ChartWatchers

Rolling with the Changes - RRG Charts Come to StockCharts!

Hello Fellow ChartWatchers!

Long-time members know that I am always thrilled whenever I can start my article with the phrase "Today I am thrilled to announce...".  And that phrase has been used so much in 2014 that it is starting to lose all meaning.  As I mentioned in recent newsletters, we have added so many important new things to the website this year, but this week I do have something really special for you...

Relative Rotation Graph (RRG) Charts Now Available!

Today I am thrilled to announce that Relative Rotation Graph (RRG) charts are now available on StockCharts.com.  These innovative charts give you an immediate, concrete sense of how well or how poorly each stock in a related group of stocks has been doing by plotting each stock's Relative Strength versus its Momentum.  Here is an example of an RRG chart:

First things first: stocks generally follow a natural clockwise rotation on an RRG chart as time passes.  For instance, if a stock starts out in the green "Leading" quadrant because it has good relative strength and good momentum, it typically will start to lose momentum and rotate into the yellow "Weakening" quadrant.  Next its relative strength will probably falter and it will move into the red "Lagging" quadrant.  After awhile, things may start to improve (relative to the other stocks on the chart) and momentum will pick up moving the stock into the blue "Improving" quadrant.  Finally, relative strength will return causing the stock to move back into the green "Leading" quadrant.  Make sense?

RRG charts have large dots on then showing you where each stock is currently on the chart.  Extending backwards from each dot is a long "tail" that gives you a sense of the stock's recent travels through the chart.  On the live RRG Chart page, you can interactively control the start and end date of the chart and watch the stocks spin around over time.  Click here to try it out.   Go ahead.  I'll wait.

Did you have fun?  These things are very addictive!

The example chart above shows the RRG chart for the nine S&P Sectore ETFs.  It is only available to StockCharts members so I wanted to take a moment and talk everyone through it so you can see how useful it can be.

Did you notice that the color of each line is controlled by the color of the quadrant that the final dot is in?  That makes it easy to see which stocks (Sector ETFs in this case) are in which quadrant.  As of right now, Energy, Technology and Health Care are in the green "Leading" quadrant with Cyclicals in the blue "Improving" quadrant.  Note that Energy is losing momentum however and should enter the yellow "Weakening" quadrant very soon.  Also note that Finance (XLF) has improving momentum and may enter the blue "Improving" quadrant soon as well.

Now let's take a moment and look at our Sector Rotation model graph and see if that helps us  interpret these results:

The fact that Technology is strong and Finance and Cyclicals are starting to perk up is evidence that we are still on the left side of this chart in the "bullish part of the red curve where the market picks up strength.  However, the fact that Energy and Health Care are also strong brings a note of caution to this analysis.  In a perfect world, we should see strong leadership from Cyclicals, Technology and Industrials with relative weakeness in Staples, Health Care, and Utilities.  (Of course, there are outside factors that may be causing Health Care to ignore the general business cycle at this time.)  So we have a bit of a mixed picture at the moment in terms of the Sector Rotation model.  It will be interesting to watch this chart in the coming weeks to see how things resolve themselves.

Please do take some time to play with these new RRG charts and see how they can help you gain deeper insight into the market.  I hope you find them useful.

- Chip

P.S. Also keep an eye out for the debut of a new "RRG Chart" blog written by Julius de Kempenaer, the inventor of RRG charts!  Julius will be writing lots of articles explaining how he developed and uses these innovative charts himself to make money.

P.P.S.  News Flash: Julius has been added to the speaker list for our upcoming ChartCon conference in Seattle in August.  That means that ChartCon is now the perfect place to see these charts in action and learn how they work!  Are you going?  If not, click here and reserve one of the few seats that are still available.

 

 

Now Is The Time For The XLY To Breakout

The Consumer Discretionary Sector SPDR (XLY) is a very important barometer in the US investing landscape. It sits on the edge of a breakout to new highs. July / August is typically the time frame that investors start to rotate into the discretionary stocks to position for the back to school stock up event and the massive Christmas shopping season. With the midst of earnings season upon us, option expiry yesterday and a few of the long trends showing weakness, it is an important time for the cyclicals to show strength. First of all a real quick check of the month long term chart to discuss the July/August acceleration in cyclical (discretionary) stocks.

