ChartWatchers Newsletter

Energy Continues To Lead And Prospects Here Remain Bright

I've been writing relentlessly about the relative strength in energy shares (XLE) over the past several months and here I go again.  Go ahead and talk about too much supply.  Hang onto the weakening demand argument if you'd like.  I'm simply following the charts which is what technicians do.  The stock market knows ALL of the fundamental information and it's been priced in.  And what the market keeps telling me is that you want to overweight energy.  It's that simple and until rotation strips away that technical strength, I'll keep riding this horse.  The following chart shows both the absolute and relative performance of energy.  Check it out:

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An Update On Gold

Gold traded fabulously last year. Actually Gold surged from January to March then went sideways. Well Gold has started to outperform the $SPX but everything else looks dismal. The SCTR is stuck at 2% even after Gold surged. The volume has started to improve, but it is still a lot less than the selling volume through November and December. 

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I am One with the Trend and the Trend is with Me

I recently saw the new Star Wars movie, Rogue One, and found a way to tie technical analysis to one of the more interesting characters. This happens all of the time because technical analysis is so ingrained in my membrane. Chirrut Îmwe is a blind warrior monk who repeated: "I am one with the force; the Force is with me". If he were a trend-follower, I think he would simply substitute "force" for "trend". Works for me! 

The chart below shows the S&P 500 hitting a new all-time high this week and the force is clearly bullish. In Dow Theory terms, think of the force as the primary trend. The bears may win some battles, but the force ultimately wins the war. After a big surge in 2013 and 2014, the S&P 500 corrected with a big channel that looks like the mother of all falling flags (blue trend lines). The index broke out of this channel in mid-2016 and hit a new all-time high in mid-July. The primary trend can only be up when the index hits a new all-time high.  

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Stock/Bond Ratio Still Favors Stocks But Has Become Overbought

Several market messages over the past couple of months used relative strength ratios to paint a more bullish picture of the stock market, and a more bearish picture for bonds. While those ratios have strengthened considerably, especially since the election, I'm a little concerned that they're starting to look stretched. On October 28, I showed a ratio of the S&P 500 divided by the 20+year Treasury Bond ETF turning up in favor of bonds. That's the lower circle in Chart 1. Since then, the stock/bond ratio has soared to the highest level in nearly three years. That puts it up against a potential resistance barrier at its late 2013/early 2014 peak. In addition, its 14-day RSI (top of chart) has reached the 80 level which is the most overbought reading in years. More concerning is the fact that its 14-week RSI line has also reached overbought territory.

For the study of major market trends, weekly indicators are usually more reliable than dailies. Chart 2 shows a "weekly" version of the same stock/bond ratio from Chart 1. The pattern of higher peaks and higher troughs since 2009 has generally favored stocks over bonds. That wasn't true, however, during 2011 when the stock/bond ratio dropped, or during 2014 and 2015. During those three years, bonds did better than stocks. The rising ratio during 2016 shows the pendulum swinging back to stocks, especially since the election. There are a number of points worth noting here. Over the longer run, the shape of the ratio appears to favor stocks over bonds. Over the shorter run, however, there is some concern. First, the ratio is nearing a previous peak from three years ago where it could meet some resistance. The second is the fact that the 14-week RSI line (top of chart) is in overbought territory over 70 for the first time since late 2013 (and early 2011). Both instances led to pullbacks in the ratio. All I'm suggesting here is that the stock/bond ratio appears very stretched. In other words, the steep move out of bonds into stocks may be getting overdone. That would suggest a bit more caution pushing the buy stock/sell bond strategy, especially as we enter the new year. We see the same pattern in several other ratios.

Tech Sector and Key Tech Groups are Still Leading

Even though the finance, energy and industrials sectors are grabbing most of the headlines these days, the tech sector is doing just fine with the Nasdaq 100 ETF (QQQ), the Nasdaq 100 EW ETF (QQEW), the Technology SPDR (XLK) and the EW Technology ETF (RYT) hitting new highs this week. We are not talking new 52-week highs, but new all time highs. In addition, the Cloud Computing ETF (SKYY) and Semiconductor SPDR (XSD) hit new highs. At the risk of stating the obvious, it is impossible to be in a downtrend when hitting new highs. Even though these ETFs may seem extended in the short-term (a few weeks), the big trends are clearly up and this bodes well for tech in the coming months. The charts below show the October-November lows marking the first important support levels to watch. 

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Some Long Term Breakouts Are Coming Into Play Globally

There are some very important macro charts starting to come into play globally. These are monthly charts, so we need to check these at the end of December, January and February. The collection of charts shows how big a global bull market could be if they all break through.

First of all, France looks like it wants to test the 16-year, long term trend.

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ChartLists Are The Key To Disciplined And Successful Trading

I spend a great deal of time scouring the market and looking for interesting trade setups.  It's quite often that I see a stock that I really like, but it's not at a price level where I'm ready to pull the trigger.  If I move onto the next chart, chances are that prior chart will be gone until.....I see it days or weeks later and it's made a big move that I was anticipating.  Then it just becomes a wasted opportunity.  So how can make a difference?

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