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« August 2012 | October 2012 »

DOLLAR PLUNGE GIVES BIG BOOST TO COMMODITIES

The Fed announced that it will purchase $40 billion a month in mortgage backed securities which adds to its holdings of long-term securities and ushers in another round of quantitative easing (QE3). The markets have all reacted in predictable fashion. The dollar and bond prices are falling while commodities and stocks are rising. Chart 1 shows the PowerShares Dollar Index Bullish Fund (UUP) threatening to fall below its spring lows. As is normally the case, the falling dollar is giving a strong boost to commodities. Chart 2 shows the DB Commodities Tracking Index Fund (DBC) climbing to the highest level in six months. It has also broken a down trendline extending back to May 2011. Not surprisingly, precious metals are leading the commodity charge. Economically-sensitive industrial metals are also rallying.

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QE3 SENDS SHORTS SCURRYING

Living in the Washington DC area, I'm not sure which was more exciting - QE3 or RG3!
 
The market was set up for higher prices as traders anticipated more quantitative easing.  Fed Chairman Bernanke did not disappoint.  By providing a third round of quantatative easing, the Fed aims to stimulate our sagging economy and boost employment.  Traders saw an opportunity and endorsed the plan by buying equities and commodities and bailing out of the dollar and treasuries. 
 
When QE1 was announced in 2008, the treasury market was caught off guard and rates fell precipitously after the Fed announcement with traders flocking into treasuries.  A few months later, when QE1 was increased, again traders flocked into treasuries with the yield tumbling 50 basis points the day of the announcement.  Take a look:
 
Bowley-1

Traders did a much better job anticipating QE2 and QE3, however, with rates tumbling BEFORE the announcements.  Check out how far yields had fallen ahead of the QE2 and QE3 announcements:
 
Bowley-2

I've been expecting QE3 for months.  The money that poured into treasuries and equities simultaneously nearly guaranteed it.  Both the treasury market and stock market sent the Fed the message that further help was needed.  And on Thursday, the Fed delivered and global markets soared.
 
Nearly every area of equities benefitted, but the falling dollar had an exceptionally bullish effect on energy and materials.  If QE3 works as intended, our economy should improve and riskier areas like technology should see rapidly rising EPS.  And it's a subcomponent of technology - networking - where I saw confirmation of a bottoming pattern this past week.  Technically, few areas have as much upside as networkers because they haven't really participated in prior 2012 rallies.  Here's the bottoming pattern:
 
Bowley-3

Several networking stocks look solid technically, but I have my eye on two in particular.  For more details on these two stocks, CLICK HERE.
 
Happy trading!

ENJOY LOW RATES WHILE THEY LAST....

Well, finally the past economic/political week has passed, and we find ourselves starting down the barrel of QE-3. There is no need to go into the particulars of QE-3, but suffice to say that the Fed is buying mortgage-agency debt rather than adding to their Treasury debt holdings. This put downward pressure upon agency debt yields of course, but then it also provided for a rally in both the 10-year note yield as well as the 30-year bond. Our interest lies in rally in the 30-year bond, for it would appear that the long bear market of a decline in yields is "over", which in our mind is a "watershed" event that means higher Treasury rates for the months and years ahead.

If we look at the monthly chart of the 30-year bond ($TYX), then we find previous support at 2.50% has held; we find the distance below the 115-month moving average tested its -40% oversold level and bounced - and we are starting to see the 14-month stochastic turn higher. This all argues for higher bond yields. But what we find more than a passing interest, is that since QE policy moves have come into being since 2008 - each and every announcement always led to higher yields and a test of the 115-month moving average. If that is the case now, then we'll see the 30-year bond move from 3.08% upwards of 4.37% in the months ahead.

30yrbond 9-15-12


Now, we aren't worried about this yet, for market participants will use any rally in bond yields as "fuel" for the stock market. However, the higher the 30-year goes, and the speed at which it gets there - if too fast - then will certainly cause concern at the Fed as well as on Main Street. Higher rates are not what the Fed wants, but at this juncture - it would appear this could be the "unforeseen" consequences of stepping on the QE gas pedal.

Enjoy while it lasts; higher rates are going to be with us for many years into the future.

