Getting the Point of Point & Figure Charts

Hello Fellow ChartWatchers!

Over the past couple of weeks, we been revamping our Point & Figure charting tool.  The new version was released last week.  It has several key improvements including:

  • You can now add up to 6 chart overlays per chart
  • You can save your settings as the "Default" P&F settings and they will be used for all new P&F charts you create
  • The parameter boxes for the various Scaling options now only appear when the corresponding Scaling option is chosen
  • Price Objectives are controlled by the "Price Objective" dropdown.  You can also turn off Price Objectives if you want
  • Intraday P&F Charts no longer are forced to use the "ATR" scaling method
  • Several predefined P&F ChartStyles are now available via the ChartStyles dropdown
  • ... and much more.

Overall, the new P&F Workbench now has a "look & feel" that is very similar to the SharpCharts workbench.  If you are familiar with using that page, using the P&F Workbench should be pretty straightforward.

Last Saturday, the ChartWatchers LIVE webinar was dedicated to demonstrating P&F Charts in general and the new workbench in particular.  If you haven't seen the video of the webinar and you want to learn about P&F charting, I strongly encourage you to review that particular video.  In it, you'll see why Point & Figure charts are one of my favorite analysis tools.

(Click on the image above to watch the video.)

- Chip

Cycle Chart from Last Week's DecisionPoint LIVE! Webinar

Carl presented his chart that illustrates typical market cycles at our DecisionPoint LIVE! Webinar last Wednesday (Here is a link to that broadcast). (P.S. Don't miss the next episode! Watch for the link on the homepage this week under "What's New"') As Carl said during the webinar, I should have a picture of him to accompany this chart with his hands thrown up in the air, eyes watering and his tousled hair sticking straight out from pulling on it while attempting to create the chart!

Continue reading "Cycle Chart from Last Week's DecisionPoint LIVE! Webinar" »

Chinese ETFs Drop 5% on Friday

Chinese stocks have been on a tear over the last year. Mainland stocks are up 25% just this year. They were probably due for a pullback and they got one on Friday. Chinese authorities tightened rules on margin selling (and made it easier to do short selling). But they did it after the Chinese stock market had closed. That explains why the Shanghai market showed gains on Friday. The selling was reflected in Chinese ETFs which trade all day. Chart 1 shows the CSI 300 China A-Shares Fund (which tracks stocks in Shanghai and Shenzen) tumbling 5% in heavy trading. The ASHR, however, still remains above its 20-day moving average (green line). China iShares (FXI) lost 4% on the day. The weekly bars in Chart 2 show the FXI suffering a downside weekly reversal (losing 1.5%) on the week. The FXI recently hit a new seven-year high. Its 14-week RSI (top of chart) had reached overbought territory over 70 which also suggested that a pullback was due. Even with this week's selling, its uptrend is still very much intact.

Decisive to a Fault

As traders we are faced with multiple decisions each day. This could include deciding when to enter a trade, deciding if what we see on a chart is valid, deciding what a reasonable price target might be and deciding where to place a stop loss in case a trade goes against us. And these are just a few examples, let alone having to be ready to quickly change strategies without much warning if necessary.

The decision making process is made much easier if we feel confident with our work. For example, if I am confident in my technical analysis skills, it gives me an advantage over those who might still be learning. So if I see a stock is closing in on a major level of support, that the stock is technically oversold and that the stock has formed a positive divergence, I know right away that the odds are in my favor. Thus, if I decide to take a position, it's because I feel strongly that there's a good chance I will be on the winning side of the trade.

Of course, as we all know, the market has a way of thwarting even the very best of plans. So, before I even enter a trade I need to have a back up plan, in case it goes against me. This requires me to set a stop loss, and one that is "defensible"; that is, I can confidently defend the reason I set a specific stop loss; no guessing allowed.

