ChartWatchers

Emerging Market Currencies Pull Stocks Lower

Emerging market assets are suffering from the dual threat of rising U.S. interest rates and a stronger dollar. The most direct result is seen in EM currencies. The green line in Chart 9 shows the Wisdom Tree Emerging Currency Fund (CEW) falling to the lowest level in five years. [The CEW includes a basket of emerging currencies]. That's a side effect of a rising dollar and weakening commodity prices (especially in Brazil and Russia). That's important because weaker EM currencies usually coincide with weaker EM stocks. The red line in Chart 1 shows a correlation between Emerging Markets iShares (EEM) and the CEW (green line). The EEM itself is in danger of falling to the lowest level in two years. That may increase risk for global stocks in general. China also has a lot to do with EEM weakness.

EMERGING MARKET ISHARES THREATEN SUPPORT... The weekly bars in Chart 2 show Emerging Markets iShares (EEM) in the bottom half of a trading range that started in 2011. The EEM is in danger of falling below last year's late intra-day low at 36.43 and a rising trendline extending back to 2011. That would be the first serious violation of chart support in four years. Plunging commodity prices are a big problem for EM countries that depend on commodity exports (which is made worse by a rising dollar). Rising Treasury yields also reduce the appeal of higher yielding (and riskier) EM assets. Emerging markets have underperformed developed markets for four years. That hasn't presented a major problem as long as the EEM has remained in a sideways trading range. Developed markets might not react as well to a breakdown in emerging market stocks.

Earnings Season Shows Mixed Market Reaction

We are deep into earnings season at this point. There have been enough companies reporting so far to make an assessment of what the market thinks of the overall earnings picture as July comes to an end. You can read all kinds of articles and opinions of analysts as to what the market thinks but from my perspective it all comes down to what the charts are telling me.

Take a look at the chart on the S&P below. I like to look at the S&P because it represents a good sampling of companies in different sectors. Also, according to Zachs, as of July 29, 263 of the 500 companies in the S&P have reported their numbers, so a nice sampling to gauge from. What the chart is telling me is that from the "official" start of earnings season on July 8 when Alcoa reported its numbers, the S&P has risen almost 2.8%. So on the surface, one could argue that investors have been satisfied with overall earnings. On the other hand, you can see that the S&P remains almost 1.5% below its May 20 all time high of 2134. So as usual, the truth lies somewhere in between; it's not been a great reaction to earnings but it hasn't been horrid either.

Zachs also shows that of the 263 companies in the S&P already reporting for the quarter, over 72% beat EPS estimates. That's potentially good news for traders since there are a lot of potential high reward to risk trading candidates, especially those that also show strong charts. In fact, I plan on conducting a FREE webinar next week that examines companies that beat earnings expectations plus have strong charts, a powerful combination. I will be joined in my webinar by Tom Bowley, Senior Technical Analyst at StockCharts.com, who will be sharing his observations on some of the charts that will be presented during the session. If you would like to register for this FREE event, just click here for more details.

At your service,
John Hopkins
President
Invested Central/EarningsBeats.com

Are We Primed For An October-Like Selloff?

I don't think so.  I'm always a bit leery of August and September because of the historical tendency for the stock market to struggle during the late summer season.  Throughout the current  6+ year bull market, the Aug-Sept period has racked up gains four out of six times.  But since the turn of the century, we've seen four separate 8%+ selloffs in this late summer bearish period, with the most recent being 2011.  So are we setting up for another late summer swoon?  Well, one of the key ingredients in any bull market is leadership from aggressive areas of the market.  Last year, selling began to grip the market in September with the bottom printing in October.  One of the problems last September was that the S&P 500 was making fresh new highs without leadership from three of the four aggressive sectors.  On a relative (to the benchmark S&P 500) basis, only technology remained a big part of the leadership on that September high.  The others - financials, consumer discretionary and industrials - were all losing ground on a relative basis.  Check it out:

Those three red arrows at the bottom of the chart reflect relative weakness throughout much of 2014 from financials (XLF), consumer discretionary (XLY) and industrials (XLI).  Technology (XLK) enjoyed a ton of relative success (blue arrow), but it wasn't enough to keep the S&P 500 from dropping close to 10%.  If you again refer to the above chart, you'll see that 2015 has been different as money continues to flow into all of the aggressive sectors on a relative basis, with the lone exception being industrials.  There's even a bit of good news there because industrials printed a reversing candle on its weekly chart off of its recent downtrend.  Here's the weekly chart on industrials (XLI):

While the reversing piercing candle is a nice short-term bullish signal on the XLI, the MACD crossing below its centerline is not.  The bulls will need to recapture both the 20 and 50 week moving averages to encourage additional buying.  But if the industrials could begin to see renewed buying, it would make it very difficult for the bears to regain control of the overall action in the market.

