ChartWatchers

Hello Fellow ChartWatchers!

I'm going to start with four important announcements and then we'll get into some sector-oriented market analysis:

• We now have the video of our ChartCon conference from back in August available in our bookstore. It contains all of the main presentations from the conference including talks by John Murphy, Martin Pring, Alexander Elder, Arthur Hill and many more. The material presented is just as relevant today as it was back in August. If you attended the conference, this is a great way to refresh your memories of what you witnessed. If you were not able to attend, this is your chance! You can now watch all of these presentations at your leisure on your computer. Click here to learn more about all of the great sessions that we captured on video and how you can get your own copy.
• Speaking of great video content, have you attended any of our webinars yet? Each week we are hosting a "mini-ChartCon" if you like with Greg Schnell (and other assorted guests) giving their thoughts on the market LIVE each Thursday after the markets close. This past week, Greg teamed up with Martin Pring for a live review of the US markets as well as Martin's thoughts on where things are headed. They then took questions from the audience for about 20 minutes before wrapping up. Click here to see a recording of the webinar and make plans to attended our next webinar this coming Thursday!
• Also, Alexander Elder's new book is out and it is full of StockCharts.com charts! Alex has completely updated "Trading for a Living" with new content, new examples and (of course) new charts. I am thrilled that we were able to help him create this amazing new version of his timeless classis. Check it out when you have some time. It is a "must have" book.
• Finally, a quick reminder to always try to spend some time each week reviewing the charts in our Pubic ChartList area. The authors of these lists - StockCharts users just like yourself - work very hard to update and maintain their charts for everyone to see. All they ask in return is for people to visit (and then pledge their undying loyalty by "voting" and "following"). With all of the other commentary on StockCharts these days, it is easy to overlook the Public ChartList area so please take a moment and check it out. Thanks!

OK, on with the show...

Stalking the Elusive Holiday Consumer with Technical Analysis

I've talked extensively in the past about Sector Rotation and doing sector analysis using the nine S&P Sector ETFs. We have many tools here at StockCharts that can help you see how the nine sectors that make up the US stock market are doing relative to each other and relative to the market as a whole. Today, I want to show how ratio symbols can be used to determine how bullish or bearish consumers are feeling heading into the upcoming holiday shopping season and what the implications of that battle are for the economy as a whole.

(Click on the chart for a live version.)

This chart shows the relative strength line for the Consumer Discretionary sector vs. the Consumer Staples sector.

The Consumer Discretionary sector (also called the "Cyclicals" sector) consists of companies that sell goods that consumers tend to buy only when they are bullish on the future. These are items that consumers are able to put off buying in difficult economic times. Industries within the Cyclicals sector include Gambling, Furniture, Durable Household Goods (e.g., appliances), Travel & Leisure products, etc. "By definition," the Cyclicals sector out-performs the rest of the market at the start of a new wave of economic optimism and remains relatively strong until that optimism wanes.

The Consumer Staples sector is essentially the "evil twin" of the Cyclicals sector. It consists of companies that sell goods that consumers will buy regardless of their opinion on the economy. Industries within the Staples sector include Food, Pharmaceuticals, Non-Durable Household Goods (e.g., cleaning suppies, batteries, etc.) as well as (somewhat sadly) various forms of booze.

Because these two sectors ourperform the market at opposite ends of the economic cycle, looking at the ratio of their corresponding ETFs (i.e., the black line on the top of the chart above) can be very enlightening. To chart the ratio of two symbols, you use a ticker symbol consisting of the first symbol followed by the colon character (":") and then the second symbol - just like I did in the chart above. The XLY:XLP ratio gives us a very good indication of how consumers feel about the economy based on how they are voting with their pocketbooks. If they are optimistic, this ratio will move higher. If they are cautious, the ratio will move lower.

Notice that since the crash back in late 2008, that ratio line has generally been moving higher. Looking closer however, a case could be made that things moved sideways between 2011 and the start of 2013, followed by a big move up that lasted until February of this year (more on that in a moment). I added the yellow Bollinger Bands to the ratio chart to give you a sense of how volatile the ratio's movements can be. Below this weekly chart, I also added a MACD indicator to help understand the momentum of these movements and see if there is any increase or weakening in the currrent trend.

Now, let's look more closely at things since February:

(Click on the chart for a live version.)

The key things to look for on this chart are divergences - places where one line is generally moving in one direction when the other line is generally moving in the opposite direction. There are two significant divergences on this chart - do you see them?

The first one happened in March - the ratio (i.e., consumer optimism) moved significantly lower while the S&P 500 (the red candles) moved sideway to slightly higher. What could have caused this? Well, if you remember, the end of February was the time when the fighting in the Crimea and, later, eastern Ukraine began. Clearly those event spooked consumers more than they did the markets. By May however, consumers had lost interest and their mood began to improve again as evidenced by the rising ratio line on the chart.