For example, take a look at the chart on Cisco below and let's assume I had been watching CSCO for a while and I liked the fact that it had recently closed back above both its 20 and 50 day moving averages so I take a position right at the end of the day on April 16 at an entry price of 28.60. And also assume that I had decided before I entered the trade that I would allow it 7% to the downside - just "because" I didn't want to lose more than 7% - so I set my stop loss at 26.60. The question becomes, what on the chart shows that 26.60 is a good place to set a stop? And the answer is, it doesn't. But if I had decided to set my stop at a close below the 20 day moving average of 27.86, it would have been because I knew it would be important for CSCO to hold a key technical level or it could move lower.

The point to all of this? If you are going to put your precious capital at risk, you need to feel confident that are capable of making good decisions, because if you are confident in your decision making you will be in a better position to execute along the path of a trade. In fact, you should strive to be "decisive to a fault" so when the time comes to push the buy or sell button it comes easily instead of worrying if what you are about to do is the right thing to do.

By the way, I will have a new and free "Chart of the Day" that will be released on Monday before the market opens that will be worth checking out so just click here if you want to be added to the list.

Committed to helping you succeed,

John Hopkins
Invested Central

Are Banks Topping or Pausing Before Next Rally?

I know looking at one industry group is taking a very small sample of the entire stock market, but throughout much of history the stock market has performed strongest when financial stocks, especially banks, at least go along for the ride.  Let me show you a long-term chart of the S&P 500 and break down its performance based on bank performance relative to the S&P 500.  Check this out:

Generally, the S&P 500 tends to perform best when we see leadership from banks.  Banks don't need to be the "leader" but they need to at least perform as well as the overall S&P 500.  When banks go through periods of relative underperformance (red arrows), we normally see the S&P 500 either consolidate or decline.  Back in 2005, we saw a type of negative divergence where banks began lagging rather badly on a relative basis while the S&P 500 continued to push higher.  In fact, that S&P 500 strength continued for nearly two more years after that warning sign appeared.  But check out the woeful relative performance of banks from mid-2006 to mid-2007.  There was actually a relative breakdown in banks in mid-2007, just a few short months before the S&P 500 topped for 6 long and volatile years.  Since the end of 2011, the S&P 500 has risen approximately 75%, but relative strength in banks seemed to end in early 2014.  Is this a warning sign?  Well it could be but I wouldn't be overly concerned until we begin to see actual price breakdowns. 

So let's look at the current technical picture of banks using a daily chart:

Banks saw a relative breakdown to open 2015, but never lost its price support level during that time.  Yes, the relative weakness is a bearish development, but nothing is more important than the combination of price/volume.  In this case, banks have continued to hold onto price support near 290.  A loss of support there would, in my opinion, begin to send a much more significant warning sign.  Until then, I'd consider the relative weakness in banks as nothing more than normal stock market rotation and I'd remain bullish on the group, expecting a further rally down the road.

Happy trading!


Separating the Short Term Island from the Long Term Trend

With a gap up and a gap down, the S&P 500 SPDR (SPY) formed an island reversal over the last four days. This is short-term bearish, but not enough to affect the longer trend, which is still up. To emphasize the short-term nature of this reversal, I am going to start with a 30 minute bar chart. The Raff Regression Channel defines the short-term uptrend extending up from April 1st to April 16th. SPY gapped up on April 15th, held this gap for two days, and then gapped down on April 17th. The blue zone represents a price island above both gaps. Traders establishing long positions on the island are now trapped with losses. The short-term uptrend clearly reversed as SPY broke the lower line of the Raff Regression Channel as well. Broken support and the gap zone become first resistance in the 209.50 area. 

Continue reading "Separating the Short Term Island from the Long Term Trend" »

Finding Diamonds In The Rough - The Four C's - Clarity, Canada, China, Commodities

It has been a very interesting week for Canada, China, Commodities and job cuts. Friday morning had the non-farm payrolls number come in about 1/2 of what was expected by economists which was well below estimates for the first time in a while. Now we have reached some critical points on the relative strength charts that are pointing to better 'off shore' results for investors. This payroll data might be a clue to why this is happening. These hints have been showing up for a while now in the Shanghai market along with Australia, Japan and Europe. But if you're a Canadian, we appear to have a rose budding amongst the thorns for the first time since last fall. Must be the return of spring.

