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OFF TO THE RACES WITH PUBLIC CHARTLISTS v2.0

Hello Fellow ChartWatchers!

The new version of our Public ChartList area is now officially released and ready for your use.  The Public ChartList area has been a real "hidden gem" of our website for years where any StockCharts member (with an Extra account) can publish their own chart analysis for everyone to enjoy.  This new version adds a nice collection of new features for both Public ChartList readers and Public ChartList authors.

FOR THE READERS:

  • A New, More Reliable Ranking System - The old vote-based system has been completely replaced with a new ranking system that takes into account multiple factors to determine a list's popularity.  Once things settle down from the launch - in about a month - readers can be confident that the lists at the top of the "scoreboard" will be worth reviewing.
  • A "Follow" System to Help You Review Your Favorite Lists Quickly - If you like a Public ChartList (and you are a StockCharts member) simply click the "Follow" button for that list and we'll make it easy to find and review that list in the future.
  • List Categories Help You Qucikly Find Lists You Are Interested In - All Public ChartLists must now be categorized by their authors. Now you can quickly find all the lists about, for example, Elliott Wave Theory or Sector Rotation with just two clicks.
  • Badges Help You Find Reliable Authors - You can now tell at a glance how long an author has been maintaining their list and whether or not they have done anything to stand out from the crowd.
  • Automatic Downgrades for Overly Commercial Lists - We've heard continual complaints from readers about the overt commercialism in many of the old Public ChartLists.  The new system automatically downranks lists that include annoying, spam-like commentary or content that offends lots of readers.

If you have tried looking at the Public ChartList area before and were not able to find interesting information there, I urge you to take another look right now by clicking here.  You'll quickly find great charts and commentary like this one from Angela O'Donnell:

ODonnelGold

or this snippet from Espen Corneliussen's daily $GOLD chart:

GoldSnippet

Bottom Line: Every ChartWatcher should spend some time looking at the Public ChartList area and Vote For and/or Follow their favorite authors.

FOR THE AUTHORS:

  • New Ranking System is Fair and Reliable - The new ranking system prevents the fraud and abuse that our old system struggled with. Trying to "game the ranking system" no longer works. 
  • Multiple Ways to Customize Your List Over Time - Earn perks like custom avatars and color schemes that can help your list stand out from the crowd.
  • Multiple Badge Awards - Earn awards that appear next to your name and show readers your commitment to quality chart commentary.
  • Earn Your Own Official Slice of StockCharts.com - Over time, popular lists will gain their own custom StockCharts.com web address along with minimal StockCharts branding and the ability to add custom HTML widgets.  It will be like having your own chunk of StockCharts!

There will be some volatility in the rankings during the first couple of weeks as the system builds up its statistics.  By the end of March, we expect things to be working fully.  And watch our for new perks and badges that authors can earn.  We plan on release more of them in the coming months to give you even more ways to customize your list.  Stay tuned...

- Chip

OVER 800 S.C.A.N. ARTICLES AND COUNTING, "SAME SCALE" PRICE OVERLAY

OVER 800 ARTICLES AND COUNTING!  The StockCharts Answer Network (s.c.a.n.) passed another milestone last week with its 800th question getting answered.  If you haven't visited it yet, s.c.a.n. is a free user-to-user question-and-answer area where you can get your questions about using StockCharts.com answered quickly by other experienced StockCharts.com users.  But don't just visit s.c.a.n. when you have a problem, keeping up with the answers to questions that other people ask can be even more rewarding.  Each week another couple of gems pops out of the discussions there - for instance here's one from last week about the differences between Price Channels and Keltner Channels.

"SAME SCALE" PRICE OVERLAY FIXES BOND YIELD CHARTS - Quick, what is wrong with this picture?

BondOverlays1
(Click for live version)

This is a chart with the 10-year and 20-year bond yields overlaid on top of each other.  The problem is that the vertical scales are different.  Compare the scale of the left with the scale on the right.  Now check out this chart:

BondOverlays2(Click for live version)

Now that's more like it!  Both bond yields are now on the same scale and their distance is accurately displayed.  If you want to chart several things on the same scale, you can now do so with the new "Price (same scale)" choice in the SharpCharts "Overlays" dropdown.

