Issue Date: 2004 Feb 21 

Chip Anderson: Scanning for P&F Changes
John Murphy: Consumer Staples Are Top Sector
StockCharts Web Site News: SharpCharts2 Beta 1 Released!
Richard Rhodes: Taking a Long-Term View of the Nasdaq 100
Carl Swenlin: Advance-Decline Line: Ratio Vs. Arithmetic
Arthur Hill: Nasdaq Breadth points a Correction or Consolidation

LAST CHANCE! "Intermarket Analysis, Profiting from Global Market Relationships" is a complete update to John Murphy's 1990 classic. New charts, new commentary, new linkages - explained only as a John can. Now on sale for 30% off - only $48.95! But hurry, this special will end on February 29th!

Hello Fellow ChartWatchers!

The market has started moving sideways again this week and is causing many shorter-term technical signals to move from bullish to neutral right now. The longer term picture remains bullish, but that could change next week when several key support levels are tested. On the sector front, energy and basic materials remain strong.

Scanning for P&F Changes

Point and Figures charts are invaluable tools for analyzing a stock. By automatically filtering out the unimportant price movements from a chart, P&F charts keep the savvy ChartWatcher focused on the "meat" of what is happening with the underlying stock. An important consequence of this "filtering" behavior is that P&F Charts may go days, weeks, or even months without changing. If a stock continues to move sideways, the P&F chart simply will not change. (Click here to learn more about P&F chart construction.)

That brings us to this week's viewer question -

"I primarily use the point and figure charts as I have for years. Is there a way to set up a report that would indicate on a daily basis those charts in my favorite list where an entry of some sort has taken place, such as a new pattern, new price objective, new X or O entry." - J.Z.

OK J.Z., no problem. First note that there are four different ways that a P&F Chart can "change":

 - It can add one or more Xs to the current column of Xs.
 - It can add one or more Os to the current column of Os.
 - It can reverse into a new column of Xs.
 - It can reverse into a new column of Os.

Our Scan Engine can easily detect if any of those conditions occurred in any of the stocks in any of your lists. Here are the broad steps that are involved ("Extra" membership required):

1.) Create a new Favorites list and populate it with the stocks you are interested in monitoring. For the purposes of this example, I'm using a list that contains the Nasdaq 100. (I created quickly by selecting "Nasdaq 100" from the "Add Tickers From" dropdown at the bottom of the "Edit List" view of a brand new list.)

2.) Create a new scan using the Standard Scan Interface.

3.) Clear out all of the scan criteria using the "Clear All Criteria" button.

4.) Select the list you are interested in using from the "Group" dropdown in the "Global Filters" section.

5.) To scan for the first type of change - adding an X - select "Charts In X" in the first and second dropdowns in the "Predefined Chart Patterns" section, then, next to the second dropdown, change the 0 in "0 days ago" to a 1. Next, in the "Additional Technical Expressions" area, select "P&F Box Cnt" in the first indicators box, select "!=" from the corresponding operators dropdown, select "P&F Box Cnt" again from the second indicators box and change "0 Days ago" to "1 Days ago". Finally, click the "Update Criteria" button. If you did things correctly, you should see something like this:

(Extra members can click here to see the Nasdaq 100 version of this same scan.)

So, this scan finds stocks whose P&F chart had a column of X's on the right side for both yesterday and today AND had a change in the number of filled boxes (i.e. X's) in that final column. Extra members can now run that scan or, better yet, save it into their account for later use.

6.) You can click here to see a very similar scan that finds the stocks that added at least one O to their chart today.

7.) Now let's create a scan for stocks that have reversed into a new column of X's today. Again, create a new Standard Scan and click "Clear All Criteria", then select your target list from the "Group" dropdown. In the "Predefined Chart Patterns" section select "Chart in Xs" from the first dropdown, then select "Chart In Os" from the second dropdown and change "0 days ago" to "1 days ago". Press "Update Criteria" and see if the results look something like this:

(Here's the link for all you lazy people ;-)

Hopefully, that scan is pretty self explanatory. Again, you can save it into your account for quick access later.

8.) Just switch the position of the "Chart In Xs" and "Chart In Os" patterns in the above scan to create the final piece of the puzzle.

Once you've created and saved those four scans, it is a simple matter to run any of them each day to see which charts have changed and in what way. If running four scans is too much work for you, you could combine each of these scans into one giant scan using our Advanced Scan Interface, but I'll leave that as an exercise for the reader.

The ability to include P&F criteria in a scan is a very powerful feature of StockCharts.com. I urge you to review the scans I listed above, study the results that they provide and then customize them to fit your style.

- Chip Anderson

Consumer Staples Are Top Sector

STOCKING UP ON CONSUMER STAPLES... This is considered a defensive sector since it includes stocks tied to beverages, food, tobacco, drugs, and personal products. People need those products in good times and bad. As a result, they tend to underperform when the market is strong, and outperform when it turns weak. The rising relative strength line in the first chart below shows the Consumer Staples Select Sector SPDR assuming a leadership role about a month ago. Since then, this has been the market's strongest sector. Consumer staples were also the top sector for the past week. A longer-term view of the Staples/S&P 500 ratio in the second chart makes that point. The ratio turned up in April 2000 (first red arrow) as the bear market in stocks started and money rotated to defensive stocks. The ratio peaked in October 2002 (green arrow) as the market bottomed as investors turned more aggressive. The upturn in the ratio early in 2004 (second red arrow) is a sign that investors are turning more defensive again.

