Aggressive Small Cap Indices Break Out Again

Both the Russell 2000 Index ($RUT) and S&P 600 Small Cap Index (SML) broke out to all-time highs last week as money continued to rotate towards aggressive small cap stocks and that should be seen as a bullish sign for equities.  In the case of the $RUT, a year long bullish continuation pattern - an inverse head & shoulders - finally resolved to the upside with a fresh target price of 1400 based on its measurement.  Heading into 2014, momentum began to slow for small cap stocks as a long-term negative divergence emerged in March 2014 on the weekly chart.  Many times that sets the stage for a selloff, or at least a long period of consolidation.  Consolidate is exactly what the Russell 2000 did.  Check out the chart:

While the S&P 500 was up nicely last week, it's still awaiting its next breakout.  Failure to break out, however, did not stop the S&P 600 Small Cap Index ($SML) from breaking out as the pattern here is quite similar to the Russell 2000 with the small cap area of the S&P surging to all-time highs.  Take a look at the SML:

Given the strength in small caps, it's very difficult to grow bearish equities at this time.

Happy trading!



5-EMA/PMO Scan Produces Interesting Short-Term Opportunities

With the market bottoming and taking a positive turn, I decided it might be a good time to review the results of one of my favorite and nicely discriminating short-term scans. It looks for stocks that are in a positive configuration of the 50/200-EMAs; meaning 50-EMA > 200-EMA which we consider the stock is in a "bull market". Then it looks for stocks with a new 5-EMA cross above the 20-EMA which is a short-term BUY signal. Finally, I whittle it down further by looking for stocks that have a Price Momentum Oscillator (PMO) that has been rising for three days and are approaching a positive crossover. This short-term scan is below:

[type = stock]
AND [Daily SMA(20,Daily Volume) > 50000]
AND [country = US]
AND [today's PMO Line(35,20,10) < today's PMO Signal(35,20,10)]
AND [today's PMO Line(35,20,10) > yesterday's PMO Line(35,20,10)]
AND [yesterday's PMO Line(35,20,10) > 2 days ago PMO Line(35,20,10)] 
AND [2 days ago PMO Line(35,20,10) > 3 days ago PMO Line(35,20,10)]
AND [today's ema(50,close) > today's ema(200,close)]
AND [today's ema(5,close) > today's ema(20,close)]
AND [yesterday's ema(5,close) < yesterday's ema(20,close)]

This scan produced about 40 stocks. The first thing I do, is look at the results in "CandleGlance". Here is an excerpt of my screen. 

Looking at just the results above, there were two that looked interesting right out of the gate for me. IYLD, Morning Star Multi-Asset Income ETF is the first. I clicked on the chart and IYLD came up in the charting workbench with my default ChartStyle that doesn't include the 5-EMA. Since my scan included the 5-EMA, I switched my ChartStyle to my 5-EMA approach so I could see the 5/20-EMA crossovers.  As part of this ChartStyle, the price bars are no longer opaque. 

The IYLD chart looks promising. The PMO is approaching a positive crossover near the previous two bottoms, so this would be considered a crossover in somewhat oversold territory. Price broke out of a declining trend and the 20-EMA is approaching a positive crossover the 50-EMA which would generate an Intermediate-Term Trend Model BUY signal. The detractors on this chart are that near-term resistance is very close and the SCTR value is below 50. My normal threshold for the SCTR is above 70.

The second chart that caught my eye was PDCO, Patterson Dental Company. I like this chart better. Price has just broken out of a declining trend channel, the 5-EMA crossed the 20-EMA while the 20-EMA was above the 50-EMA which makes this Short-Term Trend Model BUY signal more bullish. The PMO is nearing a positive crossover BUY signal and the SCTR value has been rising. What are the problems? The all-time high was hit last January and that will be a strong area of resistance which is unfortunately, not that far away. This would be a short-term investment that I would have to watch closely.