GOLD BREAKS 200-DAY LINE - GOLD MINERS TEST SUPPORT

A couple of weeks ago (February 28) I wrote a positive article on precious metal assets. The entire group has taken a big hit since then. Two contributing factors have been more positive comments from the Fed, which imply little or no more quantitative easing. That pushed U.S. bond yields sharply higher earlier this week and gave a big boost to the U.S. dollar. Stocks also rallied sharply. That combination pushed gold prices sharply lower, and gold miners along with it. Chart 1 shows the Gold SPDR (GLD) tumbling to a two month low on rising volume. It has also fallen below its 200-day moving average. Even with that short-term damage, however, the GLD chart doesn't look that bad. A possible "neckline" can still be drawn over its November/February highs. That makes the current selloff a potential "right shoulder" in a bottoming pattern. The circled area shows potential chart support formed last September and October (the potential "left shoulder"). The price of gold needs to stay above that support zone to keep any bullish hopes alive. Eventually, GLD will also have to break the "neckline" to actually turn the chart bullish. Gold miners have fallen along with bullion. Chart 2 shows the Market Vectors Gold Miners ETF (GDX) falling into a test of its December low. A couple of weeks back it was testing February resistance at 58. It failed that test of resistance. The question now is whether it will survive a test of support. The February 28 message also showed the Gold Miners Bullish Percent Index ($BPGDM) on the verge of a point & figure buy signal. Chart 3 shows the p&f buy signal taking place at 46. That buy signal, however, has been negated with a new p&f sell signal at 36. Obviously, my earlier enthusiasm for precious metals has been considerably dampened.

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S&P 500 RALLY GETTING RISKIER BY THE WEEK

The S&P 500 rally continues unabated, although it has shown some signs of wear and tear given the less-than-hoped for volume patterns as well as advance/decline patterns. However, it is clear that this type of market condition does not preclude prices from moving higher and forming major negative divergences over time. Presently, we should note that the 160-week moving average has bottomed, which suggests the rally has further upside left in it, with any and all corrections - at this point - seemingly nothing more than garden variety corrections.

Sp 500_3-17-12

However, note that prices are now overbought via the 20-week full stochastics; which simply means the rally is growing more risky by the week. The simple speed resistance trendlines we've drawn indicate that the rally could take prices higher towards the 1460 level before any real weakness materializes. Moreover, and not shown on this chart is that prices are roughly +21% above the 160-week moving average - which is about 2 percentage points below its "speed limit" of +23% that has resulted in corrections over the past 2 decades. If prices exceed +23-to-+25%, then the past 2 instances (1985 & 1995) have shown prices to be in an upward "bubble-like" advance. So, if the S&P rallies much more off current levels - then we'll have to look for a massive spike higher towards the 1700 level in the next 2-years. This would be fed by funds leaving US and world bond markets in search of higher yields. This is the risk at present; and we'll give it more than "even" shrift of occurring given the massive amounts of liquidity force-fed into the world monetary system.

COMMON MACD MISCONCEPTIONS

In my last article, I featured a weekly NASDAQ chart and pointed out that the MACD was coming up off the centerline and pointing higher.  I indicated this was a very bullish signal for the intermediate- to longer-term and supported my belief that equity prices would continue to rise in 2012 - at least until technical indicators begin to change.  I received several responses to that particular chart, with readers correctly pointing out that there was a long-term negative divergence present on the chart.

I won't argue with the fact there was a negative divergence - by definition.  After all, prices were higher and the MACD was lower.  But I interpret divergences different than most.  Momentum moves back and forth like a pendulum.   As this pendulum moves back and forth, the MACD "resets" at the centerline in my opinion and we start the game all over again.

First, let me show you the negative divergence that readers were referring to on the weekly chart of the NASDAQ:

NASDAQ 3.17.12 Weekly Version 1

Again, by definition, that's a negative divergence.  But is it really a sign of slowing momentum?  Think about what the MACD represents.  It's the difference between a 12 period EMA and a 26 period EMA.  On a weekly chart, that means that once 26 weeks elapse between MACD readings, there is ZERO common data in the two MACD calculations.  I think it's back to that old adage "comparing apples and oranges".  In late 2010, we had exactly the same situation on the weekly chart of the NASDAQ.  Take a look:

NASDAQ 3.17.12 Weekly Version 2

Again, this is MY interpretation and what makes sense to me.  Feel free to disagree.  Like I said before, by definition there is a negative divergence present.  But it doesn't indicate slowing momentum in my view.  Instead, I see strengthening momentum.

If you followed the technical definition of a negative divergence, you'd have missed another 10% move higher in early 2011 before the REAL negative divergence printed.  As we look ahead to the balance of 2012, we have a very similar MACD on the weekly chart.  The MACD has moved up from the centerline and is pointing higher as new price highs are reached.  It's telling us that the shorter-term 12 week EMA is "diverging" away from the 26 week EMA.  This represents strengthening momentum, not weakening momentum.  A pullback can occur anytime, but it's unlikely that we'll see anything stronger than a normal correction during a very strong uptrend.

