Friday was one of those hugely volatile days where the market plummeted on the bad news of the jobs data and then turned to soar for the upcoming earnings season. It was almost identical to the reversal in October 2011. For the blog watchers of the Commodities Countdown webinar on September 17th, the 34-minute mark discusses what I was watching for to make a bullish reversal. Commodities Countdown September 17, 2015. A big bullish reversal after undercutting the previous lows is what we were hoping for. Earlier in the week, we tested the intraday low of August 25th. The August 24th low was an outlier and Connie Brown's work suggests using the next bar as a good reference point rather than the panic low. With all the bearish news of the weak jobs report, the market dropped like a sack of potatoes and immediately started the rally. The intraday lows took out the 2 previous day lows just to take out any short term stops and then the push to the upside began. The move was a really nice example of the same low that we saw 4 years ago. On October 4, 2011, we broke below the lows and then rallied. This is the current view on the 60-minute chart with a 200 period moving average.
If you believe that crude oil ($WTIC) is dirt cheap and the primary trend from here will be higher, then one simple trading strategy is to own the XLE (Energy Select Sector SPDR). Over the years, the correlation between the two is strong - and perhaps obvious. Since the 2000-2002 bear market ended, the XLE has really one suffered through two bad years. The first began in mid-2008 and we're currently in the second, which began in mid-2014. While many analysts are calling for years of cheaper crude oil, the past suggests this is nothing more than a fantasy. We've seen the bottom fall out of crude oil prices in the past, only to surge higher again. And when oil prices surge, the XLE performs extremely well. I've broken down the last 15 years on a monthly chart so that you can see the relationship between the WTIC and XLE:
For many weeks, the DP Scoreboard for the Nasdaq 100 was the most positive in comparison to the S&P 500, S&P 100 and Dow Industrials. In fact, back when the NDX was in the lead with the most bullish signals, the others were grappling with more bearish signals. The "tables" (pun intended) have turned and the NDX is most negative.
One might point out that the NDX is not in a long-term bear market. That bullish signal will likely disappear early next week. The only way for the NDX to avoid a 50/200-EMA crossover is getting price back above them. That would require a move to at least 4329. Looking at the daily chart for the NDX below, the 50-EMA is less than a point away from the 200-EMA, and, a Long-Term Trend Model BUY. Last week's rally is what caused the recent Price Momentum Oscillator (PMO) BUY signals on the SPX and OEX. More rally next week could push the PMO on the NDX into a BUY signal as well. The margin between the PMO and its signal line is thin, so new short-term bullish signals could follow.
On Friday, our very short-term indicators spiked. (You'll find all of these indicator charts and many more for the NDX using the drop-down menu for members in the DP Chart Gallery) These climactic readings suggest either an initiation or exhaustion. When the positive readings spike on a current rally, that suggests a buying exhaustion. It would be the opposite for downside, a selling exhaustion. These signals don't immediately precede a price reversal, typically you'll see some churn first.
That is completely in line with what is happening to the short-term indicators for the NDX. The short-term indicators for the NDX are rising bullishly and are only in neutral territory. This suggests either more buying or consolidation (churn) on the horizon, at least until they become overbought which in the short term wouldn't take much.
My analysis continues to sway toward a bearish stance. Remember, the longer term sets the tone in the medium and shorter terms. Trends established in the long term require many touches on trendlines over very long periods of time, like in the case below, the rising trendline was established almost two years. This implies the trend is much stronger and is harder to reverse from. The weekly chart shows the NDX long-term breakdown and the failure of price to get back above that long established rising trend.
Conclusion: Three of the major indexes we cover in the DP Scoreboards switched to new PMO BUY signals, just after the NDX switched to its current PMO SELL signal. Very short- and short-term indicators on the NDX suggest more upside, but limited based on the overall bearish bias of the DP Scoreboards and charts in the intermediate to long term.
Technical Analysis is a windsock, not a crystal ball.
The much weaker than expected jobs report this past Friday put a kibosh on any intention the Fed might have had to raise interest rates during the month of October. In fact, barring a major improvement in the economic outlook, it's doubtful the Fed will be raising rates anytime during 2015.
You can see in the following chart that government bond yields began to fall immediately after the Fed's most recent rate decision where they decided to stand pat. And that continued on Friday when the market absorbed the weak jobs numbers with the yield on the ten year Treasury Note matching the low seen during the most recent August 24 flash crash:
The plunge in bond yields that began almost immediately after the Fed announcement saw a corresponding move lower in stocks with the S&P matching the flash crash low earlier last week. But once the jobs numbers were released on Friday, the market rallied once traders realized the Fed's next decision had suddenly been made easier.
