Is Technical Analysis Relevant if the Fed is Controlling the Stock Market?

Short answer: Yes. First, it is a market of stocks, not a "stock market". It is highly unlikely that the Fed is controlling the business decisions of Delta, Alcoa, Micron, Avon, Whole Foods, Mattel and other companies. Some stocks may be more interest rate sensitive than others, but Fed policy is probably not part of the boardroom debate at most companies. The PerfChart below shows year-to-date performance for ten stocks in the S&P 500. Is the Fed responsible for this performance differential? For the most part, the stock market is made up of individual stocks with company and industry group specific issues that are more important than Fed policy. 

Further more, if the Fed is indeed controlling the market, then it will show up in the price charts and chartists will not miss a thing. This is the beauty of technical analysis. As technicians, we are not concerned with who is buying or selling or why they are buying or selling. We are only concerned with the supply-demand dynamics that drive equity prices. 

Keeping up with the Fed and fundamental issues is a gargantuan task fraught with innuendo and complexity. Not only does one have to get these issues correct, but one also has to correctly predict the market's reaction to these issues. That puts two variables at work. Who knows when buy backs will stop or earnings will slow? Even if we get earnings correct, who knows what PE the market will assign to those earnings? Who knows when the Fed will actually tighten? And buy how much and how fast? Bernanke started the taper talk in May 2013 when the S&P 500 was around 1650. Taper talk was reiterated in June and November, and tapering finally began in December 2013. The index dipped in June, but this did not derail the bull market and the S&P 500 hit 2000 in September. It is not the news that matters. Instead, it is the market's reaction to the news. 

What really drives the stock market as a whole? It could be earnings, share buy backs, the Fed, momentum or a combination of factors. My best guess would be a combination. Note that total 2013 earnings for the companies in the S&P 500 hit $107, which was a record. The index finished 2013 at 1848, which was also a record. It seems logical that the index would finish at a record when earnings are at a record. It is also worth noting that companies bought back over $400 billion worth of stock in 2013. This also helped the stock market move higher because there was less supply. Throw in an accommodative Fed, some price momentum and the most hated bull market in years and we had a pretty good backdrop for an uptrend in the S&P 500. 

Truth be told, we cannot know it all and technical analysis helps investors cut to the chase. Technical analysis is a great tool because price does in fact know it all. The basic assumption behind technical analysis is that all known information is reflected in the price. All buyers and sellers have come together and agreed on a price that has an actual print. This makes price the most important of all indicators. Price does indeed fluctuate along with supply and demand, but trends and patterns do take shape over time. 

Technical analysis can help investors in at least three areas: stock selection, risk control and broad market timing. 

  • Stock selection: technical analysis gives investors the tools to find stocks in uptrends and focus on stocks that show relative strength. 
  • Risk control: technical analysis gives investors timing tools that help with entry points, risk-reward assessment and exit points. 
  • Broad market timing: simple trend following strategies would have kept investors out of the last two bear markets and prevented large drawdowns. 

As the example above shows, a simple strategy using 12-month price channels would have kept investors out of the 2001-2002 bear market and out of the 2008-2009 bear market. The strategy turns bullish on a monthly close above the upper line and bearish on a close below the lower line. Preservation of capital is perhaps the single most important aspect of portfolio management. As the very least, technical analysis gives investors the tools to preserve their capital by avoiding large drawdowns.   

Even investors using fundamental analysis can benefit from technical analysis. A 2013 research paper showed that portfolio managers using technical analysis had an edge over portfolio managers that did not employ technical analysis. Below is the abstract and link: 

Based on a study of more than 10,000 actively managed equity and balanced funds, including about one-third of which employ technical analysis, the authors compared the investment performance of funds that use technical analysis versus those that do not using five metrics. They found that funds using technical analysis provided a meaningful advantage to their investors (link). 

John Bollinger CMT CFA promotes the school of rational analysis, which combines fundamental analysis and technical analysis. Also note that the Chartered Financial Analyst (CFA) exam includes a section on....gasp....technical analysis. This section asserts that markets and stocks move in trends, and shifts in supply and demand alter these trends. 

The market clearly has a message and that message is communicated through price action. Technical analysis teaches us how to interpret that message so we can become well-rounded traders and investors. May the trend be with you!

