The Industrial Metals have been on everyone's radar recently. The daily and weekly charts are showing big cracks. Starting with the Steel ETF (SLX), this is on a train out of town. This contains a list of companies related to the Steel industry. Watch for a bounce at the 200 DMA and see if we get more than a bounce to the head/shoulders neckline in blue.
Many market pundits on CNBC continue to predict a market top, discussing how we've run too far too fast and that valuations are too high and blah, blah, blah. Fear sells and CNBC is all about their ratings and advertisements. There's an occasional nugget of solid information, especially if there's a worthwhile guest on to listen to. But keep in mind what their end goal is - to make money, and usually at your expense. I'll watch CNBC for guest appearances and streaming news, but it's typically muted and in the background.
My last two messages have stressed the importance of the 200-day moving average. It's what separates uptrends from downtrends. In order to sustain a bull market, more stocks have be above their 200-day average than below it. And that is currently the case. The red line in Chart 5 is the percent of NYSE stocks above their 200-moving average (which I also showed on Thursday). The line rebounded from 54% just prior to the November election to 76% during February. March's modest setback lowered the line to 64% where it bottomed. This week's upturn shows the red line rising again. That's a good sign for the market. It may also be a good sign for the stocks that are testing or trying to regain their 200-day averages. The blue line at the bottom of Chart 5 shows the percent of NYSE stocks above their 50-day average. That more volatile line fell from 80% to 45% during the first quarter which is a relatively mild setback. And it appears to be climbing again as well. Also good for stocks.
If you trade stocks you're going to run into situations where you question whether or not you are making good decisions. This could include identifying entry levels and setting price targets and stop losses. It could also include pulling the trigger on a trade, taking a loss or even locking in profits which is sometimes easier said than done.
At EarningsBeats we issue trade alerts to our members and every one carries with it potential risks and rewards. A trade can go against you quickly or it might work out just like you had imagined. But every trade alert issued has been studied carefully to help determine entry prices, stop losses and price targets. It then becomes a matter of trusting the work done and letting the trade develop.
A great example is a stock alert presented to members on March 15. The stock was Cambrex Corp (CBM) where we saw a solid reward to risk candidate with much greater upside than downside potential. Our entry price was $50.20 with a price target of $53.75 and a stop loss of any close below the 200 day moving average which at the time was $49.91. In this case it was over a 10 to 1 reward to risk; I like those odds.
You can see in the chart below that the stock hugged its 200 day for 9 trading days in a row. BUT...it never hit the stop loss level. Still, it took some nerve to hang in! Then finally the stock made the move we were looking for as it moved back above both its 20 and 50 day moving averages.
The key to succeeding with this particular trade was to trust the work that was done to put it in play in the first place. The downside risk was quite low relative to the potential upside reward but it also required a lot of discipline and nerves of steel as the stock tiptoed on its 200 day.
As part of the EarningsBeats service we search for those stocks that beat earnings expectations and also have strong technical charts. These become part of our "Candidate Tracker" and some of these become trade alerts just like CBM did. If you would like to see a sample just click here.
There are many things to consider when making a trade, including identifying strong reward to risk candidates, setting entry, target and stop loss levels. But if you trust your work and remain disciplined throughout the process you will greatly increase your chances for success.
At your service,
The Stock Market is a real-time place to see the true spirit of Greed and Fear come to the forefront. Technicians use the words Supply and Demand to study the market characteristics. Over the last few years, one of the most interesting areas of the market is the niche ETF for finding specific areas of investor interest.
This week marks the rollout of the 'Horizons Medical Marijuana Life Sciences' ETF (HMMJ.TO). For anyone interested in the ETF, a look inside its contents would probably be more helpful than the buzz around the concept.
As a technician, I have compiled my own list of 35 stocks into a marijuana Chartlist. Here is the performance for the last month. 80% of them were lower and half of them were lower by 10% or more. Notice all four of the big gainers had a closing price less than $3.00.
Patience was rewarded today as the Long-Term Price Momentum Oscillator (PMO) confirmed a BUY signal that had been pending most of the month. We don't log new monthly PMO signals until the chart goes "final" on the last trading day of the month. Similarly, we don't log new weekly PMO signals until the chart goes final on the last trading day of the week.