So while historical tendencies make me a little nervous, the underlying action continues to suggest the bull market rages on.

Happy trading!

Tom

Will Retail Run Up Into Christmas

This time of year is on my calendar to start hunting the best in retail for Christmas. Everyone following momentum has seen the Consumer Cyclicals ETF (XLY) continue to be a top performer. I like to migrate my attention into retail like footwear, teen apparel, toys to see who the strong ones are. Amazon (AMZN) dominates the broaden retailers with three stellar quarters of outperformance. None of the other Broadline Retailers have jumped up to compete in the Revenue Run to Christmas. But there are some interesting companies running in the other industry groups already. For the most part, I've highlighted the companies that have SCTR rankings around 70 and above. You can click on the screen shots to see the live versions all the way to Christmas.

Skechers (SKX) is one of the best stocks in the entire market. Nike (NKE) is a great marketer whereas Crocs (CROX) has managed to become a real stock again after imploding as a fad from years gone by. The long term chart for CROX says this level is important. The SCTR shows that it might have enough strength to push through.

With Jordan Spieth winning a few majors this year, Under Armour (UA) has been in the spotlight. According to the SCTR ranking, its paying off.

Continue reading "Will Retail Run Up Into Christmas" »

S&P 500 Hasn't Done this in over 20 Years

The S&P 500 is locked in a 100 point trading range (2040-2140) since March because of a serious split in sector performance. At less than 5% this is the narrowest range in several years. Note that Bollinger Bandwidth on the weekly chart reached a 20+ year low in July. This means the Bollinger Bands are at their narrowest in over 20 years. How's that for a contraction. John Bollinger theorized that a volatility expansion often follows a volatility contraction. Chartists, therefore, should prepare for significant move in the coming weeks or months. I'll highlight the key levels to watch after the jump. 

Continue reading "S&P 500 Hasn't Done this in over 20 Years" »

20-Year Treasuries ETF (TLT) Forms a Bullish Reversal Pattern

With the new Intermediate-Term Trend Model (ITTM) BUY signal on TLT and the break out for second time above the March low, I decided it was definitely time to abort the bearish Adam and Eve double-top pattern that I have been watching in earnest. Instead, I'm now seeing a rounded bottom; also known as a saucer bottom, it is a reversal chart pattern representing a long period of consolidation that turns from a bearish bias to a bullish bias (ChartSchool article on Rounded Bottoms located here). The Price Momentum Oscillator (PMO) has also been making a case to move bullish on TLT, it has continued to rise and is now in positive territory. The SCTR value is rising again and the On Balance Volume (OBV) shows that volume is behind this move (thumbnail shows that best). The recent Long-Term Trend Model (LTTM) SELL signal suggested the double-top would execute, but now it appears that signal is in jeopardy as the 50-EMA reaches out to crossover the 200-EMA.

You can see the major double-top formation on the weekly chart, but we can also see that price has broken above the neckline which technically nullifies the pattern. The 17-EMA had a positive crossover the 43-EMA this week. The PMO bottomed which is always bullish. Had the double-top pattern fully executed, the minimum downside target was around $107.50. That could hold up as an area of support should price reverse, but at this point, I'm not looking for a serious decline. Price has only just popped above resistance, so a major decline could reintroduce the double-top pattern, but I believe the rounded bottom is going to override that possibility.

The monthly PMO on the 30-Year Bond was ready to top in shorter-term overbought territory, but instead it turned up. It hasn't reached overbought extremes, so it could certainly back a longer rally.

Conclusion: While the Adam and Eve double-top is still visible, the new rounded bottom pattern and the upside break above the neckline supersedes the bearish implications. A bearish outcome is possible as price has just barely closed above the old double-top neckline, but indicators and EMAs suggest otherwise.


Technical Analysis is a windsock, not a crystal ball.