The next significant divergence started in mid-October and is still going on. The S&P has made some tremendous gains while the XLY:XLP ratio has gone sideways/lower. The exact cause of this divergence is not completely clear (low oil prices are probably playing a part in it) however; as technicians, we are not that interested in "Why?" Instead, we are interested in "How can I take advantage of this?" Based on the charts, things probably cannot continue diverging like this much longer. Either consumers will perk up and the ratio will start moving higher again or the stock market will fall back to earth when it realizes that consumers aren't interested in spending during the holidays.

Which will it be? Those recent doji candlesticks at the right edge of the S&P chart signal indecision on the part on the market and don't bode well for the near term. The MACD Histogram of $SPX (not shown, click here) also shows that $SPX is quickly running out of upwards momentum. So several things point to a decline in $SPX near-term. The magnitude of that decline may hinge on what the XLY:XLP ratio does in the coming days. It is worth watching closely.

- Chip

Chart 1 shows Wal Mart surging 4% today to break out to a record high. That's a pleasant change for the world's largest retailer which has hardly been a market leaders. The WMT/SPX relative strength ratio (above chart) is just starting to rise after falling for most of the last year. That's obviously a positive sign for the retail sector as well. Falling oil prices are one of the catalysts behind the recent surge in retailers. But there may be more to it than that. Lower end retailers appear to be getting most of the boost from falling energy costs. In addition to Walmart, that would include stocks like Costco, TJX, and Target. Let's take a look.

The black line in Chart 2 represents the price of Light Crude Oil since the start of the year. The two rising lines represent the two most popular retail ETFs. As a rule, falling oil prices are good for retail stocks because it gives customers more discretionary money to spend. That's been especially true since the middle of June when oil prices started to tumble. Although both retail ETFs have risen since July, the Market Vectors Retail ETF (RTH) has done better than the S&P Retail SPDRs (XRT). Since the start of the July, the RTH (blue line) has risen 13% versus a 5% gain for the XRT. That being the case, I'm going to focus in this message on the RTH. Wal Mart happens to be the largest holding in the RTH (10%).

The stock market is in a clear uptrend, but is short-term overbought after a big run the last four weeks. I am assuming that the trend is up because the S&P 500, S&P 500 Equal-Weight Index, Dow Industrials, Dow Transports, Nasdaq 100 and Nasdaq Composite recorded new highs this week. The S&P MidCap 400, Russell 2000 and S&P Small-Cap 600 are lagging, but these three are within 4% of their highs. The PerfChart below shows, however, that small-caps, mid-caps and the Nasdaq 100 have outperformed the S&P 500 since October 14th. Even though small-caps and mid-caps have been lagging for months, they are not exactly dead and they are showing some relative strength over the past month.

The only problem right now is that the stock market is short-term overbought after a big run. Overbought, however, is a tricky term because stocks can become overbought and remain overbought in strong uptrends. Remember, it takes significant buying pressure to produce overbought conditions and significant buying pressure is bullish. As the PerfChart showed, five of the eight indices are up double digits in less than five weeks. Using the S&P 500 as the market proxy, we can see that the index stalled the last four days with doji forming the last three days. Doji indicate indecision that can sometimes foreshadow a short-term reversal. Even if we get a short-term reversal, I would not expect much downside and would look for support in the 2000 area. Notice that broken resistance and the early November low mark support in the 2000-2020 area.

Good trading and good weekend!
Arthur Hill CMT

Consumer Discretionary (XLY) is also referred to as Consumer Cyclicals (XLY) . This is the sector we would like to see break out to new highs. This week it did. Who could be not be bullish?

Every thing I see on the chart looks so good. I saw a pick up in some of the dining stocks, the homebuilders and AMZN within the broaden retailers. It all looks so good.

However, let's take a look at the RRG. In the last 2 weeks, the XLY on Chart 2 moved from the green quadrant to the red quadrant. Because it is so close to the centre it is performing very similar to the $SPX which is the centre point benchmark for this chart.Let's remember the $SPX is making new highs so that is not so bad.

Here is the link to the XLY RRG Charts shown below. By changing the check marks on the list below you can change the chart lines showing up on the graph.

Chart 2

Chart 3 has all the industry groups showing. While there are some components with positive momentum, almost everything is pointed down which means the industry group is losing momentum which should add caution.

Chart 3

Here are the industry groups trending up in momentum. The best groups tend to be the ones heading towards the top right. Even 3 of those lost a little momentum this week (they moved down). If you look at the list under the chart you can see the actual name of those groups.

Chart 4

Amazon (AMZN) broke out of a downtrend this week, but it might not be enough to break the downward trend in the sector just yet. The majority of the sector is either losing momentum or performing weaker than the $SPX. While I feel strongly that the new high shown on the top chart should not be ignored, neither should the broad weakness in the sector from a momentum point of view. On Chart 5, we can see the relative market cap weightings of the companies in the XLY using the market carpet below. Click here for the S&P market carpet link. Double Click on the Consumer Discretionary sector to get this market carpet. Then right click to add the ticker symbols.

