ChartWatchers

Hello Fellow ChartWatchers!

The markets continue to rise impressively with the Dow closing higher for 13 of the last 16 days.  Arthur, John and the rest of the ChartWatchers team discuss that in more detail in just a bit.  I wanted to take some time to talk about six very important things that most people don't know about our website.

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Last year, we implemented a Loyalty Rewards Program that provides an ever increasing discount for our long-term subscribers.  For each year that you've been a member of StockCharts, we'll reduce your renewal cost by 1%.  The only "trick" here is that you need to remember to enter your loyalty coupon code into the renewal form before you renew.  For whatever reason, many people are not taking advantage of this deal - don't be one of them!  Before you renew, get your coupon code by clicking on the loyalty badge that is next to your name on the Members page.  Click here for more details.

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3.) Arthur Hill Has Been Improving Our ChartSchool Area -

Arthur has added lots of new articles to ChartSchool recently including ones on the Detrended Price Oscillator, Bollinger's %B, Cycle Line Analysis, the Raff Regression Channel and much more.  Be sure to revisit ChartSchool when you get a chance to learn even more about Technical Analysis.

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Some people associate the word "blog" with low-quality, controversial sites that spread rumor and innuendo.  Don't mistake our blogs for those others.  The "Blogs" area at StockCharts.com only contains articles written by the StockCharts staff and a few select guest authors.  The articles are only about technical analysis and getting the most out of our website.  If you aren't reading our Blog articles, you are really missing out on getting the most from our website.  And most of our Blog articles are free!

Here are some great recent articles you may have missed:

What are ZigZag Retracements? from our MailBag blog
Pulte hits retracement resistance from our "Don't Ignore This Chart" blog
Now You Can Add Sector and Industries to your ChartLists from our "What's New" blog 

Be sure to read our Blogs every day.

5.) The Flash Version of ChartNotes is Almost Complete -

So far the feedback on our new Flash version of our ChartNotes annotation tool has been very positive.  We have added a couple more features like mouse-wheel and printing support and we think it is almost ready to replace the Java version.  For most people, it is faster and has fewer technical issues when they try to run it.  Let us know if there are any more kinks that we need to fix before it is officially released.

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Don't forget to visit our Milestones page from time-to-time.  It shows you all of the significant improvements we've made to the site since we started way back in 1999.

- Chip Anderson

Dow Theory holds that the Dow Transports and Industrials must both hit new highs to confirm an ongoing bull market. The ability of the Dow Industrials to exceed their January high has done just that. That doesn't tell us how far the bull market will run, or for how long. It just confirms that a bull market still exists. The Dow has been a laggard for several months and is one of the last indexes to hit a new high. [The NYSE Composite also hit a new high last week]. A lot of this week's Dow strength can be attributed to upside breakouts in some key components.

DOW LEADERS... The Dow's ability to finally hit a new high is largely based on the strong price of the five stocks shown below. All have rallied to 52-week highs over the last week. In order of relative strength, they include General Electric, DuPont, Cisco, Intel, and Wal Mart. Although Wal Mart has been a laggard for sometime, all five stocks are doing better than the Dow during the first three months of the new year.

TIPS are bonds that provide inflation protection. While Erin covered this subject in yesterday's blog, I wanted to cover it with a little more depth and from a somewhat different perspective. Our default "first look" charts are usually set for one year, but I personally like to step back to a three-year chart to help put recent price action in a longer-term context.

I think the most prominent feature on the chart is the crash in October 2008. Before that you can see the strong advance, coinciding with people's belief that prices on everything would rise forever. Prices leveled in 2008 as the inflation belief began to be undermined. The crash in TIPS occurred when both real estate and stocks were crashing and fear of deflation took hold. TIPS began to advance again out of the depths of the crash.

Since the November 2009 top, TIPS have moved sideways into a triangle formation. This is also called a continuation pattern, meaning that prices are technically expected to continue higher once the consolidation phase has completed. Prices have been turned back from overhead resistance for a third time, and I think this could be the final pullback before an upside breakout occurs. Supporting this opinion is the fact that (1) the 50-EMA is above the 200-EMA (bull market for TIPS), (2) we have a PMO crossover buy signal in relatively oversold territory, and (3) the 20-EMA is close to crossing up through the 50-EMA, which will generate a Trend Model buy signal.