The Stochastic Oscillator is best known as a momentum indicator, but a careful look at the formula reveals that it can also be used to measure trend strength. As noted in a previous article on MACD, it is imperative that chartists fully understand an indicator to get the most out of it. The Stochastic Oscillator is a simple indicator that is really easy to understand. This article will start with a basic explanation and a few formula examples to explain the mechanics of the indicator. I will then show how it can be used to measure trend direction and strength over different timeframes.
What does the Stochastic Oscillator Actually Measure?
Let’s first look at the Fast Stochastic Oscillator (Fast STO) to learn exactly what it is telling us. The Fast STO measures the level of the close relative to the high-low range over a specific period. In other words, the high-low range is the scale and Fast STO plots the position of the close on this scale The classic 14-day setting measures the position of the close relative to the 14-day high-low range. In general, the indicator is above 80 when the close is near the 14-day high and below 20 when the close is near the 14-day low.
The formula for the 14-day Fast STO is the close less the 14-day low divided by the 14-day high-low range. In mathematical terms, it looks something like this: (Close - 14-day Low)/(14-day High - 14-day Low). The result is then multiplied by 100 to slide the decimal point two places. Three sample calculations are shown below with three bars for a visual. The vertical lines represent the scale (high-low range) and the horizontal lines mark the close.
The chart below shows Target with four different fourteen day periods on the price chart (shaded areas) and the corresponding levels for Fast STO. The first period shows a trading range and the close is near the middle of this range (Fast STO = 53). The second period shows the close near the upper end of the 14-day range and Fast STO is above 80. The third period shows the close near the low end of the 14-day range and Fast STO is below 20. Prices continued lower in the fourth period and the Fast STO remained below 20 for an extended time.
Slow STO, %D and %K
The Slow Stochastic Oscillator (Slow STO), which is the most popular version, smooths the Fast STO by applying a 3-day EMA. George Lane, creator of the indicator, also added a 3-day EMA as a signal line. Lane labelled Fast STO and Slow STO as %K, while the 3-day EMA is referred to as %D. In general, I prefer Slow STO because it filters out some of the noise. I do not use the signal line (%K) because I am not looking for momentum turns. %K, therefore, will be set to 1, which means it is a 1-day EMA of %D and the same as Slow STO. The chart below shows Google with three different Stochastic Oscillator to illustrate the differences.
Using Slow STO to Define the Trend
In general, prices are moving higher when Slow STO stays near the top of its range and lower when the indicator remains near the bottom of its range. Chartists can use a 125-day Slow STO to define the six month trend. In general, I would consider the trend up as long as Slow STO holds above 70. Conversely, the trend is considered down when Slow STO remains below 30. The first chart shows JP Morgan (JPM) with the 125-day Slow STO moving above 70 in mid July and holding above this level the next eight months as a strong uptrend unfolded. This is a stock we want to have on our watchlist for bullish opportunities, such as pullbacks within an uptrend.
The second chart shows Gilead Sciences (GILD) with a steady downtrend from May 2016 to March 2017. The 125-day Slow STO moved above 30 four times during this downtrend, but did not hold above 30 for long and did not come close to breaking into the top half of the Stochastic range (above 50). Notice that the stock formed lower lows and lower highs as Slow STO floundered in the bottom third of its range. Gilead is clearly a stock to avoid because of the strong downtrend.
Indentifying 52-week Highs (and Lows)
Stocks trading near 52-week highs are clearly in strong uptrends and Slow STO can be used to capture this kind of strength. Set at 250 days or 52 weeks, the indicator covers one year and measures the position of the close relative to the one year high-low range. Stocks with a Slow STO above 90 are close to 52-week highs and in strong uptrends. Conversely, stocks with a Slow STO near 10 are close to 52-week lows and in strong downtrends. This is valuable information that chartists can use as part of a trading strategy. The example below shows Apple nearing a 52-week high in mid December as the 250-day Slow STO exceeded 90. The indicator remained above 90 as Apple pushed ahead to 52-week highs in January, February and March.
