The Market is in a Classic Bull/Bear Battle Right Now

Hello Fellow ChartWatchers!

Wow, people are all over the place with their emotions right now.  "Devastating Recession on the Way!"  "Strong Tech Earnings Lead to Rally Mode!"  "The Fed is Out to Kill the Economy!"  and my personal favorite "Head and Shoulders Top Imminent!"

Let's calm down and back up a minute.  The reality is that nothing has changed from a long-term technical perspective.  Here's the actual technical situation:

(Click on the chart for a live version)

Key Points:

  1. The stock market is slowly rolling over after a long uptrend.  This is a "Rounding Top" reversal formation with a couple of  sharp down-spikes in August and January.  Don't be fooled - there are no volume spikes to confirm any kind of Head & Shoulders top scenario.
  2. Weekly momentum (as viewed by the MACD at the top of the chart) continues to decline as it has since mid-2013.  Until that reverses and the red trendline is broken significantly, the stock market will continue to be weak and volatile.
  3. In the near-term, there is stong overhead resistance at 16,500.  The long blue Volume-by-Price bar sticking out horizontally from the left edge of the chart depicts that resistance clearly as does the 5 red arrows.  Last week, the market tried and failed to breakout above that limit.  16,500 marks the upper-edge of the current bull/bear battlefield.
  4. Based on looking at where things have bounced in the past, there is important support at 16,000 however, the corresponding Volume-by-Price histogram bar is not very impressive.
  5. 15,500 is now HUGE.  Any break below 15,500 will cause lots of people to take notice.  Again, the Volume-by-Price bar doesn't stick out much, but the big double-bottom on the chart can be seen for miles.
  6. Finally, while the support for 15,000 developed back in 2013, it did result in a significant amount of volume and so this level may also have a roll to play.
  7. Support levels below 15,000 are very old - probably too old to have any immediate impact.

Bottom Line:  On the Dow chart, the bulls and bears are battling it out between 16,500 and 16,000 right now.  The overall tone of the market is bearish (rounding top and declining momentum) but the 16,000 has provided important support for the Dow at many critical times in the past going back to the start of 2014.  When the bull and bears battled in this range last August, the result was a sharp upside breakout.  Will that happen again?  I'm not expecting it to, but I can't rule it out either.

With the market moving lower generally, prudent ChartWatchers know that now is the most important time of all to pay close attention to the technicals.  While all the talking heads cast around for theories and answers to the pointless question "Why?", savvy technicians can quickly spot and profit from reaction rallies and counter-trend moves by focusing on finding stocks with increasing momentum and great relative strength.

- Chip

P.S. I will be speaking to my good friends at the Long Island Stock Traders Meetup Group on Tuesday, February 16th in Plainview, NY starting at 6:45pm.  If you are somewhere close to that location, please come see me.  I'd love to "meet up!"    


Nasdaq May Be On Verge Of Breakdown

It's never a good sign to see the Nasdaq leading the rest of the market lower, which it did this week. A -3% plunge on Friday (and a -5% loss for the week) made it the weakest of the major market indexes. Heavy selling in software and internet stocks were especially troubling. So is its chart pattern. The weekly bars in the chart below show the Nasdaq Composite bearing down on its January and August lows. On a closing basis, the Nasdaq is already at the lowest level in more than a year. In addition, the Nasdaq/S&P 500 ratio (red line) on top of Chart 4 has fallen to the lowest level in a year. That's a bad omen for the rest of the market. Weekly MACD lines (below chart) have fallen to the lowest level since 2009. That greatly increases the odds that the Nasdaq will undercut its 2015 lows. That would complete a "double top" reversal pattern which would signal another downleg. If that happens, other other major stock indexes will most likely do that same. That would also confirm that the stock market has entered a bear market.

In Rocky Times Earnings REALLY Matter

In the best of times companies see their stock prices rewarded or punished based on earnings results. Even when a company misses its earnings per share or revenue forecasts by just a small amount it can have a meaningful, negative impact on its stock price. But when the market is highly volatile and on pins and needles like the US market has been all year long, missing estimates or guiding lower for the future can be devastating for a company's stock price. 

