Editor's Note: This article was originally published in John Murphy's Market Message on Thursday, September 5th at 10:46am ET.

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A rally in global stocks has taken a turn for the better with major stock indexes clearing some upside resistance barriers. The three major stock indexes shown below have all cleared their August highs and 50-day moving averages. At the same time, their 14-day RSI lines (upper boxes) have risen above 50; and their daily MACD lines (below charts) have turned more positive. That strong price action has pushed all three indexes out of their August trading ranges to the upside. Small caps and transports are also having a very strong day. Foreign stocks are rallying as well.

Eight of eleven U.S. sectors are in the black, and are being led higher by financials, technology, and industrials. Defensive sectors like staples, utilities, and real estate are in the red and lagging behind. A rebound in global bond yields is hurting bond proxies while boosting banks and other financial stocks. Semiconductors are leading technology stocks higher.

A pullback in the dollar over the last two days is helping to boost economically-sensitive copper and oil prices; while safe haven precious metals are seeing some profit-taking. After starting the week in risk-off mood, investors are taking a more risk-on attitude today as we near the end of the week. Some positive trade news and stronger economic data are behind today's more optimistic mood. But that can change very quickly. All we can do is follow the action on price charts which has turned more positive. While stocks are trading higher this morning, it's important that they hold onto those gains through the rest of the day.

Chart 1

Chart 2

Chart 3

Major bullish reversal patterns signal the start of new up trends that can extend and be very profitable. However, chartists must first learn to distinguish between meaningful patterns and irrelevant patterns. Here's how...

There are three parts to a major bullish reversal pattern. First, there is the price action leading into the pattern, which is a downtrend. Second, there is the pattern itself, which is the base-building process. Third, there is the price action leading out of the pattern, which is the breakout. All three parts are important and there are four keys successful identification.

First, a pre-existing downtrend is mandatory. This may sound obvious, but you cannot have a major bullish reversal pattern without a substantial downtrend to reverse. The decline into the pattern should be extended, in duration and distance. A three week decline that extends 7% will not cut it.

Second, the height of the base should be in proportion to the prior decline. While there are no hard and fast rules, the height of the pattern should not cover more than half of the prior decline. If a stock declines from 80 to 40, a Double Bottom should not extend past 60. Otherwise, the Double Bottom covers more than half the decline and we should consider alternatives.

Third, the base of the pattern should extend for months, not weeks. The base represents the accumulation phase when the "smart" money buys. The longer the base, the longer the accumulation phase and the more solid the base from which to launch a breakout. A three-week base does not cut it.

And finally, the breakout should be strong and confirmed with other indicators. Price should accelerate to the upside and break above resistance like a hot knife through butter. Chartists can use volume, volume-based indicators or other trend indicators to confirm the breakout. This is a fielder's choice.

Now let's look at some examples.

The example above shows Activision Blizzard (ATVI) with a Rounding Bottom that checks all four boxes. First, the stock declined over 50% and hit a 52-week low in February. Second, the height of the pattern (40-52) is less than a third of the prior decline. Third, the base building process extends nine months as the stock formed the Rounding Bottom from December to August. Fourth, the breakout occurred with a price acceleration that is confirmed with the 200-day SMA, RSI(65) and Aroon(65).

Click here for a System Trader article explaining how to use RSI(65) and Aroon(65) to identify uptrends.

The second example shows Sonos (SONO) with a Triple Bottom that checks all four boxes as well. There was an extended decline into the pattern, the height of the pattern is less than a third of the decline and the base extends at least six months. The breakout occurred with a price acceleration and was confirmed with the indicators.

Meaningful bullish reversals patterns are the exception, not the norm. Chartists looking to profit from these patterns must learn to separate the contenders from the pretenders. Ignore the pretenders and move on. Put the contenders are on your watch list and act when your setup triggers.

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This Week on Art's Charts

SOXX extends bounce off key retracement, IPAY holds up well and ranking ETFs by chart performance (Thursday - click here)

Charting and analyzing the AD Lines, Up/Down Volume Lines and High-Low Lines for the S&P 500, S&P Mid-Cap 400 and S&P Small-Cap 600 (Thursday - click here)

Trading range extends, large-cap breadth holds up, low volatility leads high beta and junk bonds show little fear (Wednesday - click here)

A classic reversal pattern in a digital storage leader - Plus four other setups (Wednesday - Click here)

QQQ and SPY are doing just fine as XLY and XLK carry the load in August (Tuesday - click here)

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This week, China agreed to continue negotiations on the China-US trade deal. While that is news that the market can look forward to seeing play out, it definitely helped the charts technically.

