Another insightful issue of the ChartWachers Newsletter has arrived!
January 5, 2019
Hello Fellow ChartWatchers!
Happy New Year, everyone. You might not know it, but we've been waiting a long time for this newsletter. Why? Well...
This year marks our 20th anniversary here at StockCharts!
2019 is a big one for us, so we'll be celebrating the only way we know how – with lots of new features, site updates, and helpful changes for our users. I'll keep my excitement contained for now, but I can promise that it's going to be quite a year here at StockCharts.
To kick things off, we're launching multiple new shows on StockCharts TV throughout the first quarter. Keep your eyes on the channel this month and next, and stay tuned for more announcements as our new content goes live.
The price of Apple is plunging today after issuing a sales warning for the first quarter. The stock was already in trouble before that announcement. The weekly bars in Chart 1 show Apple (AAPL) falling today to the lowest level since the middle of 2017. An analyst on CNBC today sounded confident that the stock would do better than the rest of the market "on a relative basis". So far, that's not working out very well. The red line in the upper box is a ratio of Apple divided by the S&P 500. That falling ratio looks more like relative weakness to me. The stock has lost -38% since the start of October which is twice as much as the SPX. The first quarter warning came from a drop in iPhone sales in China, which is just the latest sign that weakness in that economy is starting to take a bigger bite out of earnings here. The plunge in Apple is also taking a heavy toll on semiconductor stocks and technology which is the day's weakest sector. With other trade sensitive stocks under pressure, U.S. stock indexes are having a very bad day. From a charting perspective, today's selling is coming at a bad time.
Understanding and Adapting to the Market Environment
by Arthur Hill
The broad market environment is perhaps the single most important factor to consider when selecting a trading or investing strategy for stocks. As with the weather, the broad market environment is subject to change and we need to adapt to current conditions. We should take extra precautions when it is wet and stormy and wear our Bermuda shorts when it is dry and sunny. Ah, the sun.
Similarly, we should take extra precautions when the market is trending lower with high volatility and take more risk when the market is trending higher with low volatility. Let's look at the shifting environments and consider the current environment.
The chart below shows the S&P 500 with various market environments since August 2017. The index trended higher with low volatility from August to January and hit a new high in January 2018. The environment suddenly changed with a sharp decline in February, but the index largely held the rising 200-day SMA. A volatile consolidation unfolded, but this was a bullish consolidation because it formed after a sharp advance. The index was simply digesting the big gains from the prior months. This consolidation ended with a breakout and return to a low volatility environment in mid May.
The index trended higher with low volatility from mid May to September and hit another new high. The environment suddenly changed again as the index plunged below its 200-day SMA in October and volatility increased. Notice how the 5-day Rate-of-Change exceeded plus/minus 2% on a regular basis. After becoming oversold in late October, the index then consolidated and worked off these oversold conditions. In contrast to the prior consolidation, this was a consolidation after a breakdown and a bearish continuation pattern. Volatility remained high during the consolidation and the index broke down again in December.
Where are we now? Currently, the S&P 500 is in a long-term downtrend and volatility remains high. Stormy weather. Price is below the falling 200-day SMA, the 50-day SMA is below the 200-day SMA and the 1-day Rate-of-Change has exceeded plus/minus 2% thirteen times in the last three months. Also note that the 1-day Rate-of-Change exceeded 2% two of three days this week. Thus, volatility remains above average and the market has yet to settle down.
Bottom Line: the current market environment is both bearish and volatile. We should take extra precautions until this environment improves. Furthermore, the bounce since December 26th is viewed as an oversold bounce within a bigger downtrend.
On Trend on Youtube
The first video talks about the current environment and more. The second video provides a preview of what to watch as we head into 2019. Note that this is NOT a forecast!
On Trend: Assessing the Current Market Environment
2019 Stock Market Forecast And My Report Card For 2018 Forecast
by Tom Bowley
Before I look ahead to what we might expect in 2019, let me rewind for a bit and check out last year's forecast. Here's a recap, summarizing a few of my "expectations". I've graded my predictions with a slight curve. Feel free to agree or disagree. :-)
(1) Reviewed both renewable energy ($DWCREE) and home construction ($DJUSHB), the two best industry performers in 2017. I evaluated both heading into 2018, but preferred the DWCREE and warned about losing the rising 20 week EMAs as that could signal a trend reversal. I mentioned that home construction had been rising parabolically and was "less likely to sustain this move throughout 2018". What really happened? Well, the strength in DWCREE did last longer, but eventually both groups lost their 20 week EMAs and continue to trade beneath them. Check out the rapid decline in the DJUSHB shortly after my 2018 forecast:
Looking back now, it's pretty simple to see that the DJUSHB was rising in unsustainable, parabolic fashion. After losing its 20 week EMA support in early February 2018 (red circle), it trended beneath its 20 week EMA and is still beneath it. Capturing profits at the time of the reversal would have saved a bundle! The DWCREE did outperform the DJUSHB as expected, rising to new highs in May 2018 before faltering and losing its 20 week EMA. Knowing when to exit a trade is generally more important than knowing when to enter one.
