Nasdaq May Be the Third Major Stock Index to Cross Its Red Line
by John Murphy
Editor's Note: This article was originally published in John Murphy's Market Message on Friday, February 15th at 12:40pm ET.
Charts 1 and 2 show the Dow Industrials and S&P 500 building on their gains after rising above their 200-day averages (red lines). Both now appear headed for a test of their early December peaks. Chart 3 shows the Nasdaq Composite Index in the process of testing its red line and its December high at 7486. A close above both barriers would be a positive sign for the Nasdaq and would strengthen the market's uptrend. All eleven sectors are in the black today. Financials, energy, healthcare, and industrials are leading the day's advance with gains of 1% or more. Small caps are also showing more leadership. That may be due to recent strength in the dollar which usually favors smaller stocks. Banks are leading today's gains in the financial sector.
The Relative Strength Index (RSI) is a momentum indicator that chartists can use to measure the strength behind a price move. Moreover, chartists can also use RSI values to rank momentum and find the leaders.
As an indicator that measures the magnitude of gains relative to the magnitude of losses, RSI values above 50 indicate that the gains are outpacing the losses over the lookback period. The further above 50, the stronger the gains relative to the losses. Thus, RSI values above 70 indicate that the gains are seriously outpacing the losses. Put another way, RSI values above 70 reflect strong upside momentum.
The table below ranks 10 major index ETFs by 14-day RSI. RSI is above 70 for seven of the ten ETFs and these ten show strong upside momentum. The S&P MidCap SPDR, Russell 2000 iShares and S&P SmallCap iShares are at the top of the list with the highest RSI values. Even though they may seem "overbought" short-term, strong momentum moves are usually bullish longer term.
The large-cap ETFs are at the bottom of the list. The S&P 500 SPDR is just below 70, while the S&P 100 ETF and the Nasdaq 100 ETF are well below 70. This ranking shows that QQQ and OEF, which represent large-caps, are lagging when it comes to momentum.
Chartists can also compare the RSI values of complementary pairs. In particular, note that the Russell 2000 iShares is outperforming the S&P 100 ETF, the Equal-weight S&P 500 ETF is outperforming the S&P 500 SPDR, and the Equal-weight Nasdaq 100 ETF is outperforming the Nasdaq 100 ETF.
We can also find signs of relative strength by comparing the crossing points for two key RSI levels: 50 and 70. The charts below show SPY and IWM with 14-day RSI as an overlay (behind the price plot). Comparing RSI levels, we can see that 14-day RSI moved above 50 on January 7th for IWM and on January 8th for SPY. Thus, RSI crossed its centerline a day earlier for IWM and this showed relative strength. Furthermore, 14-day RSI crossed above 70 on February 13 (Wednesday) for IWM and has yet to cross 70 for SPY.
One of the hurdles to being a great market analyst is understanding the shifting sands of the stock market without an end point. In a baseball game, momentum may swing to and fro, but the game has an ending, based on innings and score, that defines when the game is over. The stock market, by contrast, wakes up renewed every day with new clues and no predefined terminus as to where momentum is going.
Healthcare (orange) continues to be a below-average sector in the market since the 2018 Santa Claus low. The defensive sectors are on the right-hand side. Consumer Staples, Healthcare and Utilities have been the worst performers since the lows. Meanwhile, even though all the talk is usually about technology, the industrials are raging relative to every other sector.
This week saw a surge in some energy stocks. 8 of the top 20 (40%) of the biggest movers for the week shown below are in Energy. Consumer Discretionary had 3, Staples had 2 and Healthcare had 2, whereas Industrials, Financials, Technology, Staples, Materials and Utilities had 1 each. Only 1 was in the Industrial group, which has had the biggest move off the lows shown above. It is this shifting leadership that makes it so hard to continually outperform the market. Energy is the second best performer off the lows, but now has 8 in the top 20 this week.
The point I want to make is that commodities can have explosive rallies and need to be owned near the lows, not as they make new 52-week highs. Energy stocks are just getting rolling. None of the energy stocks are in the top 25% defined by the SCTR ranking - the best one on the list is barely at 53%. However, that is the nature of the commodity-related trade, which swing wildly within channels from low to high. With the new momentum shown this week, it looks like more Oil and Gas stocks could start a run here.