So in hindsight, July is a nice place to look for seasonal timing. It may drift into August for a low. You can see clear underperformance by the consumer cyclical  sector in market years that were either down years or sideways. Notice even in 2007, the sector made the highs in May even though the S&P 500 ($SPX) made highs in October 2007. 2002 continued to be weak. In 2005, the $SPX was moving higher in the back 1/2 of the year (not shown), but not consumer discretionary. We want to see the cyclicals close higher at the end of August to confirm the sector strength into the strong period to December. In the Top plot, the SCTR ranking made lows not seen since the financial crisis. This is why I have some hypersensitivity to the sector now. The MACD has also approached its signal line to illustrate a zone of caution. Currently it resides below the signal. You can see the negative number in the MACD legend. One remarkable trend is the volume. While the $SPX is back to 2006-2007 levels, we can see this sector has a huge volume  profile that is substantially larger than the 2006 period. Onto the weekly.

We can see the SCTR is just back to the 50% level.  Will this form some sort of resistance where the sector becomes stuck at or under the average ETF? This is important as it has been hugely bullish since the Fed stimulus of 2012. The MACD has started to rally. If it was to fail here, it would be huge negative divergence, so we want to watch based on the clues of the SCTR. The recent volume has been huge and marks the 2nd largest back to back weeks all the way back to 2012. We can see the price action is near new highs and has paused here for three weeks after making new highs. As the price action is relatively close to the blue up trend line, all technicians would respect a break of a major 2 year trend line. Ok, next is short term daily.

On the Daily we can see the weak SCTR. The MACD is sideways to down but nice and high. Price action is interesting on the 3 month view. Two huge high volume days are responsible for the big readings on the weekly. The first was a bounce off 1 month support. The second was a gap up and it fell all day but still closed higher than the previous day. Thursday marked a close at or below support depending where you place the line. The micro black dotted uptrend line was broken and we seem to be having trouble getting back above. It is still a bullish chart, but the long term and intermediate term (charts 1 and 2) suggest focusing on cyclicals for larger time frame direction. 

Good trading,

Greg Schnell, CMT

 

 

Mortgage Finance At Major Support

Financial stocks have lagged throughout 2014 and are showing signs of slowing momentum.  That's keeping hope alive for the bears.  The XLF (ETF tracking financial stocks) has a clear long-term negative divergence in play on its MACD as you can see from the chart below:

Most of the strength, however, has been concentrated in REITs, the defensive area of financials.  That's not exactly where I'd like to see the strength centered, but it is what it is.  One area of financials - mortgage finance ($DJUSMF) - has been lagging very badly as that industry group has dropped more than 6% over the past month, while many REITs have enjoyed gains in the 3%-5% range.  The good news for mortgage finance stocks is that they reached key 2014 price support near 5.85 before bouncing on Friday.  You can see this support on the following chart:

Financials are going to need to see strong earnings reports and guidance over the coming days to counter the slowing momentum issues discussed above.  

At EarningsBeats.com, we've started a new feature (and it's FREE) that analyzes the technical merits of companies as they approach their earnings date.  If you'd like to receive the first copy, simply CLICK HERE for more information.

Happy trading!

Tom Bowley
Chief Market Strategist/Chief Equity Strategist
Invested Central/EarningsBeats.com

Small Caps Continue to Lag Behind

One of the nagging concerns about the current market rally is the lack of participation by small cap stocks. This week's action was another example of that troubling trend. The Russell 2000 Small Cap Index lost -0.72% this week (versus a +0.54 gain by the S&P 500 Large Cap Index). In a strong uptrend, small caps should be rising with large caps. Chart 4 shows the early July top in the Russell 2000 failing to overcome its early March peak and losing 4.5% since then. The RUT/SPX relative strength ratio (below the chart) shows how badly small caps have lagged behind. Since March 4, small caps have lost -4.7% while the S&P 500 has gained +5.5%. That 10% underperformance by the RUT is the worst since 2012 when the market was in the midst of the last downside correction. The good news is that the RUT hasn't yet suffered any serious chart damage. Friday's 1.5% gain kept it above its 200-day moving average. The RUT may also be finding support at its 62% Fibonnaci retracement level measured from its May low to its July peak (green lines). Although I remain concerned about the relative weakness of small caps, the RUT would probably have to fall below its May low to signal a serious problem with the rest of the stock market. For the record, small caps usually peak first at market tops. Janet Yellen's comment at midweek that small caps were "stretched" contributed to some of this week's selling.

Narrowing Yield Spread Weighs on Regional Banks

The Regional Bank SPDR (KRE) failed to hold its flag breakout and then broke support with a sharp decline this week. It would now appear that KRE formed a rising wedge that peaked below the January high. This week's wedge break signals a continuation of the prior decline and projects a move below the May low. This week's high and the trend line break to mark a resistance zone in the 40-40.5 area. With the upswing reversed, chartists can also consider a larger bearish pattern taking shape. Combined with a relatively equal high in January, a large head-and-shoulders reversal pattern could be taking shape with neckline support in the 36.5 area. 

