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Chart Watchers - 20 April 2003


Hello Fellow ChartWatchers!

The pre-holiday rally on Thursday extended the current uptrend that stretches back to early March. The NYSE Composite, the Russell 2000, and the Dow Industrials are now all back where they were on January 1st while the Nasdaq composite is up 6.74% year-to-date. More importantly, all of the major averages are testing some important resistance levels right now - the NYSE is back at 5000, the Russell 2000 just broke the 380 level, the S&P 500 is challenging 900 again, and the Nasdaq is taking aim at 1430. Next week will be interesting indeed.

Scanning for Cross-overs

Last newsletter, we talked about scanning for divergences. This time, I wanted to back up a bit and look at a much simpler concept that all Scan Engine users need to master before moving on to the more difficult techniques - the cross-over. Let's look at each of the four basic cross-over scenarios:

1.) The Price Cross-over

A price cross-over happens when a stock's price moves from one side of a price overlay line to the other. A great example of this kind of scan signal is when a stock's price moves above its 200-day moving average. Other examples include prices crossing above the upper Bollinger Band or one moving average crossing above a different moving average. The same technique can be used to scan for Parabolic SAR signals too. As with all cross-over scans, the key is to realize that the scan actually contains two different conditions. For a cross-over to happen, the stock's price must be below the overlay line on one day and above the overlay line on the next day. Breaking that down into statements that the Scan Engine can understand results in something like this:

Close () 1 days ago <= Close SMA (200) 1 days ago
Close () 0 days ago >  Close SMA (200) 0 days ago

Because cross-over clauses are so common in scans, we've added a special comparison operator that reduces a cross-over scan to just one line. Using the "crosses above" operator ('x'), we can also write the above scan like this:

Close () 0 days ago x Close SMA (200) 0 days ago

Much simpler don't you think? In English, you read the above scan as "Today's closing price crosses above today's 200-day simple moving average."

2.) The Constant Cross-over

A constant cross-over happens when an indicator moves above or below a specific level. An example of this kind of cross-over is a when the RSI moves above 50, the center line for that indicator. Other examples include an indicator moving above a predefined over-bought level or below a predefined over-sold level. Again, we can use the "crosses above" operator like this:

RSI(14) 0 days ago x Constant= (50) 0 days ago

Read this as "Today's 14-day RSI crosses above 50."

3.) The Signal line Cross-over

Many technical indicators come with a second line that serves as that indicator's "signal line." The signal line is usually a short-term moving average of the underlying indicator. A signal line cross-over happens when those two lines cross each other. A common example is when the think black line on a MACD plot crosses above the thinner signal line. Other indicators with built-in signal lines include Stochastics, Rate Of Change, On Balance Volume, and Accumulation/Distribution. Here's what a signal line cross-over scan looks like:

MACD(12,26,9) 0 days ago x MACD Signal(12,26,9) 0 days ago

If the indicator that you are using doesn't come with a built in signal line, you can use our advanced scan interface to create your own. For instance, here is a signal line cross over scan for the ADX indicator that uses a 7-day simple MA as the signal line:

[daily adx line(14) crosses daily sma(7,daily adx line(14)]

4.) The Cross-under

So now we've seen how to use the "x" operator to create "crosses above" style scan clauses. But what if we want to scan for situations where one line moves below another line? To create a "crosses under" scan, simply create the equivalent "crosses above" scan and then switch the two expressions on either side of the "x" operator. For example:

To find stocks that have moved below their 200-day average, change the scan we created in section 1 above into this:

Close SMA (200) 0 days ago x Close () 0 days ago

To find stocks whose RSI has just moved below 50, change the scan we created is section 2 above into this:

Constant= (50) 0 days ago x RSI(14) 0 days ago

...and so on.

I hope this will help you create successful cross-over scans using the tools on StockCharts.com. I encourage you to play with these four techniques until you've mastered them. They are both simple and powerful and can help you find lots of great charts to watch, even in this lousy market!

- Chip


TECHNOLOGY AND TRANSPORTS LEAD WEEK'S RALLY

FRIDAY'S TECHNOLOGY LEADERS... Technology stocks were the strongest gainers on Thursday -- and for the entire week. Two of Thursday's biggest gainers were Broadcom and Nokia. Both reported good earnings and were rewarded for it. Broadcom gapped through its 200- day average and its March high. It did so on very strong volume. Nokia broke out of a month-long trading range -- also on big volume. Nokia was the most actively traded big board stock. Rising prices with rising volume are a good technical combination.