Looking at the CandleGlance of all 40 of the scan results I found a few other charts of interest. Run the scan yourself and see if you can pick out the promising charts. Join Carl and I at the DecisionPoint LIVE! Webinar and watch real-time analysis of more charts. To ensure that you see your chart requests, tweet the symbols @_DecisionPoint.

Happy Charting!

Behavior Modification

I made my ChartWatchers debut in the last issue and wanted to reiterate that my focus is on all things, "Beyond Technical Analysis".  In other words, my assumption is that the majority of eyeballs reading my articles are anywhere from somewhat to very skilled in technical analysis. So the good news for you is my article is surrounded by experts in technical analysis who will provide you with tons of information that you can put to good use when trading.

But I'm more concerned with all of the other things you need to concern yourself with when trading. From setting price targets, to stop losses, to proper execution of a trade. And when you go off track on any of these important steps, well it can lead to undesirable results.

If I was able to carve one thing into the minds of all the traders in the world it would be this; you must maintain the highest level of discipline possible when you trade, because without it, you have almost no shot at succeeding. You might get lucky from time to time, but to become truly successful you must be relentless in your pursuit of being disciplined.

Take a quick look at the chart below. Imagine when you entered the trade you set a price target of $80. You hit that price target within two weeks; congratulations! But, you didn't pocket your profits when you hit your price target. Instead, you shifted your thinking, hoping the stock would go even higher, and held onto the stock and the profit evaporated before your very eyes. Happens all the time.

The good news is you CAN change your behavior. It just takes practice. You have to get to the point where it becomes more rote then a decision making process. There is no question that if you hit your price target, you exit the trade. THAT is the type of discipline you need if you really aspire to be successful.

In my daily Market Insights to members of Invested Central, I include a section called, "Behavior Modification." It covers those types of decisions that go "Beyond Technical Analysis." If you would like to see all of the case studies from last week, including how you can change your behavior, just click here and you will be able to see them all.

Committed to helping  you succeed,

John Hopkins
Invested Central 

Fed Effect Continues on Friday

After a brief pause on Thursday, global markets resumed the bullish tone that started after the Fed's dovish statement on Wednesday. With the Fed scaling back on its plans to hike short-term rates later this year, markets acted accordingly. Treasury yields plunged to the lowest level in more than a month (see Chart 1). That pushed the dollar lower and contributed to a bounce in commodity markets. The drop in yields also gave a big boost to dividend paying stocks like utilities and REITs which had a very strong week (Chart 2). Homebuilders were also strong on the prospect for lower mortgage rates (Chart 3). Small and midcap stock indexes in the U.S. hit new highs, while the large cap Dow Industrials and S&P 500 neared their old highs. Even stronger gains were seen overseas.

Gold Starts To Glimmer, Silver Surges

With a pull back in the US Dollar ($USD), both Gold and Silver started to move this week. We have been discussing it in the webinars, but these are meaningful moves that are just starting as the $USD takes a breather. On Chart 1, I have used the GLD chart to show the move on Friday at midday. It has made a nice double bottom base and the MACD has given a positive crossover signal. The relative strength line in purple has not broken out to the upside yet. The volume has not surged meaningfully yet, but it is an options expiration which usually creates a high volume day so I would expect a large candle by the close. The big bullish candle on Fed day was over 12 Million shares with the average around 7 Million. This looks set to move higher now.

Chart 1

Here is the SLV chart representing Silver on Friday midday. You can see the volume is already above the 50 day EMA with more than half the trading day to go. Again, a nice base formed while testing previous lows and SLV has pushed substantially to the upside already but should have lots of room to run.

Chart 2

Spring is in the air and Silver seems to have some spring in the chart. Gold looks strong here too if the $USD continues to pull back.

Good trading,
Greg Schnell, CMT

Utilities Get their Mojo Back

It was a big week for Treasury bonds, the 10-YR Treasury Yield and the Utilities SPDR. XLU fell sharply as yields surged in February, but rebounded this week as Treasury yields fell. Overall, the big trend for XLU appears to be up with a series of higher highs and higher lows since November 2013. The green dotted lines mark a rising price channel and the ETF hit a 52-week high less than two months ago. It also appears that a higher low is taking shape because XLY is reversing well above the August 2014 low. Notice that broken resistance, the 62% retracement and November 2012 trend line converge to mark support in the 43-44 area. 

