Editor's Note: This article was originally published in Martin Pring's Market Roundup on Tuesday, July 30th at 1:14pm ET.

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Technical Analysis is an art form, one in which we put together several reasonably reliable indicators and form a weight-of-the-evidence opinion about the status of the current trend. Sometimes it makes sense to bypass that approach temporarily and instead do a two-way test for the primary trend.

My approach to this is to see whether the market in question is experiencing a positive smoothed long-term momentum. Personally, I use the KST, but any similar measure of momentum (e.g. Coppock Curve, MACD, stochastic), using the 24,15,10 parameters (or something similar) on monthly data, would do. The main thing is to make sure the indicator you are using has been reasonably accurate in the past. (I say “reasonably” accurate, because we are never going to find a perfect one.)

The second part of the test is to see where the market we are following is relative to its 12-month MA. This is by no means a perfect timespan, but it does seem to work reasonably well. Using 12 months, for example, certainly eliminates any seasonal problems. Once the quick test has been applied, it's up to the rest of the technical toolbox to prove otherwise.

Applying our two-way test to the US Dollar Index, we can see it has been in a primary bull market since early 2018. We have to be a bit careful with that statement, though, because late June saw the Index just edge below its MA. At no point, though, was the series of short-term rising peaks and troughs, in force since 2018, reversed. July saw the Index rebound. If you look very carefully you can see that the KST started to re-accelerate in July, a positive sign.

Chart 1

Chart 2 compares the Index to its Special K indicator, which you can read about here. Most of the time, this indicator peaks and troughs with the price series it is monitoring, which is easy to spot with the benefit of hindsight. That means that we need to apply trend reversal techniques to confirm when the Special K (SPK) has turned on a primary trend basis.

Because of the SPK’s jagged nature, trend line violations are probably the most practical and accurate technique to apply. Another technique would be to incorporate signal line crossovers. The signal line is calculated as a 100-day MA of a 100-day MA. The SPK violated its 2015-19 downtrend line in the spring and has managed to remain above its signal line since the spring of 2018. Since the series of rising SPK peaks and troughs is still intact, it is easy to conclude that the SPK is in a bullish trend.

The Index dropped below its red uptrend line and 200-day MA in June, but has since rebounded. Usually, false breaks of this nature are bullish because traders betting on a decline are forced to get in line with the new upward price trend. Obviously, the next challenge lies at the green line, around 98. A move above that would be very bullish.

Chart 2

The WisdomTree US Dollar Bullish Fund ETF (USDU) is far more thinly traded than the Dollar Index. However, the Index has a 57% euro weighting, which means that the USDU offers a more broadly-based view of what’s really happening with the dollar. Note that it has held above its 200-day MA for some time, unlike the Index itself. Currently, the USDU is threatening its May high, but with all three KSTs in a bullish mode, it seems likely to move higher.

Chart 3

 

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.

“Never confuse brains with a bull market.”

When the market is going higher and the average stock is appreciating, we often attribute the gains to our skill as investors. Due to our incredible investing prowess, we have managed to own stocks that are doing well!

However, when the uptrend starts to reverse, we often attribute those losses to forces outside of our control. It’s the market just moving against you, or even just plain bad luck.

Market uptrends are easy. Market downtrends are when bad habits and inconsistencies in your investment process can start to have a real drag on your performance. Having said that, here are three charts that I would argue should cause you to review your portfolio with a more cautious perspective.

First, the S&P 500’s Friday low lined up with the low from the end of June, as well as a 38.2% Fibonacci retracement from June-July 2019. This confluence of support levels suggests a potential short-term bottom as the market digests this week’s losses.

The index also closed above the 50-day moving average after trading below during the day. While this would suggest a short-term bounce next week, I think the fact that we closed below the open confirms the fact that expectations are weakening every trading day.

Finally, we have a bearish divergence with price and RSI. As the S&P has made higher highs in the last three weeks, the RSI has confirmed lower highs. This represents a weakening of momentum leading into the most recent high and suggests further weakness in the coming weeks.

Second, one of the key themes I’ve been tracking is the relative weakness of mid-cap and small-cap stocks relative to large-caps. As the S&P 500 has made higher highs in July, the mid-cap index found resistance around the 1985 level. The inability of mid-caps to confirm the upside in large-caps suggests weaker breadth than you’d want to see in bull market phases.

When you compare all the cap tier indexes, you’ll notice that while the S&P has confirmed higher highs, all the others have struggled to do so. The micro-cap index has even broken to a new swing low after selling off through Friday’s trading session. I’d want to see much stronger charts from mid-cap, small-cap and micro-cap stocks if I was looking for further upside for equities as a whole.