Look no further than Amazon and LinkedIn as prime examples of how unforgiving the market can be when there's zero room for tolerance. In the case of Amazon, they missed both their eps and revenue numbers with the stock down over 20% over the past week. And then there was LinkedIn (see chart below) guiding lower for the future and seeing its stock price fall by almost 44% in one day. Talk about falling off a cliff!
 In neither case did traders have any warning that these stocks would fall so hard after they reported their numbers. But it does illustrate the risk of holding stocks into earnings report, no matter how loved a company might be. And it's why we wait until a company has reported its numbers before it has a chance of making our list of potential trading candidates. In fact, if we issue a trading candidate to our members, we make sure they know when that company will be reporting its numbers so they can exit the position prior to its earnings release, thus reducing unnecessary risk,

 With peak earnings season nearing an end we will be scanning thousands of stocks to see which ones exceeded and which ones fell short of their forecasts. A select group will end up in our "Candidate Tracker" with some becoming long and some becoming short trading candidates. This will allow our members to key in on the strongest and weakest performers who have already reported their numbers, thus avoiding the repercussions that go along with holding a stock into its earnings report. If you want to get on our list to learn more just click here. In the meantime, make sure you know when companies you own stocks in will be reporting their earnings so you can take the appropriate action to avoid getting slaughtered. 

At your service,

John Hopkins

Materials SPDR (XLB) "Thrust" into BUY Signal

There has been renewed interest in the Percent Buy Index (PBI) ever since I spotlighted it during one of my webinars. The PBI is not related at all to the Bullish Percent Index (BPI). The PBI is Carl's creation, and it tracks the percentage of Price Momentum Model (PMM) BUY signals for the components in a given index. The Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure chart BUY signals within an index.

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What You Need To Know About Trading A Bear Market?

There are no guarantees to this question, but we do have history and past technical indications to provide us a few guidelines.  Trading strategies applied during a bull market simply won't work during a bear market.  They may work on a few select industry groups and stocks, but the game has changed for most areas of the market and we have to change with it.  So let's start with a few basic rules I follow:

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Is Anyone Helping You Find Strong Stocks In This Market?

This bear market has ripped most portfolios apart. Some portfolios have been shredded. Recently, a money manager was on TV saying he really likes it when stocks are down this hard because there are so many bargains. I have two additional statements for that. He probably wishes he wasn't fully invested when it started falling, and he'll only be happy if the year 2016 ends higher, not lower.

One of the other market axioms is that 70% of the stocks follow the index. In bear markets, that correlation goes higher it seems. The S&P 500 closed down 3.1% from the previous Friday. I did a quick scan to see how many large cap stocks closed higher this week and the number was 197. (This is a larger group than just the S&P 500). As well, I scanned for large cap stocks that closed Friday 5% higher than last Friday. There were only 47.  Lots of those stocks were just bounces off lows, but that small group outperformed the index by 8%. So how could we find the ones that at the very least did not go down before the week started? Let's see if we can find the majority of the group of 197.

The StockCharts Technical Ranking System (SCTR) ranks the price action of a stock against its peer group. So this indicator compares a large-cap stock against the large-cap group, a mid-cap stock against a mid-cap group etc. A stock with a ranking (SCTR) of 95% has price action better than 95% of its peers. This ranking uses time calculations that are predominantly 10-month,6-month, 3-month, 1 month and a few days to rank the stocks. The calculations rank the stock in real time, all day. The interesting thing is that different industry groups rise in the rankings somewhat together. Click here to learn all about the SCTR including how it is calculated.

Here is a current snapshot of the leading SCTR rankings for large cap stocks.

The list is dominated by Utility stocks. Let's zoom in by sorting on the Utility stocks. Within Conventional Utilities as an example, all but two have an SCTR ranking above 75. The SCTR column is to the right of Conventional Electricity, the next column has the change in the SCTR ranking today, then the closing price, then volume. There are even more Utility stocks, but this is a screenshot. You can get to the SCTR rankings by following this link. SCTR Rankings.

What is more interesting, is comparing the change in the SCTR from last week to this week. So the list above showed the change in the SCTR ranking from Thursday to Friday. The list below shows the change in the SCTR ranking for the last week. What I notice is that almost all of them had very little change. They were winners last week, and they still are.

