I was first introduced to Relative Rotation Graphs (RRGs) at the 2014 ChartCon. I was blown away by its simplicity and visual impact. Julius de Kempenaer, a fellow blogger here at StockCharts developed RRGs. I would direct you to ChartSchool to read more about the inner workings that create these graphs. I was recently asked if I could put together an RRG chart for the members of the DecisionPoint Market/Sector Summary. After writing about sector rotation on Tuesday, this fit in very well as an expansion of that article.
If you haven't gotten John Murphy's Book, Trading with Intermarket Analysis, I highly recommend you do. He talks at length about sector rotation and how it can help you determine where the market is and could likely be headed. The graphic above shows us the economic cycle and which sectors do well and which do not during those time periods. I review the DecisionPoint Market/Sector Summary posture table daily and publish it in the DP Alert blog daily (you can find the full report in the DP Reports blog). It lists all of the major sectors and their current Trend Model signals.
In a post-Brexit article I wrote back in July I concluded that we were in a cyclical bull market that launched off the February lows. At the time there had been a decisive breakout above important resistance at about SPY 208.00. From there the campaign-burdened market meandered sideways until testing the support in early-November. At that point the bull market resumed, and has gained +27% since its February launch. There was another breakout in November, followed by a retest of support. Last week the rally resumed with great exuberance, showing the bull to be fully in command.
I recently received a tweet (follow me on Twitter @_DecisionPoint) thanking me for an updated chart of UNG on November 21st which helped him bag a 20% gain. Back in late October, I wrote an article on Natural Gas (UNG) discussing a possible bull market move to $12 if it broke out above $9.50. It broke out, but immediately dropped back below and triggered my stop. Chalking it up to false signals, I hadn't revisited the chart since Halloween. However, my readers of course did when they read the article in the archives, hence the follow-up question sent on Twitter.
The market has rallied about +6.5% from the November low, but less than half of that can be attributed to the election results. As of the close on Tuesday, November 8, it was widely believed that Clinton would be the winner. When the opposite result emerged, the market rallied an additional +3.6%. By itself, this was not a spectacular advance, and a pullback began after Wednesday's intraday high. Is this a medium-term top, or merely a technical correction?
Readers of my DecisionPoint Alert blog have been watching the head and shoulders pattern forming on USO and Oil. There are plenty of fundamental factors that go into the pricing of Oil, but at this time they have lined up together with the technicals to form this bearish head and shoulders pattern.
On Friday gold entered a bear market when the 50EMA crossed down through the 200EMA. The preceding bull market began with a rally off the December 2015 lows and hit its high in July after a more than +30% advance. From there it went into correction mode for five months, then slid into bear mode with the 50/200 sell signal. An important line of support at about 1200 was violated a day before.
Since the election and the explosive rally that resulted, volume has been slowly trending lower. This isn't a phenomenon specific to one index, it has been occurring in three of the large-cap indexes we track using the DecisionPoint Scoreboards. Some have pointed to holiday trading as a possibility. There was the three-day Veteran's Day weekend right after the election and now we are in the midst of Thanksgiving week. Looking at the charts, the decline in volume happened almost immediately after the first big explosive rally move. Subsequently, the Dow and SPX made new record highs...yet volume receded.
When we discuss bear markets, we usually think of the major market indexes, the S&P 500 Index in particular; however, any price index -- market sector or even an individual stock -- can be experiencing a bear market, even in the midst of a broad-based bull market like we are experiencing now. In my opinion, an objective definition of a bear market is when the 50EMA of price is below the 200EMA (commonly known as the "Death Cross"). This week long bonds had a 50/200 downside crossover, which confirms that, yes, the price drop we see is indeed as bad as it looks. Long bonds are in a bear market.
Today the NDX switched to a Short-Term Trend Model BUY signal. This signal was triggered when the 5-EMA crossed above the 20-EMA. I don't use STTM signals for trading, but they do work as a temperature gauge. This new STTM BUY signal tells us that the NDX may be waking up. In fact, XLK just garnered a new Intermediate-Term Trend Model (ITTM) BUY Signal as the 20-EMA just crossed back above the 50-EMA. The NDX is gearing up for an ITTM BUY signal as well. Even better, I also noticed possible bullish double-bottom patterns on both the NDX and XLK.