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New Newsletter Format, New Faster Servers and New Award!

Hello Fellow ChartWatchers!

We're starting to get "Spring Cleaning Fever" here at StockCharts.  Can you tell?

Exhibit #1:  This!  This new newsletter design!  What do you think of it?  We reworked things to make the newsletter more readable, more printable and more informative overall.  In addition, we'll be converting all of our old newsletters into this new format and putting them in a huge archive section of our site for posterity.  Watch for that in the next month or so.

Exhibit #2: Did you notice the speed-up in our servers last week?  Probably not - our site has always been very fast - but we did install a new collection of 28 super-fast servers from IBM and they are going to ensure that things remain super-fast for the foreseeable future even as our membership continues to grow.  For example, these new servers have made the Scan Engine 16 times faster than before!

Exhibit #3: Finally, we're cleaning off another spot on our shelf for the latest "Best Technical Website" award from the readers of Stocks & Commodities magazine - for the 12th year in a row!  We are very, very honored to receive this award again and - unlike Google - we pledge to continue improving things (for example, Exhibit #2 above) for the foreseeable future.

So, I know it is still early in the year, but spring is in the air here at StockCharts.  Again, we hope you like the new email format for the newsletter.  Click here and let me know what you think!

- Chip

 

 

The MACD Reset

Personally, I love the MACD.  It's one of my favorite technical tools when trading.  It's not perfect - nothing is - but it does provide us a snapshot of momentum of a stock or index.  The MACD is nothing more than the difference between two exponential moving averages, with the standard being the 12 period and 26 period EMAs.  I follow this standard MACD.
 
As a refresher, here's a daily 6 month chart of Apple (AAPL) with the standard 12 day and 26 day EMAs reflected on the chart:
 
AAPL 3.16.13

That is a static look at AAPL's MACD as of Friday's close.  By changing the settings on the moving averages to the 12 day EMA and 26 day EMA, you can see clearly how all of the MACD-related numbers tie together.  But it's the ebbs and flows of the MACD (momentum) that really grab my attention in order to assess risk.
 
Any time the price of a stock moves up, you should expect the short-term moving average to rise quicker than the long-term moving average.  To the contrary, a declining stock price should see its short-term moving average falling faster than its long-term moving average.  Once that relationship changes and divergence turns to convergence, it's a warning that the momentum could be waning and the RISK of a quick shift in trend direction should be considered.  That's the real beauty of the MACD.  It's not just a lagging indicator.  It also can become a very strong PREDICTIVE indicator.
 
In my February 16th article, I discussed the potential risks of long-term negative divergences and how they might potentially influence the short-term direction of 5 S&P 500 stocks that were moving higher.  The problem was they possessed the signs of slowing momentum - ie, long-term negative divergences.  All 5 of these stocks suffered temporarily as their price fell and their MACD began moving back towards centerline support.  In my view, that's all I'm looking for to the down side - a 50 day SMA test and/or a MACD centerline "reset".  Below is the chart of one of these 5 stocks, Tenet Healthcare (THC), which also happens to be one of the strongest stocks in the market of late.  Its SCTR rank is among the highest in the market.  But check out its chart:
 
THC 3.16.13

This is a perfect example that shows a long-term negative divergence offering us a warning of potential weakness ahead.  In addition to the weak momentum in price action, look at the lack of volume that accompanied the breakout of THC in the first couple weeks of February. Light volume breakouts are another sign of slowing momentum and further corroborates the negative divergence on the MACD.  Taking a more cautious approach to THC in mid-February - either by selling shares and moving to cash or possibly selling a covered call - would have reduced the risk of holding and enabled a long trader to hold onto profits generated through mid-February.  Re-entry on the subsequent 50 day SMA test would have saved perhaps 8-10%.
 
Remember, long-term negative divergences are not necessarily a bearish development, especially in an otherwise bullish market environment.  But they do signal that short-term risks are elevated and that it's time for the short-term trader to alter his or her trading strategy accordingly.  And for those looking to take an initial long position in such a stock, it would probably behoove them to wait until a 50 day SMA test and/or a MACD centerline approaches before committing capital.
 