Chart 1 is a surprise for me. In Chart 1, you can see Canada ($TSX) has broken a long trend line in terms of relative performance compared to the S&P 500 ($SPX). The ratio of Canada compared to the USA ($TSX:$SPX) is shown in purple. It is early days but we can see this is the highest level of outperformance in the last 6 weeks. So although the Canadian market hasn't really broken out to new highs, it has recently performed better than the US Large Cap companies. 

Chart 1

The second example is the Hong Kong Hang Seng market ($HSI). The jagged repetition of these bugaboo-spire peaks makes it hard to create a tight trend line to the action. However, the late January peak broke the big down trend, pulled back and has now broken back above. The horizontal resistance marked in blue is an important level as that would be six month highs in relative performance. Lastly, the price action on the Hang Seng index has had a series of rising lows but an upside resistance around 25100. We can see the price action broke to six month highs and needs another good week to get to a new 52 week high and 7 year highs.

Chart 2

Chart 3 is at the same as Chart 2 but I have shown the twenty year view of the Hang Seng ($HSI). The chart will need a little discussion for investors new to supply/demand and relative strength. We can see on the price chart, that the Hang Seng ($HSI) looks to be breaking out of a very long base. To quote Louise Yamada, "The longer the base, the higher the space", so this could not look more bullish. We can see a massive 4 year trend in underperformance shown in purple on the ratio ($HSI:$SPX). This simply compares the $HSI to the $SPX each period (week) and the $HSI has dramatically under performed. You may remember that the US market has been accelerating to the top corner of the chart for the last 4 years. That little purple spike in the very bottom right hand corner of the ratio ($HSI:$SPX) could become very powerful. When we are breaking out to new highs and breaking out of an existing trend in terms of relative performance, I would expect to see major money flows towards this market as it breaks out of the 7 year base.

Chart 3

Notice the powerful move in relative performance and price off the 1998 lows at point 1. At Point 2, we started to make higher highs in relative performance and we can see the $HSI really accelerate as investors moved into the Asian stocks. At Point 3, the Hang Seng made lower highs in performance compared to the price from the 2009 peak which we call divergence. From there on, the Hong Kong market struggled in price and continuously under performed. Until this week! Pick your view, but I think a breakout in Hong Kong, China could also cause a push up in Canada. It might not be time yet, but you could definitely tilt an eye towards these markets to strategize when an entry setup appears that works for you. Martin Pring mentioned emerging markets the other day. All of this points into commodities, which typically lag a new economic surge and I discussed some of the base commodities on my webinar April 2, 2015. You can find a link to that article here. Greg Schnell Market Roundup Live. If you are new to StockCharts or very experienced, I will be posting some articles in April about how I use the StockCharts home page to find opportunities. They will be on The Canadian Technician blog which is free to everyone. You might find those blogs very helpful as a tuneup or an introduction. We keep adding to the site and sometimes great new tools go unnoticed.

Good trading,
Greg Schnell, CMT

Why Look At Other Stocks? Using SCTRs to Narrow Your Search for Winning Stocks

Hello Fellow ChartWatchers!

The other day I was out with my Dad and he said "Boy, the market has been really volatile recently hasn't it?"   And I said "Umm, not really. Where did you hear that?"  "All the cable news channels are talking about it."  And then, in my whiniest voice, I said "D-a-a-a-d.  I've told you again and again to be skeptical of those programs."  He knew I was joking but there was some truth to it also.  I pulled out my computer, brought up StockCharts and showed him this specific PerfChart:

(Click the chart for a live version)

What's happening is that the news channels hear that the Dow moved 100+ points and they decide it is a major story worth covering.  What they don't understand is that these days 100 points is only 0.5682% of the Dow's current value.  Barely over 1/2 of 1 percent!  That's not major news and it's definitely not "increased volatility."  Investors (and news stations) should only care about percentages.  The chart above shows that there is nothing notably different about the Dow's current moves relative to bigger moves made in the past 6 years (since the 2009 bottom).