Happy Charting!
- Erin

When Big Cap Tech Gaps Big

Google broke out to new all time highs this morning after announcing earnings yesterday. The real problem for investors is after a huge move, what should investors do?

I want to look at previous examples and end the article with the Google chart. Let's look at Netflix (NFLX). All of the gaps up after earnings are marked in pink. This chart is particularly volatile. But you can also see on the SCTR when it surges to become a top performer, it usually hangs in there for a while.

Continue reading "When Big Cap Tech Gaps Big" »

Google Leads the Internet Higher

(Note: This article was originally published Thursday afternoon.)

The Internet group has been leading the technology sector higher this week. The standout performer in that group is Google. The chart below shows Google (GOOGL) surging through its spring high to the highest level since last October. Interesingly, the stock has been a relative underperformer, as shown its falling relative strength line (above chart). The good news is that the stock's RS line has just broken a falling resistance line extending back to February 2014. Good absolute performance by the stock (upside breakout), combined with a relative strength line just starting to turn up, is a healthy combination.

- John

(Note: Click here to watch John's interview during last weekend's ChartWatchers webinar.)

Why You Really Should Watch our Webinars

Hello Fellow ChartWatchers!

The stock market moved higher this week on good earnings news - but it is too early to conclude that the Bull are firmly back in charge.  Why?  One word - breadth.  Breadth and momentum.  OK, sorry, two, two words - breadth, momentum and seasonality.  THREE!  Three words - breadth, momentum and seasonality.   There.  Phew.   (If you don't get that Monty Python reference, click here.)

But seriously, there are still big concerns about the internal strength of the markets right now including those three factors.  (and sector rotation.  "Four!!")  The good news is that we covered all of those reasons in great detail on this weekend's "ChartWatchers LIVE!" webinar.  Instead of rehashing all of that content in this article, I'm just going to give you a link to the free webinar recording and strongly encourage you to check it out.  Here's the video:

(If the embedded video player doesn't appear above, just click here.  Make sure the "HD" button in the lower right corner is colored blue - if not, click it.)

Continue reading "Why You Really Should Watch our Webinars" »

Not Every Trade can be a Winner - But there are ways to Protect

As traders, all of us hope that each new position we take on becomes a winner. Realistically, we all know that some trades will turn out to be losers. In fact, one could argue that there are really three things that are certain in life; death, taxes and losing trades!

There are way too many reasons to list why some trades turn into losses but a few of the most common include:

-Improper analysis
-Unexpected events
-Missed earnings
-Sudden downgrades
-Failure to take profits

In looking at those above it's hard to fault someone for an out of the blue event or a sudden analyst downgrade. But misreading a chart, holding a stock into its earnings report and not taking a profit are all fixable.

Since we're right in the middle of earnings season it's a good time to remind everyone that holding a stock into an earning's report is a very risky proposition. In fact it's an unnecessary risk because there is no way of knowing how the market will respond to an earnings report. This makes it a 50-50 gamble at best, not very good odds when your capital is at risk.

In fact, to illustrate, I went back to last quarter as I vividly remember when LinkedIn reported its numbers and it missed badly. You can see from the chart below how much the stock fell when it opened for business on May 1, and how much it has continued to struggle since that big miss.

One of the reasons we've fine tuned our service at Invested Central is to avoid unnecessary risks as much as possible. It's why we've adopted our EarningsBeats.com model where we scan the market for stocks that beat earnings plus have strong charts. This way the earnings event is already out of the way and then it becomes a matter of being patient as we watch market reaction to the numbers and seek optimal entry points. There must be something to it as we've kept track of performance for several quarters now and the numbers don't lie. If you want to see for yourself just click here and I will send you full results. In the meantime, make sure you are doing everything possible to reduce your risks as a trader, including moving aside at the right times instead of standing in front of a possible train wreck.