Happy trading!
 
Tom Bowley
Chief Market Strategist
Invested Central

Bullish Consolidation Suggests Sharp Rise for Crude Oil

The stock market's uninterrupted gains in recent months is giving rise to talk of a bubble, and perhaps this is the case within the scope of time. It is still far too soon to determine this, although further gains will cause us to consider sharply higher prices within the context of anemic economic growth. With this said, we are watching the Crude Oil futures market rather closely, for on a monthly basis - a bullish pennant pattern is forming that projects sharply higher prices...to new highs above the $150/barrel level. This would come as a surprise to many, but the fact of the matter is that there is likely to be a series of rolling euphoric moves across all asset classed stocks, commodities and bonds. Right now, it is simply stocks. But we are starting to see signs of more interest in the commodity groups than we have previously.

Wtic 3-16-13


Therefore, we are interested in various energy stocks to participate in this rally, which by-the-way can occur within the context of a lower stock market just as occurred in 2007-2008. Our choices are several of the "laggards" such as Apache (APA), National Oilwell-Varco (NOV) and others. If there is risk in the long energy trade, then we would look for a monthly close below the 50-month moving average at $85/barrel level. In effect, this would suggest a mean reversion exercise towards the 200-month moving average that occurs roughly every 7-years. In this environment, we hate to think of what the world economy looks like, but suffice to say there will likely be very few long hiding places.

Good luck and good trading,

Richard

U.S. Dollar Appears To Be Bottoming

The monthly bars in Chart 1 plot the U.S. Dollar Index since 2001. Two major trends are seen on the chart. The first is the major downtrend in the dollar between 2002 and 2008. During 2008, the USD broke its six-year down trendline which ended its bear market. Since then, the USD has trended sideways in what appears to be a major bottoming pattern (see parallel lines). To complete that bullish pattern, the USD would have to clear its 2009-2010 highs. Although that hasn't happened yet, it isn't too soon to consider the possible implications of the dollar becoming the world's strongest currency for the first time in more than a decade. The most obvious implication is that the dollar will do better than most foreign currencies. That makes the dollar a much better bet. Chart 2 shows what has happened to the world's two biggest foreign currencies since the dollar bottom during 2008. The Euro peaked that year and has fallen since then. [The Euro has the biggest weight in the USD]. The orange line shows the Japanese Yen peaking during the fourth quarter and tumbling during this quarter. Forex traders have been buying the dollar and selling the Euro and yen (as well as most other foreign currencies). Currency trends reflect how the world views economic prospects for the various economies. Dollar strength suggests that the U.S. economy is in better shape than most foreign markets. There are other intermarket implications of a stronger dollar. One of the most obvious is its impact on commodity markets.

20130314001-sc

20130314002-sc

Municipal Bonds Hit A Pothole...

Strolling through the the mid month charts, I came across this ETF.

This ETF represents Municipal Bonds.  MYI

Sc

It has only moved below its 40 WMA twice in the last 5 years. Till this week. It marks the third time.
In 2007 it marked a drop early in the year and could not stay above the black line.
It tried twice in 2008 to get back above but failed in June and July. It was important.
In late 2010, it plummeted below the line, while the stock market went on a final run into April before correcting 20% in 2011.

This fund has shown more red in the last 3 months than at any time in the last 2 years.
At this point, its a heads up that something is going on in the Municipal Bond Market. We'll stay tuned to see if it has broader implications.

Good Trading,
Greg Schnell, CMT

QQQ Forms Bullish Continuation Pattern after Gap

The Nasdaq 100 ETF (QQQ) and the Technology SPDR (XLK) have been underperforming the broader market, but both remain in uptrends since mid November and are holding their March gaps. Relative weakness stems from Apple, which is the biggest component for both ETFs. Microsoft, which accounts for over 7% of each ETF, has also been underperforming the broader market for several months. The first chart shows XLK breaking above resistance at 30 with a gap-surge in early March. This breakout is holding with broken resistance and the gap marking a support zone. A move below 29.75 would fill the gap and negate the breakout. RSI confirms that the cup is half full. Notice that this momentum oscillator held the 40-50 zone in December and again in February. Momentum favors the bulls as long as RSI holds above 40. I suspect that RSI would break 40 if/when XLK breaks the December trend line.

