Trend Check with Tushar Chande

A Quiz for Chart Watchers: Can you Identify This Indicator (Or These Indicators)?

If you are back from vacation but not quite ready to get back to work, here is a gentle diversion: can you identify the mystery indicator or indicators on the attached chart?  I have deliberately obscured names and axis labels to make things a bit more interesting. Is this the same indicator (with different values for its variables), or are these three separate indicators? I hope you will pardon the white-out effects in the charts below as I tried to obscure details that might give the game away immediately.

 

Chart 1:  Are these three different indicators, or the same indicator with different values for key variables?


 

Clue #1

In order to simplify your search, I will show you the underlying data series, which is the PowerShares QQQ ETF. This will allow you to try different indicators from the Stock Charts menu if you want to explore alternative ideas.

Chart 2: The QQQ data were used to calculate the mystery indicator or indicators.

 

Clue #2:

The three curves are highly correlated (see Chart 3), so even if they are different indicators, they must be closely related.  In other words, if you think these are three different indicators, and can make a good guess for one, the other two should be easier to find. On the other hand, they could simply be different levels of smoothing for the same indicator. (My spread-sheet calculations agree with the StockChart values obscured on the right-hand edge of Chart 2.)

 

Chart 3: The three curves are highly correlated with only small differences even at key turning points (the correlation ranges from 0.88 to 0.96). Thus, they could easily be three different value sets of the same indicator. The vertical scale (or scales) has (have) been deliberately obscured.  Rest assured that my spreadsheet calculations agree with the values obscured at the right-hand edge of Chart 2 above.

 

Clue #3:

If you need a building block for your analysis, a starting point, think of an indicator that is ubiquitous on StockCharts.  This one clue should be sufficient to solve the puzzle.

 

Food for thought

Chart 3 asks you to ponder if different technical indicators (or different value sets for the same indicator) truly carry meaningfully different entry or exit signals. 

 

Meanwhile, Back To the Markets Where Small Caps Held Key Support

The Small Cap stocks were leading the market lower in the most recent mini-correction.  But, key support on the Small Cap Index has held, and I think the broad market up-trend can continue as long as this support holds (see Chart 4).  The trend-check carpet for Vanguard Capitalization-based ETFs shows the selling at the medium and intermediate term time frame had turned the trend lower for Small Cap and Value stock ETFs (see Chart 5), but these stocks have recovered over the short-term, i.e., support held as shown in chart 3.

 

Chart 4: Small Caps held support in the 800-810 area, and so long as this support holds, I think major market weakness is unlikely. (See live chart here.)

Chart 5: A summary of my trend-following models shows that the Vanguard Small Cap ETFs and Value ETFs ( VIOG= Vanguard Small Cap Growth, VIOO = Vanguard Small Cap, VIOV = Vanguard Small Cap Value, VOOV = Vanguard S&P 500 Value) trending lower over the Medium-term (50-days) and Intermediate-term (100-days). This is where we saw the bulk of the selling over the previous month or so. The time interval increases from top to bottom, doubling at each step, from 25 to 200 days.

 

The intermediate and long-term trends in the major indexes have stayed bullish even though briefly turned lower at the short- and medium-term throughout 2017. The current trend check carpet shows the effects of the recent selling, with only the Russell 2000 bearing the marks of the selling from Chart 5 by trending lower in the medium- and intermediate-term. Note how all the rest of the indexes are bullish at the intermediate-term, and even the Russell 2000 is trending higher over the long-term.   Observe that the first two rows are mixed as market width increases from left to right reflecting the recent selling.

Chart 6: The first two rows are mixed, reflecting the mini-correction shown in Chart 5 in the Small- and Mid-Cap stocks.  Note that the Russell 2000 has turned up over the short-term reflecting the support in Chart 4 even though it is still pointing lower in the medium- and intermediate-term.   The recent selling was insufficient to move the other major indexes from their uptrend green zone in the intermediate and long term time frames.  Market width increases from left to right, from 30 to over 2000 stocks. The time interval increases from top to bottom, doubling at each step, from 25 to 200 days.

The trends in the core markets have remained constant over the past few weeks. Bonds and gold are trending higher on all time frames, the dollar is trending lower on all time frames, but the S&P 500 is mixed across all time frames (see Chart 7).

 

Chart 7: Bonds and gold are trending higher on all frames, the dollar is trending lower across all time frames, but stocks are mixed, consistent with the selling shown in charts 4 and 5 above.

 

Hurricane Effects

Even as we keep all those in the hurricane zones in our thoughts and prayers, the markets have reacted by selling insurance stocks, while lumber, home construction and emergency generator stocks have rallied.  (Tom Bowley (on property/casualty insurers) and Art Hill (on Lowes) have already devoted some space to these effects.)

Chart 6: Insurance stocks (ALL, PGR) sold off, even as Generac, Home Depot and Lowes rallied.

Biotechs and XOMA Zoom

Last week I had highlighted the strength in biotechnology stocks (see chart 5 of that post).  This week XOMA reports a perfect 100.0 score on the Chande Trend Meter, and it is easy to see why.

Chart 7: XOMA is trending higher very strongly, with a perfect 100 CTM score within a very strong industry group (Biotechnology).

 

Tune In Next Week for the Solution

If you think you know the answer to the quiz, simply write a comment, or drop me an email from my website. I'd love to hear what you think the implications are of the strong correlation.

I will show you the answer next week. Until then, thank you for tuning in, and I hope you will subscribe to my blog using the quick link below.

Tushar

 

 

 

 

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