ChartWatchers Newsletter

Rethinking Support and Resistance for Indexes and ETFs

Just like potato salad in the fridge, support and resistance levels for the S&P 500 have a shelf life and become stale over time. The value of the S&P 500 is based on the price of its individual component stocks. Support and resistance levels for the index loose their importance over time because component stocks and weightings change on a regular basis. The further the look back period, the bigger the transformation in this key index. The S&P 500 in 2017 is not the same as the S&P 500 in 2010, and certainly not the same as the S&P 500 in 1999. Chartists should keep this in mind when considering support and resistance levels for the S&P 500, as well as for other indexes and ETFs based on a basket of stocks. 

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Dow and S&P 500 End Week On a Strong Note

What started off as a soft week for stocks ended on a strong note. Friday's gain was enough to keep stock indexes basically flat for the entire week. But there was some improvement on the charts. The daily bars in Chart 1 show the Dow Industrials jumping 186 points (0.94%) on Friday. That was more than enough to keep it well above its 50-day average and chart support along its January low. Also encouraging was its 14-day RSI line (above chart) bouncing off the 50 level for the second time since mid-January. That's usually a sign of market that's consolidating rather than correcting. The only soft note on Friday was volume, which didn't match the price gains. The S&P 500 also saw improvement. Chart 2 shows the SPX jumping 16 points (0.73%) on Friday. If you look closely at the circled part of the graph, you can see a bullish short-term pattern called an "island reversal". That pattern is formed when a "gap down" (red arrow) is followed within a few days by a "gap up" (green arrow). That pattern usually signals higher prices. My Thursday message expressed concern that the two MACD lines for the SPX had yet to turn positive. The box on top of Chart 2, however, show the two MACD lines converging for the second time in two weeks. It wouldn't take much to turn them positive. Also encouraging was the fact that financials led Friday's rally. So did small caps and transports.

New Highs Expand in the Healthcare Sector

New highs are a sign of underlying strength and chartists can measure this indicator using High-Low Percent. In particular, I like to rank the nine sectors by High-Low Percent or a moving average of High-Low Percent. Note that High-Low Percent equals new highs less new lows divided by total issues. Chartists looking for the weekly leaders in High-Low Percent can look at the 5-day SMA. The table below shows the technology, healthcare and industrials sectors with readings above +6%. As a percentage of component stocks, these three sectors saw the most new highs last week. Consumer discretionary and energy were the weakest because the 5-day SMA of High-Low Percent was below 1%. 

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Stocks Relative to Their 52-Week High-Low - SPX v. NDX

Today during my DecisionPoint Report webinar, I pulled the intermediate-term indicator chart of SPX Stocks Relative to Their 52-Week Hi-Lo to show my viewers the divergences that are all over this chart. After I finished the webinar and reviewed the chart again, I decided it would be great to see what the same chart for the NDX looked like. It's a tale of two very different indexes right now.

What is present in both charts are divergences and confirmations that are quite reliable. The red arrows on the SPX chart below represent negative/bearish divergences. You can see how price tops are rising, but indicator tops are in decline. In the case of the blue arrows, there was a bearish confirmation, meaning declining price tops are matching declining indicator tops. The last few months are our warning that the SPX has problems. 

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BioTechs Are In The Starters Blocks. Will The Run Start Soon?

The Biotech arena has been a "House Of Pain" for investors while the companies continue to deliver all sorts of pain remedies to people worldwide.

But the pattern shaping up on the Biotech ETF's suggests they are one to watch closely. Even the recent tough talking banter couldn't push the Biotechs down. This is the SPDR Biotech ETF (XBI).

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No Chasing Allowed

At EarningsBeats we are steadfast in avoiding being involved in stocks into a company's earning's report because one can never tell how the market will respond to a company's numbers. Case in point is Amazon who reported their numbers last week.

Just look at the chart below and you will see that the stock was poised to break out the day earnings were reported which was February 2. However when the market opened for business the next day the stock fell sharply.

On the other end of the spectrum Apple reported blowout earnings and was rewarded handsomely as you can see below. But if you weren't in the stock prior to the earnings release you missed out on the nice move higher.

You might be cursing yourself for not having faith that AAPL would come through with great numbers and missing out on the strong move higher. On the other hand, how would you have liked to be holding AMZN into its report, only to see it fall $35 when you woke up the next day? See? A crap shoot at best.