While this is not a complete list of the companies in the Consumer Cyclical Sector, it does point to 10 companies making up about 40% of the weight in the group. You may wish to study the price action of the top 10. In summary, the sector is performing in line with the $SPX right now but many components are losing momentum. So this adds a little caution to the new high. I'm still selectively bullish with the good price action in Amazon and McDonalds this week but worried about the broad sector. So to reiterate the title, when things break out to new highs its bullish. However, if the majority of the sector loses momentum it might be time to say good bye to owning the ETF for a while.

Good trading,
Greg Schnell, CMT

Forgive me! I couldn't resist that cheesy headline stolen from the Quiet Riot album title. The headline is true, metals had a healthy day, as did other natural resource ETFs. I've highlighted notable ETFs right from our DecisionPoint ETF Tracker Report found in the DP Tracker Blog. This displays only a small portion of the ETFs we cover in the Tracker Report and only the section that sorts by the day's percentage change. I've selected four of the charts for analysis.

Let's look at the Gold ETF, GLD. What dominates this chart is a bearish reverse flag formation. However, rather than executing with a breakdown below the flag, it broke out above the flag. When you see a bullish outcome to a bearish technical pattern it is a sign of positive momentum. This is confirmed by the Price Momentum Oscillator (PMO) which bottomed. A PMO bottom in oversold territory is generally a good set up.

Uranium looks very bullish right now. There is a nicely formed bullish flag at the same time there is positive momentum. In addition, not only is the PMO rising but it is only in neutral territory with room to step up before getting overbought.

The Silver iShares ETF, SLV looks very similar to GLD. There is a reverse flag which is considered bearish, but instead of breaking down, price broke out. The PMO is very close to a positive crossover its 10-EMA which would generate a PMO Crossover BUY signal.

The Gold Miners ETF is sending us mixed messages. On the one hand there is a bearish reverse flag formation while on the other hand, the PMO just crossed over its EMA generating a PMO BUY signal.

I encourage you to go to our DP ETF Tracker, find an ETF on a line of the report that interests you and click on it. The chart will come up and you can analyze and annotate it just as I did above. To access the report you do need to be a StockCharts.com member.

So, the answer to the question you've all been contemplating since reading my first sentence...yes, I am a fan of "80's hair bands".... isn't everyone?

Happy Charting!
Erin

If ever the bulls needed to see some stellar earnings results and/or positive forward guidance, it was about one month ago. From the late September high of 2019 to the mid-October low of 1821, the S&P 500 fell nearly 10% just as earnings season kicked off. During the height of earnings season over the past four weeks, the stock market reversed and completely erased all of those pre-earnings season losses and even managed to tack on another 1% or so.

So what areas of the market triggered this bullish reversal? Well, let me first tell you the two sectors that did not - energy and materials. The XLE (ETF that tracks energy stocks) remains 10% below where it was in mid-September while the XLB (ETF that tracks basic materials stocks) is approximately 3% lower. Clearly there's been underperformance in these two sectors. But there is the potential of good news for both in the near-term. On the following chart, you'll see that much of the weakness in both sectors can be attributed to a soaring U.S. Dollar index ($USD). Both energy and materials tend to move opposite the U.S. dollar, especially key metals like gold (GLD). Take a look at the obvious impact of the recently rising dollar:

Both energy and materials have shown some strength off their recent lows and it could be in anticipation of a reversal in the U.S Dollar index ($USD) to the downside. On a long-term chart, that would make sense as the U.S. Dollar challenges multi-year price resistance. Take a look:

That's a quick look at the dollar and the possible implications it might have on energy and materials stocks. But let's get back to earnings. Since we've now ruled out both energy and materials as recent sector leaders of the market's rally, where did the strength come from?

Well, over the past month, industrials have posted a 12.10% gain with technology not too far behind with a 10.40% gain. The strongest industry groups have been transportation stocks ($TRAN), but that makes perfect sense given the drastically reduced crude oil prices. If the dollar falls, we'll likely see at least a temporary advance in crude oil prices which would have a negative impact on transportation. Therefore, let's skip that area of the market for now and focus on other strong components for potential short-term opportunities. Defense ($DJUSDN) is one area of industrials that looks very promising as it recently broke out to fresh new highs, supporting the overall market advance. Check out the strength below:

If you look at the September high (point A) and the recent high (point B), you'll see that the DJUSDN cleared its prior high by 4-5%, much more than the overall S&P 500. This is a sign to me that defense stocks are being accumulated and represent an area of the market that we should be interested in and monitoring for solid reward to risk entry points. In fact, one stock within the DJUSDN just posted earnings that topped Wall Street consensus estimates by 40%, possesses one of the best technical charts around and is literally residing at a key price resistance level - a level if broken would represent a 10 year closing high.

I'm featuring this defense stock as my Chart of the Day for Monday, November 17, 2014. Best of all, my Charts of the Day are now completely FREE as is a webinar this Wednesday evening that discusses the methodology behind EarningsBeats.com. During this session, I'll unveil my strategy of building a StockCharts Watch List of over 200 companies with better-than-expected bottom line results and superior technical strength. Simply CLICK HERE to register!

Have a great weekend and happy trading!

Tom Bowley
Chief Equity Strategist
EarningsBeats.com