So the S&P managed to hold in spite of (or because of) the realization that rates will remain low for the foreseeable future. And now traders can turn their attention away from the Fed and focus on earnings, with Alcoa getting ready to "officially" kick off earnings season when they report their numbers after the bell on Thursday.
Speaking of earnings, I am going to be conducting a FREE Webinar this Tuesday, October 6 at 4:30 PM eastern. During this Webinar I will discuss the overall market and how it is setting up as earnings season gets ready to begin. It will include a brief tour of EarningsBeats.com and how we focus specifically on stocks that beat earnings plus have strong charts, a powerful combo. You can attend the webinar by clicking here.
At your service,
The Oil & Gas Equip & Services SPDR (XES) perked up on Friday with a massive engulfing pattern on high volume. Combined with a bullish failure swing in RSI, the ETF could be setting up for a tradable low.
Created by Welles Wilder, the Relative Strength Index (RSI) is a classic momentum oscillator that has stood the test of time. The image below, which comes from his book, New Concepts in Technical Trading Systems (1978), details the top and bottom failure swings. A bottom failure swing occurs when RSI dips below 30, bounces, retreats, fails to break back below 30 and turns up. The "buy point" triggers when RSI breaks its prior peak, which Wilder called the "fail point". The opposite occurs for a top failure swing and 70 becomes the key level.
Hello Fellow ChartWatchers!
The Fed's announcement on Thursday was the big news of the week both fundamentally and technically. Prior to the announcement, stocks had moved up nicely. After the announcement, those gains were all given back and then some. It was a pivotal moment. In a flash, a promising bullish pattern turned into a very bearish pattern. But before I can show you exactly what I mean, we need to have a quick review of some common chart patterns.
When two groups of people can't agree on the proper price for a stock, prices oscillate between two trendlines - one providing support from the bulls and one providing resistance from the bears. If these two trendlines are converging, they form either a triangle pattern or a wedge pattern. Understanding the difference between the two is very important.
If the resistance line at the top of the pattern is horizontal and the support line underneath is rising, an Ascending Triangle pattern forms. Here is a simplified picture of that pattern:
As the picture shows, Ascending Triangles often resolve to the upside with the rising trendline eventually overcoming the overhead resistance.
If, on the other hand, the resistance is stronger and creates a downtrend line - while support has formed a rising trendline, a Symmetric Triangle pattern forms. Here's a picture of that pattern:
The resolution of a symmetric triangle is much less predictable however it is usually considered a "consolidation pattern" means that it will break in the direction of the trend that was in effect before the pattern appeared.
If both the resistance line and the support line are rising - and the support line is rising faster than the resistance line - then a Rising Wedge pattern forms. Here's a picture of that pattern:
(Sorry - still working on the "diagram" version for this pattern.)
A Rising Wedge typically forms during a "reaction rally" following a significant downtrend. Because of that, it often results in a downward break and a continuation of the previous downtrend.
So, why am I telling you all this? Well... look at the date on the Nasdaq 100 chart above. That's a current chart. The key question is "Is that rising wedge real?"
Up until Thursday afternoon, that pattern looked more like an Ascending Triangle pattern with a horizontal resistance line around 4350. Similar patterns had also appeared on the S&P 500 and Dow charts. However, the market's negative reaction to the Fed's announcement has made the case for a Rising Wedge pattern much stronger. And that doesn't bode well for next week.
The fact is, you will be hard pressed to find any bullishness amongst the StockCharts Market Commentators at the moment. (Keep reading this newsletter to see what I mean.) They, and I, are all very concerned about the markets as we head into October.
Be careful out there - it is time for tight stops.
P.S. Be sure to listen to my interview with Dr. Alexander Elder on this weekend's edition of ChartWatchers LIVE.
My September 2 message addressed the question about whether the market is in a normal correction or something more serious. We'll find out soon enough. I've leaned toward the correction view (a drop of 10-15%), but a lot of longer-term indicators suggest a more serious decline (20% or more). The only way we'll know for sure is whether or not previous support levels hold. The daily bars in Chart 1 put the recent stock rebound in better perspective. Thursday's downside reversal day in the S&P 500 took place just shy of the 62% retracement line. (The Dow bounce ended closer to the 50% line). Those are normal spots for a counter-trend bounce to end. The SPX also fell short of its 50-day average. The 50-day also remains below the 200-day line which is a negative sign. The normal expectation is for a retest of the August low which means a loss of -12% from its May high. A drop to more important support at last October's low near 1820 would constitute a loss of -15% from its May high which is still correction territory. But that low has to hold if this is just a correction. The month of October is also very important. My August 26 message studied three previous downturns in 1987, 1998, and 2011. All required a retest of the first low before turning back up again. And all three bottoms took place during October. All we can say with some degree of confidence at this point is that prices are probably headed lower in the weeks ahead, most likely into October. How much lower will depend on whether or not previous lows hold. In the meantime, a very cautious stance is still warranted.