Prediction Grade: A-
(2) "I believe 2018 will be a strong year for consumer stocks." I provided 4 industry groups in the consumer space that I liked heading into 2018 - broadcasting & entertainment ($DJUSBC), auto parts ($DJUSAT), footwear ($DJUSFT), and brewers ($DJUSDB). The idea behind this forecast was that consumer discretionary (XLY) had consolidated for two years relative to the S&P 500, but broke out heading into 2018, providing tailwinds just as we entered the year. Here's a relative chart that should help to illustrate my point:
Consumer discretionary trailed only utilities (XLU) and healthcare (XLV) in terms of performance since my 2018 Stock Market Forecast article. It easily outpaced the benchmark S&P 500 and the other aggressive sectors.
Prediction Grade: A
As mentioned above, I favored the following 4 consumer industry groups: DJUSBC, DJUSAT, DJUSFT, DJUSDB. Here's the long-term weekly chart for each:
Let's take these one at a time.
(3) DJUSBC - this is the hardest prediction to grade as the group underperformed in the first half of the year and outperformed during the second half. The price breakdown in Q2 (red circle) was rough, but the solid recovery into mid-Q4, a time in which the overall market had already begun to roll over, was impressive. The industry was part of a strong sector and did manage to outperform the S&P 500, so I'll be kind.
Prediction Grade: B-
(4) DJUSAT - Outside of bouncing off price support to begin Q2, auto parts was a disappointment. The second half of 2018 was a disaster. Do I really need to discuss that chart any further? The only thing keeping this grade from being an F is that I award points for participation. Hey, it's my grading scale! :-)
Prediction Grade: D-
(5) DJUSFT - Outstanding group in 2018. Not only was footwear a part of the strong consumer discretionary sector, but it also was one of its strongest components. While Q4 was weak for footwear, how many industry groups were strong? One word of caution, however. Like so many areas of the stock market, the DJUSFT lost key support levels over the past few months. In particular, it's now trading beneath its declining 20 week EMA. You saw what happened to home construction in 2018 when it lost its rising 20 week EMA support. Be careful in 2019.
Prediction Grade: A+
(6) DJUSDB - Brewers represented an area of the stock market that had been downtrending in 2017, but was still in a longer-term uptrend. I pointed out last year that I was waiting for the shorter-term down channel to break as that would likely represent a change of character on the chart and a longer-term reversal to the upside. As you can see from the above chart, this "reversal" never occurred and the DJUSDB continues to trend lower as we enter 2019. Because the buy signal never flashed, it was a nice call to simply avoid the group as it was an extremely weak performer in 2018.
Prediction Grade: B
All in all, I believe the 2018 Forecast was a pretty good one. Unfortunately, one really bad grade kept me off the Honor Roll. Oh well, that leaves me something to shoot for in 2019, right?
"You're only as good as your last call......what might we expect in 2019?"
First, we've entered a cyclical bear market. When I'm trading and there's a debate about "is this a correction or is this a bear market?", I honestly don't care. Call it whatever you want. The beginning of both looks exactly the same. We see panicked and impulsive selloffs with a VIX spiraling higher. The difference between the two is that a correction never experiences the lower highs and lower lows on a longer-term weekly chart. Once that support levy breaks, we transition into a bear market. At that point, my trading strategy changes as I will short into strength as we near overhead resistance. Bear markets print lower highs and lower lows. Resistance acts like a steel wall and support will break. That's opposite of what we grow used to in a bull market. When a bear market arrives, you must change your approach to the market, whether a trader or a long-term investor. Bear markets will drain you financially and emotionally. Here's the chart that illustrates the December 2018 breakdown and transition from "correction" to "bear market":
I believe the price support breakdown beneath the early-February 2018 low transitioned us from correction to bear market. I suspect that 2019 will be very challenging. There will be periods of strength (ie, short-term uptrends), followed by panicked episodes of selling to establish at least one more low beneath the December 2018 low. Here are specific "big picture" predictions for 2019:
(1) We have entered a cyclical bear market within a secular bull market. I believe we will experience tremendously higher equity prices over the next decade, but there will be hiccups along the way. One look at the following chart will help to illustrate why I believe the future remains very exciting for stock traders and investors:
Do not ever lose sight of the above chart and the secular bull market that we're in (my opinion). Why? Because cyclical bear markets can be very fast and to a much lesser degree than secular bear markets. It's entirely possible that we quickly resume the overall secular bull market uptrend much faster than many believe possible.