For more, check out this week's Weekly Market Roundup video! I work through all the bullish indicators from a sentiment perspective. The $USD and other currencies are a big focus this week as the Yen and the Euro sit at important support. I am watching for confirmation from currencies, bonds and global markets, which may converge to show their direction over the next few weeks. Click here to view theWeekly Market Roundup 2019-02-16.
Wednesday's Market Buzz was a must-watch edition discussing prominent stocks in the software industry that you've never heard of. You can find the new Wednesday Edition of Market Buzz on the StockCharts TV
If you would like to learn more about the basics of charting, check out Stock Charts for Dummies. The first section of the book walks through all the chart settings you need to help you get the charts you want, the second section explores why you might use charts for investing and the third section is about putting it all together.
Here's How Relative Strength Will Help Your Trading Right Now
by Tom Bowley
Understanding relative strength is extremely important in outperforming the benchmark S&P 500. As a sector begins to outperform, it tells us that money is rotating towards that particular sector. One way to visualize this is to look at an RRG chart. It will only take one glance to quickly identify what's working RIGHT NOW and what is not:
I have highlighted consumer discretionary (XLY) on this chart because it's the only sector with "RS-Momentum" and "RS-Ratio" above 100 readings. That places it in the leading quadrant and tells us that we need to beware of the money rotating into consumer discretionary stocks.
But the relative strength evaluation doesn't stop there. We know that the XLY is grabbing more than its fair share of the money, but which areas of consumer discretionary are strong? Here's the current RRG chart to illustrate this breakdown of consumer discretionary:
Specialty retailers ($DJUSRS) are surging relative to the XLY, its sector ETF. So now we know that the DJUSRS is helping to lead the XLY higher. Are we done now? Nope.
Why not delve into the specialty retailers to find individual stocks that are leading? The stocks below are the large cap, mid cap and small cap specialty retailers, but I'm only including small caps with SCTR scores above 90 to keep our list somewhat manageable:
In addition to moving into the leading quadrant from "improving", it's also many times bullish to see a stock or index turning back up from "weakening" to "leading". There's nothing wrong with a leading stock taking a break for a period of time before leading again. Five Below, Inc. (FIVE) is a great example and I've tracked its relative progress over the past 13 weeks to cover an entire quarter. Three months ago, FIVE was waaaaaaay over to the right side of this RRG chart, indicative of massive outperformance and relative strength. While its relative strength weakened during a profit taking period in late 2018, relative strength is returning again in 2019 just as FIVE approaches a possible breakout technically. If you want to see how all of this looks on a SharpChart, check this out:
While nothing in this article guarantees future profits from being long FIVE, I hope it does illustrate the types of stocks that you want to consider trading at the appropriate time. Using relative strength to identify potential investing/trading candidates is a sound discipline, but employing a risk management strategy to maximize gains and limit losses is the next step in the process.
Using facets of relative strength and my Strong Earnings ChartList, I provided the EarningsBeats.com community a list of my Top 10 Stocks on November 19, 2018. From that date through Friday, February 8, 2019, they gained on average 17% while the S&P 500 inched higher at less than 1%. 8 of the 10 stocks provided gained ground and outperformed that benchmark index.
I am returning to EarningsBeats.com to provide my new Top 10 list on Tuesday, February 19th at 4:30pm EST. I'll further discuss the importance of relative strength at this event. EarningsBeats.com is offering to provide you their Strong Earnings and Weak Earnings ChartLists for the next 90 days for a nominal amount. Having used this approach to trade stocks for the last several years, I can tell you that using this list in conjunction with relative strength principles discussed above significantly improved my trading performance. I hope you'll join me. In order to download the ChartLists from EarningsBeats.com, however, you do need to be at least an Extra member here at StockCharts.com.
For a free 30 day trial to StockCharts.com, CLICK HERE.
To join me on Tuesday at the EarningsBeats.com event, CLICK HERE for further details.