MARKET AVERAGES CLOSE STRONG... The market ended the shortened week on a strong note. The Nasdaq gained an impressive 30 points and is nearing a challenge of its recent high. We're also encouraged by the renewed leadership by the Nasdaq market, which outperformed the broader market all week. Thursday's gain of 2.7% compares with a 1.5% gain in the S&P 500 and a 1% gain in the Dow. We started the week saying that leadership by the Nasdaq is usually good for the rest of market. So far it has been. The S&P 500 closed over the 200-day moving average. This is the first "weekly" close over that resistance barrier in more than a year. That's another encouraging sign. Just a reminder that the markets are closed for Good Friday. We'd like to take the opportunity to wish all of our members a Happy Easter and a Happy Passover.





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WHAT'S NEW ON THE WEBSITE


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NIKKEI BEAR MARKET OVER?

The Nikkei has now declined over 80% from its 1989 top, and some think it is time to be looking for a bottom. While it may seem as if "enough is enough" at this point, in my opinion neither the technical nor fundamental evidence supports the idea of a final bottom for the Nikkei.

Japan had its financial mania 10 years ahead of the rest of the world, and the collapse in the value of financial and real estate assets owned by Japanese banks and corporations was reflected in stock prices as well. While the Japanese government has tried to inflate the problem away, it hasn't worked, and the grim reality is that the real prices of the deflated assets have yet to be acknowledged on corporate balance sheets, and stock prices will never recover until this financial "hair ball" has been coughed up. How can investors buy a stock when an honest representation of the company's worth is not available?

The trading range maintained by the Nikkei in the 1990s was an anomaly made possible primarily by a huge global economic expansion, which provided an external updraft that helped support Japan's stock market. When it ended, the Nikkei finally fell through the bottom of the range. Some think that the current global bear market will be worked out in a similar trading range, but without a very favorable economy as a source of support, it is not likely.

Technically, the long-term chart above implies that there are still lower prices ahead before the secular bear market is over. This does not preclude some huge rallies during the process of moving to the final low, but the model of the typical life and death cycle calls for a return to the level of basing and accumulation that took place prior to the launch of the parabolic rise. Optimistically, that level would be at about 5000, but a more pessimistic case can be made for 2000.


Charts courtesy of DecisionPoint.com

Carl's website, DecisionPoint.com, contains the most compehensive collection of market indicator charts on the net. Breadth charts, Investor sentiment charts, P/E charts, even historical charts going back to the 1920s - DecisionPoint has it all!



Market Breadth and Underlying Strength

The Nasdaq and NYSE each trade around 3500 issues per day and their AD Lines reflect the extent of participation, or lack thereof. Strength in the AD Line is evidence of a broad-based advance, while weakness illustrates limited participation. Broad-based advances are subject to continuation and narrow advances are subject to failure.

A look at the NYSE AD Line reveals broad participation in the recent advance. The AD Line formed a higher low in March, moved above its 50-day EMA and recently exceeded its January high. In contrast, the NYSE Composite formed an equal low in March and has yet to exceed its January high. The AD Line shows excellent relative strength, which indicates broad participation and increases the chances of further upside.

In contrast to the NYSE AD Line, the Nasdaq AD Line shows limited participation in the recent advance. With strength over the past week, the AD Line did manage to move above its 50-day EMA and February high. However, the AD Line is near the trendline extending down from early December and remains well below its January high.

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From both a fundamental and technical perspective, we have over the past many months, maintained an overtly bearish stance on the Nasdaq Composite based on a myriad of factors and indicators - and we continue to be so through today. But, that may be changing based upon several very simple observations emerging in longer-term weekly chart - and we do not make this claims lightly. Namely, we find the 20-week stochastic is turning higher from higher levels than the previous low - the 45 level to be exact. We find this to be a departure from past bear market action, and therefore we must be cognizant for the increasing probability a larger rally is underway towards longer-term resistance at the 110-week moving average at 1663. Coincidentally, the 1663 level presents an approximate 50%-62% rally off the Oct-2002 low - and very reasonable for a counter-trend corrective rally to undertake. Furthermore, if one were to examine the daily chart - one would find the Composite has now closed above its 250-day moving average for two consecutive (2) days - a circumstance not seen since Jan-2002 and Mar-2002...but we should caution - each of these periods represented highs. Thus, while the probability has increased of a rally...care should be taken to continually confirm the recent rally.

If you want to read Richard's award winning advise, check out his website: TheRhodesReport.com - Highly recommended!


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A: You know, I get this question all the time and you might be surprised by my answer. While there are lots of books out there that are invaluable, there is one that I feel is the best for newcomers - "The Technical Analysis Course" by Thomas Meyer.
This book is a great, no-nonsense survey of all the major charting techniques and indicators and is filled with detailed sample charts to study. But the best part is that the book is structured like a textbook and includes true-false questions at the end of each chapter that test your understanding of the key points presented. At the end, it also presents a sound strategy for applying technical analysis to any investing strategy. In short, this book has it all and carries my highest recommendation. - Chip

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   Chip


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