Finally, we have one of my favorite measures of offense vs. defense in the form of the Consumer Discretionary-to-Consumer Staples ratio. This ratio is a good way to track flows between traditionally offensive and defensive portions of the consumer space. The ratio moved higher through much of June and July, but started to turn lower this week. This suggests that investors are rotating to a more defensive posture, which would indicate potential further weakness going forward.

This summer has so far seen a resilient bull market during a traditionally strong part of the trading calendar. These bearish indications warn of a potential rotation to a bearish phase leading into the fall, when most market bottoms have indeed occurred.

Regardless of what the coming months hold, right now is an excellent time to review your portfolio for potential downside risks and plan accordingly!

RR#6,

Dave

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David Keller

CMT President, Sierra Alpha Research LLC

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(This is a reprint of a Trading Places blog article written a week ago. I've updated the performance and charts to include last week's selloff.)

Beating the S&P 500 is my #1 goal. If I didn't believe I could beat the S&P 500, I'd simply buy the SPY (ETF that tracks the S&P 500) and call it a day. But I know I can beat the S&P 500 performance, and you can too. Beginning in November 2018, I created my Model Portfolio. In May 2019, I added two additional portfolios, my Aggressive Portfolio and Income Portfolio. All three consist of 10 equal-weighted stocks that have two common characteristics - strong earnings and relative strength. Fundamentals combined with technicals is the absolute best approach to trading the stock market, without a doubt. It's not gambling - it's doing your homework.

The Big Picture

I take a top-down approach that starts with my overall view of the stock market. I am very bullish, much more so than most, and I believe we remain in the relatively early stages of a secular bull market. That doesn't mean we will go up every day; in fact, from time to time, we'll have cyclical bear markets. These will be much different than the secular bear markets we endured in 2000-2002 and 2007-2009, however. They'll be quick, scary and probably cause quite a bit of portfolio pain. Think back to Q4 2018. That's the type of cyclical bear market I'm talking about.

How can I be so bullish with all the worries out there? Well, first of all, we always have worries if that's what you choose to focus on. Instead, I'll focus on the historically low interest rates, which are very business-friendly. We certainly can't ignore central bankers that are dovish across the globe. Finally, we haven't even scratched the surface of rotation from defensive treasuries to aggressive equities. Trillions of dollars have poured into U.S. and foreign treasuries to drive yields to record or near-record lows. When treasury holders start selling, where do you think those proceeds will go? Global equities. It's coming. It's a matter of timing. We're nowhere near a euphoric bull market high. It's quite the opposite actually, as we are slowly climbing that "wall of worry." When much stronger economic news hits, massive amounts of capital will shift to equities, in addition to a lot of new money. Smart money is already positioning for it as aggressive sectors led the charge to all-time highs. It's happening one step at a time as everyone frets the small stuff. Turn off CNBC and turn on StockCharts.com, EarningsBeats.com, my Trading Places blog and my fellow technical analysts here.

Keys To A Strong Portfolio

Solid earnings. Relative strength. Wall Street accumulation.

If you get those three on your side, you've got a great chance for success. Those are my 3 pillars. Because I'm a CPA, I honestly must trust management. If a company says, "we missed our prior estimates, but next quarter or next year we'll do better," why should I believe them? They literally just failed on their last promise and now I'm supposed to believe their next one? Really? I want a management team that executes and is conservative with their guidance. It reduces the chances of a warning that devastates portfolios. Beat your revenue estimate. Beat your earnings per share (EPS) estimate. Convince Wall Street that you're worthy of their investment dollars. Then, and only then, will I consider investing my dollars in your company. It's really quite simple and disciplined, and I stick to it religiously in my portfolios.

So let's move on to my portfolios and their respective highlights and goals. Before I go into individual portfolio specifics, here are common traits of each portfolio:

(1) Each portfolio contains 10 stocks from 10 different industry groups. I do not attempt to cover all sectors. After all, if a sector is underperforming, why do I want to own it? I'm not a value investor. I trade relative strength, not falling knives.

(2) Every stock has beaten Wall Street consensus estimates as to both revenues and EPS in its latest quarterly report. Every. Single. One. No exceptions!

(3) Every stock is technically sound (in my opinion).

(4) Every stock is held an entire quarter. This means you will hold every stock through one earnings report. This one is really hard for me, but by holding 10 stocks through earnings reports, the idea is that the great earnings reports will more than offset the poor reports.