The Secret Combination For Solid Reward To Risk Trades
by John Hopkins
Well, it's really not a secret, but it's our secret at EarningsBeats.com. Our mantra is "Better Timing. Better Trades." and, for us, that means finding the best stocks, identifying key price and moving average support and then adding.....an extra helping of patience. Many of the stocks on our Strong Earnings ChartList never hit key support and, therefore, are not solid trades despite the fact they may go higher, even much higher in some cases. To be successful traders, we must be disciplined in managing risk.
Let me give you a couple of examples of what to look for in a trade. Both of the following stocks came off of our Strong Earnings ChartList, which means they already possess solid fundamentals. The only way a stock is added to this ChartList is if it beats Wall Street consensus estimates as to both revenues and EPS. In other words, their business plan is working. If their business plan is working, Wall Street likely trusts the management team and will buy the stock on weakness. And so will we. Here's two perfect examples of what to look for:
1. Atkore International Group (ATKR)
ATKR is a $1.1 billion company that manufactures and distributes electrical raceway products, and mechanical products and solutions. Over the past 3-4 months, ATKR has been a leading stock within its industry and its industry has been showing relative strength vs. the benchmark S&P 500. Strength within strength is a very nice combo, so for us it's just a matter of waiting for a rising 20 day EMA and/or price support to be tested. We saw both one week ago:
Emotionally, we all want to buy a stock when it's moving higher. It seems like the right thing to do. Unfortunately, we're ignoring the risk of such impulsive buying strategies. It's completely fine to want to own the stock, but put it in a ChartList and let it go on sale first. When ATKR pulled back to test both price support and it's rising 20 day EMA, there was little risk involved in the trade. If it fails to hold support, you exit quickly with a minimal loss. But now, one week later, ATKR is on the move again, having risen 7% over the past week since touching support.
2. Deckers Outdoor Corp (DECK)
DECK is a $4.3 billion company that designs, markets, and distributes footwear, apparel and accessories for casual lifestyle use and high performance activities. Footwear ($DJUSFT) was a very strong area of the market in 2018 and not much has changed in 2019. The DJUSFT continues to demonstrate excellent relative strength. With its latest quarterly earnings report, DECK broke out to fresh highs and has begun leading an already strong industry group. Chasing the earnings-related gap higher, though, was not the right choice. Instead, the best reward to risk entry was waiting for the pullback to test price support:
Instead of paying 145 at the opening bell after strong earnings were released, three days of patience would have resulted in a solid technical entry at 137, a savings of 8 bucks at the outset of the trade.
Better Timing. Better Trades. It's that simple.
I want everyone to experience the difference that a Strong Earnings ChartList with annotations can mean in your trading results. We constantly update our Strong Earnings ChartList throughout the quarter and every time we update it, we want to send you a copy. It's our first-ever quarterly trial. That's right, 90 days of annotated ChartLists for a trial price of just $7. In order to download our ChartList, however, you'll need to be at least an Extra member at StockCharts.com. If you're not currently a StockCharts.com member, you should take advantage of their 30 day free trial.
Included in the quarterly trial membership at EarningsBeats.com will be a special Tuesday, February 19th event - Tom Bowley will join me for his "Top 10 Picks", which will begin at 4:30pm EST. He joined EB.com in November and shared a similar Top 10 Picks list that crushed the S&P 500 (+17% vs. +1%) over the next quarter. I've invited him back to share his next list of superstars and your quarterly trial offer includes this special event. For further details, CLICK HERE.
How To Get The Confidence To Profit From Bullish To Bearish Transitions By Recognizing The Evidence
by Gatis Roze
Life can be cruel if change happens and you miss the signs during the transition. I’ll offer up four examples with mild to toxic consequences: Weather, Science, Superstars and finally, the Stock Market.
Pretty much everyone is aware of the predictable and abrupt shift in the weather as the temperature nears 32 degrees Fahrenheit. We’ve mastered the concept of water-to-ice and rain-to-snow when the thermostat approaches 32 degrees. It’s predictable and requires that we adjust our behavior.