Thus, the indexes look set to take a run at the nearby highs. But the areas of the markets that I am looking at are the Industrial metals and Rare Earth metals. The chart below represents copper miners.

The rare earth metals chart didn't kick off as strong on the news, but, if we start to see some growth in trade, this area should perk up nicely.

Recognizing that these charts are bouncing off two-year lows, we can see they also topped out when tariff announcements started in early 2018. Check out the 3-year charts below.

Here is the REMX weekly.

Notice there is significantly higher PPO lows currently on the weekly charts than the December 2019 lows. Stay tuned to see if these charts can fly! What is the x-factor? The tickers copX and remX are both worth watching, as these ETFs should move significantly faster than the metals.

The excitement is building as Tom Bowley gets ready to rejoin the EarningsBeats.com team as Chief Market Strategist. Why the excitement? Because Tom's experience as Senior Technical Analyst at StockCharts.com, along with being one of the original founders of and contributors to EarningsBeats.com, gives him a unique perspective and knowledge that will benefit both communities. Accordingly, we are pleased to invite the entire StockCharts community to join Tom for a special webinar this Monday, September 9th at 4:30pm ET, as he lays out his vision for EarningsBeats.com's future. Just click here to learn more and to get webinar instructions.

Speaking of Tom... Check out the leading stock that has helped to power his Model Portfolio higher.

This stock was first added to the Model portfolio on May 19 at a price of $84.03. When the 90-day holding day period ended, the stock was trading at $134.96, a 60% gain. Then, when Tom released his new batch of Top 10 Picks on August 19, ROKU was once again one of the stocks in the Model Portfolio - IN SPITE of its huge gain. Since that time, the stock has tacked on another 25+%. In fact, since the stock was first added to the Model portfolio on 5-19-19, ROKU has more than doubled! I wanted to point this out as one of the topics Tom will cover during Monday's webinar will be the makeup and performance of his three portfolios - Model, Aggressive and Income - that have consistently and substantially outperformed the market. You DON'T want to miss this event!

In the meantime, with Tom front and center at EarningsBeats, we'll continue to focus our attention on stocks like ROKU that beat top- and bottom-line earnings expectations and have charts that indicate they could go much higher.

 

At your service,

John Hopkins

EarningsBeats.com

Better Timing. Better Trades.

You board any airplane today and before it takes off, the flight attendants review all the exits with you. Cruise ships do life boat drills before departure. Exits on trains and buses are also clearly marked and labeled for emergencies. Clearly, the point is that you need to know how to get out. Your life just may depend upon it. Similarly, your financial life might also depend upon knowing your exits.

I recall reading the Market Wizards books years ago and learning how a large percentage of the wizards formulated their exit strategies BEFORE ever buying into their positions. In my mind, I label that the race before the race.

My habit is to formulate my exit strategies when the markets are closed. I like to think that I’m using my rational silicon brain. When the markets aren’t open, I’m calm and unhurried — strategically formulating both bearish and bullish scenarios. I can plan out specifically how I’ll pyramid into my position and which accounts will get allocated in pre-calculated proportions. Then I deal with conquering my own hopes and fears, my dreams and promises with respect to the specific investment at hand.

Too many times, I’ve witnessed investors try to formulate exits on the fly in the middle of a trade during market hours — only to have the silicon brain vaporize and the human brain kick in. In those moments, they suddenly move to the fictitious Lake Wobegon, where as Garrison Keillor says, everyone thinks they’re far above average.

The stock market is episodic by nature and will consistently generate a crisis of beliefs and emotions which in turn produces indecision and brings delays. Markets, money and moods are all bundled together by your beliefs. I learned to wrestle with this triumvirate best during off hours. You need to enter the battle having prepared yourself mentally and emotionally beforehand — coming equipped with both bullish and bearish scenarios that are appropriate to your personal trading plan and timeframe. Only then will you be ready to listen to what the market has to tell you.

The market is a jealous mistress that’s determined to have it her way and only her way. Once you learn to approach her with this mindset and obey her, the market will share her profits and riches with you.

 

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Friends! Come join me for...

"The 10 Stages of Stock Market Mastery"

Next month – Saturday, September 28th at 9:00am – come join me here in Seattle for a special one-day seminar. In my "10 Stages of Stock Market Mastery" course, I'll cover the most important aspects of my personal investing system and share with you the routines and strategies I've used to trade the stock market for a living for more than 25 years.

If you're anywhere near the Seattle area (or if you're up for a quick trip out to the PNW!), this is a great chance to spend some quality time learning more about the markets, focusing on your portfolio practices and strengthening your investing approach.

For complete details and registration info, CLICK HERE.

See you on the 28th!

 

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Trade well; trade with discipline!