Dad knew to only look at percentage, but forgot in the heat of the moment.  It's easy to do.  He was glad that I reminded him.

Using SCTRs to Narrow Your Search for Winning Stocks

We've recently done several webinar broadcasts about scanning.  Scanning is super important to technical traders.  Of the 80,000+ ticker symbols in our database, which ones are worth looking at?  Scanning narrows down that list to a much more manageable number.  And by combining scanning with our SCTR rankings, you can quickly narrow things down to just a few stocks worth looking at.

SCTR (pronounced "Scooter") stands for "StockCharts Technical Rank."  It is a number that ranges from 0 to 100 depending on how strong a stock's technicals are relative to all the other stocks in a given group.  For instance, if a large cap stock has a SCTR ranking of 50.0, you can conclude that its technicals are better than 50% of the other large cap stocks that we cover.  For more details on SCTRs, please see our ChartSchool article on that topic.

One of the great things about SCTRs is that they can be used in scans.  By using SCTRs in your scan, you are automatically weeding out underperforming stocks and that makes your scan criteria much simpler.  Let me show you...

Let's say that we are a typical investor with some cash on the sidelines and we're looking to get into the market.  We'd prefer to go long (buy low, sell high) and we'd like to invest mainly in momentum plays - i.e., situations where a stock has starting moving higher again after a significant bottom.

Now, you could take time to research all of our technical indicators and work up a multi-step scan criteria with lots of ANDs and ORs and square brackets, or you can "cheat" and use SCTRs.  For the purposes of this article, let's cheat.  If a stock starts moving up after setting a significant bottom, its SCTR value will probably start moving up from the 10-20 point range into the 40-50 range (and hopefully even higher soon after that).  So our "cheating" approach is to simply find stocks that have had SCTR values below 20 for at least the previous 3 weeks but now have SCTR value that are above 40.  Here's that sentence in Scan Speak:

[5 days ago max(15, SCTR) < 20] and [today's SCTR > 40]

"What could be simpler?"  (No, seriously.  This is much simpler than most scans out there.)  The only mildly tricky part is knowing that the "max( )" function finds the largest value over the specified number of days (15 in this case).  We use a 5 day offset in front of the max( ) function so that the max( ) function starts looking at values starting 5 trading days ago (i.e. from 5 days ago to 20 days ago).  Again, in English, this scan finds all the stocks that had low SCTR values over the previous 3 weeks but then had their SCTR value rise to above 40 since then.

When I run that scan right now (Saturday afternoon), I get 7 results:

Looking at the prices, my eye immediately goes to FEM, MOV and NSR (and possibly SQBG).  Those stocks have good pricing and good volume and (as we now know) good technicals!  Here's the chart for Neustar for example:

That is a very nice breakout after a low base!  

And finding this stock was so simple.  Notice that this scan doesn't have lots of extra clauses for price ranges or volume filters or stock groups.  All that is essentially handled automatically because we used SCTR-based criteria.

Now you might be asking yourself "Can I change the numbers that I used for my scan to be more aggressive or more conservative?"  Absolutely!  For example:

More Aggressive:
[3 days ago max(15, SCTR) < 20] and [today's SCTR > 30]

More Conservative:
[5 days ago max(20, SCTR) < 20] and [today's SCTR > 50]

Those are just two examples.  Go nuts testing other possibilities.  Just remember that you'll want to test things in various market conditions - up markets, down markets, sideways, etc.  (You can do that by change the "Starting ___ days ago" setting at the top of the Scan Workbench.)

SCTRs and Scanning really are two great things that go great together.  (Kind of like the peanut butter I'll be spreading on my Easter chocolate tomorrow!)