The weekly bars in Chart 2 are an updated version of a chart shown in my September 2 message. The steeper trendline starting in 2011 has been broken. That suggests the four-year rally has ended. The current correction could retest last October's low at 1820 (flat line). We may be on track for that to happen. The lower trendline drawn under the 2009/2011 lows, however, is still intact. A retest of that support line near 1700 would represent an SPX loss of -20%. That would qualify as a bear market, but with the longer-term upturn intact. It would also leave prices above the 2007 peak near 1576. It's also encouraging that the 14-week RSI line (top of chart) is nearing oversold territory near 30 for the first time in four years. Speaking of bear markets, it's important to distinguish between different types of bears. In a "secular" bear market (between 2000 and 2009), bear markets can lose as much as 50% (and they did). In a secular uptrend (which I believe we're in), a "cyclical" bear market is much shallower. So even if this does turn into a bear (-20 to -25%), I think it would be a "cyclical" versus a "secular" bear.
To say the past three weeks have been wild would be a major understatement.
For example, the S&P lost 11% of its value in just 4 trading days ending in the most recent low of 1867 on August 24. Then it gained over 8% from that August 24 low to Thursday's high of 2020 after the knee jerk reaction to the Fed's decision to stay pat on rates. Then the S&P fell almost 3% from its peak on Thursday to its low on Friday, after traders had some time to contemplate the Fed's decision. That qualifies as a wild ride!
All of this volatility got me wondering how stocks that reported strong earnings for last quarter held up while the market was under fire. And what I found is they held up quite well.
For instance, at EarningsBeats.com we focus strictly on companies that beat earnings expectations plus have solid technical charts. Those that make our "first cut" are added to our "Candidate Tracker" which become trading candidates for our members. We added 14 stocks on September 7 and what I found was all of them have held up very well. For example, while all of the major indexes have mostly remained below all key technical levels - 20, 50 and 200 days - many of the stocks we recently added to the Candidate Tracker remain above important key technical levels.
Perhaps this isn't so surprising. One would think that companies that beat earnings expectations would stand out, especially during market turmoil. But it's always good to validate and while it's a fairly small sampling it points out why it makes sense to zero in on companies that beat expectations.
If you would like to see a sample of what I'm talking about just click here and I will provide you with some examples. It's worth checking out as all traders need whatever edge they can get when we're in the type of market environment we're in now.
At your service,
When I wrote the title for the article, I started with "3 Reasons To Watch Commodities Now" and realized most people would add "Go Down, Go Down More, And Go Down A Lot More" on to the end. So I amended the title. How crazy is it to expect commodities to rally here? Well, one of the nice things about commodities is they can rally in the face of a weak market so you can find something going up.
The $USD closed Friday at the same level it was at in Mid January so the dialogue of the recent strength in the $USD by the Fed is confusing. Looking at the chart tells us something else. First of all, we are in a down trend of lower highs and lower lows. Recently we broke below the 200 DMA and the bounce up was uninspiring. Friday was the first weekly close below the 200 DMA since July of 2014. The major commodities are very sensitive to the direction of the US Dollar ($USD).
The S&P 500 SPDR (SPY) and the 7-10 YR T-Bond ETF (IEF) are going their separate ways as opposing wedges takes shape and IEF outperforms SPY (bonds outperform stocks). First, note that I am using close-only price charts to filter out some of the noise few weeks. This includes the ridiculous spike low on August 24th in several ETFs, the pop-and-drop on September 9th in SPY and the Fed-induced volatility on September 17th. Instead of intraday noise, I prefer to focus on closing prices and the overall trends at work.
Let's start out with bonds using the 7-10 YR T-Bond ETF (IEF) as our proxy. IEF trended lower from February to June, bottomed in early June and broke a channel trend line in mid August. The ETF also broke back above its rising 200-day simple moving average. Looks like the bigger trend turned up with this move. After the August peak the ETF corrected back to the rising 200-day and support zone with a falling wedge. It looks like this correction has ended because IEF broke out with a surge over the last two days. This breakout is bullish for IEF and chartists can mark support in the 105.5-106 area. The indicator window shows IEF outperforming SPY as the price relative broke out in August, formed a wedge into September and broke out again last week.
As we approach the end of the third quarter in 2015, it's time to unveil a few "Best Of" awards as they pertain to the NASDAQ 100. Let's get this party started:
Best Buy & Hold
Google (GOOGL). The long-term chart speaks for itself. You do have to deal with some volatility here. If you're not sure what I'm referring to, I'll simply point you to 2008. The bear market was devastating, but nearly all the losses were gone by the end of 2009. After a stellar 2013 and early 2014, GOOGL paused for more than a year before recently turning higher on superb earnings. GOOGL broke out of its basing pattern on increasing volume and has been a relative standout considering the overall market environment. And I don't know about you, but I don't "search" the internet, I "google" it. Here's the chart since GOOGL went public:
This week the DecisionPoint Long-Term Trend Model generated a long-term SELL signal for $DJCHINA, but it was a tad late, considering how far that index has fallen. This chart provides us with a good example of when mechanical signals need to be ignored.