(5) Every stock is selected as of the 19th day of February, May, August and November. The reason for this timing is to allow the time for every stock to report its quarterly results and for me to analyze those reports and Wall Street's reaction to those reports. That last part - Wall Street's reaction - is very important. I might think a particular earnings report is very solid and want to buy it immediately. However, many times, a company reports stellar results but then trades down on both an absolute and relative basis after the report. I need to see that to make an informed decision. So I wait... until the 19th. It's just a date that I've picked. I guess it could have been the 16th, the 21st, whatever. But I've gone with the 19th. It's my OCD kicking in, I suppose. :-)

Now, the specific portfolios:

Model Portfolio

Let me explain how the concept of these portfolios came about. Since Q4 2013, I've traded almost exclusively from my Strong Earnings ChartList (SECL) that I keep here at StockCharts.com. I review thousands of earnings reports every quarter and quickly narrow the list down to only those companies that beat revenue and EPS estimates. Then, they must meet certain volume requirements, as I won't trade illiquid stocks. At that point, I look at the absolute and relative charts. If they've had clear positive reactions after posting better-than-expected earnings and they're liquid, I add them to my SECL. Usually, if I think they're borderline in terms of their technical outlook or if their industry group is weak, I'll still add them to my SECL. Why? Well, Wall Street could begin to react more favorably or their industry group could come to life. If an industry group suddenly becomes strong, I want to know which companies within that space have beaten estimates. I will not include downtrending stocks, no matter how good the earnings report is.

The Model Portfolio came to life after many members of EarningsBeats.com kept asking the same question over and over and over again. "There are 200+ stocks on your SECL. Which 5 or 10 are your favorites?" Finally, I caved on November 19th and the Model Portfolio was born. They're my 10 favorite stocks after reviewing thousands of earnings reports and looking at hundreds of charts. I personally invest in these 10 stocks in my retirement accounts, and they represent many of my short-term trades in my taxable accounts (as do stocks from my Aggressive and Income Portfolios). From my Model Portfolio's inception on November 19th, here are the numbers as of the August 2nd close:

Model Portfolio: +39.00%

Benchmark S&P 500: +8.97%.

That's 30 percentage points of outperformance in 8+ months. In an era where roughly 80% of mutual funds can't keep up with the benchmark S&P 500, I'd say it's working pretty well. Anyone managing money for others should consider at least a portion of their funds in a portfolio filled with relative strength leaders.

Here are the numbers since the latest May 19th selections:

Model Portfolio: +6.82%

Benchmark S&P 500: +2.54%

I track the daily performance with the User-Defined Index feature. Here's a chart of the Model Portfolio's performance since its inception on November 19th:

For those interested, I'll send a link to all of the current Model Portfolio, Aggressive Portfolio and Income Portfolio stocks. Simply send me an email with the subject line "Top 30 Stocks" and I'll send you a link to view them. (This is the same link and list that I offered in my Trading Places blog a week ago, so please don't request it again if you've already received it.) You don't need to be a StockCharts.com member to view the charts, but you will need to be a member to download them into your account. These portfolio stocks are typically reserved for EarningsBeats.com members, so by requesting the link, you agree to sign up as a FREE EarningsBeats.com Digest subscriber. It's sent out 3x per week and I generally contribute a brief article about earnings and/or relative strength 1-2 times per week.

My email is "tomb@stockcharts.com". Feel free to let me know how long you've followed my work and if it's helped you with your trading over the years.

Aggressive Portfolio

These represent excellent stocks, but they carry more risk due to their volatile nature. They tend to be small- and mid-cap stocks with tremendous relative strength and potential. The idea here is that 1 or 2 stocks will surge higher to carry the portfolio. In the current quarter, 5 stocks in this portfolio are up 10% or more. One is up more than 30%, while the big winner is up 99% (in just 10 weeks!!!). This portfolio was started in response to EarningsBeats.com members wanting a more aggressive group of stocks to trade. Check out these results since the portfolio's inception on May 19th:

Aggressive Portfolio: +19.63%

Benchmark S&P 500: +2.54%

Outperformance of more than 17 percentage points in just 10 weeks is a rather impressive start to this portfolio. Here's the daily performance chart:

The worst stock in my Aggressive Portfolio is -2.8%, and it's the only one that is lower since May 19th.

Income Portfolio

So you're retired and want to participate in the stock market's ascent, but you want to do so with much less risk in the event the stock market moves lower. Is that you? Then you'll love this portfolio. It's filled with many household names, mostly outside of the fast-paced world of technology (XLK) and consumer discretionary (XLY). Every stock in this portfolio pays a dividend, and the average dividend yield was 1.9% at the time of portfolio inception on May 19th. While I compare the Income Portfolio vs. the benchmark S&P 500, outperforming it is simply a bonus. The real idea here is modest capital appreciation with a big helping of safety. I'll know this portfolio is a major success when it significantly outperforms the S&P 500 during a period of declining prices.