The Stochastic Oscillator is clearly more than just a short-term momentum oscillator. This becomes clear when we fully understand the formula and timeframe settings. Chartists can use 21 days to determine the position of the close relative to the high-low range over the past month. I prefer to use it as a long-term measure of trend strength with look-back periods that cover six to twelve months (125 to 250 days). The level of smoothing is also a choice to consider. The Fast STO has no smoothing and will hit 100 when the close is at the exact high of the look-back period. Slow STO, which has built in smoothing, will not hit 100 as often. Chartists can also consider tinkering with this smoothing parameter. Bottom Line: the Stochastic Oscillator can be used to measure trend strength and find stocks in strong uptrends.
Follow me on Twitter @arthurhill - Keep up with my 140 character commentaries.
Thanks for tuning in and have a good day!
--Arthur Hill CMT
Plan your Trade and Trade your Plan
Over the past year, the Dow Jones U.S. Apparel Retailers Index ($DJUSRA) has been one of only four industry groups in the consumer discretionary space that has posted a loss. And over the past three months the DJUSRA is the worst performing area of consumer discretionary. But keep in mind that March is the best calendar month of the year for apparel retail stocks historically and April is solid as well. From a longer-term perspective, there's a bullish upsloping inverse head & shoulders pattern in play so I'm not ready to write off this group. Check out the chart:
Chart 1 shows the FTSE All-World Stock Index ($FAW) trading at a new record high. The FAW includes stocks from 47 developed and emerging markets. It just recently cleared its 2015 high which resumed its major uptrend. That's a positive sign because it shows that the stock market rally is global in scope. The FAW, however, is heavily influenced by the U.S. market which is also at record highs. A better way to judge the performance of foreign stocks it to look at global stock indexes that don't include the U.S.
Foreign stocks are on the rise as well. Chart 2 shows the Vanguard FTSE All-World ex-US ETF (VEU) rising to the highest level since June 2015. It still needs to clear its 2014-2015 highs, but is heading in that direction. The VEU is a combination of foreign developed and emerging markets. Interestingly, the VEU has actually done better than the U.S. this year. The VEU is up 8.5% in 2017 versus a 6.3% gain for the S&P 500. Most of those gains have come from emerging markets which are up 13% this year. Most of those gains have come from Asian countries like China, South Korea, Taiwan, and India. Commodity exporters like Brazil and Russia have pulled back with commodity prices, but are starting to bounce again. Foreign developed stocks have also outpaced the U.S. this year by 1.3%. Emerging Markets and EAFE iShares (EEM and EFA) have both reached the highest levels since the middle of 2014.
As part of our service at EarningsBeats.com we send trade alerts to our members on stocks that beat earnings expectations. But before we notify members of any trade candidates we look closely at the "Reward to Risk' ratio as we want to make sure it is favorable before we pull the trigger.
The basic concept is this. We only want to get involved in trades that have much more upside than downside potential. At a bare minimum it needs to be 2 to 1 but 3 to 1 and greater is even better.
As an example, we issued a trade alert to members last week on ARNC. We had two entry levels, both that hit, at a blended price of $26.59. Our price target was $29.85 while our stop loss was $26.07. So, if our price target hit it would be a gain of $3.26 and if our stop loss hit it would be a loss of .52. So in this case we had a slightly greater than 6 to 1 reward to risk ratio. I like those odds.
When we come up with a stop loss it is listed as either "Intra Day" or as a "Closing Stop." An Intra Day stop means a stock moves below a specific level during the course of the trading day. A Closing Stop means the stock closes below a specific level when the closing bell rings. Both have merits but we have found that stocks that move below key support levels during the trading day can often recover by day's end.
We never set a stop unless their is a very specific and valid reason to do so. In other words, our stops are going to be at key price or technical support levels; no guessing allowed!
I'm going to conduct a Webinar on Tuesday, March 21 at 4:30 PM eastern. During this FREE event I will be sharing with attendees some examples of high reward to risk trading candidates including identifying appropriate target prices and stop loss levels. If you would like to join me for this event just click here to register.
If you're going to put your money to work you might as well have as much upside to downside potential in your favor. Obviously not every trade is going to work out but if you do your homework in advance you can maximize your reward to risk before you put your money on the line.