Similarly, scientists know that magnets work as intended until you heat them. An abrupt change occurs at 570 degrees. Magnetism disappears. It’s predictable and calls for a change in their application.
With superstars, be they star sports athletes or stellar mutual fund managers, few ever retire at the top of their game. Whether they begin to believe their own legends or whatever other reasons, their transformations can be tracked by softening statistics or increasing losses and relative underperformance. It’s left to athletic team managers and investors to closely monitor these stars’ performances by applying the appropriate criteria and making the necessary changes.
Most laymen have mastered key weather transitions. Academics continue to explore ways to master transitions in science. As investors, the stock market transitions present a vexing challenge for most when, in fact, I believe there is no need for unnecessary financial pain. I am not claiming that all market volatility is predictable, but I maintain that the major stock market realignments — bullish markets to bearish markets, uptrending markets to downtrending markets — do not abruptly shift in the same manner as the weather or heated magnets.
The stock market is not a binary on/off switch. It’s more of a sliding transition. First and foremost, you, as an investor, need a fundamental understanding of what to focus on and the criteria to use. I’ll present the approach we use in two parts:
a) The first question is straightforward: What is the trend of the market?
b) Secondly, what is the balance of fundamental evidence pertaining to the present market?
In the Tensile Trading ChartPack, which Grayson and I use everyday (and make available to you), there are three ChartLists titled “Permission to Buy” — these are 10.1, 10.2 and 10.3. Together all three offer a detailed answer to the essential question of “What is the present trend of the stock market?”
A straightforward quick-take on trend is the result of reviewing the six charts in ChartList 10.1 which display the market in various timeframes (our telescope to microscope methodology) and include momentum as well. One chart, for example, is the Darryl Guppy Trend Trading methodology which deploys moving averages. Don’t overthink it. Remember, trends can only do one of three things:
it can be in an uptrend
it can be going sideways
it can be in a downtrend
The second part of our approach reviews the balance of fundamental evidence. We review these sixteen charts every week and simply note with a green highlighter if the chart is bullish. If the chart looks bearish, a red highlighter is used. It’s a powerful exercise that insulates us from all the hyperbole in the press, thereby preventing stupid knee-jerk trades.
These sixteen charts (we call ChartList 10.4 our Bullish & Bearish Dashboard) clearly present how stock markets have behaved historically based on sixteen essential fundamentals that drive the market — such as the unemployment rate, S&P 500 earnings, industrial production, etc. Herein lies the key: this review will give you the confidence to take the necessary appropriate action. It will give you the confidence to ignore normal market volatility until the balance of evidence points to a major transition from a bullish market to a bearish one. Remember that an ounce of the appropriate action is worth pounds of pontificating.
Here are three sample charts from ChartList 10.4 of our ChartPack:
In its most basic form, navigating transitions is simply 3 stages:
Having the discipline to monitor for these transitions.
Embracing organized routines that you execute consistently.
Being confident enough to implement change.
Not only is it essential that you protect your assets and profits when markets transition, but research proves that this is “the secret” that’s contributed to the long term success of many legendary investors. They haven’t always outperformed the indexes during bull markets, but they have always minimized their losses during bear markets. Call it what you will (some label it market timing), but with specific routines it can be done successfully.
If learning how to achieve this effectively strikes you as worthy of your time, I'd like to invite you to join Grayson and I for two days in my very own trading office next week. We’ll teach you these and many other necessary disciplines to upgrade your investing skill set and realize your potential.
Fair warning: this will be our 4th Stock Market Mastery Boot Camp. It’s an intense interactive experience with a small group of twelve other investors. You will see results. We know for a fact that accumulating the appropriate stock market knowledge is directly correlated to the long term health and wealth of your portfolio. Come join us!
Trade well; trade with discipline!