120314xlk
120316qqq

The second chart shows QQQ with similar characteristics. A small flat consolidation formed after the surge. This looks like a flag, which could be flying at half-mast. A breakout would signal a continuation higher and target a move to around 70. The flagpole extends 3 points (±66 to ±69) and this amount is added to the flag low (±68 + 3 = 71).

Happy St Paddy's Day!
Arthur O'Hill CMT

Advance-Decline Lines Confirm New Price Highs

There are negative divergences on a lot of indicators we track (price makes a new high, but the indicators makes a lower high), but the advance-decline lines for breadth and volume are actually confirming the recent new price highs. This is reassuring but, it does not guarantee that even higher prices are coming.

As Yogi Berra once said, "You can see a lot by just looking," and there is a lot to see on the following chart which shows the S&P 500 Index advance-decline lines for breadth and volume. I have annotated some of the variations of divergences and confirmations which can occur. Let me briefly discuss them.

First, I generally limit comparisons to periods of no more than about a year, because I don't think that comparisons over long periods are valid. For example, I am not concerned that the current volume level has not exceeded the 2007 volume top.

1999-2000: We had mixed signals. Breadth diverged negatively, while volume confirmed the price high.

2002: There was a reversal divergence on breadth and a negative divergence on volume - a thoroughly negative picture.

2007: There were negative divergences on both breadth and volume. Not a good outcome.

2011: A reversal divergence on breadth and a negative divergence on volume.

6a0120a65d6eb8970b017c37b930a9970b-800wi

The down-pointing arrows identify some of the times where a new high was confirmed by one or both of the advance-decline indicators. In those instances the price top was followed immediately by a price decline, or the confirmed top was followed shortly by a slightly higher top, marking the high before a significant decline. (Note: There are many other confirmations that resulted in positive outcomes. I'm only trying to illustrate that this not always the case.)

Conclusion: Indicator divergences should always inject a note of caution into our outlook, and it is best when the indicators confirm new price highs, but a confirmation doesn't always mean that there is no immediate danger.

Wailing and Gnashing of Teeth in the Gold Market

The past two trading weeks in the gold market has been rather dramatic:  a sharp decline followed by a sharp rally and then a recent test of the lows. The end result - quite a bit of wailing and gnashing of teeth. And, we think the wailing shall become louder before gold finally bottoms and turns higher towards new all-time highs. Quite simply, gold is in the process of providing those longs accumulated over the past 2-years with losses, and a resultant "puke point" lies ahead.

Gold 3-2-13

Technically speaking, we are looking for a test of the rising 150-week moving average at $1539 - much in the same manner as was seen during late 2008. However, one need understand that this moving average is likely to be violated for a short period of time, and it is likely to test the rising 40-month moving average currently trading at $1494. So, we have a zone in which to consider buying gold for an initial position; and then we would use a breakout above the 30-week moving average to add to the trade and get very very aggressive. Until then, we can wait for the yellow dog to bark.

Good luck and good trading,

Richard Rhodes

NDX Exhaustion Divergence

Textbook dIvergences occur when an indicator fails to keep up with price. For example, a positive divergence is when price makes a lower bottom, but the indicator makes a higher bottom. A negative divergence is when price makes a higher top, but the indicator makes a lower top. In each case the divergence signals a possible price reversal. I call them "textbook" divergences because they are the kind that are typically referenced in any discussion, but there is another kind of divergence, which I will call an "exhaustion divergence," that is extremely useful but rarely mentioned.

Let me first apologize if the exhaustion divergence has been identified and named something else by someone else. I am not the most widely read person you will ever meet. But, since I do not recall ever having seen it included in a discussion of divergences (except by me), I will take the liberty of giving it a name for the purposes of this discussion. Also, I seriously doubt that I am the first to have noticed and remarked upon this type of divergence.