I am hosting a FREE webinar on Wednesday, March 21, 2012, to discuss the concept of the "MACD reset" and how it impacts momentum analysis.  If you use the MACD in your technical analysis, you'll find this session to be invaluable.  To learn more, CLICK HERE.

APPLE ENTERS DANGER PHASE

Apple is a great company, and AAPL has been a great stock since early-2009. From that point to the end of 2011 it rose +300% in an orderly, relentless advance. The angle of the rising trend line was conservative and sustainable. Unfortunately, since the beginning of this year AAPL has begun a vertical ascent, which is not strictly a paraboic, but the result of which will almost certainly be the same -- a price collapse.

Vertical price moves signal that a bubble mentality has taken over the market (the market in AAPL, not necessarily the entire stock market), and bubbles almost always end badly. When prices finally turn down, they usually drop as fast as they went up.

Swenlin1

While we can be pretty sure of the outcome, we have no way to know at what price the final blowoff top will arrive. In a recent headline someone was predicting the AAPL would go to 850. Well, that is entirely possible, but who knows? At this point, one thing we know for sure is that where AAPL is concerned, rationality "has left the building." Use extreme caution from here out. Think housing bubble -- to the majority of investors the reasons it could never end seemed bullet proof at the time.

Is a price collapse the only possible outcome? Actually, no. Occasionally, parabolic stocks can enter what is called a "high-level consolidation," which is where price begins to move in a sideways trading range for several years. This has the effect of digesting the excesses of the previous advance. For example, if this were to happen now, the consolidation might have a range of between 400 and 600, and run for five to ten years. Emphasize, this is just an example, not a prediction.

Another area of concern is AAPL's effect on stock indexes of which it is a component -- the SPX, OEX, NDX, and XLK to name a few off the top of my head. These are all capitalization-weighted indexes, and AAPL has such a large market capitalization it has a strong influence on the performance of these indexes.

The Nasdaq 100 (NDX) provides us with a great example. The QQQ reflects the performance of the cap-weighted version of the NDX. Thanks to AAPL, the QQQ has moved about 10% above the resistance line drawn across the July 2011 top.

Swenlin2

The QQEW ETF is the equal-weighted version of the NDX. Note that it has barely moved above the resistance line, because AAPL has the same weight as the other 99 stocks in the index.

Swenlin3

Conclusion: AAPL has entered a dangerous vertical phase. We can only guess where the final top will be before a major correction or collapse begins, but extreme caution is warranted from here on. While you may not be involved with AAPL directly, be aware that radical moves by AAPL will also have an inordinate affect on cap-weighted indexes of which it is a component.

Materials SPDR Continues to Show Relative Weakness

While the S&P 500 and Dow moved to new highs last week, the Materials SPDR (XLB) fell short of its February highs and continues to underperform. Also note that the Technology SPDR (XLK) and Consumer Discretional SPDR moved to new 52-week highs last week. Along with the Finance SPDR (XLF), these three are the clear market leaders right now. The chart below shows XLB breaking below its mid February low and then surging back above the support break with a seven day rally. The pink trendlines define this seven day advance, which could be a rising flag or wedge. A move below 36.5 would reverse this short-term uptrend and signal a continuation of the early March decline.

120316xlb
Click this image for a live leprechaun.

The indicator windows show the price relative (XLB:SPY) ratio and the StockCharts Technical Rank (SCTR) for XLB. Notice that the price relative peaked at the beginning of February and moved lower the last 6-7 weeks. Underperformance and relative weakness are confirmed by the SCTR, which also peaked at the beginning of February and moved below 50. The centerline (50) is the make-or-break level for relative performance. In general, a stock or sector shows relative strength when the SCTR is above 50 and relative weakness when below.  With the SCTR below 50 and falling, XLB shows continuing relative weakness. Look for a break back above 50 for XLB to start showing relative strength again.

INTERMARKET CHART SHOWS INFLATION / DEFLATION

Hello Fellow ChartWatchers!

In my last article, I went over two key Intermarket relationships - the one between the US Dollar and Commodities and the one between Commodities and the US Stock Market.   (Keep in mind that John Murphy and Arthur Hill describe new Intermarket developments every day in the Market Message area of the website.)  This time I wanted to go into some more detail about that second relationship - the one between commodity prices and the US Stock market.

Last time I showed how there is a very strong positive relationship between stocks and commodities right now.  We also saw that that relationship hasn't always been as strong.  In fact, as the chart below shows, things have been pretty unusual since 2008:

SPXCRBLong
(Click on the chart for a live version.)