At your service,

John Hopkins
President
Invested Central/EarningsBeats.com

Internet Index Soars

There's a reason we watch chart patterns.  Earlier this week in a DITC blog article, the internet index ($DJUSNS) finally cleared 900 resistance after failing at that level on a few occasions the past 18 months.  This latest attempt was different, however.  Many times it gets quite frustrating as continuation patterns develop.  The "I need to make money right now" crowd gets very impatient and loses faith in sectors or industry groups as they underperform for periods of time as money rotates within the market.  Those who use technical patterns simply bide their time.  What is lost is that the DJUSNS had a parabolic move higher BEFORE the consolidation pattern took place.  Check out the chart for this group:

There are a few points to be made here.  First, note that the breakout above 900 actually took place earlier in the week BEFORE Google's (GOOGL) big earnings report on Thursday after the bell.  Technical analysis provides us clues in many cases and this certainly was one of those cases.  Second, look at how long the DJUSNS consolidated in that ascending triangle pattern.  Third, we always have to be mindful of parabolic rises because they are often followed by continuation patterns that can take many months to take shape - just as the DJUSNS did.  Fourth, check out the relative strength of the DJUSNS vs. the S&P 500 during that 18 month consolidation period.  While the DJUSNS remained in a bullish continuation pattern, it was NOT where you wanted your money to be as we awaited confirmation of the pattern.  Finally, all of that consolidation enabled the weekly MACD (black circle) to move back to its centerline support.  Now the move higher is likely to be supported by moving averages during any period of selling.  I look for the DJUSNS to remain in favor for several months with pullbacks representing opportunities for entry along the way.

Happy trading!

Tom

Bulls-Eyes Are Great, but First Get the Arrow onto the Target

If you've ever practiced archery, you know that your ultimate objective is to put the arrow in the bulls-eye, but just putting it on the target still feels pretty good. While we aim at perfection, we'll happily settle for competence. If you are good enough to stay on the target, you'll score some points, and the odds are good that you'll even hit some bulls-eyes.

When I was just beginning my studies in technical analysis, a friend and I were working independently to develop a magic bullet for investing. I had come up with an indicator that I believed predicted the direction and duration of market moves. At one time the indicator predicted an up move of several weeks, so on paper I picked 25 stocks to go long (out of the over 100 stocks we were charting by hand, by hand mind you!). After a few weeks, 23 of the 25 stocks I had chosen were winners. My friend in exasperation asked, "How did you do that?!" Of course, I thought I knew the answer.

Continue reading "Bulls-Eyes Are Great, but First Get the Arrow onto the Target" »

Staring Into Asia, Specifically India

The news from the Shanghai market has been expected for while. Parabolic rises seldom descend in a controlled manner. Lately, this dominates the Asian news feeds about markets. However, some of their neighbours are doing quite well. South Korea is doing well, but India is doing a little better currently. India has the world's best numbers from a demographic perspective so I'll spend the article today focused on India.

Let's look at the market from India through the Bombay Stock Exchange ($BSE). Starting at the top, shown in purple, is the relative strength line of the $BSE compared to the $SPX.  India was outperforming the S&P 500 ($SPX) for almost a year. Recently, the Indian market underperformed the SP500 as shown by the blue line. However, in mid June the RS broke above this down sloping trend line and also exceeded the previous high of June 1. Moving on to price, after climbing 50% in one year, India has rolled over (since March 1) and pulled back to support. The pullback was a little over 10% off the highs. However, the support level has at least 6 tests on it with 2 from below in July of last year. The more touches a level has, the more important the level. After dipping below for a day, the market quickly rallied since mid June. It took a week to get through the 200 DMA and closed above the previous resistance area at 2 month highs. Nice.


Chart 1

Continue reading "Staring Into Asia, Specifically India" »

Home Construction ETF Leads and Holds Breakout

The mixed performance of ten key industry group ETFs reflects the flat performance in the S&P 500 since early May. Note that the S&P 500 is virtually unchanged since April 30. As the PerfChart below shows, six of the industry group ETFs are up and four are down. The Biotech SPDR (XBI) is the clear leader with a 21% gain in two months, but I am most interested in the Retail SPDR (XRT), Home Construction iShares (ITB) and Regional Bank SPDR (KRE). These three are up and showing leadership recently. ITB is the third best performer with a 6+ percent gain. 

Housing is an important industry for the economy and continued strength in the Home Construction iShares could bode well for the broader stock market. The second chart shows ITB with a big ascending triangle and a breakout earlier this year. Broken resistance turned support in the 26 area and this level held from late April to early June. An ascending triangle is a bullish continuation pattern and this breakout is valid as long as the May lows hold. A close below 25.5 would negate the breakout and this would be bearish for ITB, and weigh on the rest of the market. 

Thanks for tuning in and have a great weekend!
Arthur Hill CMT

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