In addition to a support bounce on the weekly chart, XLU broke out this week on the daily chart. The second chart shows the Raff Regression Channel and early March high marking resistance at 45. Also notice that the rising 200-day moving average marks support in the 43-44 area. The ETF surged above the upper line of the Raff Regression Channel and above the early March high to reverse the eight week downtrend. The reversal on the daily chart suggests a continuation of the long-term uptrend on the weekly chart. 

Thanks for reading and have a great weekend!
Arthur Hill CMT   

Free Market Analysis! Get your Free Market Analysis Right Here!

Hello Fellow ChartWatchers!

The market gave back ground this week, especially on Friday as a good Jobs report led to fears that the Federal Reserve would raise interest rates soon.  It definitely seems like a turning point in the market just occurred as the Sector Rotation picture is now muddier.  Compare last week's Sector Rotation PerfChart to this week's edition:


Continue reading "Free Market Analysis! Get your Free Market Analysis Right Here!" »

The Life and Full Line Insurance Groups Start To Perk Up

The Full Line Insurance Group Is one of the top 5 industry groups over the last month. 

With the market pulling back hard on Friday, this group turned up higher. The Full Line group continues to anticipate better times ahead if the interest rate changes. Another group moving up fast is the Life Insurance group. 

They also rallied on Friday with expectations of a change in rates as a driving cause. This interest rate change could be a major catalyst for the financials that are interest rate sensitive. We'll be watching these areas very closely over the next few quarters.

Good trading,
Greg Schnell, CMT

Gold Tumbles on Rising Rates

Gold got hit hard Friday on two fronts. One was the sharp jump in U.S. interest rates. The other was the surge in the U.S. Dollar to the highest level in eleven years. The chart below shows the price of gold tumbling $29 (-2.4%) on Friday to the lowest level for the year. And it did so on rising volume. [Gold stocks lost -7.4% and were day's and week's biggest losers]. The green line is the 2-year Treasury yield. The chart shows gold trending inversely to the 2-year yield. That's been especially noticeable since the start of the year. A peak in the yield line at the start of the year helped push gold into a strong January. The upturn in the green line since late January has helped push gold (and gold shares) sharply lower. There are at least two reasons why. Gold is a non-yielding asset. It has more appeal when U.S. rates are low or declining. It loses its appeal when rates start rising -- as they are now. The second reason is that rising rates push the dollar higher which is also bad for gold. Gold is priced in dollars, as are all other commodities. The surging dollar is a main reason why commodity markets in general are doing so badly.

Internet Stocks Showing Renewed Relative Strength

When we look back at last week's action, a few things stand out to me.  First, the aggressive sectors - financials, consumer discretionary, technology and industrials - held up quite well on a relative basis.  That should be seen as a positive.  The worst performing group was utilities, which makes sense as the yield on the 10 year treasury ($TNX) soared.  The fear of rising interest rates spooked the market last week, but I don't believe we've necessarily entered a long-term period of higher interest rates.  Instead, we're likely seeing a bounce in treasury yields after many months of decline.  In fact, if we look at a long-term 40 year chart on the TNX, it appears to me that we could see yields rise to the 3.75%-4.00% area and still remain in the downtrend channel that began in late 1983.  Historically speaking, that would still leave the TNX at a very low level, conducive to stronger economic growth.  Take a look at the more than 30 year downtrend:

Despite the rather large sell off last week in equities, the internet space ($DJUSNS) actually strengthened.  We're still waiting on a breakout in this group, but clearly money began rotating to internet stocks in late February and that rotation continued in early March.  Look for a close above 900 or a continuing short-term sell off to price support at 865 and the rising 20 day EMA, currently at 861 as potential opportunities for entry into stocks within this space.  Check out the recent strength:

Happy trading!

Tom Bowley

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