So how has it performed thus far (since May 19th inception)?

Income Portfolio: +5.15%

Benchmark S&P 500: +2.54%

Honestly, that's very impressive. There's a personal products company in there. Food companies. A railroad. A waste disposal company. How sexy is that? Yet they've beaten (actually doubled!) the S&P 500 return - due to what? Relative strength. Let's not forget the almost 2% dividend that will be tacked on as well.

Here's the daily performance chart since its inception:

While the S&P 500 has moved mostly higher since May 19th, it's worth mentioning that the 4% move lower in the S&P 500 from May 19th through May 31st resulted in only a 2% drop in the Income Portfolio. Last week, the Income Portfolio performed notably better than the benchmark -again during a market decline. Thus far, that's a couple of "tests" of this approach and the results are solid.

Conclusion

So there you have it. 3 strategies and 3 different portfolios. 3 times that solid fundamentals and relative strength win out. Not only are my 3 portfolios just getting started, but so is the current secular bull market. We've got a long ways to go and I'd love for you to join me on the ride.

Please write me at "tomb@stockcharts.com". In the subject line, write "Top 30 Stocks". I'll also make sure you're set up to receive EarningsBeats.com's free newsletter beginning Monday and I'll send you a link to my current Top 30 stocks - 10 in each portfolio. It's a way of saying thank you for all of your support over the years! :-)

One last thing: the "charts" above of my User Defined Indexes to track the three portfolios are images. You cannot click on them to get live data. Why? Because I have to input the data in my StockCharts.com account. The data is not in your account, so you cannot track it in that manner.

 

Happy trading!

Tom

The bears were awakened last week following Fed Chair Powell’s remarks, as well as Trump’s trade war tweets. Both events brought the markets to their knees, with each of the major indices pulling back to their 50-day moving averages.

Despite the negative action in the broader markets, there was, beneath the surface, a subset of stocks that gapped up higher, with many on heavy volume. In fact, over 180 stocks sprung to life, which took place after they reported strong earnings reports. This figure represents approximately 1/3rd of those that reported last week.

And some of the gains were huge! My biweekly MEM Edge Report - available to investors - has seen 6 of its Recommended Holdings stocks gap up an average 7.1%. The refined list of 25 top-performing stocks on this report is designed to uncover big winners and, despite the general downturn in the markets, it revealed plenty of opportunities.

While many investors will sell their stocks after a big pop in price, this approach can oftentimes be shortsighted and the stock will go on to move much higher. Of course, you need to have a healthy market as your backdrop. With that in mind, let’s review some of the dynamics that will propel a stock higher following a strong earnings report.

 

DAILY CHART OF COUPA SOFTWARE (COUP)

Above is a chart of Coupa Software (COUP), which has been a big winner this year. The company reported strong Q4 earnings at the end of January, which resulted in an 8% gap up in price. The green arrows on the chart are highlighting analysts' upgrades and/or price target increases.

This is common among these winning stocks, as analysts are now interested in this strong grower and are turning bullish as they uncover sound fundamental information that will support continued growth of earnings. This, in turn, will spur further bullish sentiment and help propel the stock higher.

Other dynamics are at play here as well. For instance, Coupa Software is in one of the strongest areas of the market, with Software stocks up almost 40% year-to-date prior to this week’s selloff. Industry Group affiliation accounts for a large portion of your stock's upside (or downside) potential, so make sure you’re trolling in areas that have products or services that are in high demand.

Most importantly, you’ll need to pay attention to the chart. If the stock breaks out of a base while gapping up on volume (as seen above), this is very bullish. Beyond that, the stock will need to find continued support at its upward-trending simple moving averages while it continues to advance.

 

DAILY CHART OF CHIPOTLE (CMG)

Chipotle (CMG) - which I highlighted 2 weeks ago as looking bullish going into its earnings report - could be a winning candidate after gapping up last week following the release of strong earnings. The stock advanced further this week in a very difficult period after Goldman Sachs upgraded the stock. Add in the fact that CMG is finding support at its upward-trending 10-day moving average (green line), this stock could easily continue to outperform.

Next week, I’ll highlight how to trade these stocks following their gaps up in earnings – something my newsletter subscribers will read about this weekend – so be on the lookout for that. For those who'd like to receive my articles directly, you can sign up using the Contact Us link here.

 

Warmly,

Mary Ellen McGonagle

MEM Investment Research

In my latest "Don't Ignore This Chart" article, I used a Relative Rotation Graph holding 20 stocks as a starting point to find an interesting-looking rotation and a possible trading opportunity for BHGE. The question: how was I able to select those 20 stocks to include on that RRG?

