Trend Check with Tushar Chande

What Causes a MACD Divergence? (With Scan Code to Detect MACD Divergences)

This blog post is for short-term players looking for counter-trend opportunities. This blog post explains why we observe divergences between the MACD indicator and stock prices.  I also describe the scan code for automatically detecting divergences using the StockCharts scan engine on daily and weekly data.  Short-term and swing traders can now automate the search for MACD divergences via this post.  Longer-term players will gain insight into how the MACD works. 

 

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S&P 500 Pauses to Refresh

Topics: Market consolidates under all time high; guessing support for $SPX; gold breaks down; semiconductors find support; dollar forms higher low, looks stronger technically.  A big thank you to Tom and Erin for inviting me to their Market Watchers Live show (on 12/06/17) and to all their listeners who tuned in and responded with questions and comments.  There are some references for you below (that connect to the discussion on the show).

 

Chart 1: The year-end forecast can be found here and here.

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Fasten Your Seatbelts

The market is trading on emotion, so it is time to fasten your seat belts.  The melt-up in Financials best captures the near euphoric rally to new highs as tax cut legislation moved forward in the upper chamber in D.C.  As Chart 1 below of FINU, the ProShares Ultra Pro Financial Sector ETF shows, the past three days have seen sharp moves.  The last bar has a small open-close range and a long high-open range, which suggests the market has touched some resistance overhead.

 

Chart 1: The FINU accelerated to new highs, but as the last bar shows, it seems to have met some overhead resistance.

 

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Trend Analysis of Jim Cramer's Anointed 15 (Or, Using the Chande Trend Meter)

The Chande Trend Meter (CTM) is a flexible tool for analyzing absolute trend strength across all time frames.  I will illustrate its application using a list of 15 stocks that Jim Cramer of CNBC called the "anointed ones", stocks that are likely to go higher because they have a strong institutional fan base on Wall Street.  I will show that CTM can be combined with StockChart's SCTR to find the stocks on Cramer's list. I will also show that CTM scales sensibly across time frames, from intra-day to monthly, whereas the SCTR is only computed using daily data and re-plotted on weekly and monthly charts.  (The SCTR rankings are undefined for intra-day data.)

 

Chart 1: A candle-glance summary of Cramer's 15 Anointed Stocks.

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Berkshire Hathaway (BRK.B) Attractive to Long-term Investors

Berkshire Hathaway, buffeted by tax plan headlines, has pulled back into support, and offers a potential entry point for long-term investors. The market itself has seen selling in the short-term time frame. However, intermediate-term and long-term trends are still bullish, as they have been all year.

 

Chart 1: Berkshire Hathaway (BRK.B) retests its prior breakout at 182, with support starting at 177.  The solid black line is the 130-day simple moving average. (A live version of the chart is here.)

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Using Momentum ETFs

Momentum ETFs are a useful way to invest in strongly trending markets.  Here momentum is generally measured as a combination of monthly returns over different periods.  Since capitalization is always a concern for the larger ETFs, the larger the capitalization and the stronger the recent price performance, the larger the allocation to the stock.  In general, when market trend strongly, momentum ETFs are expected to do well (see Chart 1).

Chart 1: Momentum ETFs have typically done better than the $SPX as we should expect from their design.

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Re-optimizing the 4 Percent Rule (Initial Withdrawal Rate) for Low Inflation

This post is for retirees or those near retirement.  All of you will have to make some decisions on how to manage withdrawals from your retirement portfolio.  The Bengen 4 Percent Rule is the industry standard, which states that an initial withdrawal rate of 4 percent of starting capital, adjusted for inflation each year, will be a "safe rate" that will "ensure" that you will "not run out of money" over a 30-year retirement horizon.  Naturally, the higher the "safe" withdrawal rate, the larger your spending budget, the "better off" you will be.

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Micron Technology (MU) Captures The Essence of this Rally (Or, Market Trend Check 10/31/2017)

The rally in Micron since the breakout I pointed to in early September (see Chart 9 of that post) neatly summarizes the story of this market. In the composite charts below, at left is the initial breakout, on September 14.  I felt this breakout was an important sign that the market would rally.  On the right is Micron today, rallying mightily, just like the rest of the Technology sector. That in short is what the market has done and is doing, with a more detailed analysis below.

The breakout in Micron Technology (MU) was a key sign of the rally to follow.

 

Trend Check Major Market Indexes


We begin by using my trend-following models to check the major indexes.  In Chart 1, the number of stocks in the index increases from left to right, from 30 to over 2000.  The time period increases from top to bottom, starting at 25 days and doubling at each step.  Except for the Russell-2000 and the NYSE index, which are flat on the short-term (see red box), the indexes are trending higher.  So, overall, the picture is bullish.  Note that all indexes have been bullish all year long at the intermediate- and long-term time frames.

Chart 1: Overall, the indexes are trending higher, except for the Russell 2000 and NYSE in the short-term (see red box outline).  

