Okay, I’ll admit, this was just about the worst-kept secret of the year. That said, it doesn’t detract from the good news. Last week, we launched an expanded partnership with David Keller and officially introduced his new blog, The Mindful Investor.
As many of you know, David was one of our new faces at ChartCon 2018. His presentation was a tremendous hit, and after a flood of positive responses, it was clear that we needed to bring more of his commentary onto the site. David's passion for the markets and his extensive industry experience will allow him to provide all of our StockCharts readers with insights that are unavailable anywhere else. We couldn't be more excited to bring his new blog to life.
By way of an introduction, David currently serves as the President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
Prior to founding his own research firm, David served as Managing Director of Research for Fidelity Investments in Boston, where he managed the Technical Research Department as well as the legendary Fidelity Chart Room. He is a Past President of the Chartered Market Technician (CMT) Association and has lectured on technical analysis and behavioral finance as an Adjunct Professor at the Brandeis University International Business School in Waltham, Massachusetts. Early in his career, David served as a Technical Analysis Application Specialist with Bloomberg L.P. in New York and was a regular contributor to Bloomberg Markets magazine.
With a nearly unmatched knowledge of technical analysis, David is a world-class communicator and a true educator at heart. I’m always struck by the clarity of his writing, and I appreciate the way he demonstrates how to use technical analysis as an instrument to enhance your decision making. In his new blog, David will discuss how to minimize the negative impact of behavioral biases, explore practical techniques to develop a healthy perspective on your past, present, and future, and reflect on the current market environment through the lens of the Mindful Investor.
Editor's Note: This article was originally published in John Murphy's Market Message on Friday, October 5th at 2:02pm ET.
Tuesday's message showed the Russell 2000 Small Cap Indexbeing the first of the major market indexes to fall below its 50-day line, and warned that the selloff in small cap stocks might be a warning that the stock uptrend is losing momentum. Small caps continue to lead large cap stocks lower. Chart 5 shows the RUT falling today to its lowest level in four months and sitting right on its 200-day average. That's an important test for small cap stocks, and possibly for the rest of the market. Small caps have a history of leading stocks lower during market pullbacks and corrections.
Utilities are not the most exciting stocks in the world, but the Utilities SPDR (XLU) is the third best performing sector since February and the second best performing sector last week. The could have further to run. Let's look at the charts.
The first chart shows weekly bars over the last ten years. Prices are moving from the lower left to the upper right and there is clearly a long-term uptrend at work. The red lines show pullbacks within this uptrend, the longest of which was 32 weeks in 2015.
The top window shows XLU without the dividend adjustments (_XLU) and the bottom chart shows total return XLU (with dividends). From the March 2009 low to the November 2017 high, price appreciated 155%. The total return increases to 244% when we add in the dividends, which are clearly important.
The next chart shows unadjusted XLU (_XLU) with an uptrend since early February. There was a correction in May-June and a breakout in late July. A triangle in July and another breakout in early August. Most recently, XLU became short-term oversold as RSI moved below 30 in late September. This oversold condition gave way to a bounce as the ETF surged over 4% from this low.
The Utilities SPDR is in an uptrend since February and one of the leading sectors over the last eight months. The recent oversold bounce is bullish and I would expect XLU to continue its uptrend in the coming days and weeks.
On Trend on Youtube
Available to everyone, On Trend with Arthur Hill airs Tuesdays at 10:30AM ET on StockCharts TV and repeats throughout the week at the same time. Each show is then archived on our Youtube channel.
Topics for Tuesday, October 2nd:
Keeping Perspective (SPY, QQQ, MDY, IJR)
Higher Yields and Rising Energy Prices (plus UUP)
Market Drags (XLF, XLC, IAI, ITB, KRE)
Focus on Energy-Related ETFs (XLE, XES, XOP, FRAK)
#AskArthur: ETFs vs Indexes, ChartLists, Funnymentals
Before heading off on my vacation, I mentioned the breadth indicators for the major exchanges were getting weak, but the breadth for the $SPX was still very bullish. This week the main exchanges saw the breadth crash to twenty-four month lows.
The Bullish percent index for the NASDAQ is now below 50% but more importantly it has declining tops since the beginning of the year. Notice the series of lower highs on the BPI compared to the higher highs on the $COMPQ. This divergence is huge and meaningful. It is very important that the market bounce from here. Notice at the other major tops marked by blue vertical lines, how the declining highs in the Bullish percent Index occurred before the market broke down.
The Percentage of stocks above the 200 DMA in the bottom panel is only at 42% shown in black. THat means that on Friday's close, over 57% of the stocks were under the 200 day moving average! These are not levels to expect new highs from. This also looks like a failed test of the August high on the $COMPQ.
On the NYSE things are a little better, but let's not split hairs. The $NYA index is in trouble as well. The Bullish Percent Index (BPI) has been struggling to get back above 60% for a while. It has also made lower highs in each of the last three months in the zoom box. This divergence is now playing out. While the BPI is still above the early 2018 lows, it is the failure to get strong above 65 % again after that deep low that is meaningful. Looking left, most major tops happened when the deep oversold rallies fail to get broad participation at the next high. We have to be on notice that this is at least a potential major top.