The SCTR can really help you stay on top of the best of the best. When this leadership starts to change into other industry groups or sectors, you can change your portfolio to only hold winners, week in and week out. The odd one drops like a stone, but that can happen at any time to any stock. 

For more information on SCTR's, I try to use them extensively in my webinars. I'll be doing three webinars this week. The first one is on Monday as a guest of Tom Bowley on Trading Places. The second one is focused on the Canadian Stock Market on Tuesday as the Canadian Technician and the last one will be on Thursday for the Commodity Countdown.

If you have not tried to use the SCTR ranking, click on the links above to register. It is an incredibly valuable method of staying with winners. In each webinar, you can learn more about how to use the SCTR system. When the majority of your portfolio is holding winners week in and week out, the odds are much better that you won't be relying on luck to outperform the market. Click here to go to the SCTR Rankings. I like to use the drop down box at the top to look at different SCTR groups. I then click on the column headers in the following order. Click SCTR to make sure the 99% one is at the top, then click industry, then click sector. Scroll down and see which industry groups are really starting to shine.

You can follow me on twitter @schnellinvestor. You can also follow any StockCharts author by clicking the Yes button below their blog. 

Good trading,
Greg Schnell, CMT


Small-caps, Finance and Tech Weigh on Market

After sharp declines the first two weeks of the year, the stock market turned into one mixed up beast the last three weeks. The PerfChart below shows three-week performance for the seven major index ETFs. All seven were down 6+ percent the first two weeks of the year, but four of the seven are up the last three weeks. These include the S&P 500 SPDR, S&P MidCap SPDR, EW S&P 500 ETF and Dow SPDR. The S&P SmallCap iShares, Russell 2000 iShares and Nasdaq 100 ETF are the losers and these three represent the high beta, or riskier, end of the stock market. Relative weakness in these three tells us that the stock market is in risk avoidance mode. QQQ is the biggest loser with a 2.7% decline over the last three weeks and IWM recorded another 52-week low this week. 

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Discussing Some Of The Technical Indicators For Long-Term Investors

I was recently at an event where someone suggested a simple Technical Analysis 101 of the current market. Today, I want to do that in one chart.

There are some simple theories in the market. When the market is going down, the volatility picks up. Using some of the most common tools of Technical Analysis, this market breakdown has been coming for a while. The point of this review is to identify signals that can help us spot the market trend and when it might end in either direction.

This is the $SPX with one of the simplest indicators. The 40 Week Moving Average shown in green. When the market is below the 40 WMA and the average is pointed down, we have to be aware of the possibility of a market breaking lower. Notice how the market had trouble getting back above the 40 WMA for the last 3 major tops in 2000 and 2007. You'll also notice both 2010 and 2011. The Federal Reserve acted during the low points in the market in 2008, 2010, and 2011. The last QE was late 2012 through to October 2014. 

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Last Sectors Standing

If you go to our DP Reports blog and take a gander at the DecisionPoint Market/Sector Summary, you'll find there are only two sectors left with BUY signals. I'll give you a moment to guess which ones. Those of you familiar with John Murphy's sector rotation analysis will likely guess correctly. Both the Utilities and Consumer Staples cap-weighted and equal-weight ETFs are on BUY signals. An Intermediate-Term Trend Model BUY signal is generated when the 20-EMA crosses above the 50-EMA. Unfortunately, three of those ETFs have declining 20/50-EMAs. Let's look at the charts to determine if those signals will hold up much longer given the overall market malaise.

The Utilities SPDR (XLU) has the best daily chart of the four. All of the EMAs are configured positively and the 20/50-EMAs are rising which should keep the BUY signal in place for some time. Price has been in a rising trend channel that unfortunately was penetrated on Friday's decline. The Price Momentum Oscillator (PMO) has decelerated but it is still rising and isn't that overbought. The OBV suggests some serious weakness as it has been declining in a negative divergence with price's rising trend. While this is one of the stronger sectors, there are still signs of trouble.

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The One Where a 4-month Setback Freaks Everyone Out

Hello Fellow ChartWatchers!

