ChartWatchers Newsletter

Get Ready - Earnings Season is About to Begin

They say how time flies; and it's true, especially from one earnings season to another, and starting this week we're going to start hearing from thousands of companies as they release their numbers. And boy, there's nothing traders and longer term investors care about more than earnings.

This makes total sense. Think about it. Companies cannot control everything swirling around them. What they can do is adapt to the times, adjust their strategies as necessary and stay focused while delivering strong results for their shareholders.

One thing is for sure; traders gravitate to those companies that report solid earnings, especially those who beat bottom and top line expectations. And you should focus on some of these winners as well.

For example, Micron Technology (MU) recently reported its earnings and as you can see from the cart below it gapped up sharply on extremely heavy volume.

This big spike in volume shows great interest in the stock; everyone loves a winner. And the stock broke above a high it last saw in December, 2014. Pretty impressive!

We saw this pattern repeated over and over last quarter where a company would beat earnings expectations and gap up on strong volume. The other thing we saw? Patience rewarded. In other words, those traders who watched how the market reacted to a specific earnings report and then waited patiently for a pullback were handsomely rewarded.

As another example, take a look at the chart below on KORS, one of the stocks we watched closely and at the right time sent a trade alert to our members:

In this case, once the initial excitement settled down and the stock pulled back to its 20 day moving average, we issued the alert to members with the stock becoming a very nice winner, gaining 9.3%.

The whole concept behind EarningsBeats is to scan for those companies that beat earnings expectations - both earnings per share and revenue - and also have nice looking charts. Some of these become trade alerts for members. In fact, I will be conducting a Webinar this Monday, October 9, at 4:30 pm eastern and will be joined by StockCharts.com Senior Technical Analyst Tom Bowley as we show attendees how to scan for companies that beat earnings expectations (including some high reward to risk trading candidates) and how to establish a StockCharts.com Chart List, a powerful trading tool. To learn more and register just click here

And with earnings season about to begin, timing couldn't be better!

Earnings season presents some great reward to risk opportunities, especially for those who exercise great patience. Honing in on those stocks that exceed market expectations can indeed be profitable.

At your service,

John Hopkins
EarningsBeats

The NASDAQ 100 Hit a Record High This Week, But Still Lags The S&P 500

Chart 1 shows the Powershares QQQ ETF hitting a record high this week. It was the last of the major stock indexes to do so, and its breakout is a positive sign for the market. It also did slightly better than the rest of the market. The QQQ, however, has still been a relative laggard over the last month. That's shown by the falling QQQ/SPX ratio since the start of September (blue line). This week's upturn in its RS line may be a sign that some funds are flowing back into large tech stocks. But there's more going on beneath the surface with the QQQ. For one thing, comparing the QQQ to the S&P 500 doesn't fully reflect QQQ recent underperformance. That's because the S&P 500 itself has been an underachiever over the last month (relative to smaller stocks). To get a truer picture we have to compare the QQQ to the groups that have been getting most of the tech money. Financials have been the biggest beneficiary of the past month's rotation out of techs. That's been tied to the upturn in bond yields, and expectations for another rate hike in December. The reasons why financials usually outperform techs when rates are rising have been described in previous messages. Let's compare their recent relative performance.

Anyone still doubting that a significant sector rotation has been going on need only look at the next chart. The blue bars in Chart 2 plot a relative strength ratio of the PowerShares QQQ divided by the Financial Sector SPDR (XLF). The bars show the QQQ underperforming the XLF by a wide margin since the start of June, and again during September. Since the start of June, financials have nearly tripled QQQ performance (14% versus 5%). Since the start of September, financials have outperformed the QQQ by a 7% to 1% margin. Rising bond yields have been the main reason why. And signs of a stronger economy. Three other economically-sensitive sectors outperforming the QQQ over the last month are the industrials (including transports), energy, and materials. That shows that money has also been flowing into parts of the market that do better in a climate of rising rates and a stronger economy. Those three sectors have doubled the performance of the QQQ over the past month. They also hint at rising inflation.

Four Critical Signals That Confirm It's Full Speed Ahead For Equities

I've been following the stock market for a long time and I'm always searching for that perfect signal that never fails.  I still haven't found it and there are never any guarantees in the stock market, BUT following the rotation of money to aggressive areas of the stock market can provide fairly reliable confirmation that a bull market rally is sustainable.  The four relative ratios that I rely on the most are the following:

Continue reading "Four Critical Signals That Confirm It's Full Speed Ahead For Equities" »

A Pullback in the Energy SPDR? Here's What to Watch.

The Energy SPDR (XLE) is the top performing sector SPDR since mid August with a double digit advance over the last seven weeks. On the price chart, XLE broke out of the channel, exceeded its summer highs and pushed RSI above 70 for the first time this year. It was a remarkable move, but the ETF is short-term overbought and ripe for a corrective period, which could involve a pullback or a consolidation. 

Where might a pullback find support and reverse? I am watching the summer highs, the Fibonacci Retracements and RSI for answers to this question. A key tenet of technical analysis is that broken resistance turns into the first support level. XLE broke resistance in the 65.5-66 area and this area turns first support to watch on a pullback. Also notice that the 38.2% retracement resides in this area. This is the minimum retracement expected on a correction. 