The low reading on the % of stocks above the 200 DMA ($NYA200R) did have a lower reading in late March than the current one. But the failure to get back above 65% is another warning shot. Notice where the bull market tops peaked out at after having deep pullbacks on the $NYA200R before. You will get some rally, the question is how high? Now we are starting the breakdown from an extremely weak level.The European PIIGs issue in 2011 wasn't a clear turn at it rallied sharply but still caused a big selloff. Look how clear 2007 and 2015 are. The blue lines show these moments. I have dropped a blue line there for the current levels because it definitely qualifies as a major potential topping weakness. We'll watch to see how it plays out.
The $SPX BPI is much more robust suggesting a group run into the $SPX by managers into only the biggest broadest stocks.
In this chart below, what I like to look for is how big is the bounce after a deeply oversold condition. Can it generate enough breadth to start the next bull market? 2007 and 2015 both had big pullbacks below 50 % on the BPI. The following rally was big in each case, but not enough to push the breadth to start a new bull market. Then the rallies failed and the markets rolled over. Well on this bounce it is the worst of the three in terms of breadth. It is similar to 2007 in that it got into the 60% and above level, but maxed out there while making new highs. Both 2011 and 2015 saw higher highs on the BPI before rolling over after a big down move below 50%. 2011 looked extremely strong only to still fail. So the weak drop in the spring of 2018 suggests caution to me later in the year. Guess what, so far we have failed to get the breadth in the rally.
Lastly, the $SPXA200R is showing the same signals. A giant pullback to really low levels and then a failure to rally broadly while making higher highs. Without question it at least adds caution that a potential major top is in place. Trade accordingly.
This appears to be a pivotal time for the markets. I am hosting an online and in person conference in Calgary on Saturday October 13th. Could it be a better time to hear some live speakers discuss the current setup?
I have five very exciting technicians joining me on Saturday October 13th from 8 AM MT to 5 PM Mountain time. If you would like to hear some more thoughts around the current market setup and more discussion by me on these breadth indicators, please follow this link. It is a very affordable day and StockCharts members will be authorized to get the best discount. The Past President of the CMT Association will be presenting as well as two other American technicians who have written great books on TA. Jon Vialoux and I will round out the speakers list. Please click here to register and use the savings code SC2018W. Can you really beat $35 CDN which converts to $28 USD for a whole day?
Speakers Include: Greg Schnell, Brian Shannon, Hima Reddy, Jon Vialoux, Craig Johnson!
When Panicked Selling Kicks In, Look To The VIX For A Bottom Call
by Tom Bowley
It was a brutal week for many areas of the stock market, but mostly those areas that have led the charge for so long. Stocks that for one to two years or more rarely saw a significant pullback suddenly couldn't find buyers this week. Unfortunately, that's how Wall Street works. Ever notice how quickly the market sells and how long it takes to recover. The January-February episode was a perfect example. The Dow Jones lost more than 3000 points in 10 trading days! Then the recovery back to the January high took more than 7 months. The answer would be to simply get out of the market before the panicked plunges, but these short-term selling episodes are very difficult to predict and then time correctly. Who saw last week's plunge coming? Seriously. Usually, summer time represents a period of selling, but Q3 turned out to be our best quarter in a few years. Given that backdrop, it was difficult to be overly bearish heading into Q4, yet our first week was awful.
So the big question now is.......do we bottom this week and begin to repair the technical damage? I think we will. The stock market was spooked by the prospects of higher interest rates as the 10 year treasury yield ($TNX) surged through yield resistance at 3.11% to close the week at 3.23%, our highest weekly close since 2011. Yes, interest rates are going higher, but they're not a problem.....yet. In fact, recent surges in the TNX have been accompanied by rising equity prices and, in the end, I suspect that will be the case this time as well. Here is a visual of TNX surges and accompanying rises in the S&P 500:
This illustrates that when money is rotating away from defensive treasuries (and corresponding treasuries yields rise), it's typical for that money to find its way into U.S. equities. The red ellipses above show that it's not always the case, but the overall trend in both the TNX and SPX are higher. Clearly, however, U.S. equities were spooked last week by the prospects of higher treasury yields. I believe this will turn out to be a short-term buying opportunity, much like the S&P 500 drops that we saw in October 2016, March 2017 and February 2018.
High volatility ($VIX) marks significant stock market bottoms. Check this out:
Spikes in the VIX into the 16-18 area have coincided with many of the short-term bottoms in the S&P 500 over the past two years. On Friday, the VIX hit a high of 17.36. If we open up this week with further downside action, watch for a reversal in the VIX to potentially mark the short-term bottom.
Here's A Stock That Regularly Beats Its Earnings Estimates
by John Hopkins
We're approaching another earnings season, setting up trading opportunities in the normally bullish fourth quarter. While we favor waiting to see quarterly earnings reports and the market's reaction to those reports, we also know many of you try to trade companies prior to their better-than-expected reports. History never provides us guarantees of future results, but it can at least make us aware of tendencies.