(2) This bear market will be short-lived. Cyclical bear markets tend to end quickly and they're not nearly as deep as their secular bear market counterparts. Since 1945, bear markets within secular bears have on average lasted 632 days, or roughly 21 months, dropping 43.92%. Bear markets within secular bulls have on average lasted just 284 days, or 9-10 months, less than half that of a bear market within a secular bear and have fallen 25.73% on average. Knowing the difference clearly can pay huge dividends. I will be looking for a cyclical bear market bottom to form in the June-September timeframe and an explosive Q4 rally to follow. I do not believe we'll see a low beneath 2100 on the S&P 500. 2200 could mark the bottom.
(3) Sentiment will help to guide us in 2019. Bear markets are emotional and many times pay little attention to price, trendline and moving average support. The last two bear markets never saw a VIX reading move below 16. Therefore, if the VIX drops beneath 16 during 2019, at least consider the possibility the bear market has ended. A bear market requires fear. If fear dissolves, so too will the bear market.
I understand the above forecast is much more big picture without specific sector or industry predictions, but keep in mind that bear markets can be extremely unpredictable and preserving capital will be my primary focus, not trying to guess which area will outperform or underperform. While I'm not normally a fan of gold ($GOLD), I do believe the yellow metal will be a nice hedge - at least during the first half of 2019.
Please subscribe to my blogs. They're 100% FREE! You can subscribe to my ChartWatchers blog by scrolling to the bottom of this article and typing in your email address in the space provided and then clicking the green SUBSCRIBE button. My "Trading Places with Tom Bowley" blog will provide you daily articles (published just before the stock market opens each day) to keep you technically informed of the things that matter most. A recent article that discussed sentiment (VIX) to help me realize a major bottom had formed was published on December 27, 2018 and titled "Support Has Been Established, Now How High Might We Bounce?" You can subscribe to my Trading Places blog at the bottom of that article in the same fashion described here. As always, I really appreciate your support. I'll do my best to guide you through a challenging 2019!
If you'd like to send me a response or offer up your agreement/disagreement with the above, or just to comment about my blog content in general, feel free. My email is email@example.com and I'd love to hear from you.
I want to wish everyone a very happy new year! To health, happiness and prosperity for all!
EARNINGS: S&P 500 P/E Overvalued, But Back In Normal Range
by Carl Swenlin
S&P 500 earnings for 2018 Q3 have been finalized. The following chart shows us the normal value range of the S&P 500 Index. It shows us where the S&P 500 would have to be in order to have an overvalued P/E of 20 (red line); fairly valued P/E of 15 (blue line), or an undervalued P/E of 10 (green line). There are three hash marks on the right side of the chart to show where the range markers are projected be at the end of 2019 Q3. Last year price was well above the traditional value range; however, the recent price decline has lowered the P/E to 19, and the market is back within the normal P/E range of 10 to 20, albeit still overvalued. If earnings estimates hold and price doesn't change significantly, the market could be close to fair value by year end.
Historically, price has usually stayed below the top of the value range (red line); however, since about 1998 it is not uncommon for price to exceed normal overvalue levels. The market hasn't been undervalued since 1984.
The table below shows how earnings are expected to improve going forward, but the drop in P/E shown is only possible if price doesn't rise significantly. In the best case shown (2019 Q3), the market will be close to fair value, but this depends upon price being about the same level as it is now.
The following table shows where the colored bands will be using forward earnings.
CONCLUSION: The S&P 500 is back in the normal value range, but is still overvalued. Historically, overvalued conditions leave the market vulnerable for a large correction or bear market, and that seems to be what we are currently experiencing. These earnings charts are intended to provide an historical context for current earnings, and to demonstrate that overvaluation is not your friend.
Technical Analysis is a windsock, not a crystal ball.
Most of you who read my blog know the name of our service is EarningsBeats.com. The name makes sense since, for many years during the bull market, we've zeroed in on those companies that beat earnings expectations that could be prime long candidates. Fast forward to today and we've got a new category to focus on; companies that miss earnings expectations and could be prime short candidates.
