ChartWatchers Newsletter

What the Market Needs now is...Earnings

The market moved into a rare funk last week as traders decided in unison to take profits, especially in the tech heavy NASDAQ. This is quite understandable with all three of the major indexes hitting record levels during the month of June.

There are various theories as to why stocks took a tumble from being overpriced to worries about the lack of progress with the health care bill to quarter end window dressing to a more aggressive Fed. Whatever the reason, there's always one good remedy that seems to cure all market ills; solid earnings.

Just take a look at the chart below of the S&P and you will see how the market perked up right after earnings season began in January for 2016 Q4 and then again in April for 2017 Q1.

The good news for the bulls is the 2017 Q2 earnings season will kick off over the next few weeks and for a solid month+ we'll be getting earnings reports galore. And if companies continue to show earnings growth it could help to get stocks back on track.

Of course we'll continue to see headlines that stymie the market but those headlines will become less important once actual numbers start to get released. This is because when everything is said and done the one thing shareholders care about more than anything else is the bottom line.

One of the things we do at EarningsBeats is scan for companies that beat earnings and have solid charts. These are the types of stocks that grab the attention of traders. And with earnings season right around the corner our list will grow. If you would like to see a sample just click here.

The bulls have done a great job of holding key levels on pullbacks consistently since the market bottomed last November. Can they hold the line this time as well? Maybe, but traders are going to be looking for proof that earnings continue to be strong since nothing compares to strong numbers when everything is said and done.

Why Breadth Matters Today

The US markets and Canadian markets are totally different beasts right now, but it makes a great learning moment to look at both of them to understand how markets break down.

The chart below is the Bullish Percent Index for the Nasdaq Composite ($BPCOMPQ). I have two other plots on the chart. On top is the plot of the Nasdaq Composite ($COMPQ) and the other is the Percentage Of Stocks Above The 200 DMA ($NAA200R). To read more about the Bullish Percent Index, read the ChartSchool article here. Bullish Percent Indexes (BPI). As a quick comment, the BPI keeps track of the percentage of stocks in a group that are on a buy signal meaning they are making higher highs. 

On the charts below, the green lines on the panels that I have placed there manually are the current market levels. I have placed two red lines on each of the indicator plots. The top one is when the market is Big Bull", the other is the level that the market usually finds support in a big bull market. When the Nasdaq Composite Bullish Percent Index ($BPCOMPQ) is above 65, the market can roar forward. Recently it spent from December to March above that level. In April, May and June it has hovered around 60% and we can see the market still roared ahead. That is fine, the lower level is more for brief pullbacks. When it starts to fall under these levels, the market is usually in a correction of some sort. However, the BPI is slower to notify than the $NAA200R in the bottom panel. When a stock is below the long term 200 day moving average, technicians call that condition bearish. This chart keeps track of all of the stocks on the Nasdaq Composite and currently shows a level of 59% (green line in zoom box). If you look left on the chart, corrections usually start around the 58% level. These are eyeball levels based on the charts history and are different depending on the group of stocks you are looking at as I will explain later. In 2015, the market started to break down below these levels as an example. The late October 2016 4% pullback showed this chart pulling back to 54% roughly. In broad terms, if enough stocks are currently participating in the bull market (59%), the overall market can still push higher. We refer to this as the breadth of the market. The more individual stocks in uptrends, the better the 'breadth' of the market.

Continue reading "Why Breadth Matters Today" »

Charles Dow and Leonardo Fibonacci Walk into a Bar

The bar was 61.8 inches off the floor, but Leondardo still did not see it. All (bad) joking aside, I would like to look at corrections through the eyes of Charles Dow and Leonardo Fibonacci. These two may seem miles apart at first glance, but the numbers suggest otherwise. In fact, Dow and Fibonacci are pretty much on the same page when it comes to retracement amounts. Charles orders a frosty mug of beer, Leonardo orders a glass of Tuscan red wine and they start talking technical analysis. 

Continue reading "Charles Dow and Leonardo Fibonacci Walk into a Bar" »

S&P 100 Flips Back to IT PMO SELL Signal - DP Scoreboard Weekly Charts

On the last trading day of the week, the DecisionPoint IT Price Momentum Oscillator (PMO) signals go "final". Today saw a new weekly PMO SELL signal on the OEX. Some may recall that just last Friday the OEX triggered a weekly PMO BUY signal. Don't let the very "green" Scoreboards fool you, there is deterioration in momentum on nearly all daily and weekly charts for these four indexes. To see the daily, weekly and monthly annotated charts for these four indexes, you can go to the DecisionPoint LIVE shared ChartList here or use the link at the top of the blog.

Continue reading "S&P 100 Flips Back to IT PMO SELL Signal - DP Scoreboard Weekly Charts" »

Falling Commodity Prices Are a Big Reason Why Inflation Is So Low

Ever since Wednesday's Fed rate hike, and the press conference by Janet Yellen, I've been thinking a lot about inflation. I believe the Fed is underestimating how weak inflation really is. I also believe that's because it's looking in the wrong places. Or, more to the point, it's ignoring the weak signals hiding in plain sight. Namely, falling commodity prices. Chart 1 shows the Reuters/Jefferies CRB Index falling this week to the lowest level since the spring of 2016. Ms. Yellen may refer to that falling trend as "noise". To a chart reader, it's called a downtrend. The CRB Index includes 19 actively traded commodities which include energy, industrial and precious metals, and agricultural markets. [The Bloomberg Commodity Index has also fallen to the lowest level in a year]. Ms. Yellen said that the Fed views the recent decline in inflation as transitory. She referred to a temporary drop in the cost of cellphone plans as an example of why inflation could bounce. Is that really what the Fed is relying on? What about falling food and energy prices. Then again, economists don't include those in their calculations for "core" inflation. [They consider them too volatile, whatever that means]. But that omission helps explain why they've been so wrong for so long on inflation. The implications are important. If the Fed is wrong on inflation, then it's plan to keep raising rates is misguided. Falling bond yields, and a flattening yield curve, suggest that bond traders are already suggesting that.

