ChartWatchers Newsletter

ChartLists Are The Key To Disciplined And Successful Trading

I spend a great deal of time scouring the market and looking for interesting trade setups.  It's quite often that I see a stock that I really like, but it's not at a price level where I'm ready to pull the trigger.  If I move onto the next chart, chances are that prior chart will be gone until.....I see it days or weeks later and it's made a big move that I was anticipating.  Then it just becomes a wasted opportunity.  So how can StockCharts.com make a difference?

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Rotation Continues Into Value Stocks, Financials and Energy Still Look Cheap

Two days after the election (November 10), I wrote a message entitled: "Rotation Out of Growth Stocks into Value Stocks Causes Profit-taking in Technology". We're seeing a replay of that rotation again this week as technology stocks are underperforming the market while financials, energy, and industrials surge. Chart 1 compares the move to new highs in the S&P 500 Value ETF (black bars) to the weaker action in the S&P 500 Growth ETF (red bars) since the start of November. That rotation can be seen more graphically by the surge in the IVE/IVW ratio over the last month (top of chart). The reason behind the rotation is understandable. Technology accounts for 35% of the growth ETF (IVW). Meanwhile, the three largest value groups are financials (25%), energy (12%), and industrials (11%). A lot of money has moved into those last three groups which were perceived as relatively undervalued. Money used to make those purchases has been coming out of more expensive technology stocks. And that rotation into cheaper parts of the market may have a lot further to run.

A lot of questions are being asked about whether or not recent rotations into cheaper parts of the market can continue. The next chart suggests that they can. The red line on top is a relative strength ratio of the Technology SPDR (XLK) divided by the S&P 500. It's clear that technology has been a market leader for the last ten years. The Financials (XLF)/SPX ratio (green line), however, shows that sector to have been a terrible performer since 2007. It's only just starting to rise. The gray area shows the energy sector (XLE/SPX ratio) to have been a very weak performer as well. Chart 2 suggests that both of those previously ignored groups have a long way to go to restore them to their normal market relationship. [Transportation stocks, which are helping drive the industrial sector higher, could be added to the list of undervalued stocks starting to play catch up, as well as industrial metal stocks like copper and steel that have been pulling material stocks higher]. The economy appears to be evolving from a deflationary, low interest world into a more inflationary period with rising rates and stronger economic growth. Monetary stimulus is giving way to fiscal stimulus which should lead to more infrastructure spending. That suggests that post-election rotations may have a lot further to go. All the more reason to be in those market sectors that will benefit the most from that new economic climate. Technology may not be one of them.

Taking Advantage of Good Luck

Every once in a while the gods of trading look out for us and reward our perseverance, a little bone for all of those trades that don't turn out so well. When one of these opportunities takes place you should be prepared to take advantage of these rare gifts by pocketing profits when you can.

 

As an example, we issued a trade alert to our members this past week on HLX. We issued the alert because the stock had reported strong earnings and had pulled back to a key technical level and looked ripe for a bounce. And as you can see in the chart below the bounce was sharp.

 

The alert was sent out to members last Tuesday at an entry price of $9 with a price target of $10.20 and a stop loss of a close below $8.37. As you can see the target price was easily exceeded by the following day with the stock continuing to climb higher right into week's end, actually rising by 27% in two days.  

 

That 27% climb in two days would be a spectacular rise even if it had taken a full year. But we all know that profits can disappear just as quickly as they appear and that's why it makes sense to have a strategy in place when these situations arise.

 

For example, in this case once the initial price target of $10.20 was hit, I issued a profit alert to members since our objective was met. That alone represented a 13% rise in one day; not too shabby. But sometimes if a stock has sudden momentum it's tempting to try and ride it higher. That comes with a risk of those profits evaporating quickly. So one idea would be to place a trailing stop that would continue to raise as the stock moved higher. This way you would be guaranteed to lock in a solid profit if the stock took a sudden turn.

 

I'm often asked what's an appropriate period of time to hold a stock when making a trade and my answer is always the same; I don't have a specific time frame. It doesn't matter to me if it takes one minute, one day, one month or one year to hit a price target as long as it continues to look solid on a chart. But once that price target is hit, it is important to lock those profits in or have plan B ready to go.

 

All of the trading candidates that are issued to members of EarningsBeats come from our exclusive "Candidate Tracker" which consists of companies that beat earnings expectations and have strong charts. In fact, I am going to conduct a webinar this Tuesday, December 6 at 7:30 pm eastern where I will discuss the concept of trading stocks that beat earnings expectations and have strong charts, including some examples of recent trades. And I will be joined by StockCharts.com's Senior Technical Analyst Tom Bowley, who will be discussing scanning for stocks that beat earnings expectations as well as an overview of the market. VERY timely as we near year end. If you want to join Tom and me for this Free event just click here to register. The session will also be recorded as well for those who are unable to attend the live event. 

 

Locking in profits on a successful trade is still one of the hardest things to do when trading. But when you are lucky enough to hit a home run over a short period of time don't think twice; take the money and run!

 

At your service,

 

John Hopkins

EarningsBeats

Sum of the Parts Analysis for the S&P 500

The whole is only as strong as the sum of its parts. Applying this logic to the stock market, the S&P 500 represents the whole and the nine sector SPDRs represent the sum of the parts. Let's see just how strong the parts of the S&P 500 are. The chart below shows SPY and the nine sector SPDRs. The sector charts are sorted by the percentage above the 200-day EMA with the highest at the top (XLF) and the lowest at the bottom (XLP). First, note that SPY is above its rising 200-day EMA and in a clear uptrend. Second, note that six of the nine sector SPDRs are above their 200-day EMAs and the 200-day EMAs are rising for all six. 