-Arthur Hill CMT and Cool-Aid Drinker

Where Can I get an Overview of Sector Breadth Indicators? (video)

Chartists can find sector breadth charts in the CandleGlance Groups on the Free Charts page. The CandleGlance Groups can be found at the top of the middle column. Click the Sector Breadth Indexes link and you will shown 27 breadth charts covering the 9 sector SPDRs. These include the AD Line, AD Volume Line and High-Low Line. The examples below just show the AD Lines and AD Volume Lines. 

The screen shot above shows these indicators for the Energy SPDR (XLE) and the Consumer Staples SPDR (XLP). Right away we can see which sector is strong and which is weak. The AD Line, AD Volume Line and High-Low Line for the Consumer Staples SPDR hit new highs this week and remain in strong uptrends. The AD Line and AD Volume Line for the Energy SPDR (XLE) peaked in late August and moved sharply lower in September. The High-Low Line turned down last week. 

These charts can also be used to identify breadth breakouts and relative strength. The screen shot above shows the AD Line for the Industrials SPDR (XLI) breaking out with a surge above the early September highs. The Finance SPDR (XLF) is one of the strongest sectors. Notice that the AD Line broke to new highs this week and the AD Volume Line broke to new highs last week. 

Fastest 2 Minutes On StockCharts

StockCharts is growing so quickly, there are exciting new features showing up all the time.  Sometimes it takes a quick little review to show how to find things. Since the addition of DecisionPoint charts, there are lots of ticker symbols that are new.

The video below will clarify how to do this quickly. 


If you have other questions, see our video library. Arthur has done a massive amount of work to quickly demonstrate the features.

Here is the link to the Videos. Using StockCharts Videos. This link can also be found on your members page.

Good trading,

Greg Schnell, CMT


How can I use the StockCharts Technical Rank with the Market Carpet? (with video)

Chartists can analyze relative performance by viewing the StockCharts Technical Rank (SCTR) in a Sector Market Carpet. There are two ways to measure relative performance. First, chartists can compare the absolute SCTR values, which range from zero to one hundred. Low values (0 to 30) signal relative weakness, while high values (70 to 100) signal relative strength. Second, chartist can compare the change in SCTR values. A big gain in the SCTR signals relative strength for that period, while a big loss signals relative weakness for that period. Let's look at some examples. 

The chart above shows the Sector Market Carpet with the SCTR indicator in absolute mode. Notice that SCTR is visible in the drop down at the upper left and the Delta sign is NOT shaded, which means it is NOT selected. The strongest stocks have dark green squares and the weakest have dark red. The tables on the right show the top and bottom five. 

The second chart shows the SCTR indicator in change mode. Notice that the Delta signal is shaded, which means it is selected. Chartists can use the slider at the bottom right to set the date range. I have chosen five days to measure a one week change in the SCTR. The table on the right shows the five biggest gainers and the five biggest losers. Three of the five biggest losers come from energy. Two of the five biggest gainers come from finance. Don't forget that there are many ways to change the viewing options. First, hover over the carpet and right click. Second, use the arrow at the top left to switch between sector overview and individual stocks. Third, double click on any square to focus on that particular sector. You can learn more about Market Carpets by viewing our video tutorials


How Can I find Dividends and Other Price Adjustments? (w/video)

Chartists can view dividends and other price adjustments two ways. First, you can go to the "recent data adjustments" page and enter a symbol to see recent adjustments. A link to this page can be found on the right navigation column under "additional tools & reports". The example below shows the 20+ YR T-Bond ETF (TLT) with the payouts over the last four months. Notice that TLT pays a dividend every month. 

Second, chartists can pull up a SharpChart and select "events" as an overlay. This will add a dotted line on the event date and the amount at the bottom. This method makes it easy to see how often there is a payout and how much. If you would like to see a chart with unadjusted data, simply prefix the symbol with an underscore. For example, _TLT would show a TLT chart with unadjusted data. 


Hidden Gems on the SharpCharts Annotation Bar (w/ video)

SharpCharts users can access several "hidden" annotation tools by hovering over icons that have small arrows in the right hand corner. First, create a SharpChart and click the annotate link to open the ChartNotes workbench. There is a row of annotation icons just above the chart on the left side. Some of these icons have small arrows that point to more icons just below. Simply hover over these icons to reveal the hidden gems. The example below shows four examples. First, the Parabola Tool can be found under the Trend Line icon. Second, the Triangle Tool can be found just under the Box Tool. Third, three other Fibonacci tools can be found under the Fibonacci Retracements Tool. And finally, the Percent Change Tool can be found just under the Auto Support-Resistance Tool. 