Hello Fellow ChartWatchers!
We have lots to talk about since our last newsletter! For those of you who have been watching the "ChartWatchers LIVE" webinar, you know that for almost three months prior to the recent market collapse on August 19th, we had been expressing concerns over the market's slowing momentum and weakening breadth statistics. Well, clearly, the collapse that occurred during the 19th thru the 24th was the "big change" that those indicators were pointing to. The question since then has been and continues to be "Now what?"
One of the warnings that I wrote about over the summer was the drop in the percent of NYSE stocks trading over their 200-day average. I pointed out over the summer (before the August plunge) that a stock market couldn't maintain an uptrend while two-thirds of its stocks were in downtrends (below their 200-day lines). Chart 1 is an updated version of those earlier charts, and carries good and bad news. First the good news. The red line has fallen below 20% which puts it in a major oversold condition. This is a logical spot for it to attempt a bottom. The bad news is that the red line is still in a downtrend. That has to change. Chart 2 shows the downtrend starting in late April from a +60% reading. Its been all downhill since then. To the bottom right, the line is starting to stabilize (red circle). That's encouraging. But it needs to more to signal a bottom. A good start would be a rise above its late August peak at 24%. A more convincing move would be above its early August high at 42%. It may take awhile for that to happen. But the bottoming process may have started.
We've all heard that famous quote from Franklin D. Roosevelt in his first inaugural address. It's a saying that has had staying power for over 80 years. And it's something that rings true today in the current and volatile market environment.
It starts with the VIX which hit a level on August 24 that had not been seen since March, 2009, when the market was in tatters and bottomed. And even before that the VIX had skyrocketed to an historical high that might never be seen again.
Whether or not this recent fear is warranted hardly matters. It is what it is. But it's worth examining some to see how the period we are in now stacks up to the environment back in the 2009 time period.
One of the areas I like to watch is the global arena. When the markets around the world are breaking down it can be a good warning signal for the US markets. Obviously, the big drop from the parabolic rise of the Shanghai market has been a concern globally. But I also like to watch Japan. As the third largest economy in the world and a highest level of debt to GDP, I like to keep an eye on this market. Currently the government program of Abenomics has involved a massive Quantitative Easing package. While this package usually attracts investors to the Japanese market, the dropping Yen has also been a part of the QE strategy. Recently both charts [the Yen ($XJY) and the ($NIKK)] have reversed direction which is the reason that it is timely to examine what is happening in Asia.
Let's look at the Yen first. In the centre of the chart below is the Japanese Yen ($XJY). The turning points in the Yen have been at major historical turning points for the overall equity market in Japan. The low in the Yen currently is the same as the low level in the Yen that occurred at the 2007 equity market top in the Nikkei ($NIKK) and the S&P 500. It is interesting to me that the Japanese market rolled over so strongly recently while the Yen looks like it is trying to rise above resistance.
There are plenty of technical analysts calling for the beginning of a bear market after the past couple weeks of heavy volume selling. I'm certainly open to that possibility as I always respect price support breakdowns with accelerating volume. But the story behind the scenes isn't making a lot of sense and doesn't support that line of thinking. Typically, we see money flow away from aggressive sectors on a relative basis (vs. the benchmark S&P 500) before the plunge begins. The weakness recently, however, has been focused more on energy, materials and defensive groups, which is just plain odd. Bear markets can come in all shapes and sizes so I will definitely respect what's happened, but at the same time I will not be shocked if we magically resume the six year bull market once September is behind us. Compare how the aggressive sectors acted relative to the S&P 500 prior to the 2007 top to how they're acting now:
Bonds are outperforming stocks as money flows into relative safety and shuns risk. Overall, relative strength in bonds reflects risk aversion in the financial markets. Relative strength in bonds also indicates that investors should prefer bonds over stocks right now. Like all market dynamics, it is subject to change, but current trends favor bonds until there is evidence to the contrary.
I am using the Aggregate Bond ETF (AGG) to represent the "bond" market and the Equal-Weight S&P 500 ETF (RSP) for the stock market benchmark. The chart shows AGG firming in the 107.5 area in June and breaking out in July. AGG extended its gains into August and established support in the 108.5-108.75 area. The ETF caught another bid this week with a bounce and this further affirms the support zone. The trend here is clearly up as long as support at 108.5 holds.