ChartWatchers

Text Book Rollover Continues in US Markets with Dow Industrials Leading the Way

Hello Fellow ChartWatchers!

The US markets continue to s-l-o-w-l-y roll over with the Dow Industrials leading the way.  Despite the fact that $INDU moved 100 points higher this week, the intermediate to long-term trend is clearly down.  Lots of people talked about the "Death Cross" that occurred on the Dow's daily chart on Monday when the 50-day simple moving average moved below the 200-day average, but that should come as no surprise to any reasonably-attentive ChartWatchers.  Here's why:

When a market rolls over slowly like this, the first thing to go is the uptrend's momentum and, yes, we see that as the MACD has been moving lower for months.  The next thing to happen is increased interaction with the 50-period moving average.  Next up are tests of the 200-period moving average and it draws closer and closer.  Then comes a definitive break below the 200-period average and then finally the "Death Cross" occurs - which is where we are at with the Dow.

A longer-term weekly chart shows the slow roll-over more clearly.  It really is a "text book" rollover:

The S&P 500 hasn't rolled-over quite yet but its chart looks very similar to the chart above back in June.  The Nasdaq chart offers some hope with the price bars remaining above the 200-day MA for now but something significant needs to change if it is to avoid this same fate.

For more thoughts on the market - including the current breadth and sector situation - be sure to watch the recording of this weekend's ChartWatchers LIVE webinar.  Just click here to get started.

As I say towards the end of that recording, there are still stocks out there with positive momentum and great relative strength - you just need to work a little harder to find them and then watch them closely for signs of weakness.

Take care everyone!
- Chip

Bond ETF's Are Building Strength

A few weeks ago on the July 16th webinar, I talked about the bond markets and the chart view was looking bullish to get long TLT. Well, that actually played out nicely. But now the MACD looks like it wants to roll over. The SCTR has just pushed above 75. 

Continue reading "Bond ETF's Are Building Strength" »

How to Avoid Getting Slaughtered

There are differing opinions on whether or not it makes sense to hold stocks into earnings reports. One camp argues that you stand to make a big score if a company beats its numbers. Another camp - the one I'm in - says it's way too risky because you can never predict how the market will respond to an earnings report. I have two very specific examples that support both sides of the argument.

First up is Amazon that beat expectations handily in its most recent earnings report and you can see in the chart below that the stock was nicely rewarded:

Next up is LinkedIn, a stock I have featured in the past - but it's worth showing again - because it illustrates the heavy risk of holding a stock into its earnings report:

Now, if you held AMZN into its most recent earnings reports you were rewarded with an almost $100 pop, or a 20% gain from the prior day's close to the high the following day. Who wouldn't like that? Well, try those who were short the stock into the earnings report.

On the other hand if you held LNKD into its most recent earnings report, you would have suffered an almost 12% loss from the prior day's close to the low the following day. And even worse, if you had held the stock into the previous earnings report, you would have suffered a 20%+ loss in just one day.

I've always been a big believer that holding a stock into its earnings report is a crap shoot, a 50-50 proposition at best. BUT...and here's the big difference...while no one likes to see an "opportunity" lost, it's much, much worse taking an actual loss. So in the two examples above, if you held AMZN you had more money that you did not have in your pocket than the prior day but in the case of LNKD you actually would have lost a lot of money had you held the stock into either of its past two reports.

Bottom line? If you like to gamble, maybe holding stocks into earnings reports is for you. On the other hand, if you would rather minimize the risk associated with an unknown market response, it's best to stay on the sidelines. And I will be discussing this topic as well as the power of combining companies with strong fundamentals (earnings) and strong technicals (charts) in a FREE webinar next week. If you care to join me in the webinar just click here.

At your service,

John Hopkins
President
EarningsBeats.com

Small Caps Bounce At Two Key Support Levels

Bears are awaiting price breakdowns in key areas of the market, but thus far they remain highly disappointed.  Last week they had their chance to take down the small cap universe on two fronts and both failed.  This isn't meant to say that the bulls are out of the woods, but at least for now, support has won out.  Multi-month price support held mid-week last week as bullish hammer, then engulfing candlesticks printed.  Take a look:

Continue reading "Small Caps Bounce At Two Key Support Levels" »

Are Signs of Accumulation Emerging in SPY?

The S&P 500 SPDR remains largely range-bound since March, but a pair of potentially bullish patterns emerged and signs of accumulation are appearing. First, note that SPY hit new 52-week highs in May and July, and the overall trend is still up. The ETF is trading within 2% of its July high, but also in the middle of the tightest range in decades. Chartists must, therefore, look inside this range for clues on the next directional move. 

For the first pattern, note that an inverse head-and-shoulders pattern could be taking shape since late May. With an overall uptrend, the inverse head-and-shoulders represents a consolidation within an uptrend and a bullish continuation pattern. A break above neckline resistance would confirm the pattern and target further gains. Typically, the height of the pattern (213 - 204 = 9) is added to the breakout for an upside target (213 + 9 = 222). 


Click this image for a live chart.