This brings up the question; how can I take advantage of Apple's strong showing if I wasn't holding it into its earnings report?

Instead of worrying about missing the move higher on AAPL try to set a strategy to get involved on a pullback. You need to be careful and not premature because there was a great deal of excitement about its numbers; just look at the volume bar which was three to four times greater on the good news. At a minimum you would want to wait to see if the stock pulled back to the bottom of the gap on February 1 which was right around $127. However an even better place to enter would be closer to the 20 day moving average near $122. And that could easily take place and the stock would still be in good technical shape.

At EarningsBeats we track stocks that beat both top and bottom line expectations and we then present these to our members in our Candidate Tracker. This includes date reported, earnings per share (actual vs estimate) and revenues (actual vs estimate.) Some of these stocks become trading alerts that includes entry price, price target and stop loss. If you would like to see a sample of the Candidate Tracker just click here.

Everyone would like to ride a stock higher on strong earnings but no one likes to ride a stock lower when they miss expectations. This is why it makes sense to let a company report its numbers, watch market reaction and then set a strategy to get involved once all the hype settles down.

At your service,

John Hopkins

10-Year Treasury Yield Is Bouncing Off It's 50-Day Average, As is The Dollar

The pullback in Treasury yields (coinciding with an oversold bounce in Treasury prices) may have run its course. Chart 1 shows the 10-Year Treasury Yield ($TNX) bouncing sharply off its 50-day moving average. The two momentum indicators above Chart 1 are also supportive. The 14-day RSI (green) line is back above the 50 level. The more sensitive 14-day Slow Stochastics oscillator (top box) is rebounding from oversold territory below 20. My Saturday message also showed potential support at its November 2015 peak ranging from 2.34% to 2.30%. That may also be providing a floor beneath the TNX. [Pullbacks should find support near previous peaks as resistance turns into support]. Keep in mind also that longer-range weekly and monthly charts support a new uptrend in Treasury yields. Higher yields are pushing Treasury bond prices lower. They may also start to weigh on rate-sensitive stock groups like staples, utilities, and REITS. All three of those groups have rebounded along with bond prices over the past month, but are starting to struggle with resistance at their respective 200-day averages. They could start to weaken along with bond prices. Rising yields should also support financial stocks. Money moving out of bonds may also find its way back into stocks. That's a lot riding on a two-day bounce. But we'll be watching closely over the next week to see if the rebound in yields continue.

THE DOLLAR IS ALSO BOUNCING... Not surprisingly, the U.S. dollar is bouncing with bond yields. That's not surprising since both rose together after the November election, and have pulled back together over the past month. And it too is bouncing off chart support. Chart 2 shows the PowerShares Dollar Fund (UUP) climbing back over its 50-day average. It's also bouncing off a rising trendline drawn under its September/November lows. [Although not shown here, the Dollar Index is also bouncing off a previous peak formed in November 2015]. The dollar hit a 14-year high last month, which means that its long-term trend is higher. Part of the reason for today's dollar buying is tied to weakness in the Euro. The ECB decision to stand pat on monetary policy in the face of rising eurozone inflation stands to widen the interest rate gap between the U.S. (which plans to raise rates) and the eurozone (which doesn't). Rising Treasury yields are also supportive to the dollar.

This Weak Industry Group Approaching Very Bullish Historical Period

There haven't been too many areas of the market that have performed worse than retail stocks over the past month.  While the NASDAQ 100 ($NDX) has jumped to record highs over the past month, weak retail stocks in that index like Dollar Tree (DLTR), Walgreens (WBA), O'Reilly Automotive (ORLY), Tractor Supply (TSCO) and Ross Stores (ROST) are littered among the worst performing NDX stocks.

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5 Boring Uptrends in 5 Exciting Stocks

One would normally not consider Facebook, Alphabet, Apple, Amazon and Microsoft boring. Well, maybe Microsoft. All joking aside, these tech titans are the biggest stocks in the Nasdaq 100 ETF (QQQ) and they account for around 40% of the ETF. This means traders or investors in QQQ best follow these five charts closely. These titans also account for around 13% of the S&P 500 SPDR, which is yet another reason to make these charts part of your routine. 

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