Going back before 2008, if you look more closely, you can see distinct time periods where the correlation line had a bias towards the positive side and then a bias towards the negative side.

Unlike the period since 2009, most Intermarket charts are not 100% precise.  Interpretation is involved. The trick to determining the dominant relationship during a given time period is to look at how the correlation line behaves after it crosses zero.  If the line immediately moves back across zero or bounces at zero, that's a good indication that the correlation has not really changed.

For example, take a close look at the period between 2004 and 2008.  Notice that the line was above zero more than it was below it.  Also that the line only remained below the line for brief periods of time.  Notice also that this effect is stronger in 2004 and 2005 than it is in 2006 and 2007 - a sign that things were breaking down going into the crisis of 2008.

Why is this important?  Each time there is a generally positive correlation on this chart, it means the economy is in a deflationary environment where stock prices and commodity prices are strongly coupled. Each time that black line stays in negative territory, the economy is in an inflationary mode where rising commodity prices are bad for stocks. This chart will give you that critical piece of information well before economists and the financial press do.

For example, going back further on the chart, can you spot the exact moment where the current Deflationary environment began?  The large jump into positive terrtory at the start of 2001 was the moment where the correlation changed significantly.  The events at the end of 2001 and 2002 muddied the picture somewhat, but by late 2003 it was clear we were in a deflationary scenario - which we are still in.

Notice that prior to 2001, the correlation line had a negative bias (inflation).  See how it tried and failed repeatedly to move above zero in 2000?  Again, it's not precise, but you can see how the black line generally stayed below the zero line from mid-1996 through the start of 2001.

Going back further, there was a short period of positive correlation (deflation) from roughly 1993 until mid-1996.  Prior to that, there was a long period of negative correlation (inflation) starting around 1985.

So I'll leave you with this question: Given what we just learned, what would it mean to your portfolio if the black line suddenly moved below zero for the first time in almost 4 years?   That is the value of Intermarket Analysis.

- Chip

DOLLAR INDEX BOUNCES OFF 200-DAY LINE

An impressive upside reversal day on Wednesday enabled the Power Shares US Dollar Index (UUP) to bounce off its 200-day moving average as shown in Chart 1 (see arrow). That dollar turnaround was apparently the result of Mr. Bernanke omitting any mention of QE3 in his testimony before Congress that day. That's dollar friendly since infusions of more money into the system resulting from Fed bond purchases weakens the dollar. At the same time, the European Central Bank (ECB) spent more than expected on the second round of its Long-Term Financing Operation (LTRO). LTRO involves three-year loans to European banks at 1%. That had the effect of weakening the Euro. The immediate reaction in all of the financial markets was fairly dramatic. Stocks sold off in the heaviest trading this year. U.S. bond yields jumped. [Fed buying of longer-dated bond maturities has kept yields unusually low]. The biggest gainer was the U.S. dollar. The biggest losers were precious metals.

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BANKING ON A STRONG 2012

In earlier articles, I wrote about key upcoming resistance on banks and the "January Effect".  Very strong performance in January suggests that equities will continue to rally throughout 2012.  If the recent performance in the banking industry is any indication, consider it confirmation.

If you study history, you'll find that the stock market performs very well when banks are leaders.  Since the mid-December low, the S&P 500 has risen 13.91%, while banks have led the advance, gaining 24.80%.  This is a complete turnaround from 2011.  The S&P 500 finished flat for the year while banks fell 24.57%.

From a fundamental perspective, I spent nearly twenty years in public accounting on the audit side.  Banking was one of my areas of expertise.  I can tell you from experience that bankers, by and large, are a VERY conservative bunch, despite all the shenanigans that took place in terms of leveraging in the early 2000s.  When banks are not performing well, access to credit is denied in many instances where it normally would be approved.  Think back to the credit crisis in 2007.  Do you recall what happened to overall stock market performance?  It was one of the worst bear markets in our history.  GDP turned negative and millions of jobs were lost as many companies found it difficult to even borrow the necessary funds to meet payroll.  That type of credit crunch and poor behavior by banks is toxic for equities.

But on the flip side, improving health at banks generally leads to easier access to credit.  That, in turn, leads to economic improvement, growth and hiring.  The relative performance of banks in 2012 tells me that this rally is probably closer to its beginning than to its end.  In fact, I believe equities are heading MUCH higher in 2012. That differs from my forecast just 2-3 months ago, but the recent performance of banks makes it necessary to adjust my thinking.