- John Murphy


Want more from John? Wouldn't it be great to read John's thoughts on the leading Consumer Staples stocks right now? How about knowing which sector John thinks is pulling the market lower these days? John's subscribers already know these answers. You should too!
Subscribe to John Murphy's Market Message


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SHARPCHARTS2 BETA 1 RELEASED! - Announcing the next step in our quest to provide you with the best charting tools anywhere on the web. We call it SharpCharts 2 and it is significantly better than our award-winning current version. Today we are releasing the first in a series of "Beta" versions of SharpCharts 2.

A "Beta" version is an unofficial, early version of the software that demonstrates what SharpCharts2 can do in limited ways. Beta versions are not as fast or as stable as an official version and they should not be relied on to make financial decisions, but they give you a "sneak peek" at what is coming and the allow you to send us feedback before the final version is released.

The current plan is to release several Beta versions of SharpCharts2 before the official version is made available later this year. Each Beta will build on the previous one by providing more and more capabilities. The "Beta 1" version that we are releasing today tries to duplicate the features of our current SharpCharts charting engine while providing you with charts that look significantly better visually. You'll notice that the controls are identical to our current charting workbench - that's deliberate. The goal of Beta 1 is to make sure that SharpCharts2 can do everything that SharpCharts can do. All of the great new features we've been working on will start to appear with the release of the next Beta version - hopefully sometime in March.

Known Limitations of Beta 1:
- You cannot store charts in a favorites list
- You cannot annotate charts
- You cannot store chart settings
- The Rabbitt Q-Rank indicator isn't available
- The "ZigZag w/Retracements" indicator isn't available
- The Cumulative chart style isn't available
- Mount Rainier is missing from the Rainier color scheme
- You cannot bookmark charts, email chart links to others, or post them on bulletin boards

We expect all of those limitations to disappear by the time the official version comes out.

To start using SharpCharts2, visit this link: http://stockcharts.com/h/sc
Don't forget to send us feedback on what you see!

Enjoy!

 

Taking a Long-Term View of the Nasdaq 100

Today we step back and take a very long-term viewpoint of exactly where the NASDAQ 100 stands. At this point, several issues of relevance are conspiring to increase the probability for lower prices.
1) First, the longer-term trendline off the 1994 and 2001 lows provides and overhead "cap" to sharp gains from current levels.
2) Secondly, the downward sloping trendline off the highs intersects at current levels, should provide resistance.
3) Thirdly, the bearish "rising wedge" continuation pattern, which once trendline support is violated - then the probability of lower prices increases, with an outside chance at new lows.
4) And finally, the 5-month RSI is trading over 80.0.

Therefore - from a purely trading perspective: the probability of lower prices is slowly, but surely increasing - sufficiently so that long positions should be "pared back", and those inclined to more aggressive trades should consider short positions. Our target is the 25-month moving average currently at 1196 - a drop of 19% from Friday's levels. At that point, the manner in which it is tested will determine whether we will become buyers...or simply allow our short positions to remain.

- Richard Rhodes

Want more of Richard's award-winning advice? Check out his Web site: TheRhodesReport.com


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Advance-Decline Line: Ratio Vs. Arithmetic

The Advance-Decline line has traditionally been calculated by subtracting the daily declining issues from advancing issues and adding the result to the prior day's cumulative value. There are two things that have affected the Advance-Decline Line over time: (1) The gradual increase in the number of issues being traded; and (2) the introduction of decimalization in 2001. The increase of issues traded results in a greater net A-D for the same ratio of advances and declines, and decimalization will affect advance or decline status by moves of only a penny. Both of these elements make historical comparisons impossible because of the increases in scale of more recent data.

One way to greatly reduce the affect of these two elements is to begin with a ratio calculation rather than the old arithmetic one. Instead of:

Advances - Declines

use

(Advances - Declines) / (Advances + Declines)

Once you have the ratio result, apply it to the calculation of any and all breadth indicators.

Above are two charts comparing the A-D Line as calculated by both methods. The first chart shows the comparison going back to 1926, and the distortions of recent activity are clear. However, the second chart shows the most recent 3-year period, and it is virtually impossible to tell the two apart. For this reason we still use the arithmetic version for our short-term charts, but a long-term chart of the ratio version is now available.

- Carl Swenlin

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

Nasdaq Breadth points a Correction or Consolidation

The AD Volume Line is calculated in two steps. First, the total volume for declining stocks (DV) is subtracted from the total for advancing stocks (AV). Second, the result is either added or subtracted to form a cumulative or running total. The resulting AD Volume Line rises when AV is greater than DV and declines when AV is less than DV. Volume is like fuel for the market and the AD Volume Line tells us which stocks (advancing or declining) are getting the most fuel.

With the February low, the AD Volume Line for the Nasdaq Composite broke below the March-03 trendline. In addition, the indicator broke below the 50-day EMA for the second time this month. Prior to the 50-day EMA held since April and was successfully tested in August, October and December (gray arrows). The trendline break and move below the 50-day EMA signal that volume in declining stocks is outpacing volume in advancing stocks. With more fuel powering declining stocks, traders should prepare for a correction or consolidation in the Nasdaq Composite.

- Arthur Hill

For more of Arthur's insights, check out his Web site: TDTrader.com


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