- Chip

China Leads Emerging Market Rally

Emerging markets usually do better when Treasury yields are dropping along with the dollar. Which may help explain why emerging markets were among the world's strongest stocks this week. The red daily bars in the first chart show Emerging Markets iShares (EEM) ending the week at a new four-month high. It's also trying to clear its 200-day average. The rising green line is the WisdomTree Emerging Markets Currency Fund (CEW). It started rising with the EEM in mid-March. That suggests that a weaker U.S. dollar is part of the reason for money flows into emerging assets. [Higher U.S. rates, and a strong dollar, siphon money from higher-yielding emerging markets]. Among the biggest EEM gainers this week were Brazil and Russia. The real star, however, is China.

China IShares Achieve Major Bullish Breakout ... Chinese stocks have been the strongest in the world over the last year. The Shanghai Stock Index has gained 88% since last April and is now trading at the highest level in seven years. Money flows into Shanghai started last spring when the Shanghai-Hong Kong Stock Connect was first announced (and launched in November). That opened up trading of mainland Chinese stocks (A shares) to foreigners. The Hong Kong Hang Seng Index lagged behind Shanghai over the last year (gaining 14%), but it still close to a new seven-year high. The most liquid of the Chinese ETFs achieved a bullish breakout of its own this week. The chart below shows FTSE China iShares (FXI) closing above its 2010 high to reach the highest level since 2008. That's a major bullish breakout. Some newer Chinese ETFs have been started over the last year that focus on mainland stocks. The Deutsche X-Trackers Harvest 300 (ASHR) offers exposure to mainland A-shares traded in Shanghai and Shenzhen. I can't vouch for its liquidity, but the ASHR has gained 94% since last April. Chinese authorities have lowered interest rates to boost its economy, and have hinted at more monetary easing to come. That's also driving money into Chinese stocks.

Technical Analysis Skills Wasted

Trading stocks is never for the faint of heart. It requires great skill and discipline to consistently succeed. For those who believe technical analysis is an important part of trading, learning to read and interpret charts is a very important part of the equation.

Understanding technical analysis alone does not guarantee positive results. In fact, one could argue that some traders spend too much time trying to perfect their chart reading skills while ignoring everything else that must be considered in order to make a successful trade.

For example, you might be superb at identifying key support and resistance levels, but what good does it do you if you constantly ignore honoring stop losses that then lead to substantial losses?

Take a look at the chart below on Intel. Imagine you decided to take a long position when the stock pulled back to its 50 day moving average in early January. You did this because you felt the 50 day provided solid support and liked the risk/reward potential and you committed to yourself that if the stock closed back below the 50 day you would exit the trade without much of a loss. But the stock kept dancing around at the 50 day so you decided to give it just a little more wiggle room so you wouldn't exit "prematurely." But you waited just a little bit too long, missed another very important negative technical development as the 20 day crossed below the 50 day, and watched the stock drop significantly as it then tested its 200 day moving average. By that point you were down big so you decided to adjust your stop down to the 200 day moving average as you believed it would provide great support. But when the 200 day failed to hold, you finally had enough, cried uncle and exited the position with one big, fat loss.

So you see, your original analysis was correct; the 50 day was a critical level of support; you had nailed it. And if you had exited there as you had committed in the first place, it would have been an acceptable loss. You then had a second chance to exit at your revised stop, but you ignored that as well. Instead, your losses kept mounting to the point where you finally threw in the towel, pretty much making your original analysis worthless.

Of course it didn't need to end that way and you can see how important it becomes to remain disciplined at all times. This is the very good news! You can fix something like this by trusting your good work and sticking with your original game plan. Honestly, it's as simple as that.

Speaking of spotting key technical developments that can be used to your advantage, our Chart of the Day for Monday, April 6 is an major index chart that's at a "Make or Break" point. If you're not already getting our FREE Chart of the day, just click here to sign up and I'll send you a new annotated chart every morning before the opening bell.

Committed to helping you succeed,

John Hopkins
Invested Central

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