Continue reading "Are Signs of Accumulation Emerging in SPY?" »

DecisionPoint Sentiment Charts Illustrate Bulls are Backing Down

There are many sources that DecisionPoint uses to develop the DP Sentiment charts. You'll find two of them in the free DecisionPoint GalleryAmerican Association of Individual Investors (AAII) Sentiment and Rydex Asset Ratio. I'm going to review the AAII, National Association of Active Investment Managers (NAAIM) and Rydex Cashflow charts from the DecisionPoint Market Indicator ChartPack and DecisionPoint Rydex Funds ChartPack  (available for download to Extra and above members). With market action and indicators sliding into neutral, sentiment charts are very helpful in determining the current health of the market. The sentiment indicators I'm reviewing today, with the exception of the AAII chart, take into account what actual money managers are objectively doing with their funds. This can be much more enlightening than a subjective survey.

Continue reading "DecisionPoint Sentiment Charts Illustrate Bulls are Backing Down" »

Acting on Impulse with Elder Impulse Bars

Hello Fellow ChartWatchers!

It was a fairly positive week for the markets last week following a big down move during the week before.  For the month of July, the Nasdaq was the big winner rising 2.3% and the Russell 2000 was the loser falling 1.4%.


(Click the chart for a live version)

As you can see on the weekly chart above, after a long run up, the S&P 500 is now moving sideways in a range between 2050 and 2125 (green lines).  The horizontal "Volume by Price" histogram bars show us that volume has now been concentrated within that range as well.  Because the index is unable to move higher, it is losing momentum as shown by the falling MACD and Chaikin Money Flow (CMF) lines.  Finally, the long-term moving averages are slowly closing in - the index has bounced off of its 50-week moving average twice now.  Clearly, the gauntlet has been thrown down and the battleground is defined - a close above 2125 will be a major victory for the bulls; a close below 2050 will be a huge setback.

Acting on Impulse with Elder Impulse Bars

You may also notice on the chart above that the bars are colored either red, green or blue - what's up with that?  Those colored bars are called "Elder Impulse Bars."  They were designed by Dr. Alexander Elder.  He talks about them extensively in his books.  The simple explanation is "Green is good, red is bad and blue is neutral" but please read on for a more detailed explanation.

Technicians are very interested in two properties of a price chart - the stock's trend and its momentum.  It is important to understand these two concepts in general.  They also are key components in the Elder Impulse system, so let's take a moment and review them closely.

Trend is simple to describe and hard to quantify.  Trend is the general direction a stock is moving in.  Is it going up?  Is it going down?  And (most importantly) when does a stock's trend change direction?

Because stock prices often bounce around a lot from one price bar to the next, most technicians use various moving averages to help them determine a stock's trend and that can cause some problems.  Which type of moving average should you use?  How many periods should be used to come up with the average?  The answer to those questions is always "It depends..."   The key issue is that when you use a moving average, you introduce lag into your analysis.  Your ability to detect changes in trend will be delayed somewhat which can be frustrating.  Unfortunately, lag is unavoidable.

To help deal with lag, technicians turn to the concept of momentum.  Momentum is the rate at which a stock is moving higher or lower. Is it moving upwards (or or downwards) quickly or slowly?  And (most importantly) is it moving more or less quickly than it was yesterday?  Momentum is important because before a stock can change direction, it needs to lose all of its momentum.  Therefore, decreasing momentum is a leading indicator for a trend change(!).

Technicians have several indicators that can measure momentum.  One of the most popular is the MACD.  You can read all about how the MACD works in our ChartSchool, but the important thing to remember is that if the black MACD line is rising, the stock has positive momentum and prices are rising faster than they were before.  The MACD Histogram shows the rate at which momentum (i.e. the MACD Line) is changing.  The chart below shows the relationship between MACD, the MACD Histogram and momentum:

Knowing that trend and momentum are very important, Dr. Elder did some research and came up with the following simple system for determining a stock's current status:

  • Trend = the Slope of the 13-period EMA
  • Momentum = the Slope of the MACD Histogram
  • If Trend and Momentum are both UP, color the bar GREEN
  • If Trend and Momentum are both DOWN, color the bar RED
  • If Trend and Momentum disagree, color the bar BLUE.

And that is what the green, red and blue bars mean on a Elder Impulse System chart.  You can use it as a strict trading system or, as I do, an additional (but optional) visualization of a stock's current situation.  If you do use it for trading, be sure to consider the following:

"The Impulse System encourages you to enter cautiously but exit fast. This is the professional approach to trading, the total opposite of the amateur's style. Beginners jump into trades without thinking too much and take forever to get out, hoping and waiting for the market to turn their way." - Dr. Alexander Elder

Again, you can read much more about the Impulse System in Dr. Elder's books.

You can add Elder Impulse Bars to your own charts by selecting "Elder Impulse System" from the bottom of the "Type" drop down on the SharpCharts workbench page.  That dropdown is located in the "Chart Attributes" area below the chart.  Or just click here for another example.  (Or just select the "Elder's Weekly" style from the ChartStyles dropdown below the chart.)

Hopefully, you will find the Elder Impulse System as useful as I have.
- Chip

 

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

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