The answer: making use of the tools and functionality that is available on StockCharts.com!

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In this particular case, I started on my dashboard. The image above is a screenshot of part of my Your Dashboard page, where I have two widgets side-by-side displaying the top UPward SCTR movers and the top DOWNward SCTR movers. The universe is limited to large-cap stocks to make sure we will have decent trading volume available and no exceedingly jumpy SCTR changes from day to day.

As you may have noticed, there is an RRG link below both of those widgets. Clicking that link will open up the RRG page, with the ten stocks in that table against the benchmark S&P 500.

Obviously the ten UPward moving SCTRs will show more-or-less positive rotations on the RRG, while the ten DOWNward moving SCTRs will show predominantly negative rotations on an RRG.

To keep an eye on all 20 movers on one RRG, I simply copy all the symbols in the RRG for DOWN movers and paste these symbols at the end of the input box of the RRG for UP movers.

Here are the steps you need to accomplish this:

1. Open Your Dashboard
2. Duplicate browser window in another tab
3. Click the RRG link for Top SCTR DOWNmovers
4. Select all symbols in the symbol-entry box and copy
5. Go to the browser window that still holds Your Dashboard
6. Click the RRG link for the Top SCTR UPmovers
7. Put cursor at the end of the symbol entry box
8. Add a comma, then paste the symbols you copied in step 4.
9. Click "Update"
10. Voila, you now have a Relative Rotation Graph holding the top ten UP and DOWN SCTR movers to work from.

From that freshly created RRG, I can now follow my normal workflow to analyze the universe. As you know, RRGs can help you narrow down a selection and give you a high-level overview of what is going on in the market as it enables you to see the (relative) movement of a universe of stocks in one graphical representation.

From that overview, I encourage people to follow their usual workflow. RRG was never designed to replace what people are used to doing in the process of analyzing markets. But RRG definitely helps you keep an eye on the big picture and save time in finding new trading ideas and/or monitoring your portfolio.

This approach of using the Top SCTR movers as input for your RRGs also means that you will have a dynamic universe that changes every day with the moves that take place in the market, keeping you on top of new developments.

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On the RRG above, I have identified a few trails that interest me for further investigation. either positive or negative. The RRG below shows only these trails for cleaner visuals.

Going over the price graphs, with relative strength indicators, I found two/three potential trading opportunities.

K vs. PRU pair trade

The first and second opportunities, as this is about two stocks, are in K and PRU.

On the RRG, K is inside the improving quadrant and has just hooked back up towards the leading quadrant. PRU, on the other hand has just entered the lagging quadrant and is heading further into it at a negative RRG-Heading.

Looking at their two price charts, I noticed that K has just completed a double bottom formation, while PRU has just completed a double top.

The opposite rotations on the Relative Rotation Graph, in combination with the opposite double top/bottom formations, make this a potential pair trade to watch/execute.

The only caveat for this one is that the jump in K may have gone too far away from the breakout level already, which adds a bit of risk to the trade.

Activision Blizzard - ATVI

The stock with the most interesting combination of rotation and price development (imho) is ATVI.

On the RRG, ATVI is positioned inside the improving quadrant and just "hooked" back at a heading towards the leading quadrant. These "hooks" are very rapid rotations that are simply too fast for the time frame, in this case weekly, to be picked up as a clockwise rotation.

That this is in fact a clockwise rotation becomes clear when you switch to a daily version of the RRG, where you will find ATVI having just entered the leading quadrant after completing a full rotation through all quadrants over the past six weeks.

On the weekly price chart, ATVIS has just completed a bottom formation and started moving higher. We still have one more trading session to go before that last bar becomes a real weekly bar with a weekly close, but the fact that ATVI has been able to fight against the weak market of the last few days is another sign of strength. $47.50 seems to be a solid support level for now.

Out of the 20 stocks on the RRG with which I started this article, via the four interesting positive rotations, I think ATVI is the stock with the best risk/reward ratio for coming weeks.

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My regular blog is the RRG Charts blog. If you would like to receive a notification when a new article is published there, simply "Subscribe" with your email address.

Julius de Kempenaer

Senior Technical Analyst, StockCharts.comCreator, Relative Rotation Graphs Founder, RRG Research

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– Follow @RRGResearch on Twitter– Like RRG Research on Facebook– Follow RRG Research on LinkedIn– Subscribe to the RRG Charts blog on StockCharts

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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.

To discuss RRG with me on S.C.A.N., tag me using the handle Julius_RRG.

RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered trademarks of RRG Research.