It was "back to the future" time for the markets this week with the Dow falling over 350 points and ending up just below 16,000.  This has caused lots of consternation and teeth-gnashing in the mainstream financial press, but let's back up and get some technical perspective before drawing conclusions.  Here's my chart of the current big picture:

This is this same chart I featured during last week's webinar.  (So far, I haven't needed to update the annotations either!)  There's a lot of stuff going on here so let's break it down:

  • The market continues to roll over (blue line) after a l-o-n-g uptrend stretching back to at least 2011.  Investors that got used to that long uptrend were spooked last August when things first broke down.  Those same investors loved it when the market quickly recovered in October.  Now - somehow - they are once again shocked by the recent decline back down to the same levels we saw in August/September.  (They seem to be "memory challenged" in my book.)
  • Looking above the price chart, we see that the market's weekly momentum continues to decline with the MACD below zero and heading lower quickly.  That's not surprising given the sharp declines over the past two weeks.  You can expect momentum to continue moving lower for several more weeks at least.
  • The green arrows on the chart point out our "first line of defense" - 16,000 - which has proved very important to the market in the past.  Will it provide support for things this time around?  That is THE questing right now.  There was some evidence of support at 16,000 at the end of the day of Friday, but we won't know for sure until Tuesday's open.  (Monday is a market holiday in the US.)
  • The interesting thing is that 15,500 is probably a more important support level for the Dow (as shown by the red arrows).  That's where last August's big drop turned around.  It also was an important level back in 2013.  As I said last week, if 15,500 doesn't hold, that will be the time to become more seriously concerned about the long-term health of the market.
  • The black arrows show the "last line of defense" which is around 14,750.  Let's not talk about that yet shall we?
  • One last thing to notice on this chart: weekly volume hasn't spiked siginificantly during the past two weeks.  Yes, it is high, but not unusualy so like it was in August.

Even though the market headed lower last week, that doesn't mean that there weren't any opportunities for the bulls.  Our Sector Rotation PerfChart (below) shows you exactly where those opportunities were:


This chart says that since the start of the year, three sectors - Consumer Staples, Health Care, and Utilities - have out-performed the S&P 500.  Since those are key defensive sectors, we should expect the market overall to keep moving lower in the near term.

Note that the chart above doesn't show the entire picture however because the S&P itself has been heading lower too.  Let's see this chart using absolute performance instead of performance relative to $SPX.  By clicking on the grey "S&P 500" box in the upper left corner of that chart, we get the absolute picture:

Hmm... That's kind of depressing.  We now see that only the Utilities sector (which is a proxy for the Bond market i.e., the "anti-stock market" sector) has shown a gain in January.  If you need to buy stocks right now, Utilities (and possibly Staples and Health Care) are the stocks to look at.

Clearly now is a time for caution.  In reality, the charts have been negative since early 2015.  That said, now is not the time to "tune out."  As the market declines, technical analysis becomes more and more important.  As I demonstrated above, charts can show you where previous support levels are located and technical indicators can tell you if those levels will hold or not.  The expression "Wall Street is on sale" is becoming more true every day as stocks decline.  Use charting to help you discover when the sale is ending.

- Chip

P.S. Don't think there are any bullish charts out there right now?  Check out Campbell Soup which was returned by my "Strengthening Strength" scan.  (See last week's webinar for details on that scan.)  No promises, but it is still doing well and is in one of the key defensive sectors (Staples) this is doing relatively well right now.  Something to keep an eye on.

Banks Lose Two Year Support Despite Solid Results

Technical analysis doesn't try to answer why questions.  Fundamentalists are constantly bewildered by price action, especially when it seems to contradict fundamental news.  Technicians simply don't care.  The stock market looks ahead and therefore price action precedes news.  That's why it's important to look at how the market reacts to news, not to simply look at the news itself.  This past week was a perfect example.  JP Morgan Chase (JPM) reported quarterly results that exceeded expectations.  In fact, take a look at the banks that reported quarterly results last week and how their bottom line compared to consensus estimates:

Continue reading "Banks Lose Two Year Support Despite Solid Results" »

Advance-Decline Turns Down, Foreign Markets Already Bearish

A lot of us on this site have been warning about the fact that the fourth quarter rally was mainly driven by large cap stocks and wasn't being supported by the vast majority of stocks. That's been shown by breakdowns in small and midsize stocks and the fact that 80% of big board stocks have fallen below their 200-day averages. The best known measure of market breadth is the NYSE Advance-Decline line. Chart 1 shows that line falling well short of its 2015 high during the fourth quarter, which was an early warning. This week's drop below its August/September lows to a 52-week low is another. That puts the AD line in its first downtrend since the bull market started seven years ago. That's a bad sign for the stock market.