The exhaustion divergence is quite the opposite of the positive or negative divergence. In a rising trend, the price index makes a lower top while the indicator makes a higher top. And in a falling trend, price makes a higher bottom while the indicator makes a lower bottom. I believe it signals the exhaustion of the price move because internals are unable to drag price along with them.

On the chart below I have annotated examples of each type divergence. In 2010 we had a positive divergence which coincides with the price low. In 2011 two lower indicator tops precede the price break in July/August. And finally, the exhaustion divergence occurring at the most recent price top.

6a0120a65d6eb8970b017d41640cbf970c-800wi

The significance of the divergence becomes more obvious when we understand the indicator. The Percent Buy Index (PBI) shows the percentage of Price Momentum Model (PMM) buy signals for all the stocks in a given index -- in this case the Nasdaq 100 Index. (The PMM generates mechanical medium- to long-term buy and sell signals for individual stocks.) At it's peak in January the PBI showed that 90% of stocks in the NDX were on buy signals (much higher than in September), yet price was struggling below it's previous top. it reminds me of a car with its engine turning at high RPM and the clutch slipping.

Since the NDX is a cap-weighted index, the cause of the divergence is that the larger-cap stocks in the index are not doing very well, not a heaalthy situation. In addition to the divergence you'll notice that the PBI has crossed down through its 32-EMA. This is a sign that a price correction may be about to take place.

Conclusion: My observation is that the exhaustion divergence is a reliable tool, probably more reliable than the positive divergence, which tends to be nullified during strong up trends. Currently, there are many indications that a price correction is due. This is just one more.

LONG-TERM INDICATORS ARE ROLLING OVER

A lot of traders and investors are waiting for the bull market in gold to resume. They may have a very long wait. That's because a lot of traditional chart, technical, and intermarket signs are now working against gold. Let's start with a long-term look. The monthly bars in Chart 1 show the major bull move in gold that lasted from 2001 to 2011. The rising trendline drawn on the log chart is still intact. [A log price scale measures percentage price changes and is better for long-term trendline analysis]. But the two indicators shown on the chart aren't. The orange line overlaid on the gold price is the 14-month RSI line which measures long-term market momentum. The last major peak in the RSI took place during 2011. The fact that it fell short of its 2008 peak formed a "negative divergence" with gold. Even worse, the RSI line has been dropping since 2011 (orange trendline). The RSI line is now approaching an important test of its 2008 low (dashed line). It it doesn't hold there, the long-term trend of gold should weaken further. The monthly MACD lines (top of chart) look even worse. The two lines turned negative at the start of 2012 (red arrow) and have fallen to the lowest level in three years. That's the worst downturn by the MACD lines since the bull market began in 2001.

20130228001-sc

Searching for Answers in Orlando

Hello Fellow ChartWatchers!

Last weekend I had a great time giving our SCU 101 seminar to a room full of people at the Dolphin Hotel in Orlando.  One of the questions that came up during that seminar was "What does the solid black candlestick mean?  I've looked all over your site and I can't find anything that talks about what the different candlestick colors mean."

OK, that is a very good question.  It's also a question that our support team sees quite often from other users.  And it is an important question that everyone needs to know the answer to.   I was glad to get that question during the seminar, but I decided not to answer it directly.

Instead, I took the opportunity to show everone in the room our "Search" feature.  Why?  Because we rewrote it last year and it works really well however many people either don't use it or they don't use it correctly.  I can make that statement because, like the candlestick question, many of the questions our support team gets each day are already answered on our website.

I told everyone at the seminar to go to our homepage, find the "Search the Site" box on the right side of the page, enter "Candlestick colors" into the box, and press the "Search" button.  Here is what the results of that search look like:

Screen Shot 2013-03-03 at 9.02.48 AM

Because we programmed this search feature ourselves, we control the order of the results that you see and we can tweak those results so that the articles that are more interesting to chartists like yourself appear first.  (Our old search feature was hosted by Google and Google's results weren't nearly as useful.)