 

Bonds, Gold, Stocks and Dollar


Next, looking at the four core markets, stocks are trending higher on all four time frames, as we saw in Chart 1. Bonds and gold are trending lower on the short- and medium-term time frames. At the long time frames, bonds are still trending higher, but gold is mixed. The dollar is trending higher on the short- and medium-term time frames, now flat on the intermediate-term time frame, but still trending lower on the long-term basis. (See my earlier analysis here.)

Chart 2: Bonds and gold are pointing in opposite direction to the US Dollar across almost all time frames. Stocks are trending higher on all time frames as shown in Chart 1.

 

Path of Least Resistance for Russell 1000 Universe


The Path of Least Resistance applies the trend-following models to each stock in the Russell 1000 universe, then rolls up the results, and breaks them down into just two categories, trending up or flat-to-down.  By this metric, the path of least resistance has just turned negative on the short-term, consistent with the neutral reading for the Russell 1000 in the short-term in Chart 1.   The path of least resistance is higher on all other time frames, and most importantly, in the longer intermediate to long-term area.  So, overall, the majority of stocks in this group are trending higher.

Chart 3: A majority of stocks in the Russell 1000 universe are trending higher in all but the short-term time frame.


S&P 500 Sector Analysis via Guggenheim Equal Weight ETFs


The Guggenheim equal weight ETFs allow us to get a more detailed insight into the price action of  major sectors in the S&P 500 universe on an unweighted basis, so that each stock has "equal impact" on the analysis.  The consumer staples is the worst performing sector, as I have discussed before, and Consumer Discretionary and Energy are weakening on the short-term. The strongest sectors, trending higher on all time frames are Materials, Financials, and Technology.

Chart 4: The three strongest sectors are Materials, Financials and Technology. Consumer Staples i.e. defensive stocks are the weakest.

 

S&P 500 Sector Analysis via Chande Trend Meter


I used the Chande Trend Meter to rank the major sectors in the S&P 500 Index.  Note that consistent with the RHS data in Chart 4, the XLP or Consumer Staples is the weakest trender.  Technology stocks are strong (QQQ, XLK), along with materials (XLB) and Financials (XLF), consistent with Chart 4. Major indexes SPY and DIA are also strong.

Chart 5: Consumer discretionary (XLP) is the weakest sector in a strongly trending market with many indexes and sectors with CTM > 80. Technology is strongest at the moment (QQQ, XLK).  These results are consistent with the data in Chart 4 from Equal Weight funds.


Trend Check by Market Capitalization via Vanguard ETFs


Market capitalization is another way to tease apart the large number of stocks and here I use Vanguard ETFs to look at Mega Cap to Small Caps.   The recent selling has been limited to Small Caps and Mid Caps in the short-term time frame.  Large Cap and Mega Cap indexes are unaffected by the recent trading.  Value stocks which had a sharp rally in September-October have seen some profit taking. Overall, all capitalization stocks are trending higher from the medium to long term time frames.

Chart 6: The recent selling, or what there has been of it, has been confined to small stocks, and Value stocks in the Mid Cap area.  Overall, all stocks are trending higher on the medium-term and longer time frames.

 

SPX Trending Higher


The S&P 500 index is trending higher, as can been seen by the Aroon green line being well above the red line and the red line being at zero. A bit of selling is also visible over the past six days.

Chart 7: The S&P 500 index has been steadily moving higher with the Aroon red line pinned at zero.  (A live version of the chart is here.)


Intermediate-term Bonds In Down-trend Channel


The Vanguard BND Total Bond Market ETF has defined a down-trend channel and has strong support in the 80.75-81.00 area.

Chart 8: Bonds have been consolidating, and have defined a down-trend channel as they approach support.   Their intermediate- to long-term trend is still higher from Chart 2 above.

 

Post-Election Rally Rolls On

I have been tracking the post-election rally since April, and the market is firmly on track in that model. 

Chart 9: The market continues to track the post-election model I wrote about in April.

 

Looking Ahead

Head-line risks are the primary risk to the market, but the models are all trending higher.

Thank you for tuning in, and I hope you will follow the blog using the quick sign up below.

 

 

Amazon (AMZN) Large Upside Gap Meets Jumbo Gap Criterion

Today's jump in Amazon (AMZN) after their  blow-out earnings announcement yesterday meets the jumbo gap criterion I had analyzed earlier, with an open well above the prior day's high plus the 10-day average true range.  It is nice when a stock actually follows through on one's analysis, and Amazon's price action today confirms my earlier chart analysis from October, 05.  I revisit the chart and show the Jumbo Scan from earlier today, which shows a number of big technology stocks that announced good earnings yesterday.

 

Chart 1:  This chart first appeared on Oct 05 as Chart 4.   As expected, Amazon tested resistance at 1020, then faced some selling going into the earnings announcement before the big Jumbo Gap today.

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