Good luck and good trading,
Richard

Create Your Very Own Personal Bullish Percent Index

Hello Fellow ChartWatchers!

The Fed spoke and the markets took off.  StockCharts.com was one of the best places to watch as stocks surged in the wake of the Fed's QE3 announcement.  You can read more about how it affected things from the rest of the columnists in this week's newsletter.  As for myself, I'm going to talk about how you can now create and chart your own personal Bullish Percent Index with StockCharts.com.

MY OWN "SMALL CAP" BPI

In case you haven't heard, Bullish Percent Indexes are one of the best ways to measure the strength of a group of stocks.  A BPI is a daily market indicator that shows the percentage of stocks in a group that have bullish looking Point & Figure charts.  To compute a BPI, each day you count up the number of stocks in your group that currently have the "P&F Buy Signal" pattern on their P&F chart.  You then divide that number by the total number of stocks in your group and multiply by 100 to get the BPI value for the day.  After gathering these values for many days, you can then chart the results to get a sense of how strong the group has been over time.

We here at StockCharts have been automatically calculating 19 different BPI's every day including $BPNYA (the BPI for all NYSE stocks), $BPCOMPQ (all Nasdaq stocks), $BPTSE (all Toronto stocks), and many others.

But what if you want to chart a BPI for a group of stocks that we don't cover?  Now, with the User Defined Index (UDI) feature of our PRO service, you can!

You start by creating a group of stocks that you want to use for your BPI.  You can choose from some of our predefined stock groups or you can create a ChartList in your account, add whatever symbols you want, and use that as your group.  For the sake of this example, I'm going to use the 600 stocks in the S&P Small Cap index to create my own "Small Cap" BPI.

Once you have a group in mind, you can use our Advanced Scan Engine Workbench to create a scan that shows you how many stocks in your group have a P&F Buy Signal.   Your scan should have two clauses, one for your group / ChartList, and one for the P&F Buy Signal.  Here's an example:

BPIScan

You can use the "Sector and Industries" dropdown, the "Indexes and ETFs" dropdown, or the "ChartLists" dropdown to help you create the first clause in the scan.  You then use the "P&F Patterns" dropdown to add the "P&F Buy Signal" clause to the end of the scan.

Now, make sure that you have a zero in the "Starting" box at the top of the scan page and that "Last Market Close" is selected from the top dropdown, then press the "Run Scan" button.  You should then see a page full of scan results.  For the BPI calculation, you only need to see the "Count" of the scan results - i.e., the number of stocks that was returned.  In the case of the scan I showed you above, the count is 412.

To calculate the BPI value for today, you take that count and divide it by the total number of stocks in your group, then multiply it by 100.  In my example, Friday's BPI value turns out to be 68.67.

For safety sake, I recommend that you write down that value and the date that it corresponds to (Sept 14th in this example) on a sheet of paper in order to make sure your work isn't lost.  Later, we'll enter that information into your User-Defined Index area.

Now, knowing today's BPI number is useful, but we'd love to see a chart of recent BPI data for our group in order to see if any trends exist.  To "back-calculate" BPI values for previous days, we simply change the number in our scan's "Starting" box, re-run the scan, and recompute the BPI value for that day.

Note - It's important to record the calendar date for each BPI value you calculate.  It make that easier, you can use the popup calendar that automatically appears when you click inside the "Starting" box.

Continuing our example, when I change the "Starting" box to "1" and re-run the scan, I get 400 results.  So I record 400/600 = 66.67% as the value for Sept. 13th, 2012.  I get 390 stocks for Sept. 12th, 388 for the 11th, 387 for the 10th, and 380 for the 7th.

Feel free to go back as far in time as you'd like but keep one thing in mind - if your group is a sector or index that changes its membership over time, the further back in time you go, the less accurate your "back-calculated" BPIs will be because you will still be using the current group membership.

Once you have a nice amount of BPI values written down, it's time to enter then into your User-Defined Index (UDI) symbol (typically called @MYINDEX) so that you can chart them.

To enter your data into @MYINDEX, go to the "Members" page and click on the link for the "User Defined Index Workbench."  Once there, click on "Delete All Data" to get rid of any previous data you had in @MYINDEX and then start entering the BPI dates and values that you wrote down in the previous step.

Note: You only need to enter the date in the "Date" field and the BPI value in the "Close" field.  Leave the other field blank and hit "Add Row."  We'll automatically fill in the other rows.

After your data is entered, press the "View Chart" link to see the results.  For our "Small Cap BPI" example, here's what I got after back-calculating date back to the start of August:

ScBPI

So this shows that the small-caps have strengthened significantly since August 1st confirming similar strength seen in charts of $SML and $RUT.

The larger point here is that PRO members can create and chart BPIs for any collection of stocks they find interesting using these techniques.  The even larger point is that PRO members can create and chart any index they want, not just BPIs.

- Chip

Have you used our User Defined Indexes to create a new / unusual / unexpected kind of chart?  If so, let us know about it and we may feature your work in a future article.

Quantitative Easing and the S&P 500 Since 2008

Stocks surged on Thursday after the Fed announced another round of quantitative easing, and extended their gains on Friday. Obviously, the stock market is pleased with the announcement. The chart below shows the S&P 500 since September 2008 and the yellow areas mark the beginning-end of the prior quantitative easing programs. Even though two QE cycles are not enough to establish a trend, notice that the stock market rallied during the prior two QE periods and fell sharply when they ended (red arrows). Of course, the S&P 500 was up substantially before these declines and ripe for a correction. More importantly, the index established a higher low after each decline and subsequently advanced to new highs. As the blue channel lines show, the trend is clear on this chart. Even though chartists can debate whether or not the index is overbought and ripe for a correction or pullback, there is no arguing the uptrend. Anything trading at a 52-week high is in an uptrend.

120915spx
Click this image for a live chart.

The indicator window shows the Vortex Indicator, which is new at StockCharts.com. This indicator combines elements of the Average True Range (ATR), Plus Directional Movement (+DM), Minus Directional Movement (-DM) and the properties of a vortex flow. See the ChartSchool article for the all the gory details. This indicator consists of two lines: a green line to measure upward price movement and a red line to measure downward price movement. The bulls have the edge when the green line is above the red line. The bears have the edge when the red line is above the green line. As with all indicators, it is not immune to whipsaws and bad signals. The Vortex Indicator is helpful for trend identification because it is unambiguous. Either the green line is above the red line or it isn’t.

Have a great weekend!
Arthur Hill CMT

OUR NEW ALERTS FEATURE CAN HELP YOU MONITOR YOUR OPEN POSITIONS

Hello Fellow ChartWatchers!

Last month we added a feature that many of you have been asking for for a long time - custom technical alerts!  Today I want to spend some time showing you how they work and one of the best ways they can be used to help you make better investing decisions.

First off, let's review the typical process for investing with technical analysis:

  1. Use custom technical scans to search for stocks that have a chart setup that you are interested in trading.
  2. Use SharpCharts with your custom indicator settings to find the best scan result(s) and determine entry point and exit conditions.
  3. Enter the position.
  4. Monitor the stock for technical warning signs and/or sell signals.
  5. Close the position when sell signal given.

OK, so StockCharts Extra and PRO members have always had the tools to perform tasks #1 and #2.  Tasks #3 and #5 are done via your trading platform.  Which leaves us with task #4 - monitoring your open positions for technical warning signs and/or sell signals.

Our new Custom Technical Alert feature is intended to automate much of that task.

A technical alert is a set of technical criteria which you create (just like our Advanced Scans) that we then continually evaluate while the market is open.  If the alert's criteria ever becomes true, we send you an email notifying you of that event.

So, imagine that you are a technical trader who thinks that the Parabolic SAR gives a great set of signals for tech stocks in the S&P 500.  (This is a simple example for the sake of this article - real trading signals are often more complex.)  Whenever you are out of the market, you are using your trusty Parabolic SAR scan to find opportunities to get back in.  Here's what that scan might look like:

 [group is SP500] and [group is TechnologySector] and [Today's Low x Parabolic SAR(0.02,0.2) ]

This scan finds all large-cap technology stocks that just had the dot for today's Parabolic SAR move below today's price bar - the standard (simple) Parabolic SAR signal.  (Remember, the "x" in the middle means "crosses above" in our scan system.)  When I run that scan for today (Sept. 1st, 2012) I get 5 results: CERN, GLW, LLTC, MSFT, and SAI.

For Task #2, you'd use our SharpCharts charting workbench to examine each of those 5 stocks in greater detail.  For the purposes of this article, let's say that after you studied all 5, you decided you really liked the chart for CERN:

CERN
Click here for live version of this chart.

So, you then do some more analysis with that chart to determine your entry strategy, your stop locations and your exit strategy.  (Dr. Elder's eBook in our bookstore is a great place to learn more about this part of the process.)  You then - task #3 - place an order with your broker to buy the stock.

Terrific!  All finished.  Right?

No.  Now, with custom technical alerts, you can finally automate task #4 - the monitoring process.

For our example, let's assume that you plan on holding CERN until the Parabolic SAR gives a sell signal (which happens when the dots first move back above the price bars).  In other words, you want to be notified when the following condition is true:

[symbol = 'CERN'] and [Parabolic SAR(0.02,0.2) x Today's High]

The first part of this alert expression ties our alert to the only stock we are interested in monitoring, CERN.  The second part of this alert expression is essentially the opposite of the scan expression that you used to find the stock during task #1 above.  It will be true when the Parabolic SAR's dots move back above the price bars - which is our sell signal.

To enter that alert into StockCharts, Extra and PRO members can login and use the new "Technical Alert Workbench" via the link on the "Members" page:

AlertWorkbench

Simply enter your criteria and then click "Add/Modify Alert" to add the new alert to our system.  You'll want to give your alert a name that matches what it looks for - something like "CERN Parabolic Sell Signal" in this case.

That's it!  Once an alert has been added, we will continuously run the alert until its expression(s) become true.  In this case, we will run the alert until the expression returns more than zero results.  Once that happens, we will send you an email automatically.

Pretty neat huh?

There are some things to keep in mind when using our technical alerts:

  • Extra and ExtraRT members can have up to 5 custom alerts saved in our system at any one time.  PRO members can have up to 50.
  • Just like our custom technical scans, our alerts are based on daily data bars.  That means that you need to express your alert in terms of the technical conditions that happen on a daily chart.
  • Because our alerts are based on daily data, they can only be triggered once per day.  When a signal appears on a daily chart, we will alert you at that point.  If, later in the same day, the signal disappears and then reappears a second time, we will not alert you about that second occurance.
  • Alerts are typically associated with one ticker symbol (as shown in the example above).  If you create an alert that applies to multiple ticker symbols, the alert email is not able to show you which ticker symbol(s) triggered the alert.  In that case, you would need to re-run your alert criteria as an Advanced Scan to see those results.
  • Unlike scans, saved alerts are continually evaluated by our servers.  All saved alerts are re-evaluated at least once every minute the market is open.  This makes it important that you pause/delete alerts that you are no longer interested in.
  • We also publish many Predefined Alerts on this page.  Predefined Alerts also generate Twitter messages with the hashtag #sccalerts when they occur.

The scenario I described above is the "standard" scenario for which we designed our technical alerts feature.  That said, there are a couple of other very interesting ways this new feature can be used.  Check out my blog over the next week or so for more examples and ideas on using custom technical alerts.

- Chip

VOLUME INDICATORS GIVE WARNING SIGNS

My Tuesday message expressed the view that if a stock correction were to start, this would be a logical spot for that to happen. That's because several market indexes are testing spring highs, which is a normal spot for chartwatchers to take some profits. I also warned that light volume during the latest price advance during August showed lack of bullish enthusiasm on the part of traders (who may be be paring their bullish bets as the market nears the dangerous month of September). Light volume during a price advance is a warning signal. The volume bars at the bottom of Chart 1 shows trading activity dropping noticeably during the second half of August. In addition to that visual comparison, there are a couple of volume indicators that show the same lack of strong upside buying pressure The best known is on balance volume (OBV). OBV is a cumulative measure of daily upside versus downside volume. When prices rise, that day's entire volume is added to the total. Volume is subtracted on down days. The OBV line and the stock index price should trend in the same direction. A danger signal is given if the OBV line lags too far behind (or actually starts to drop). Chart 1 compares the S&P 500 (bars) to the red OBV line since the start of the year. Both peaked together during March and bottomed during June (notice that the OBV line turned up first). Since that June bottom, however, the red OBV line has lagged far behind the S&P 500. That has created a "negative divergence" between the two. Chart 2 compares the two over the last 15 months. Notice that the red OBV line turned up first last August and preceded the S&P bottom by two months (rising trendline). The opposite is now happening. The falling trendline this summer shows that the OBV may start leading stocks lower.

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THE GOLD RUSH IS ON

Before I take a look at the bigger picture, there were a couple rather bullish signs on the one year chart for gold the past few weeks.  Take a look:
 
Gold 1 Year Chart 9.1.12

 After testing descending triangle support (you'll see that in the 5 year chart below) in mid-May, gold began its ascent.  Higher lows continued to print and the reaction high near 1640 in early June served as solid price resistance for the last few months.  But you can see the subtle improvement in technicals in late July and early August (blue circles).  The first blue circle highlights the 20 day EMA crossing above the 50 day SMA (golden cross).  The next two blue circles show that the moving averages are acting as support - a bullish development as well.
 
Momentum has clearly swung to the bullish side.  The daily MACD broke above centerline resistance in late July and it's continuing to push higher with higher prices, a classic case of accelerating momentum.
 
The best news of all, however, is that the long-term five year weekly chart has been in a bullish continuation pattern that has now confirmed a breakout to the upside.  Check this chart out:
 
Gold 5 Year Weekly Chart 9.1.12

From this chart, it's much clearer to see how important that kicksave at support in mid-June was.  It enabled gold to remain in its descending triangle pattern.  I'd much prefer to see an ascending triangle vs. a descending triangle, but triangles represent continuation patterns.  Because the prior trend was UP, I've been awaiting a breakout to the upside and it appears that's exactly what we've seen from gold.
 
Happy trading!
 
Thomas J. Bowley
Chief Market Strategist
Invested Central

http://www.investedcentral.com

CANADIAN MINING STOCKS READY TO ROLL OVER

The Canadian mining stocks appear ready to roll over.

It is quite surprising that they've not been able to rally given the recent weakness in the US Dollar. With the move down in the US dollar, we would've expected the value of the metals and the associated miners to move up but that just isn't happening.  Check out this chart to see what I mean:

$SPTMN 20120827

This hardly looks like a bull run off the June lows.  While the weekly bars have moved a little higher, they have not moved up enough to turn the Elder Impulse System from blue to green, nor has the Full Stochastic line moved up.  The MACD and Ultimate Oscillatior are slowly improving, but the RSI and relative strength lines at the top of the chart have gone sideways.  If Canadian miners were really rallying, the weekly technical signals would be much more positive.

For all those reasons, caution appears warranted.  A case can even be made that the 750 level makes a nice head/shoulders neckline on a long term chart!

Greg Schnell, CMT

NAAIM SENTIMENT AND SEASONALITY URGE CAUTION

The National Association of Active Investment Managers (NAAIM) weekly poll* shows that they are 83% long. This qualifies as an extreme level of optimism, and should cause concern.

On the following chart we can see that readings above 80% are not a magic number or an automatic sell signal; however, when sentiment reaches that level, we should begin looking for at least a brief correction. (Note that we have not identified every reading over 80% but have placed markers to provide points of reference.)

6a0120a65d6eb8970b0177447117c4970d-800wi

This spike of optimism comes as we are entering the September-October time period, the most seasonally negative two months of the year. We do not view this as a happy coincidence.

* NAAIM sentiment polling is conducted by The National Association of Active Investment Managers (www.naaim.org). Cutoff for the poll is Wednesday, and the results are released Thursday.

Approximately 40 NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on Wednesday. Responses can vary widely as indicated below. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group.

Range of Responses

200% Leveraged Short
100% Fully Short
0% to 100% Cash or Hedged to Market Neutral
100% Fully Invested
200% Leveraged Long


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