Candlesticks and candlestick patterns are the foundation to trading in my view.  I use them on every charting timeframe, whether it's a one minute, hourly, daily, weekly or monthly chart.  If you're a daytrader or swing trader, trading without the knowledge of reversing candlesticks is doing yourself a great disservice.  While not every uptrend or downtrend ends with a reversing candlestick, most reversing candlesticks do end a trend if a prior trend is in place.  The reversal may just be a temporary end to the trend, so you have to view these candlesticks in tandem with other technical indicators such as price support/resistance, trendlines, key moving averages, MACD divergences to determine the potential degree of any reversal.  Combining these candlesticks with other technical indicators can be especially rewarding.  Take a look at the following chart of Aspen Insurance Holdings (AHL):

AHL was our Chart of the Day for Tuesday, March 16th.  I've circled the doji which would be an interesting candlestick all by itself.  But when you combine it with a 50 day test, trendline test and price support test, it becomes even more meaningful.  Also trading AHL, which at the time had RSI in the 40s and stochastics in the single digits, was a much better alternative than chasing stocks that had already advanced significantly and were sporting RSIs and stochastics in the 70s and 90s, respectively.  AHL was also a fairly conservative trading prospect.  Note that the 6 month trading range on AHL only spanned 3 points or so.  So while it probably wasn't go to be a huge winner in terms of a percentage gain, neither was it likely to be a big loser.  Given the extremely overbought market conditions last week, AHL represented a decent trading opportunity for the more conservative trader.  A significant benefit to trading off of a reversing candlestick is that it provides you a pre-determined stop level.  In the case of AHL, any move below $27.20 (the low the day the reversing candle printed) would have been a sign to exit.  This is crucial as a trader because now you can clearly identify your risk.  Roughly, there was $.30 per share risk in this trade.  If you wanted to limit your risk to no more than $150, then you know to purchase no more than 500 shares (500 shares X $.30 = $150).

I realize not all traders are conservative, however, and many want to "swing for the fences" on occasion (or maybe more than "on occasion").  I search for those as well.  You can check out two such candidates - KongZhong Corp (KONG) and Ford Motor (F) that were included as Charts of the Day on Thursday and Friday of this past week.  F is included as a more aggressive stock in this example because it was included as a short candidate following Thursday's reversing candlestick.  Note the 3.2% drop in F on Friday.  CLICK HERE to view the videos we produced on our Thursday and Friday Charts of the Day on both KONG and F to gain a better understanding of the power of reversing candles.

By the way, every ETF that tracks the major indices printed reversing candlesticks on Friday.  Given the recent uptrending market, this is something that shouldn't go unnoticed.  The equity only put call ratio (EOPCR) indicator (my favorite sentiment indicator discussed in previous articles - check the archives) that marked the short-term bottom in early February was flashing a sell signal throughout last week as well.  This is certainly indicative of a short-term top.

Whether you're an active daytrader, professional trader, portfolio manager or simply someone looking for a bit of supplemental income, candlesticks should be an integral part of your screening technique.

Happy trading!

The recent S&P rally to new reactionary highs has shown to be on rather slim-footing given that volume patterns are rather tepid. We don't disagree in the least, but the fact of the matter is that the advance/decline figures have been rather "good" of late and showing impressive strength in the face of this volume contraction. We've always been led to believe that volume equals conviction, but the current rally has only convinced in terms of points and percentages...not in volume.

So we must question whether the S&P is on sound-footing or not? Our initial reaction would be "no"; but when we look at the longer-term monthly S&P chart, we can't dismiss the fact that the S&P has broken out above its 50-month exponential moving average by a slim 1% to 2% margin. In the past, the 50-month has been an inflection point that gives confidence as to the next market move - be it higher or lower. The current breakout coupled with the still rising full stochastic means we lean "long" at this point. This is a very difficult statement to make given we've fought the rally as being of the counter-trend variety.

Still, the potential exists for this nascent breakout to fail, and for prices to falter and extend below the 1146 level once again. This would lead to a resumption of the bearish trend. However, if prices extend from current levels - then we won't be surprised to see a test of the 1400 to 1500 highs in the next several years. Yes, we hear the knashing and wailing and we can point to a litany of economic issues that illustrates the markets should move lower; and they very well may do so. But the technical breakout stands for now; not on firm footing - but a footing that must be respected.