ie, long-term negative divergences), it's ok to remain somewhat bullish, but it's important to adjust to a higher level of risk in the market.  In such circumstances, selling calls against long positions make sense to reduce risk.  Those who are not interested in trading options can simply sell a portion of their positions to raise cash.  Then we sit back and wait to see if the higher risk translates into a bounce off key support or if the market transitions into a period of higher uncertainty and more selling.  This past week, all or our major indices suggested we are clearly in that period of higher uncertainty.

What that means to me is that we'll see added volatility and more whipsaw action with both longs and shorts being regularly confused.

Let's take a look at the recent progression from what I considered to be a very strong and bullish market to one that now has turned much more bearish.  First, check out the S&P 500 in early 2012:

This type of long-term negative divergence absolutely sends a warning signal.  But these bearish divergences usually do not provide us long-term signals.  They tell us that momentum has waned in the near-term and that a short-term period of consolidation, or perhaps a period of bearishness, is to be expected (not guaranteed).  It's what happens AFTER these signals that usually drives market action in the foreseeable future.  In other words, can the MACD test its centerline support to "reset" the difference between the 12 day EMA and 26 day EMA back to zero.  That's the definition of a MACD centerline test.  Does the bullish momentum resume or do we see a bearish MACD centerline crossover that indicates momentum has turned in favor of the bears?

For that answer, take a look at the current technical picture of the S&P 500:

A few technical items stand out to me.  First, the long-term negative divergence that indicated slowing momentum in March served as an important signal and it proved correct.  Next, the subsequent decline in equity prices did test key moving averages like the 50 day SMA and we did see the MACD move back to key centerline support.  The problem, however, is that the selling was not contained there.  It was just beginning.  Finally, check out the MACD on last week's selling.  Momentum is accelerating to the downside.  Because momentum now is so strong in favor of the bears, we cannot expect much more than an oversold bounce.  I feel fairly confident that we will get a bounce and it'll likely move the S&P 500 towards its declining 20 day EMA.  At that point, however, it'll be time to short - perhaps even aggressively - until the market proves to us otherwise.

The bulls have two signs on their side as we begin a new trading week - oversold conditions and sentiment.  It appears we need a capitulatory type of selling day in order to establish a short-term bottom.  That will give us an opportunity to unwind what has become VERY oversold short-term conditions.  It's not often when you see three of the major indices - S&P 500, NASDAQ and Russell 2000 - with its stochastic reading below 1, combined with RSI readings mostly in the low 20s.  That's POWERFULLY oversold.  But perhaps even more significant is the fact that options traders are piling in on the equity put side.  You should know by now how closely I follow the equity only put call ratio (EOPCR) and my calculation of relative pessimism.  Relative pessimism has a solid track record in helping to spot short-term market bottoms.  It did it in both June and August of 2011 and is primed to do it again.  Check this out:

I can tell you that my approach to trading has changed.  I'm not writing off the possibility of a further move to the upside in 2012, but the market needs to prove that possibility to me first.  For now, I consider bounces to be shortable.  To give you an idea of what I look for in a short candidate, consider ANSYS, Inc. (ANSS), which was a short candidate and presented as a Chart of the Day on Thursday of last week.  CLICK HERE for further details.

Happy trading!

Everything seemed perfectly aligned for the bulls.  In March, slowing momentum on the bulls' side was a growing concern, but the consolidation that took place in the latter part of March and throughout April relieved that concern, so technically it appeared the bulls might resume control of the action.  Take a look at the negative divergences that had become problematic:

The slowing momentum was obvious.  But while the short-term looked dicey, the longer-term remained strong.  Here are those same charts, but on a longer-term weekly basis:

I'll be honest.  I was dead wrong last week.  With the unwinding of those negative divergences and the MACD back near centerline support across all of our major indices, I was looking for a rebound last week, possibly to fresh 52 week highs.  Historically, the first week of a calendar month tends to be quite bullish as well as new money hits the Street.  Unfortunately, the slowing global economic picture was felt here at home.  After a solid start to May on Tuesday of last week, the disappointing jobs and manufacturing data took its toll with a fairly significant selloff taking place throughout the balance of week.  Anyone else hearing the whispers of QE3?  I've said throughout 2012 that we're going to get it because of the way the treasury market has behaved.  Based on the data last week, it's getting closer, not further away.

Clearly, the market's "signals" are mixed here.  The long-term charts continue to suggest the 2012 rally is not over, but the weakness last week was a stark reminder of how quickly things can change.  For me, it's a fun time in the market because we've been inundated with earnings reports - some quite stellar - and I see the potential emergence of new leaders.  While my focus is ALWAYS on technical indicators for timing into or out of stocks, I'm still a CPA at heart.  I spent close to 20 years auditing companies so it wouldn't be prudent for me to completely ignore the fundamental data from companies that we see each and every quarter.  Therefore, I like to combine my fundamental analysis around earnings time with my strong desire to follow the money flow.  That's what I refer to as "cherry picking" the best companies in order to find those companies that will outperform.

Let me give you a recent example.  In mid-January 2012, Tractor Supply Company (TSCO) raised its earnings guidance and the stock hasn't looked back.  Check this out: