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January's Technical Market Review - Looking Bullish So Far

Hello Fellow ChartWatchers!

So far, 2013 is proving to be very interesting with bullishness dominating the stock market so far.  Since the start of the year, most of the major US market averages are up over 4% with the Russell 2000 (+5.12%) leading the way.

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Looking at the market capitalization PerfChart, we see that everything is positive with the S&P 400 Mid-Caps (+5.24%) posting the largest gain.

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On the S&P Sector side of things, everything is up however technology and utility stocks are significantly lagging the other sectors.

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Looking at the Bullish Percent Index charts for the 9 S&P sectors, the 20-day averages for all sectors are currently moving upwards with the exception of the Utilities sector.  Given that Utilities are a proxy for the Bond market and that Bonds generally move in the opposite direction to Stocks, this is more confirmation that money is moving back into stocks right now.

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Finally, the McClellan Summation Index has just moved above its previous mid-September peak, further confirming that it is currently in an uptrend (green line).

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Bottom line, stocks are current bullish.

Now, do you know how to create the charts above?  Did you know that such tools existed on our website?  Are you confident that you are getting everything possible from your StockCharts.com membership?

If the answer to those questions is "No" then please consider attending one of our upcoming live StockCharts University seminars.  The first course, "SCU 101: Getting the Most Out of StockCharts.com" shows you exactly how to perform the top-down analysis I show above allowing you to always know where the market is heading.

But don't take my word for it.  Here are some actual quotes from several of the people that attended our Dallas seminar which was held just last weekend:

"If I had left before lunch, I would have received more than full value for the cost." - C.B.

"I thought that I would pick up a few useful ideas from the seminar, but in fact learned much more than I anticipated.  I came away from the course realizing that there were many useful features of the website that I was not fully utilizing to their fullest extent, and to my best advantage." - B.D.

"I learned how to make a scan that immediately paid for the class and entire weekend in the next week of trading. I strongly recommend the class." - D.J.

"If charts and technical analysis is your thing, the Stockcharts seminar is a day well spent." - P.C.

Again, I love presenting at these seminars and hope I can see you at one of them soon.  This year we will be holding seminars in Orlando, Long Beach, Seattle, New York, and Toronto.  The Orlando one is coming up fast and would be a great excuse to escape to Florida next month!  Click here for more information.

- Chip

GOLD BULLISH PERCENT INDEX STILL IN DOWNTREND

Whenever we look at gold, it's a good idea to check on the trend of gold miners. The orange bars in Chart 1 show the Market Vectors Gold Miners ETF (GDX) still in a downtrend, but trying to stabilize. The first thing the GDX needs to do to improve its short-term trend is to clear initial resistance near 47.50 (orange line). It also needs to see stronger chart action in individual gold mining stocks. The black line plots the Gold Miners Bullish Percent Index ($BPGDM), which measures the percent of gold miners in point & figure uptrends. That line has been in a downtrend since October. It needs to see an upturn to support any meaningful rally in the GDX. The BPGDM has been flat-lining at 31. It would need to rally to 38 to signal a possible upturn. Chart 2 shows why. The most popular way to track turns in the Gold Miners BPI is with a point & figure chart which is shown in Chart 2. The X column shows an uptrend, while the O column marks a downtrend. Each box is worth 2 points. In order for the current down (O) column to achieve a three-box upside reversal and start a new X column, it would have to rise to 38. An upturn in the GDX would support any potential upturn in the price of gold.

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Currency Wars!

Back in November I blogged about the currencies and the events around them. Recently in Early January, 4 of the currencies in the Dollar Index were testing the trend line for the dollar cross.  Today, 3 of 4 of those currencies broke down this week, and the Euro is losing strength.  Keep watching as currency changes can help time market breakdowns. The Euro makes up 56% of the dollar basket, so until it breaks, this bull train continues.

First of all here is the British pound. It fell dramatically this week. $XBP  It lost the 50 DMA, the trend line, and the 200 DMA all in a week.  Notice the purple relative strength line plunging to new lows.  The negative divergence on the RSI and the MACD played out perfectly. Remember this chart style as the $XEU is setting up a similar trade.

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Here is the Swiss Franc. $XSF  Notice the large negative divergence between September and December. Lower peaks on the RSI between the mid-September 2012 high and the December 2012 High. The price was making a higher high, but the RSI was making a lower high.  The MACD was making the identical pattern. You will also notice two short term divergences  between September/ October and the current move down. The price on January 14 was near the previous high, but both the RSI and the MACD were significantly lower.
This is called double divergence. We have it on the short term (2 weeks) and intermediate term (3 months).

Notice in October, the purple SPURS line was gaining strength compared to the price.  So people were enjoying the outperformance of the Swiss Franc. It was breaking down through both the 200 DMA and the 50 DMA. So this is a hard signal in real time. Notice how the Swiss France bottomed a few days before the overall stock market ($SPX) bottom of November 16.

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Here is the Swedish Krona. FXS  You can see this chart shares many of the similarities in divergence  that the Swiss Franc above shows.  This market is showing even more divergence over the intermediate 3 month period.  You can also see the purple relative strength breaking down. This would need to get support here immediately.

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Here is the Euro. $XEU.  So I won't belabour the point here. Short term and medium term divergence is apparent.  The price is still clearly in an uptrend. I would suggest if the Euro starts to break lower, we'll mark a top of some sort in the equity markets.

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Here is the Canadian Dollar which is also usually a good indicator of the tops and bottoms in the equity market. $CDW  It had a bad day Friday losing .65 cents to the $USD.  On this one we see the same short term and intermediate term divergence setting up. The Loonie has dipped below the trendline once again.  Will it reverse higher again?  I don't expect it to with the divergence on this chart and the divergence that has created price reversals on the British Pound and the Swiss Franc.
It doesn't really matter what I expect, it is more important to follow the price action. If both the Canadian Dollar and the Swedish Krona break their trendlines, I would not be surprised to see the Euro come down as well.

The tables on the chart label the $SPX market tops and bottoms.

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So, I expect the currencies to continue to help us with market direction. 2 of the smaller currencies have broken. Two more are testing the trendline and look to be breaking in terms of momentum and relative strength.  The Euro appears toppy as well. The $DAX market and the $CAC have not been moving much this month. We'll see if this all concludes together.

I will be doing a webinar to the MTA on Wednesday January 23rd at Noon EST if you would like to hear my current macro view of the market and some unique perspectives on market analysis.
You can follow this link to login. MTA Webinar   It is free to attend.

Good Trading,
Greg Schnell, CMT

The Best Sector for 2013

Technicals do change and I reserve the right to change my opinion as price action evolves, but the energy sector looks like THE ONE for 2013.  I remain bullish the stock market overall so I expect most sectors will perform well in 2013.  Keep in mind that money rotates from sector to sector to sector and last year's leaders tend to pass the torch in subsequent years.
 
First, let's recap 2012 performance.  Of the six "aggressive" sectors (financials, technology, consumer discretionary, industrials, energy and materials), energy was the only sector with a return below 10%.  The XLE finished the year with a 3.31% gain.  In the meantime, financials (XLF) and consumer discretionary (XLY) posted gains of 26.08% and 21.58%, respectively.  In 2011, the defensive groups led the action higher as the XLE tacked on just 1.29% for the year.  That's marked two years of relative underperformance for energy and I believe that's going to change in 2013.
 
In fact, it already has.
 
The XLE was the best performer on Friday as our major indices finished strongly to close at new multi-year highs on the Dow Jones, S&P 500 and Russell 2000.  I understand that one day does not make a trend, but the XLE also led the action last week and has the highest return of all sectors year-to-date (5.70% vs. the S&P 500's gain of 4.19%).  Ok, that's all history.  How do the technicals look?  Well, the Oil Services Index ($OSX) is my favorite within the energy space as it has just broken out of a long-term symmetrical triangle pattern.  I put a lot more weight on breakouts on long-term charts.  They tend to establish the "big picture" from which a trading strategy can be developed.  Take a look at the $OSX weekly chart over the past 5 years:

 $OSX 1.19.13

In addition to the $OSX chart looking more bullish, I also studied the 15 component stocks that make up the oil services index and just about every one of them show improving technical strength of late.  In particular, I like Tidewater, Inc. (TDW).  For more information on TDW and the other oil services index components, CLICK HERE

- Tom Bowley

A Close-Up on AAPL

Next week, the markets will be focused upon the incoming earnings reports; and in particular - Apple's (APPL) earnings after Wednesday's close. Over the past several months, AAPL has declined rather sharply off its highs around $700 down to its current trade at $500; which is due in large part to an increase in competitiveness of other product manufacturers such as Samsung - and a report out that AAPL is downsizing its number of component orders. Presumably, this means less iPhones and other gadgets.

Aapl 1-19-13

Our interest in this stems from the technical viewpoint, which in our opinion is "slightly bearish.". The reason we believe at least modestly lower prices are ahead stems from the fact prices have violated the 70-week moving average crossing at $531. The last time this occcured was 2008, with prices falling roughly -50%. Now, we aren't expecting this substantial a decline, but certainly if the earnings report is less-than-hoped for, then we very well could see trendline support violated and the $300-to-350 support zone tested. Moreover, we only have to go back to late-2011...not so long ago really.

Our only concern is the oversold 20-week stochastic; however, it has simply entered into oversold territory, but it could be a number of weeks before it bases and turns higher. Hence, while the short-term appears rather challenging for AAPL; it will be setting AAPL for a larger back towards the highs. Its all a matter of timing.

Good luck and good trading,
Richard Rhodes

Equal-Weighted Beating Cap-Weighted Again

I have long been a cheerleader for equal-weighted indexes versus cap-weighted ones, and now seems like a good time to demonstrate why. In a cap-weighted index stocks influence the price of the index based upon their market capitalization (price time number of shares). For example the top 50 stocks in the S&P 500 Index represent about 70% of the index value, with the remaining 450 stocks providing only 30%. With an equal-weighted index all stocks carry the same weight -- all the horses are pulling the wagon.

Decision Point follows a number of equal-weight indexes, with the chart below showing probably the most prominent -- the Guggenheim (formerly Rydex) S&P 500 Equal Weight ETF (RSP). As you can see, RSP is making new, all-time highs and exceeded the 2007 top two years ago; whereas the SPX is still struggling to reach the level of the 2007 top. SInce the 2009 low the SPX has advanced about 114%, but RSP has advanced 175%.

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Of course, RSP does not always out-perform the SPX, but the relative strength line (bottom panel above) shows that it mostly does over time.

The table below the mechanical signal status on various market/sector indexes paired with their equal weight counterpart. Note how, when both indexes have the same days elapsed, the equal weight index usually has the largest percent profit. It is particularly notable in the case of the Technology sector, where the problems of a few large-cap stocks (AAPL, IBM) weighed heavily on the weighted index (XLK), but the effects of those stocks were muted in the equal weight ETF (RYT).

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Equal weight indexes are not always the best choice -- they tend to move faster to the downside than their cap-weighted counterparts -- but in a bull market they should receive close consideration.

It’s Big Wedge Versus Little Wedge for XLK

The Technology SPDR (XLK) has been lagging the broader market for some time now, but the trend since mid November remains up and a bullish continuation pattern is taking shape this month. Weighed down by its top components, XLK has been lagging the S&P 500 ETF since September. Relative weakness continued in January as the price relative fell further the last 2-3 weeks and recorded a 52-week low. Relative weakness in this key sector SPDR is negative, but the trend since mid November remains up. The blue trend lines show a rising wedge taking shape the last two months.

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Click this image for a live chart

Even though rising wedges are potentially bearish, the wedge is currently rising and the trend is up as long as it rises. A break below the November trend line would provide the first sign of a medium-term trend reversal. Short-term, XLK formed a smaller falling wedge this month. Note that this pattern evolved after the 31-Dec surge and 2-Jan gap. Technically, this pattern looks like a bullish continuation pattern akin to a falling flag or pennant. A move above the orange resistance zone would reverse this fall and signal a continuation higher. Next week should tell the tale because IBM reports on Tuesday and Apple reports on Wednesday.
 
Good day and good trading!
Arthur Hill CMT

GOLD - BOTTOM FISHING OR LOST WRECKAGE

Gold has become pretty unloved. That in itself is usually bullish. This week we look at why it might be time to renew your interest in Gold and the miners.

First of all, Lets look at the Gold Miners. Here is a link to the live chart. Gold Miners Index.

$BPGDM 20130105

Lets start at the $BPGDM. First of all, the Bullish percent index is very close to the level it normally reverses at which is denoted by the green line. The index has 29 stocks in it, so each stock is more than 3% influence. It would only require 2 stocks to change the index below the line. So, getting into bullish territory.

In examining the chart information for more detail, I found a couple of interesting points. Lets start with the RSI.
There have been 4 times in the past 5 years where the index has dropped below the current level of 40. All of them produced nice trading rallies. It is clear that down at 40 is a pretty good area to look for a buying opportunity.

Next, the MACD histogram shows a deep push on momentum. This is the momentum of the Gold Miners index, not Gold. We have only had the selling momentum reach this level 7 times. This is one of the worst if you look at the area of the histogram over the last few months. It looks really bad. So that could be bad or good. However, the histogram recently seems to have bottomed out and made a higher low this week. That is important. I have drawn vertical lines where the histogram starts to improve. You can compare it to Gold's price at the bottom panel. Pretty nice location to start buying. The April to July 2012 period was harder to call as the histogram didn't go very deep.

Next is seasonality. I marked the vertical lines green if the rally started near the first of the year. Look at how strong those rally points were. I dotted the one in 2008 because of the trauma that was ensuing that particular year. While it did not happen in January, it did start near the beginning of the year. The seasonality factor looks to be huge. 4 for 4 in rallies for the beginning of the year. 3 rallies started around July.

Continuing down is the final panel where I have $GOLD plotted in Gold color. I have annotated the chart with some blue trend lines. The solid lines are equidistant from the middle as shown by the black lines. The dotted lines are best fit based on the trends in the price. This could be due to a log scale chart which would normally be used for a multi year chart with so much price movement. What I see from here is that GOLD is at an area that is near the lower extreme of distance from the trend. The blow off top of 2011 was a clear exaggerated move outside the trend. Could we see that to the downside still? Anything is possible. But this chart shows a lot of good reasons for a trade right here.

Lets look at a chart of $GOLD on the daily. Here is a link. $GOLD

$GOLD 20130105

Recently, the RSI has been improving. The GDX:GLD ratio is rising which is very good to see. The downward sloping bullish wedge is also a positive signal to help spot a reversal. Friday's reversal candle was textbook on higher volume as a lot of stops were tested on the weekly chart below. The MACD appears to be trying to make a higher low while price is making a lower low. The force down was not as significant on this push so that too is bullish. I have shortened the time to 6 months so the price action is clear, but the shelf back in August is at a very important level. This level has marked support and resistance for 15 months. You can see that on the weekly below.

Here is a Weekly of $GOLD. $GOLD Weekly

$GOLD 20130105 Weekly

On this weekly chart, the RSI is holding 40 which is excellent. The purple shaded area represents relative strength compared to the $SPX and is declining so that is not a good sign.

 $Gold looked to find support at the horizontal line of $1625. This line has been a support resistance zone for the last 15 months.  The $GOLD price also tested stops below the 2 year uptrend line this week. This is a very nice place for the chart to reverse, especially with seasonality.

The MACD is making higher highs in October compared to March 2012 even though the price was the same. That is a bullish divergence.

One thing that looks weak on this chart is the full sto's falling below 50. They really need to find a floor right here or that would mark a significant negative trend reversal.

This looks like a very interesting place to enter a gold related trade to the upside. Like all great entry points, they have significant potential to fail if no new major investors join the falling trade. For the gold followers, it has been a very difficult trade and they would sure like to see some upside reprieve.

In conclusion, I like the seasonality and the bullish candle. We'll see how 2013 treats the gold trade.

Good Trading,
Greg Schnell, CMT

NEW FREE EDUCATIONAL VIDEO SERIES AT STOCKCHARTS

Hello Fellow ChartWatchers!

Happy 2013!  I'd thought we'd start the year off with a bang by announcing a major new section of our website - the StockCharts Videos Archive.  We've been working hard creating new educational videos that can help anyone understand how to use our charting tools better.   Many of the new videos are hosted by Arthur Hill, our senior technical analyst.  We also have video excerpts from our recent ChartCon conferences.  And best of all, these are all free!

Click here to see our new Videos Archive page

Enjoy!
 - Chip

 

RECORD HIGH BY SMALL CAP STOCKS IS A POSITIVE SIGN FOR THE MARKET

One of the most impressive technical developments of Wednesday's stock surge was the ability of the Russell 2000 Small Cap Index (RUT) to reach a record high. [The S&P 500 Midcap Index did the same]. The chart shows the RUT closing above previous highs reached during 2011 and 2012. Although not shown here, the RUT also cleared its 2007 peak. The blue line is a ratio of the RUT divided by the S&P 500. The ratio peaked in spring 2011 which began the correction/consolidation period that's existed since then. The ratio reached a new three-month high yesterday and broke its 18-month resistance line (blue circle). Given the tendency for small cap stocks to act as leaders for large caps on the upside, yesterday's bullish breakout is an encouraging sign for the rest of the market.

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THE LOW IS AHEAD

January 2013 has rolled in, with the "fiscal cliff" solved for the moment; and now there are concerns "QE-4" will end sooner rather than later...and perhaps below 2013 ends. Collectively, the passing of the fiscal cliff and the new QE-4 concerns pushed 10-year note yields higher; however, given "QE-4" has begun, and the growing concerns over raising the US debt ceiling - all should contribute to pushing 10-year yields lower...in all probability to new lows below 1.394%. This is our opinion; and it is our opinion this should be the "final move", and prep the landscape for a generational low in yields.

Tnx 1-5-13

Technically speaking, the downtrend in 10-year yields remains in place, with the 20-week stochastic having turned lower from less-than-overbought levels. This failure should allow yields to move into lower trendline support, which at this point has three clear touches...thereby solidifying its importance as major support. Too, we should note that 10-year yields tend to bottom out at -50% below the 200-week moving average, which once new lows do print - should provide an upside mean reversion target in the future.

So, as we enter 2013 - perhaps one of the "biggest" trades on the technical landscape will see 10-year note yields finally rise on the order that everyone has expected over the past several years. It is an inevitability that prices will trade back above the 200-week moving average (a rare occurrence in the past 12-years); and our bet it that the move will begin somewhere towards the of 1Q or 2Q 2013. Be prepared.

Good luck and good trading,
Richard

FOUR-YEAR CYCLE LOW WILL BE LATE

Calculating from the Four-Year Cycle low in 2009, the next cycle low is due in two months, but unless there is a major crash, that projection will not be realized. In fact, we can't even say that there has been a cycle crest yet, although, given the proximity of current prices to the tops in 2000 and 2007, it is likely that a long-term top will be put in soon.

Obviously, the Four-Year Cycle does not repeat at exact intervals -- the last one lasted almost six years from trough to trough -- and it appears that the current cycle is going to be extra long. A "normal" downside for the cycle is about 18 months, so an educated guess as to when the price low might hit is about mid-to-late-2014.

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To summarize, the ten-year trading range of the S&P 500 Index suggests that a major price top should be arriving sometime in the first half of 2013, maybe within three months. After that the Four-Year Cycle low (price low) projection would be for the last half of 2014, unless the decline is exceptionally accelerated.

GAUGING THE JANUARY EFFECT

Happy New Year!!!  Here's to good health and good fortune in 2013!
 
Now is the time when market pundits give their predictions for the stock market for the upcoming year.  While it might be entertaining to try to figure out where the S&P 500 might finish in 2013, one of the best predictors of yearly stock market performance lies within January performance.  You wouldn't think that how the market performs in January could have a strong influence on what will happen the next 11 months, but history says it makes a HUGE difference.
 
Let's take a look at this "January Effect".  The basic premise of the January Effect is that "as goes January, so goes the rest of the year".  The numbers bear this out.
 
First, consider that the average annual return of the S&P 500 since 1950 is 8.71%.  Of the 63 years on the S&P 500 since 1950, 35 years have produced annual gains ABOVE 8.71% and 28 years have produced results that are below that 8.71% threshold.  Of the 35 "better than average" years, January was higher in 31 of those years.  By contrast, during the 28 "worse than average" years, the S&P 500 climbed only 8 of those years.  That's a pretty strong correlation between January strength and annual strength.
 
Now let's look at it from a slightly different angle.  Does January strength portend strength the balance of the year?  In the above paragraph, I broke down the results by "better than average" and "worse than average" annual performance of the S&P 500.  In this second approach, I will break down January performance into four quadrants - the top 25% of Januarys, the second 25% of Januarys, etc.
 
In Quadrant 1, the best 16 Januarys in terms of S&P 500 performance produced January gains ranging from 4.10% (1999) to 13.18% (1987).  These MONSTER Januarys averaged rising 6.92%.  Of these 16 years, the balance of the year produced gains in 15 of the 16 years.  In 13 of these 16 years, the S&P 500 rose more than 10% during the balance of the year (not including the January gain).  The average "balance of the year" returns were 17.07%.  So think about that for a second.  The years that produce the best Januarys go on to post ADDITIONAL gains that average 17.07% per year.  The average annual return during these strong January years is an astounding 23.99%.  Not too shabby.
 
In Quadrant 2, the next best 16 Januarys in terms of S&P 500 performance produced January gains ranging from 1.73% to 4.05%.  These 16 years also showed continuing strength over the balance of these years, averaging 9.73% gains over the balance of the year.  13 of these 16 years saw gains during the last 11 months of the year.  The average gain during the balance of the year is 9.73%, significantly below the 17.07% of Quadrant 1, but still very solid action.  The average annual return for Quadrant 2 is 12.62%, again a far cry from Quadrant 1's 23.99%, but still 4 percentage points above the S&P 500's average annual gain of 8.71%.
 
Quadrants 1 and 2 demonstrate the overall positive impact that strong Januarys have on how the S&P 500 trades during the balance of the year.  Januarys that fall in the top half of all Januarys have produced POSITIVE balance of year returns in 28 of 32 years.
 
As you might imagine, this is where the bullish part of the discussion ends.
 
Quadrant 3 January performance averages -0.45% and ranges from -2.53% to 1.56%.  The average balance of the year returns for this group of Januarys is 0.09% with nearly half of these years producing losses from January 31 to December 31.  The average annual return on the S&P 500 for Quadrant 3 years is -0.36%
 
Quadrant 4 covers the worst 25% of Januarys since 1950.  This covers January returns that range from -8.57% to -2.74%.  The average annual returns of the S&P 500 for Quadrant 4 years is -2.10%.  Of the 11 worst S&P 500 years since 1950, 5 of them are situated in Quadrant 4 and 5 more are included in Quadrant 3.  There is obviously a tight correlation between awful stock market years and poor January performance.
 
So while it's entertaining in early January to talk about where the S&P 500 might finish 2013, I'd suggest you wait until January 31st.  You'll have a much better idea then.  January 2013 got off to a great start - now we'll see if the bulls can extend the gains over the balance of the month.
 
Happy trading!
 
Thomas J. Bowley
Chief Market Strategist
Invested Central
http://www.investedcentral.com/

Gold Miners ETF Tests Support near Fibonacci Cluster

It was a volatile week for gold and gold miners, but the Gold Miners ETF (GDX) remains at an interesting juncture that warrants attention. After surging above 47 to start the New Year, the Fed minutes on Wednesday put some doubts on the future of quantitative easing. Keep in mind that the Fed announced its latest quantitative easing program in mid September and suggested then that it would be open ended. Even though the Fed minutes got the blame for this week's plunge back below 46, I am not so sure of this connection because gold and the Gold Miners ETF (GDX) have been moving lower since October, which was just after the Fed announced its latest round of quantitative easing. Gold may be marching to the beat of a different fundamental drummer.

130105gdx
Click this image for a live chart.

Whatever the case, the trends for the Gold Miners ETF (GDX) and the Gold Miners Bullish Percent Index ($BPGDM) are clearly down as GDX fell back to potential support with a sharp decline the last 2-3 days. Note that support is just “potential” because the trend is down. Resistance levels are expected to hold during downtrends and support levels are expected to fold. The 45 area is “interesting” because GDX formed a falling wedge the last few months and is trading in a Fibonacci cluster. Falling wedges are typical for corrections and this Fibonacci cluster could mark a reversal zone. The last two peaks established resistance in the 47.60 area and a break above these peaks is needed to reverse the downtrend. Until such a trend reversal, this downtrend could extend to next support in the 39-40 area. The indicator window shows the Gold Miners Bullish Percent Index trending lower since October as well. A break above 40% is needed to reverse the downtrend in this breadth indicator.

Best wishes for 2013!
Arthur Hill CMT

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