The first article listed on that search results page is a direct answer to the question that was asked in the seminar.  The "SU" icon beside it means that the answer was written by our Support staff and is stored in our Support Knowledgebase.  The next couple of articles are labelled "CS" for "ChartSchool" and are general articles about candlesticks and candlestick patterns.  We then have a link to an educational Video ("VID") about candlesticks from Arthur Hill and finally a Blog ("BL") article that Arthur wrote last November re-explaining how candlestick colors work.

So these search results are pretty useful to someone who is trying to understand how candlestick coloring works on our website.  When everyone at the seminar saw this, they immediately started searching for the answers to other "great mysteries" they had always wanted to know.  In other words, they had learned how to "fish."

I encourage you to take a moment and do this search yourself and then dig into some of those articles and videos and see what you discover.

Later, during the lunch break, several people told me they were very glad that I made them try the Search box because they had already discovered several new tricks and tips on their own.  That was great news to my ears.  It's also another example of the kind of real world value that most seminar attendees get during our courses.

So please remember to use our Search feature whenever you need help using our website.  You'll be amazed at all the things you'll find.

- Chip

 

DEFENSIVE SECTORS SHOWING RELATIVE STRENGTH

In my last article, I laid out several arguments why it would make sense to be more cautious as you approach the stock market.  I'm bullish for the balance of 2013 - at least as of now - but the short-term has definitely turned more dicey.  One of the ways that I evaluate the strength of a move to the upside in the S&P 500 is by looking to see what areas of the market are leading the charge.  As of Friday's close, healthcare and consumer staples were the two best performing sectors of 2013, indicative of a market that is tired.
 
The good news is that financials on a relative basis continue pushing higher.  Rarely do we see overall market weakness when financials are strong on a relative basis.  But here are a couple of things to watch for if our major indices break out to fresh new highs once again.  First, do financials make yet another relative breakout that coincides with an S&P 500 breakout?  If so, it would be a checkmark in the bulls' column for sure.  More importantly, however, is whether the defensive sectors take a backseat to the more aggressive sectors on such a breakout.
 
Check out the chart below:
 
S&P 500 3.2.13

 
The Dow Jones and S&P 500 have been showing relative strength vs. their more aggressive counterparts - the NASDAQ and Russell 2000.  Should we see a break to fresh new highs with index leadership from the Dow Jones and S&P 500 and sector leadership from healthcare, consumer staples and utilities, it'll be a breakout worth ignoring.
 
Healthcare stocks (XLV) broke out on Friday, but did so with a long-term negative divergence in play.  In the current market environment, please make sure that you identify potential trading candidates with strong reward to risk trading profiles.  I found one such healthcare stock and am including it as my Chart of the Day for Monday, March 4th.  If you'd like more information, simply CLICK HERE.
 
Happy trading!

Dollar Breakout Could Foreshadow a Return to Risk-Off

The Dollar Bullish ETF (UUP) extended its advance with a break above the mid November high this week and a fresh six month high. UUP is at levels not seen since August 2012 and this surge could weigh on stocks because the Dollar and stock market have been negatively correlated the last three years. A rising Dollar could also signal a return to a risk-off environment. On the chart below, it looks like UUP formed a higher low around 21.50 and the February breakout signals a continuation of an uptrend that has been in place since August 2011. The yellow area marks the next target zone in the 23.50 area. The upper trend line of the rising channel and the 50-62% retracements were used for this target. 

130301uup
130301fxe
Click these images for live charts.

Watch the Euro for clues because it accounts for around 57% of the US Dollar Index and the Dollar Bullish ETF. The second chart shows the Euro Trust (FXE) breaking the July trend line and piercing support from the January low. This breakdown signals a continuation of the prior decline (May 2011 to July 2012), and the next support zone resides in the 118-120 area. The indicator window confirms the breakdown as StochRSI broke below its November low and below .40 for the first time since July.

Good trading!
--Arthur Hill CMT

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