- Gatis Roze, MBA, CMT
Dow and SPX Log New IT BUY Signals - Consumer Discretionary (XLY) LT BUY Signal
by Erin Swenlin
During today's DecisionPoint show on StockCharts TV (airing Fridays at 4:30p EST), Carl and I discussed how, while we're still bearish, there are signs of improvement. The main problem will be getting too overbought. Three signs of definite improvement are the two new IT Price Momentum Oscillator (PMO) BUY signals on the Dow and SPX Scoreboards, as well as the new LT Trend Model BUY signal on Consumer Discretionary (XLY), generally considered an aggressive sector that does well in bull markets.
You'll note the positive PMO crossover that triggered the IT PMO BUY signal on the weekly chart for the Dow below. Remember that PMO signals are derived from the daily (ST), weekly (IT) and monthly (LT) charts. I was concerned that price was going to have difficulty with overhead resistance at the intersection of the declining and rising trend lines. I've annotated previous PMO BUY signals; they tend to be pretty accurate for the intermediate term.
While the SPX has broken out of the declining trend, it still hasn't quite made it over the LT rising trend line. I've highlighted two PMO BUY signals that I believe will be the result of this current BUY signal. It's possible we could end up with consolidation instead of strong upside movement.
The PMO on the daily chart for XLY is overbought. However, we have seen it move down to -3 readings, which implies that +3 could end up being the top of the zone. The biggest obstacle ahead is $112. PMO bottomed above the signal line. I would like to see a more healthy OBV, but it isn't currently showing any major negative divergences.
Watch the latest episode of DecisionPoint with Carl & Erin Swenlin LIVE on Fridays (4:30p EST) or on the StockCharts TV YouTube channel here!
Technical Analysis is a windsock, not a crystal ball.
Checking The NIFTY 50 Universe On RRG Results In A Nice Setup For INFRATEL.IN
by Julius de Kempenaer
With more and more eyeballs looking at the Indian stock market and data for individual stocks and sectors becoming available on Stockcharts.com I started to keep an eye on developments in that market via Relative Rotation Graphs.
To make it easier (for you but also myself), the NIFTY 50 Index is added as a group to the drop-down selection box. This universe holds all the members of the NIFTY 50 index and uses that index, $NIFTY, as the benchmark.
Going forward we are planning to add pre-defined groups for Indian sectors as well as groups holding the components for each sector just like we have it for the US market.
Because this RRG is quite crowded with 50 (the max at Stockcharts.com) stocks on the canvas, use the highlight functionality and then browse/toggle through the universe of stocks for inspection of the tails and the rotational patterns.
You simply select one stock in the table below the RRG, this will highlight that stock on the canvas and dim all others. Then press the Control (Windows) or Command (Mac) keys and use the up-down arrow keys to walk through the universe of stocks.
The added advantage is that you can increase the tail length to inspect longer rotations.
Picking From The RRG
While browsing the RRG with NIFTY stocks, I noticed the strong RRG-heading of Infratel inside the leading quadrant. Additionally, the distances between the observations are increasing which indicates that the power behind the move (ROC) is strong.
The tail also reveals a few interesting observations.
First, the shortening of the distances between the observations just prior to the upward "hook" that occurred in the week of 25 January. This shortening of the distances is something that is often seen prior to a turn of the tail.
These upward hooks often confuse people as the expect a perfect clockwise rotational pattern to complete. unfortunately real-life does not always follow our models nor our thoughts. However, the markets always follow that clockwise rotation, but sometimes it is not visible on the time-frame that we are analyzing.
In the RRG above which is based on weekly data, we see a sharp upward hook with the pivot on 25 January. To better understand what is happening in such cases it helps to bring up the RRG on a lower time-frame.
Weekly vs. Daily
The image above shows the weekly and the daily rotation side by side with the arrows pointing to the pivot point on 25th January. On the daily RRG, the next lower time-frame from weekly, the rotational character is once again clearly visible.
The proof is in the pudding
Relative Rotation Graphs are great for filtering and selecting or monitoring the rotational aspects of various securities within a group against a common benchmark and against each other. They will greatly benefit you to get a situational awareness of what's going on around you. They provide the big picture in one picture.
However, IMHO, Relative Rotation Graphs provide only a piece of the puzzle and therefore I highly recommend using them in combination with other tools in your workflow.