The indicator window shows RSI failing to break above 60 from January to August. It is typical for RSI to fail in this area during downtrends. The opposite holds during an uptrend. If a bigger uptrend is indeed emerging, I would expect RSI to hold the 40 area on any pullback and would look for a pullback to end when RSI enters the 40-50 zone.  

Follow me on Twitter @arthurhill  - Keep up with my 140 character commentaries.

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Thanks for tuning in and have a good day!
--Arthur Hill CMT

Plan your Trade and Trade your Plan
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Weekly PMO BUY Signals Explode on DecisionPoint Scoreboards

Today all but the NDX garnered new PMO BUY signals in the intermediate term. The intermediate-term PMO signals are gathered from the weekly chart PMOs and their crossovers. I'll give you a peek at the NDX weekly chart too, but it is much further away from a new weekly BUY signal. In fact, the NDX weekly chart looks surprisingly bearish. 

Continue reading "Weekly PMO BUY Signals Explode on DecisionPoint Scoreboards" »

The $USD Hits Resistance

This week the US Dollar climbed to its highest level in two months. For those who have been following the Commodities Countdown articles, the reversal in the $USD was expected from the big downtrend. The three-year chart of the $USD shows the Euro turning higher at the start of 2017, the British Pound basing until March and then turning higher and the Canadian Dollar bottoming in May and surging higher. With every chart making new 52-week highs against the Dollar, this is a significant technical change. The $USD made new two-year lows. The macro suggests major change is afoot.

Continue reading "The $USD Hits Resistance" »

Rising Energy Prices Help Boost August CPI, British Pound Surges to Yearly High

ENERGY ETF REACHES FIVE-MONTH HIGH ... It was reported Thursday that the headline CPI for August rose 0.4% from the previous month, which was its biggest monthly gain since January. That boosted its year-over-year comparison to 1.9%, which is just shy of the Fed's target of 2% inflation. The biggest reason for that jump was a 2.8% monthly gain in the price of gasoline. The core CPI figure (excluding food and energy) rose 0.2% during August, which was its biggest monthly gain since February (for a year-over-year gain of 1.7%). Rising housing costs were the biggest reason for that gain. Futures markets raised expectations for a Fed rate hike in December from 30% to just over 50%. That also boosted bond yields here and elsewhere (more on that shortly). As you know, low inflation has been viewed as the main factor holding the Fed back from another rate hike this year. Which is why yesterday's strong report is encouraging to those looking for higher rates. And that brings me back to one of my favorite themes regarding inflation and the Fed. I find it ironic that energy prices are the main force driving the CPI higher, while the Fed continues to exclude energy from its inflation readings. Hurricane Harvey probably had more to do with the higher August CPI than anything the Fed has done. Chart 1 shows the Power Shares Energy Fund (DBE) climbing to the highest level in five months. [The DBE includes crude oil, gasoline, heating oil, and natural gas]. It has climbed above a falling resistance line extending back to January, and its 200-day moving average. Weather is playing a role in its recent advance. But the chart argues for higher energy prices. That's helping boost energy shares. And may argue for higher inflation readings. A falling dollar is also helping. So is this week's sharp jump in the British Pound.

BRITISH POUND SURGES TO YEARLY HIGH ... Inflation in the UK has jumped to 2.9%. The Bank of England left UK rates unchanged on Thursday, but voted in favor of tighter monetary policy in the near future (which suggests a rate hike this year). That gave a big boost to the British Pound. Chart 2 shows sterling surging nearly 3% this week to the highest level in a year. Sterling has gained 10% against the dollar this year (versus a 13% gain for the euro). The pound is the third biggest foreign currency in the Dollar Index basket with a weight of 12% (behind the euro and the yen). It's rise this week is keeping downward pressure on the dollar which is supportive to commodity prices. The pound is also being supported by higher UK bond yields.

Finding Stocks Poised To Begin A Pre-Earnings Run Higher

If only it was that easy, right?  The problem many times is that a company that reports great results one quarter fails to do so the next.  But my strategy is to find companies that not only reported great results in the prior quarter, but also showed major accumulation at the time, and just after, that earnings report was released.  Analyzing the volume is critical during this step.  I look for well above average volume for a period of a few days or more as the stock rises after its earnings-related gap higher.  Over the next few to several weeks, these companies pull back on lighter volume and prepare for the next earnings run.  That's where planning and doing your homework become so important.  Here are a few trading candidates that fit the bill and could be primed for a big pre-earnings run higher:

Continue reading "Finding Stocks Poised To Begin A Pre-Earnings Run Higher" »

Car Manufacturers Rev Up

In the wake of the devastation of Hurricane Harvey and Hurricane Irma, a lot of cars were flooded. When scrolling through the auto charts, a few were breaking some trend lines this week.

GM is pushing to new highs since basing for 4 years between $23 and $36.

Continue reading "Car Manufacturers Rev Up" »

What Does a Trend Line Really Tell Us?

We all know what a trend line is, but does a trend line actually dictate the trend? In other words, does a trend line break actually signal a trend reversal? Or, is a trend line break telling us something else? We cannot use a tool unless we fully understand it and this article will shed some light on the humble trend line. At the very least, I hope to stimulate the analysis process by challenging you to think hard about an indicator and its message. 

Continue reading "What Does a Trend Line Really Tell Us?" »