Take a look at WW Grainger's (GWW) track record over the past four quarterly earnings reports:
Not only have EPS numbers come in ahead of expectations, but the response has also been positive in terms of its price action. GWW has gained 11.2%, 5.3%, 18.5% and 12.7% the day after its previous four quarterly earnings reports. GWW is expected to earn $3.96 in its next quarterly report that will be released on Tuesday, October 16th before the market opens.
We're starting a FREE newsletter that will, among other things, help to identify bullish and bearish historical patterns with respect to quarterly earnings reports (similar to the GWW information provided above). If you'd like to subscribe, simply send me an email at john@investedcentral.com with "FREE newsletter" in the subject line.
Peter Lynch was the portfolio manager for Fidelity’s Magellan Fund for 13 years. His performance results were legendary, and when he retired, he wrote a number of books based on his winning investing principles. To paraphrase and blend a few of those together, Lynch felt that individual investors could outperform the professionals by investing close to home in companies and products they...
DP Scoreboards Lose Their Shine - NDX Loses 2 More BUY Signals - Dow Adds PMO SELL Signal
by Erin Swenlin
The BUY signals are starting to peel away on the DecisionPoint Scoreboards. The Dow which has been the most stout, but after the corrective move of the past two days, it couldn't hang on to its "all green" Scoreboard. Technology, as most know, has been hit particularly hard over the past month or more, so I'm not surprised to see the NDX Scoreboard flipping quickly to bearish signals.
Here's where these signal changes come from.
The Dow saw its Price Momentum Oscillator (PMO) negative crossover its signal line to generate the SELL signal. Today we saw the breakdown of a rising wedge. If you do a measurement of the base of the wedge and add that downside distance to the breakdown point, you end up at support along the February top.
The Short-Term Trend Model Neutral signal on the NDX was generated when the 5-EMA crossed below the 20-EMA. It is a Neutral signal because the negative crossover occurred above the 50-EMA. The PMO crossed below its signal line yesterday for the short-term PMO SELL signal. With the bearish features of this chart, I would look for a test of support at 7200.
This IT PMO SELL signal is the most concerning for me. We don't get frequent signal changes on our weekly and monthly charts, so when I see them, I heed them. The NDX is the weakest of the four Scoreboard indexes. I think this SELL signal confirms not only the PMO SELL signal on the daily chart, but it also confirms the bearishness of this latest breakdown from a rising trend.
Technical Analysis is a windsock, not a crystal ball.
NIFTY breaks trend. Pharma and IT show relative strength
by Julius de Kempenaer
The Indian $NIFTY Index dropped out of an almost three-year uptrend at the close of last week. The rising support line that started at the low in early 2016 did not manage to hold up and was clearly broken during last week's market action.
This move changes the dynamics of the Indian stock market. On the weekly chart above a new series of lower highs and lower lows has not (yet) begun. So technically it is not a downtrend yet. On the daily chart, however, a series of lower highs and lower lows is visible already since the first week of September.
Relative Rotation Graphs can help to put the move of the $NIFTY index in international perspective as well as help pinpoint sectors within the $NIFTY index that should offer protection against a decline of the general market, or at least an outperformance over $NIFTY.
From an international perspective
The Relative Rotation Graph shows the $NIFTY inside the weakening quadrant, which it entered a few weeks ago after a strong rotation through leading. The long tail indicates that there is (negative-) power behind this rotation.
The US market ($SPX) is still stable, indicated by the short tail, inside the leading quadrant making it one of, if not "the", strongest equity market in the world (at least in this selection of world markets).
The Japanese $NIKK index is making an interesting move as it rapidly rotated back to leading after a short move through weakening, looks like an interesting market to have a look at (in another post).
Where to go?
With the NIFTY stumbling down, the Relative Rotation Graph for Indian sectors can provide us with some perspective of sectors that may offer investors some protection against a general decline or at least outperform the benchmark index.
Inside the leading quadrant, there are four sectors; Pharma, Banks, Energy and IT. Of those four, Banks and Energy have already started to roll over and they are moving lower on the JdK RS-Momentum scale. This makes them less interesting as they may have already run their course.
Pharma and IT are inside the leading quadrant AND at a strong, which means between 0-90 degrees, RRG-Heading. This makes these two sectors the leading sectors for the Indian market at the moment.
A third sector that may be worth keeping an eye on is the Metal sector which is inside the improving quadrant but showing a very long (=strong) tail, is at the highest Jdk RS-Momentum value AND heading towards the leading quadrant at an almost 45-degree angle.
I will expand on this analysis in my RRG-blog in coming days.
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Julius de Kempenaer | RRG Research
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Utilities are not the most exciting stocks in the world, but the Utilities SPDR (XLU) is the third best performing sector since February and the second best performing sector last week. The could have further to run. Let's look at the charts.
Speakers 