Before we take a look at banks, the market does have to deal with negative divergences on the daily charts of many indices, sectors, ETFs and individual stocks, which abound.  This is a sign of slowing momentum in the near-term.  It would be best technically if we were to unwind these negative divergences and "reset" the MACD closer to its centerline support.  Let's take a look at the NASDAQ first as it's been one of the stronger indices in 2012.

NASDAQ 3.3.12

Last week, we saw a bearish engulfing (reversing) candle print on the NASDAQ on increasing volume.  Personally, I grow more cautious near-term when I see slowing momentum present on the daily charts and then it's reinforced with an increasing volume, reversing candle.  That's generally when I review the longer-term chart to see if the weekly divergences also show slowing momentum.  Take a look at this weekly chart of the NASDAQ:

NASDAQ 3.3.12 weekly

As you can see above, momentum on the longer-term weekly chart is SUPERB.  Any time I see a MACD that's recently cleared its centerline and is pointing up and moving further from the centerline, that's a sign of strong and increasing momentum over the intermediate-term.  Therefore, I believe the NASDAQ could benefit from a short-term consolidation period, even a bit of outright short-term selling, before another strong leg higher ensues.  The interesting part is that a long-term negative divergence many times will result in a 50 period SMA test.  A pullback during a period when the MACD is strong many times will result in a 20 period EMA test.  On the charts above, the 50 day SMA (on the daily chart) and the 20 week EMA (on the weekly chart) are at 2805.09 and 2767.84, respectively.  Both are rising, however, so a test could take place somewhat above those levels.

The negative divergence on the NASDAQ's daily chart is just one example of the problems that market bulls face in the near-term.  But the long-term looks much better and much less suspicious.  The performance of banks is one reason for that.  The relative performance of banks vs. the S&P 500 has obviously improved.  One quick look at chart below and I think you'll agree:

BKX vs. SPX 3.3.12

On Tuesday night, I'll be hosting the latest in Invested Central's Online Trader Series (OTS).  This month's topic will center around the banking industry and I'll take a look at the relative performance of banks throughout the years and plot that against overall S&P 500 performance.  It's one of the keys in determining whether a rally is sustainable or not and I think you'll find it both interesting and thought-provoking.  For more information, CLICK HERE

RYDEX ASSET LEVELS ARE BEARISH

At Decision Point we keep a close watch on asset levels in the Rydex mutual fund group as a way of evaluating investor sentiment. An important result of these efforts is the Rydex Asset Ratio, which is calculated by dividing assets in the Bear plus Money Market Funds by the assets in the Bull Funds.

On the chart below we can see that the Ratio has reached the highest level in 10 years, which shows an unusually high level of bullishness on the part of Rydex investors. Based on previous Ratio tops shown, we can assume that prices are likely to correct or consolidate at the very least.

SwenlinChart1

Digging deeper into the numbers, the following chart shows that Money Market Assets are near 10-year lows, which indicates that Rydex investors have very little money on the sidelines with which to make an additional commitment to bullish positions. Also, Bear Fund Assets are near 10-year lows, demonstrating that Rydex investor expectations for bearish outcomes is very low. These bullish attitudes are bearish for the market because it appears that there are very few resources left to fuel a continued price advance.

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When we analyze Rydex assets we assume that this tiny slice of the market more or less represents what is happening in the broader market. This may or may not be the case. For example, Rydex investors could have other cash reserves located somewhere other than in the Rydex system. Nevertheless, Rydex asset analysis appears to be a useful addition to our technical toolbox.

Small-caps Continue to Lag as Russell 2000 Breaks February Lows

Relative weakness in small-caps remains a concern for the broader market. Smaller companies are less diversified and have less exposure abroad, which makes them more vulnerable to changes in the domestic economy. As such, small companies are like the canaries in the economic coal mine. They are the first to benefit from an upturn in the economy, but also the first to suffer from a slow down. Chartist, therefore, should keep an eye on small-cap performance for clues on the economy.


Click this image for a live chart.

The chart above shows the performance of the Russell 2000 ($RUT) relative to the S&P 100 ($OEX) using the Price Relative ($RUT:$OEX ratio). This ratio rises when small-caps outperform and falls when small-caps underperform. Small-caps outperformed in October and January with a bout of flat performance in between (November-December). February was a different story as the $RUT:$OEX ratio fell rather sharply and continued lower the first two days of March. Life is tough for indices that do not include Apple, which features in the Nasdaq, Nasdaq 100, S&P 100 and S&P 500.The blue dotted line marks the start of underperformance on February 3rd. With the Russell 2000 breaking its February lows on Friday, it looks like small-caps are starting a correction that could extend to the broader market.

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