After falling for two decades between 1980 and 2000, commodity prices rose between 2002 and 2008. That rise was mainly the result of a plunging U.S. Dollar. Chart 2 shows a dollar 2008 bottom, however, coinciding with a major commodity peak. A second dollar rebound in 2011 produced another CRB downleg. A third dollar upturn in 2014 produced an even steeper commodity downturn (see arrows). At the start of 2016, the CRB fell to the lowest level since the 1970s which raised fears of a dangerous deflation. They rebounded during 2016, but are falling again. Here's why that matters. The inflation pipeline has three stages. The first stage is the price of raw materials. The second stage is the price companies pay for raw materials (producer price inflation). The third stage is what companies charge consumers for their products (CPI inflation). It all starts with the direction of commodity prices. Strangely, that's the part that economists (and the Fed) pay no attention to. How can economists expect to predict the final stage of CPI inflation, if they ignore the first stage which is the direction of commodity prices?

Managing Risk - Identifying Strong Reward to Risk Trading Candidates

If you are looking for ways to manage risk in an increasingly volatile environment then you should start by searching for the "best of the best"; those companies that beat earnings expectations and have solid charts. This makes an awful lot of sense if you think about it; riding the coattails of those stocks that are both fundamentally and technically sound.

For example, take a look at the chart below on H&R Block. They recently reported earnings and the stock shot up over 10% after the numbers were released.

Look at that huge volume that came into the stock when traders learned of those strong earnings. In fact the same thing happened when HRB reported its earnings last quarter in early March. At the same time, unless you owned the stock into its earnings report, it doesn't make sense to chase it after that nice gap up. Instead, it requires lots of patience; let the stock work its way back to a key level of technical or price support after the euphoria wears off, and that's when you make your move.

For example, wouldn't it be worth considering taking a position in HRB if it pulled back to its 20 day moving average, currently at $27.12? It would still be technically sound, you could place a tight stop in case it continued moving lower, and your upside could potentially be a revisit of the high near $30. THAT would be a solid reward to risk play.

In order to take advantage of price appreciation that goes along with solid earnings you will need to develop a way to find those stocks. In fact I believe this is vitally important so I have decided to conduct a webinar this Monday, June 19, at 4:30 pm eastern. During the webinar I will discuss the method for how stock trading candidates are selected and will discuss recent performance and how managing reward to risk really works in growing a portfolio. As an added bonus for attendees, I will be joined by Senior Technical Analyst, Tom Bowley, who will discuss setting up ChartLists and how to run scans that meet specific criteria, quite a potent combo. Just click here to save a seat for the webinar.

Every trader out there knows how difficult it is to identify trading candidates, pull the trigger on a trade and come out of it with a profit instead of a loss. At least take the time to search for those companies that have both solid fundamentals and strong charts as they can add a level of protection and potential not found in most stocks.

At your service,

John Hopkins


Latest Members Dashboard Update - #AWESOME!

Hello again, everyone!  Just a quick note to tell you about an awesome new feature that we just rolled out.  We've updated the Members' Dashboard so that it is now even more customizable and useful.  The change is subtle - you would probably miss it if you weren't reading this article - but it is very powerful.

There is now a new little "Gears" button in the top right corner of the Members' Dashboard.  If you don't see it, click on "Members" and then look above the top right corner of the "Market Movers" panel next to the "ChartLists" button.  See it?  Good.  Now click it.

You will be presented with a dialog that contains two checkboxes - one for "Scan Center/Alert Center" (which should be checked) and one for "Additional Data Panels" (unchecked).

Check the "Additional Data Panels" checkbox (check-circle?) and press "Update."   VOILA!

There are now three more "Market Movers" panels just like the one on the right side of the page.  The new panels are in a row right below the first row of panels.  Initially, they all display the same thing - which is definitely boring.  BUT, you can now change each of them to be whatever you want.  Just click on the dropdown labeled "Top 10" in each panel and select something different.  Whatever settings you select will "stick" and be back the next time you visit the page.

Personally, I've put the Ticker Cloud in the upper right panel, the S&P 500 Top 10 in the next panel, the Large-Cap SCTRs in the middle panel, and the Predefined Alerts in the lower-right panel.  Here's what it looks like after changing those settings:


Note: Right now the settings are stored in your browser's cookies which means that if you change browsers or computer (or you clear your cookies) you'll need to re-set things up.

Just one more way we are continuing to improve the website.  Enjoy!
- Chip


Finding New Opportunities in an Overbought Market

The market has been on fire lately with all of the major indexes hitting all time highs. In spite of some recent weak economic reports, including a miss on Friday's jobs report, and in spite of all of the political "noise" swirling around, stocks have powered higher. In fact, both the NASDAQ and S&P are technically overbought with the Dow not far behind. And the VIX is right near all time lows as it dipped back into the 9's on Friday showing traders are very willing to own stocks.

When the market gets stretched like it is now it starts becoming harder to jump in; who want to jump in when the market could be ripe for a pullback? But in all market conditions there are stocks that have lagged, for whatever reason, that could move higher while "catching up" with the rest of the pack.

Continue reading "Finding New Opportunities in an Overbought Market" »