Trend Check with Tushar Chande

Scan Code: Point and Figure Plus Chande Trend Meter

Topics: 1)Scan code for Quadruple-top Breakout Plus Chande Trend Meter; 2)Is Amazon a Counter-Trend Buy?; 3) Market review: the Market follows-through on the breakout (gold retreats, high-yield bonds rally, relative-strength of European bourses flat-lines, breadth breaks out).  A more detailed discussion of each topic is set forth below.

A Quadruple-Top Breakout on a Point-and-Figure Chart


Concept of the Scan

Here is a simple scan code which combines two types of breakout searches: a quadruple-top point-and-figure breakout with the Chande Trend Meter to measure the absolute strength of the breakout.  The results seem quite intriguing.  It is important to remember that the point-and-figure method ignores time, and only looks a price movements. As such, it is a clean look at price movements, with a filter to screen out moves smaller than some chosen threshold.  The Chande Trend Meter is an intermediate-term measure of momentum which combines many price intervals, price patterns and momentum signatures.  Hence, the two together should give us a nice screen for pure breakouts with excellent absolute trend strength.   A small sample of the results from today's scan are shown in Figure 1.

//Scan Code: : Quadruple PnF Breakout + CTM
// limit search
[type is stock] and [sma(20,volume) > 40000] and [Country is US]  
// look for Point-and-Figure Quadruple Top
and [PnF Quadruple Top Breakout is true]
// with strong absolute momentum via CTM
and [Chande Trend Meter > 85]
// sort by CTM
rank by Chande Trend Meter

Chart 1: Here are the first few rows from a scan that looks for a quadtruple-top breakout on PnF charts with strong absolute momentum.


A Closer Look at CRAI - CRA International

CRAI is the third stock in the scan shown in Chart 1.  We will explore its chart to understand the results of the scan. Let us begin by looking at its point-and-figure chart first.  If you look at the upper right-hand corner, you can see the red arrow pointing out the quad-top breakout at 40.  The green P&F Pattern readout in the top legend identifies the quad-top breakout on 9/26 last week.

Chart 2: A quadruple-top formed in the 39 area (see red arrow at top right) for CRAI, with a quick pop up to 43 once the stock rose past the 39 top.  Note there is no time axis.

The picture is a bit more complicated with a time axis (see Chart 3).  The quadruple top took 7 months to form, and the price actually ranged from about 37 to 40 in round terms. Depending on how we count the peaks, one could call this a breakout above the three prominent peaks just below 40. The Chande Trend Meter is now about 92, showing the strong trend strength at the breakout.  A rough price target to 48 can be derived from the chart for the recent breakout.


Chart 3: The breakout beyond the 37-40 range occurred with strong momentum with the CTM at 92.  Using the 8-point range from the lows near 32 to the range high at 40, we can project out to 48 as a price target.


A Bullish Reversal in Amazon

Moving away from a trend-following entry, let us examine a potential counter-trend entry into Amazon (AMZN).  The Amazon chart is the mirror opposite of the CRAI chart, in that instead of testing resistance, the Amazon has been probing support at 920.  Observe that AMZN broke out above 920 in May, and then came down to re-test it three times, though to be correct, it tested the range 920-940, rather than just the 920 level itself.  Most recently, it seems to have broken above a down-trend line after forming a head-and-shoulders pattern as part of its testof support at 920-940.  Naturally, there is more work to be done, with resistance in the 1000-1020 area to overcome before challenging the huge overhead resistance at 1080.  It is possible it may form a wide right-shoulder (just like a wide left shoulder) as part of testing the resistance at 1000-1020.  


Chart 4: Is Amazon about to reverse after multiple-tests of support?  Observe how the Amazon chart is the mirror image of the CRAI chart in Figure 3... it has been testing support instead of probing resistance.


Market Follows Through on Breakout

The SPX and major market indexes followed through on their breakout, as I had expected for the past several weeks.  Today I want to point out that the "ancillary" chart are now in sync: gold has come down, high-yield bonds are rallying, and the US market is holding its own versus Europe, after the various political developments over there.  The iShares Gold Trust (IAU) has broken below its breakout at 12.5 and is about to test its lower band at 12.09.  Due to its negative correlation to the market, any bounce here in gold may mean a pullback in the market.

The HYG ETF is trending higher, and green lighting further gains in equities (see Chart 6). At the same time, European equities have flat-lined in relative strength versus US equities (see Chart 7), another positive sign for our markets. Finally, the percentage of stocks in the S&P 500 universe above their 50-day average has broken out to the upside (see Chart 8), also a sign of further strength in the market.


Chart 5: IAU has broken below the key 12.50 level, and is now testing the lower band at 12.09 (A live version is here.)


Chart 6: The iShares iBoxx High Yield Corporate bond ETF is trending higher, pointing to further strength in equities. (A live version of this chart is here.)


Chart 7: The ratio of IEUR:SPY, or the iShares Core MSCI Europe ETF versus the S&P 500 SPDR ETF has flattened out, means that US equities are perceived to be at least as attractive as European bourses, as net positive for trends in our markets. (A live version of the chart is here.)


Chart 8: The percentage of stocks in the S&P 500 above their 50-day moving average has broken out out a converging triangle and above the upper descending trend-line. Stronger breadth also augurs well for the continuation of the current trend. (A live version of this chart is here.)


Looking Ahead

October has seen hiccups in the market before, so one always has to be ready for head-line risk.  But so far, the trend-following models are all pointing higher.


Chart 9: Our trend-following models are all long, pointing to higher prices, across all time frames, and market breadth from 30 to over 2000 stocks.  Breadth increases from left to right, and time frame doubles at each step from top to bottom.  (My trend-following models are here.)

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