The concept of "market breadth" also applies to global stocks. In a healthy uptrend, most stocks markets should be rising. When most are falling, that 's bad for everyone. I've been pointing out the fact that foreign shares have been much weaker than the U.S. and have already started to break down. That's not good for them or us. The weekly bars in Chart 2 show the Vanguard FTSE All-World ex-US ETF (VEU) falling to a three-year low after having completed a "double top" reversal pattern (see circles). The VEU has lost -22% since last spring and is in a bear market. That includes developed and emerging markets. EAFE iShares (which measure foreign developed markets) has fallen to a two-year low, while Emerging Markets iShares are trading at the lowest level since 2009. It's pretty tough for the U.S. to hold up when the rest of the world is in a downtrend. Global stocks also become more highly correlated during downtrends. That increases the odds that we've started to follow them lower.

BOTTOM LINE... With foreign stocks in a bear market, U.S. stocks are in danger of following suit. Internal market measures show that the market is already much weaker than the major stock indexes. That also increases the odds that 2015 lows will be broken. If that happens, the S&P 500 could lose another 10-12% before reaching major support. Sector rotations also show that investors have been rotating toward defensive consumer staples and utilities, and have been selling economically-sensitive stocks. Commodity-related stocks are still being sold hard. Countries tied to commodities are being hit especially hard, as are their currencies. Chinese stocks and the yuan are sinking together. The dollar and yen are the only two currencies holding up. A firm dollar is keeping downside pressure on commodities. Money leaving stocks is moving into the safety of Treasury bonds and gold (not to mention cash). That's what normally happens in times of financial stress. Economists are starting to worry about the health of the U.S. economy. Stock selling suggests investors are worried too. On a lighter note, enjoy the three-day weekend. We can all use a timeout.

Will Earnings Matter?

Earning's season will kick into high gear this week and trader's are wondering how much they will matter after the market slaughter already experienced this year. Since this is the worst start to a year for stocks it's a legitimate question.

Let's start with the notion that the market is extremely oversold and that technically, just about everything is broken. For example, the Russell 2000 is well below all key technical levels and has fallen 22% from its June 2015 high, putting it in bear market territory. And its fallen during a period that is generally quite bullish for small cap stocks.

Though neither the Dow nor the S&P has entered bear market territory they are down 12.7% and 11.9% from their respective highs, so nothing like the Russell 2000, but nothing to write home about either.

At we scour the market for stocks that have strong fundamentals - earnings - and also have strong technical attributes. Historically we have found that stocks with these two attributes generally outperform the broader market. But we've also found that when the market is reeling like it has been lately it's tough for even strong stocks to hold their ground.

Now that thousands of companies will be reporting earnings over the next several weeks we're going to see if those companies that do report strong numbers can hold up. We might also start looking for companies that miss analysts expectations as they could be high reward to risk short candidates. This would mark a change in our strategy since historically we have focused on long trading candidates or simply moving to cash when the market is soft. But as the old saying goes, desperate times call for desperate measures.

This does point to the notion that when the market is in turmoil it requires a different approach. It starts with the recognition that a more bearish environment makes it harder to succeed on the long side so expectations need to be lowered. If you continue to trade on the long side you might want to deploy less capital and grab profits that come along more quickly. And it becomes even more important than ever to have appropriate stops in place for those trades that don't work out. And for many, simply moving to the sidelines to protect capital could be the best alternative.

We will be paying close attention to the market's reaction to earnings over the next few weeks to see which companies are rewarded and which ones are punished.  We'll then zero in on which ones provide the best profit potential in this tricky environment. If you want to get on our list to see what we come up with just click here.

At your service,

John Hopkins