The overall stock market remains strong with the S&P 500 near all time highs and the Finance SPDR (XLF) hitting a 52-week high this month. Why are regional banks underperforming and breaking down? The spread between the 10-year Treasury Yield ($UST10Y) and the 2-year Treasury Yield ($UST2Y) may be to blame. The second chart shows a 1.99 difference between these two yields, which means the 10-year Yield is 1.99% more than the 2-year Yield. The yield curve is still very positive and this bodes well for the economy overall, but the difference between the two has narrowed significantly this year. The 10-year Yield fell, the 2-year Yield rose and the Yield Curve 10YR - 2YR ($YC2YR)) fell to its lowest level since June 2013. Banks make money by borrowing at short-term rates, lending at long-term rates and capturing the difference. This difference is less and this could be weighing on regional banks. A break above 2.2 in the Yield Curve (10YR - 2YR) would suggest that the spread is widening again and this would be positive for regional banks. 


Good trading and good weekend!
Arthur Hill CMT

Is The Euro Carrying Critical Information For Commodities Direction?

This week was an important week on a lot of the commodity charts. Most of them surged up to major long term resistance lines with a few of them breaking through.

But it is the Euro Currency Charts that look critical right here. If major support should fail on the Euro ($XEU) , that would indicate a rise in the US Dollar ($USD). A major push in the $USD usually has downward pressure on commodity prices. 

Lets look Monthly, Weekly and Daily to see the full picture.We can see on the Monthly, the Euro recently peaked out at a key long term support resistance area. After pushing up against the down sloping green resistance line it has pulled back and is testing the 2 year up sloping blue line.

Chart 2 is the Euro Weekly. A few important things to note, the green line is the 40 Week Moving Average (40 WMA). We have been trapped below it for 6 weeks now. I have drawn a dotted line which has a lot more tests of support. It appears to be clearly broken at this point. The push down in 2013 was the only major pullback in the US equity markets. The low on the $SPX was made June 24, 2013. The top resistance line is just overhead. We can see the up slope on the MACD is near the support line. On the US Dollar ($USD) chart, we can see the downtrend has been broken, and we have back tested this line for support. It appears to have held at a critical point. We also have massive horizontal support at the blue shaded area near 79.

Finally here is the daily on chart 3 for the zoomed in view. We can see the Euro clearly broke the major support area which I have marked with a dotted line. Now we seem stuck under the 200 DMA and based on the price action of this week, the backtest of the 200 DMA looks to have failed. We are approaching a major test of the last trend line for support. Just below is the red zone. Usually a good place to go short is on a failed backtest of the 200 DMA. 

On the US Dollar chart, we can see the back test and bounce that we saw on Thursday. The blue trend line fits nicely on the Feb , Mar, April tops and when extended back it is at the island top gaps. While it doesn't fit nicely on May 2013 tops, it is a good fit of the data we currently have since then. 

Should the $USD start a major rally here, all my commodity bullishness may have to wait. The weeks ahead will be important reversal or confirmation weeks as these levels are still close and could revert back into the previous trend. Based on the monthly charts at the top, when these currencies lose trend line support the move is pretty aggressive and significant for major trends.

Good trading,

Greg Schnell, CMT.

What to Expect in the Second Half of 2014

Hello Fellow ChartWatchers!

2014 has already been full of surprises both in the markets and here at StockCharts.com.  From a market perspective it has been yet another great year to be a technician assuming that you trusted the charts and not the talking heads and experts.   "The market is too high!"  "It's overdue for a pullback!"  "It is prudent to be on the sidelines in this environment."  Did you listen?  Or did you watch your charts instead?  Check out what this chart has been saying so far in 2014:

First off, except for a brief period at the start of February, the Dow was above its 200-day moving average so technicians should have had a bullish bias to begin with.  Then, regardless of the technical indicator you followed, you should have been in the market much more than out.  Do you like momentum?  The PPO (a percentage-based version of the MACD) has been above zero since mid-February and above its signal line for much of that time.  Do you like watching money flows?  The Chaiken Money Flow has been positive most of the time also - certainly since late April.

There's only one worrisome signal on the chart above.  Can you spot it?

Yep, declining volume since February is a warning signal but, by itself, it is not a reason to move to the sidelines especially if you are practicing sensible risk management techniques.