How Can I Get Industry and Sector Details on a Chart? (w/video)

Chartists can get industry and sector information by using two pseudo symbols and setting the legends to verbose. The default setting for legends shows basic information that includes the security symbols and indicators. This setting is great for basic charting, but might not be enough when using pseudo symbols such as $INDUSTRY and $SECTOR. These symbols plot the industry group and sector associated with a stock. Note that they do not work for ETFs or indices. Chartists can add these symbols by choosing "price" as an indicator and entering $INDUSTRY or $SECTOR in the parameters box. 

The image above shows two half charts with default legends on the left and verbose legends on the right. Starting at the top, notice that a verbose legend turns INTC into Intel Corp (the full name). Further down the chart, notice that $SPX becomes S&P 500 Large Cap Index. And perhaps most importantly, $DJUSCC becomes Dow Jones Semiconductors Index and XLK becomes Technology Select Sector SPDR. This makes it easy to see the appropriate industry group or sector when using $INDUSTRY and $SECTOR symbols. As an added bonus, notice that the industry group and sector automatically change when the main symbol changes. For example, if I changed to Amgen (AMGN), $INDUSTRY would automatically change to Dow Jones Biotechnology Index and $SECTOR would change to Health Care Select Sector SPDR. The image below shows how to change the legends to verbose and add $INDUSRY or $SECTOR to a chart. 

What Indicator Can I use to Set a Trailing Stop-loss? (w/video)

Chartists can add Chandelier Exits as an "overlay" to set a trailing stop-loss for long and short positions. Chandelier Exits are dynamic because they are based on the Average True Range (ATR), which is a measure of volatility. The default Chandelier Exit is designed to set a trailing stop-loss for long positions. A 22-period Chandelier Exit for long positions would set a trailing stop-loss three 22-period ATR values below the 22-period high. The exit will remain below prices during an uptrend and rise as the uptrend continues. A move below the Chandelier line could then act as a stop-loss. 

Continue reading "What Indicator Can I use to Set a Trailing Stop-loss? (w/video)" »

What Do Big Moves in StochRSI Tell Us?

StochRSI, or Stochastic RSI, is the Fast Stochastic Oscillator applied to RSI. This makes it a momentum oscillator of a momentum oscillator. Velocity is a term that could be used to describe the momentum of momentum. The chart below shows Carmax (KMX) with RSI(14) in the first indicator window. RSI(14) and the Full Stochastic Oscillator (14,1,1) are in the middle indicator window. StochRSI(14) is in the lower indicator window. This full Stochastic Oscillator setting (14,1,1) is essentially the Fast Stochastic Oscillator. 

First, notice how the Stochastic Oscillator (14,1,1) matches with StochRSI(14). Second, notice that StochRSI oscillates between zero and one. So what does 14-day StochRSI actually tell us? A move to 1 signals that 14-day RSI is at a 14-day high. A move to 0 signals that 14-day RSI  is at a 14-day low. Note that a surge to 1 often signals an upside breakout in RSI, while a plunge to 0 signals a downside break in RSI. These signals can be used to get the jump on a change in momentum. The green areas show StochRSI surging above .80 and the Stochastic Oscillator surging above 80. You can read more about StochRSI in our ChartSchool article.

What Does the Slope Indicator Measure? (w/video)

The Slope indicator measures the slope of a linear regression, which is the line of best fit for a data series. A 20-period Slope, therefore, measures the slope of a 20-day linear regression. As you may remember from your high school math, the slope is the rise over the run for a line. Chartists can plot a linear regression using the Raff Regression Channel on the price chart. Note that the middle line of the Raff Regression Channel is the linear regression. 

The chart below shows 20-period timeframes with the blue horizontal lines and Raff Regression Channels drawn during these timeframes. The Slope indicator is in the lower window. The Raff Regression Channel sloped down in early February and the Slope indicator was negative. The Raff Regression Channel from early February to early March rose and the Slope indicator was positive. In general, a positive slope indicates an uptrend, while a negative slope indicates a downtrend. You can read more on the Slope and the Raff Regression Channel in our ChartSchool.  

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