- Gatis Roze, MBA, CMT

StockMarketMastery.com

• Author, Tensile Trading: The 10 Essential Stages of Stock Market Mastery (Wiley, 2016)
• Presenter of the best-selling Tensile Trading DVD seminar
• Presenter of the How to Master Your Asset Allocation Profile DVD seminar
• Developer of the StockCharts.com Tensile Trading ChartPack

Very soon, I will be launching a daily newsletter for DecisionPoint that will give you some stocks that have presented themselves in one of my many DecisionPoint scans. I do the analysis so you don't have to. I don't make trading recommendations, and certainly no promises - I just do the legwork and find the stocks I think you should look at.

I decided that I would do my first scan report for our ChartWatchers readers. Keep an eye out later this month for more information on the launch of this new service from DecisionPoint.

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Today I ran my "General PMO Scan" after the market closed. (You'll find the scan language at the end of the article.) From the results, I've picked my five gems for the day. Again, it is important that you do your own analysis. When this newsletter launches, I'll be posting five gems five days a week!

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These results are in alphabetical order.

BRO was an interesting one. As far as price, it did break out, but hasn't been able to maintain above the resistance level. However, note that the OBV has a positive divergence that activated on the recent rally. Since then, the OBV has continued to climb with price. The PMO is about ready to give us a positive crossover BUY signal. The SCTR has been the "hot zone" above 75 for quite some time, indicating that there is internal strength.

EPAM was very interesting to me. No doubt it has been experiencing some difficult volatility alongside the market, but it has now formed a symmetrical triangle. These are continuation patterns, which means they should break in the direction of the leading trend. As you can see, EPAM overall was in a rising trend. The PMO is attempting to trigger a BUY signal. I like to find candidates that are beginning to make their move, so that most times they won't already have that crossover BUY signal. The PMO turned up above the zero line, which is a plus. I also like the SCTR. Despite the ups and downs, EPAM has held up with the SCTR above 75 within this charting period. Yesterday saw a big upside move; today, it pulled back. I'm watching for an upside breakout.

LHCG had formed a bearish descending triangle, but today it resolved to the upside. I always find a bullish resolution to a bearish pattern especially bullish. The 20-EMA avoided a negative crossover. Today, the 5-EMA crossed above the 20-EMA for an ST Trend Model BUY signal.

MTSI had a fabulous day with a continuation of yesterday's breakout, closing near the top of the range. The OBV had a positive divergence with price, which resolved as expected with a price rally. You may want to hold out for a pullback after today's rally, but, many times, the good ones will continue to run. The PMO is turning up above the zero line and is not really in overbought territory.

SGH has been in a trading range for most of August. Yesterday, we saw a breakout; today, we got the pullback. While it was a move 1% lower, the rising trend is completely intact and the OBV is confirming the current rally.

I hope you enjoyed reading about these gems. Again, I'll remind you that I am not making trading recommendations. When I start publishing this newsletter, I will also give complete disclosure as to whether I own or plan to purchase any of the stocks that I show you.

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General PMO Scan:

// Narrows down the universe to stocks with decent volume and from the US

[type = stock] AND [Daily SMA(20,Daily Volume) > 100000]

AND [country is US]

 

// Keeps the penny stocks and high volatility stocks out of your results

AND [Close > 10]

 

// This identifies a PMO that hasn't yet had a positive crossover its signal line

AND[today's PMO Line(35,20,10) < today's PMO Signal(35,20,10)]

 

// This identifies a PMO rising for three days

AND [today's PMO Line(35,20,10) > yesterday's PMO Line(35,20,10)]

AND [yesterday's PMO Line(35,20,10) > 2 days ago PMO Line(35,20,10)]

AND [2 days ago PMO Line(35,20,10) > 3 days ago PMO Line(35,20,10)]

 

//This ensures we get a positive IT and LT Trend Model configuration

AND [today's ema(20,close) > today's ema(50,close)]

AND [today's ema(50,close) > today's ema(200,close)]

 

//This identifies stocks with SCTRs greater than 75 or in the "hot zone"

AND [SCTR > 75]

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Watch the latest episode of DecisionPoint with Carl & Erin Swenlin LIVE on Mondays 5:00pm EST or on the StockCharts TV YouTube channel here!

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Technical Analysis is a windsock, not a crystal ball.

Happy Charting! - Erin

erinh@stockcharts.com

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Helpful DecisionPoint Links:

Erin's PMO Scan

DecisionPoint Chart Gallery

Trend Models

Price Momentum Oscillator (PMO)

On Balance Volume

Swenlin Trading Oscillators (STO-B and STO-V)

ITBM and ITVM

SCTR Ranking

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