Now, my point is not "Buy! Buy! Buy!" - but instead I'm saying "Pay attention to the charts and ignore the pundits. The market is bullish until it isn't and the charts will tell you that long before the talking heads do."  Headlines like this "Stocks soar, and most Americans just don't care" amaze me.  Who doesn't care about making 2.97% in 6 months (11.03% since the February low)?  And that's just from the Dow.  The S&P 500 is up over 7.4% since the start of the year (14% since the February low)!  Who doesn't love that?  It is madness.

So the first half of 2014 has been the perfect time for pure technicians - i.e. those of us who truly just follow the charts.  And, regardless of what the market does for the rest of the year, if you pay attention to the charts, you will always come out ahead.

Speaking of the rest of the year, what does StockCharts have in store for you between now and December 31st?  A ton of great new things actually - here are some teasers for things to come:

  • High quality historical data from Pinnacle Data -  Pinnacle Data has been synonamous with accurate historical data for over 30 years.  Knowledgeable technicians like Greg Morris and Carl Swenlin swear by these guys.  And now that legendary data is coming to StockCharts!  Over the course of the next month, we will be updating many of our ticker symbols - especially our breadth indicators - with Pinnacle Data that goes back much further than what we currently offer.  The is a big deal for all of our users but especially our PRO members who want to conduct research using data as far back as the 1950s and even earlier.  As an example of what you can look forward to, the Nasdaq 100 index ($NDX) now has data back to October 1985 (it used to end in January of 1992).
  • Relative Rotation Graphs -  These things are amazing (and also somewhat hard to explain).  We are still working on finishing them but I can give you a "sneak peek" at what they might look like when we are done:

    They will be interactive also - similar to our PerfCharts.  Just don't ask me for an explanation yet!  But don't worry, we will have a full explanation and examples available by the time this new tool is launched later this year.
  • International Data -  Anyone here interested in charting stocks from non-North American exchanges?  We are too!  And because of that we are working hard on upgrading our datafeed so that it can handle more data - specifically more international data from places like India and England.  We still have a ways to go with that work, but we hope to have it ready before the end of the year as well.
  • New, Comprehensive Site Documentation -  The Support area of our website is undergoing a complete re-write at the moment.  When it is finished, we expect it will be much more helpful than our current documentation.  Stay tuned for an announcement soon - this is a top priority with us right now.
  • At Least Two New Bloggers -  One of them will be helping everyone understand those RRG charts you see above and the other one will help us understand India's markets.
  • Did I Mention ChartCon 2014? - It will be without a doubt our best conference ever with presentations from 14 industry experts (including 2 special guests just added to the agenda!).  If you miss ChartCon, you will regret it.  Given where the market is right now, don't you want to hear what the top technicians in the country think about the rest of 2014?  Don't you want to learn first hand about all of the new tools we've added to StockCharts this year?  ChartCon 2014 is the best way I know of to accomplish those goals.  There are still a couple of slots left - click here to reserve your spot now.
  • ...and the proverbial "much, much, more!" -  Why should we stop now?  I'm sure that we will soon add stuff even I didn't know about!

Thanks again for an amazing 1st half of the year and here's to an even better second half!

- Chip

Assessing The First Half of 2014

It's been quite confusing for several reasons, a few of which are discussed below.

Historically, the S&P 500 nearly always struggles during the balance of a calendar year in which January performance is weak.  In January 2014, the S&P 500 fell 3.56%, ranking it in the bottom quartile of all Januarys since 1950.  That rarely bodes well for equity performance over the next 11 months, yet the S&P 500 has risen in every calendar month since January and is up roughly 200 points and more than 11% since the end of January.  History has misled us - at least through June 30th.

Technically, the bulls have been fighting an uphill battle all year - and winning.  There have been multiple negative divergences on the S&P 500 chart.  Twice in 2014 already, it appeared the bulls lost their momentum, but after brief periods of selling, that momentum returned.  Currently, there's another negative divergence as we head into earnings season.  Will it matter?  Check it out and you be the judge:

That's a short-term issue that can be easily corrected by a period of unwinding.  There's is a bigger picture concern, however.  Much of this 2014 rally has been led by defensive areas of the market - utilities, consumer staples, healthcare, REITs.  We have begun to see leadership from aggressive areas of the market again and that's important.  Traders need to be willing to take risks in order to sustain advances - at least that's what history tells us.  Check out the relative strength of defensive areas of the market throughout this 2014 rally - especially when equities broke out in March/April:

The past couple months do look better and that's good news for the bulls. The recent push higher has seen the relative strength of defensive stocks deteriorate, which is exactly what we want to see.  It will be important to see money continue to rotate away from safety.

Later this week, I'll be hosting my annual Mid-year Market Outlook webinar where I'll be discussing the second half prospects for each of the sectors and many industry groups.  While many market pundits follow the "Go away in May" theory, my research tells me it's more like "Go away in mid-July".  I'll discuss that historical tendency in detail in this webinar as well.  For more information on how you can participate, CLICK HERE.