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Is There A Holiday Present For Gold Investors Here?

Gold has dropped into the very unloved category. There is a great quote that interests me when we get technical setups like this. 

" I believe the very best money is made at market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms" - Paul Tudor Jones

Martin Pring has created some great indicators for helping to find oversold levels. I like to use long term charts and look to see how an oscillator has behaved over time. I find the Percentage Price Oscillator (PPO) works better than the MACD for long time frames. 

Interestingly enough, Gold made a major low one year ago on December 1, 2015. Gold has had 17 PPO signals in 20 years where the price drop has pulled back significantly to the level we are currently at, as shown on the Percentage Price Oscillator (PPO) below the $GOLD plot. 5 of the 17 signals got more severe. That includes two during the Great Financial Crisis which I think we could all say seemed to be an exception. So in a 20 year period, we have seen the gold market reverse after this percentage price drop (blue line) 80% of the time (12) and 3 others got even worse. At least it suggests we might want to look at it.

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Weakened NDX Triggers Two Short-Term Bearish Signals

The daily chart of the Nasdaq 100 doesn't really resemble any of the other large-cap indexes or even most small-cap indexes. Technology sectors have performed terribly. The Election "euphoria" enjoyed by the Dow Industrials and most other indexes really didn't do much for tech. Consequently, the NDX has triggered a Short-Term Trend Model Neutral signal and a Price Momentum Oscillator (PMO) SELL signal. A look at the DP Scoreboards below and it is quite clear the NDX is weakest and the Dow, the strongest. The Dow is the only index to manage an IT PMO BUY signal. I invite you to watch Friday's webinar where I review all of the daily and weekly charts for these indexes as well as small- and mid-cap ETFs, and the Dollar, Oil, Gold and Bonds.

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Small Caps Flying High, Now Feeling Historical Tailwinds

The Russell 2000 is a small cap index and it had been lagging for quite awhile....until 2016.  This year the Russell 2000 is wildly outperforming the S&P 500 and now we're heading into December, its most bullish calendar month of the year by far.  Since 1987, the Russell 2000 has produced annualized returns of 38.49% during the upcoming month and December has risen 25 times while declining just 4 times.  Clearly, December is the sweet spot for small cap stocks.  Here's a look at the relative strength of small caps vs. the benchmark S&P 500 ($RUT:$SPX):

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Commodity Investors Raise Their Eyebrows

The long term chart for the $CRB continues to be a worry for technicians like me trying to understand why Commodities are having trouble staying above the 45 year trend line. Oil reached lows around $10-$12 in the 2000 period whereas now the oil low was $25. Currently oil is at $46 and this long-term commodity chart is barely holding the long term trend. The question that needs to be asked is what is changing the long-term trend in commodities that suggests the historical support level is not longer support?

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Falling Yen Boosts Nikkei Index

My October 6 market message suggested that the Japanese yen was peaking which would give a boost to export-oriented Japanese stocks which appeared to be bottoming. Since then, the yen has fallen to the lowest level in six months against the dollar, and has fallen below its 200-day average (Chart 1). At the same time, the lower box shows the Nikkei 225 Index rising to the highest level since January (based on today's higher close). But that's only part of the story. That earlier message explained that foreign investors (like Americans) buying Japanese stocks need to hedge out the negative effects of a falling yen. As explained at the time, the easiest way to do that is through the Wisdom Tree Japan Hedged Equity ETF (DXJ).

DXJ OUTPACES EWJ... As I've explain in the past, foreign stock ETFs traded here in the states are quoted in U.S. dollars. As a result, they tend to do worse when the dollar is rising against the local currency (like the yen). Since October 1, for example, Japan iShares (EWJ) have actually lost value (-1.5%) despite a nearly 10% gain in Japanese stocks. By comparison, the Wisdom Tree Japan Hedged Equity ETF (DXJ) has gained 10% over the same time span. The difference between the two Japanese stock ETFs is mainly an -8% drop in the yen. Chart 2 plots a ratio of the DXJ divided by the EWJ since the start of the year. The ratio started rising during October as the yen started to drop, and has risen to the highest level in nearly eight months (meaning the DXJ is doing much better than the EWJ). That's because the DXJ hedges out the negative effect of a falling yen. The same principle holds when investing in other foreign markets. This week's upside breakout in the dollar increases the need for hedging out the negative effect of falling foreign currencies when buying foreign stocks.

 

Move to Risk Began in July and Continued in November

The market began its move to riskier assets in July and this move simply accelerated over the last two weeks. The chart below shows stocks (risk assets) bottoming in late June and Treasury bonds (safe-haven assets) peaking in early July. The S&P 500 SPDR (SPY) hit a new high this week and the 20+ YR T-Bond ETF (TLT) is trading at its lowest level since January. The indicator window shows the price relative (SPY:TLT ratio) bottoming in February, forming a higher low in early July and surging to its highest level since summer of 2015. This means stocks are outperforming T-bonds and this reflects a strong risk appetite in the US markets. 

Continue reading "Move to Risk Began in July and Continued in November" »