For me, the final check is always the price chart in combination with relative strength. I typically use a weekly price chart in combination with the "raw" relative strength line and the RRG-Lines (JdK RS Ratio and Jdk RS-Momentum).
Bharti Infratel Ltd - INFRATEL.IN
The price chart of INFRATEL.IN shows a very wide range, INR 240- 420, over a very long period starting late 2014 and still ongoing.
The most recent, major, low against the lower boundary of that range was set in October last year. The rally that emerged out of that low, broke out of the falling channel that characterized the chart since the start of 2018. Since that break, the start of a new series of higher highs and higher lows started to become visible and the first support level is marked near INR 300 which should now act as support after breaking that level as resistance a week ago.
The long-term trend in the RS-Line is still down, since early 2016. But just like the price trend, the swings are so wide that they are meaningful enough to pay attention to.
The most recent acceleration lower in RS started in October 2017 and came to rest in Q4-2018. Out of that plateau in relative strength, a new uptrend is emerging now. This up-move is confirmed by the RS-Line breaking above its own recent highs.
The RRG-Lines have now started to move higher in tandem and a continuation of this move seems likely.
In price terms, INR 340 is an intermediate resistance level on the way up but after that, the INR 420-440 area comes within reach again.
My regular blog is the RRG blog If you would like to receive a notification when a new article is published there, simply "Subscribe" with your email address using the form below.
Julius de Kempenaer | RRG Research
RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered TradeMarks ®; of RRG Research
Follow RRG Research on social media:
Feedback, comments or questions are welcome at Juliusdk@stockcharts.com. I cannot promise to respond to each and every message but I will certainly read them and where reasonably possible use the feedback and comments or answer questions.
If you want to discuss RRG with me on SCAN, please use my handle Julius_RRG so that I will get a notification.
As a StockCharts Member, you unlock all of our most powerful tools and features, including saved charts and settings, custom scans, technical alerts and much more. Discover all that StockCharts can do with our free 1-month trial and start charting like a true market pro.
The point I want to make is that commodities can have explosive rallies and need to be owned near the lows, not as they make new 52-week highs. Energy stocks are just getting rolling. None of the energy stocks are in the top 25% defined by the SCTR ranking - the best one on the list is barely at 53%. However, that is the nature of the commodity-related trade, which swing wildly within channels from low to high. With the new momentum shown this week, it looks like more Oil and Gas stocks could start a run here. 
I have highlighted consumer discretionary (XLY) on this chart because it's the only sector with "RS-Momentum" and "RS-Ratio" above 100 readings. That places it in the leading quadrant and tells us that we need to beware of the money rotating into consumer discretionary stocks.
Specialty retailers ($DJUSRS) are surging relative to the XLY, its sector ETF. So now we know that the DJUSRS is helping to lead the XLY higher. Are we done now? Nope.
In addition to moving into the leading quadrant from "improving", it's also many times bullish to see a stock or index turning back up from "weakening" to "leading". There's nothing wrong with a leading stock taking a break for a period of time before leading again. Five Below, Inc. (FIVE) is a great example and I've tracked its relative progress over the past 13 weeks to cover an entire quarter. Three months ago, FIVE was waaaaaaay over to the right side of this RRG chart, indicative of massive outperformance and relative strength. While its relative strength weakened during a profit taking period in late 2018, relative strength is returning again in 2019 just as FIVE approaches a possible breakout technically. If you want to see how all of this looks on a SharpChart, check this out:
Life can be cruel if change happens and you miss the signs during the transition. I’ll offer up four examples with mild to toxic consequences: Weather, Science, Superstars and finally, the Stock Market.
The second part of our approach reviews the balance of fundamental evidence. We review these sixteen charts every week and simply note with a green highlighter if the chart is bullish. If the chart looks bearish, a red highlighter is used. It’s a powerful exercise that insulates us from all the hyperbole in the press, thereby preventing stupid knee-jerk trades.
The image above shows the weekly and the daily rotation side by side with the arrows pointing to the pivot point on 25th January. On the daily RRG, the next lower time-frame from weekly, the rotational character is once again clearly visible.