Happy trading!

Tom Bowley
Chief Market Strategist
Invested Central

Consumer Discretionary and Tech Join the Leadership Circle

Relative weakness in the consumer discretionary sector was a concern a month ago, but not anymore. The first PerfChart shows the Consumer Discretionary SPDR (XLY), the Technology SPDR (XLK), the Energy SPDR (XLE) and the HealthCare SPDR (XLV) leading since June 3rd. XLY really came to life this past week with a new 52-week high and a gain that was greater than that of the S&P 500. 

It is quite positive to see these two sectors leading the stock market. The consumer discretionary sector is the most economically sensitive sector and relative strength here is a positive sign for the economy. The technology sector is also an important barometer because it has the stocks with the highest betas (volatility). This means the tech sector represents the appetite for risk and a healthy appetite for risk bodes well for stocks. In contrast to these offensive sectors, notice that the Consumer Staples SPDR (XLP) and Utilities SPDR (XLU) were the weakest sectors. As defensive sector, this indicates that money is moving from defense to offense. The second PerfChart shows the equal-weight sectors with similar characteristics. 

Good trading and good weekend!
Arthur Hill CMT

Use ChartStyles to Stop All the Clicking!

Hello Fellow ChartWatchers!

Small Caps have been on a tear recently - have you noticed?  This week all the major market averages moved higher with the Russell 2000 Small Caps (+1.85%) leading the way.  The same is true for the month of June so far with the Russell up over 5% since June 2nd.  Year to date, Large Caps are still the big winners with $SPX up 6.2% but the Small Caps are gaining quickly.  You can watch all of the action using our Major Markets PerfChart:

To see the exact chart above, click on the link for the Major Markets PerfChart, then click on the "Histogram" button below the lower left corner of the chart.  Next, right-click on the horizontal date slider (i.e., the box below the chart that initially says "200 days") and select "Past Month".  Finally, hold down the Shift key on your keyboard and press the right arrow key until the starting date in the upper left corner of the chart says "02 June 2014".

Use ChartStyles to Stop All the Clicking!

Are you a Serial Clicker?   When you create a new SharpChart on our website, do you immediately start clicking all over the place to change its settings?  Do me a favor; next time you sit down to use our charts, notice how frequently you click to change chart settings.  If you click on more than 3 settings immediately after creating most of your charts, you my friend are a "Serial Clicker."  The good news is that there is a cure for Serial Clickyness - and that cure is called "ChartStyles."

ChartStyles are essentually chart templates.  A ChartStyle is a collection of all the setting that make up a SharpChart with the exception of the main ticker symbol.  ChartStyles themselves are NOT charts - instead, they can be combined with any ticker symbol to create a chart.  To use ChartStyles you need to be a StockCharts member.  Members can save up to 50 different ChartStyles into their account. 

Consistantly clicking on more than 3 different settings after creating a new SharpChart should be a signal to your brain that you need to create a new ChartStyle.  It means that there is a set of settings that you use that you haven't yet captured.  Once those settings are stored in a ChartStyle, you can quickly apply all of them to any chart by using just one or two clicks.  Wouldn't that be nice?

Just like adding a new ChartStyle can be a huge time-saver, you also need to make sure you don't have too many ChartStyles.  You really only want to create ChartStyles for chart settings that you use frequently.  Hunting through a long-list of rarely used styles is not fun.  The key then is to take a moment, reflect the different kinds of charts you typically look at when analyzing a new stock, and then create one ChartStyle for each of those chart types.

So what's an example of a good collection of ChartStyles?   Many people use time periods as a starting point.  The settings that you use for a 1-minute chart are usually different from the settings that you use for a weekly chart.  Often the same is true for 10-minute charts, Hourly charts, Daily charts, etc.  Each one of those "collections of settings" is a ChartStyle and you should save them as new ChartStyles in your account.

In addition to having a set of "time period" styles, many people often have a set of ChartStyles for different kinds of ticker symbols - i.e. Stocks vs. Indexes vs. Mutual Funds vs. Market Indicators, etc.  Again, the key is to notice when you are clicking too much and then step back and think about the different types of charts that you are trying to create with our system when you do all that clicking.

For more on ChartStyles - including detailed instructions on how to create them and how to apply them to charts - please CLICK HERE to watch a great video put together by Arthur Hill.

ChartStyles really are the key to using your StockCharts account more effectively.  I hope this article and Arthur's video will help you (and your poor mouse) stop all the clicking!

- Chip

 

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