To give you just one example, take a look at the chart below on XPO, a company that reported results in December, fell sharply on huge volume and has made its way up close to key technical resistance, where it has stalled. So, in effect, the opposite of a potential long candidate that had strong earnings, gapped up higher and then pulled back to key support.
In this case, we issued a short alert to our members last Wednesday with an initial entry price near $58, with a second entry on any move higher to $59, with an initial downside target of $53.80 and a stop of any close above the 20-day moving average, which was near $59.40. This resulted in roughly a 5 to 1 reward-to-risk ratio, assuming both entry levels hit. But, given the extreme volatility these days, ANY profits have to be gobbled up quickly, so we adjusted our stop Thursday morning to any Intraday move above $55.50 after the stock had moved lower (but had not hit our price target) and ended up with a nifty profit of 4.2% in less than 24 hours.
It's not going to surprise me if we find a number of companies coming up short of expectations when Q4 earnings start pouring out in the next few weeks. Just take a look at Apple, as blue chip as they get, slammed hard on their earnings warning after the bell on Wednesday. So having another tool to work with - shorting those stocks with weak results - could be just what the doctor ordered as traders navigate what could be some bearish waters ahead. In fact, if you would like to see a few of the stocks on our Weak Earnings ChartList that could be setting up as high reward-to-risk trading candidates on the short side, just click here. In the meantime, keep an open mind as you set your trading strategy, as we're in a completely different market environment than most of us have been used to.
100% Guaranteed Prediction for The New Year: I'll Be a Better Investor - Here's How!
by Gatis Roze
“The only way you get a real education in the market is to invest cash, track your trade, and study your mistakes…The examination of a losing trade is torturous but necessary to ensure that it will not happen again.”
— Jesse Livermore
Ray Dalio, who wrote a best seller PRINCIPLES and is a founder of the tier-one money management firm, Bridgewater Associates, worships this approach. Diamonds, gold, steel and iron are all formed and strengthened by heat and pressure. This past year, the markets tested us all. Will you be strengthened by the experience? Will you capture the painful lessons that lead to ultimate success?
To do more of what worked for you this year and less of what did not, you must revisit all ten stages that contribute to stock market mastery. A year ago, Grayson wrote a much more detailed blog about precisely this. This year, I’ll outline precisely the eight steps I am taking to ensure with 100% certainty that I’ll be a better investor in the coming months.
So here are the eight steps I take. This is not simply a “reset” exercise. My incentive is to find even small improvements that will enhance my odds. Each probability enhancement makes a contribution, and together they all have an immense positive impact over time similar to the magic of mathematical compounding. Every investor is unique. Each investor has his or her own particular needs and motivations. This is what has worked for me. Take from it what you deem useful.
My readers know that I value my personal Traders Journal above all my other investing tools. As it’s color-coded and revisited on an ongoing basis, I’m looking for evidence of emotional control and maintaining a brutally honest and objective voice throughout the year. Did I keep my ego in check as I transitioned from a bullish mindset to a bearish one? These are all the touchstones we wrote about in Stage 3 — the Investor Self from TENSILE TRADING. It’s a powerful and insightful exercise.
I’ve spoken about this already, but I reread Stage #10 in our book (“Revisit, Retune, Refine”).
I go through all my trades from the previous year with a specific focus on my selling discipline and execution. I also carefully review my bet size for each trade. A personal axiom I have adhered to has saved me many times: “never buy a second position if the first position is not yet profitable.”
This exercise is all about applying a “fresh eye” to what I look at regularly throughout the year. I rerun the “X-ray” tool in Morningstar.com on my entire portfolio. Each asset class is scrutinized in relation to all others, and I update correlation calculations. I review each of my “Best of Breed” charts to verify that I only own the best of the best for each asset class. You can read this previous blog for a more complete explanation.
My motto is “if it ain’t broke, I don’t want to try and fix it.” Having said that, once a year I review my methodology and tool kit, and I then simply ask how I might improve it. This usually results in the updates you all see in the Tensile Trading ChartPack.
I often say that time is the most precious commodity that I have. With that in mind, I like to detail my routines and ask myself if they are indeed optimized. Can I do more with less?
I update my personal goals for the year. As an investor, the markets require that we change. This is normal evolution. Not embracing change results in what I consider “de-volution” — that is, moving backwards.
I update my reading list. I already mentioned Ray Dalio’s book. For more recommendations, I refer you to this blog describing the most essential books on investing.
REMINDER: Three Educational Events Coming Up in Early 2019!
Jan. 12th: 3-Hour Seminar on “Probability Enhancers to Achieve Stock Market Mastery”
Feb. 9th: 3-Hour Seminar on “The Four Most Consistent Sources of Profitable Investment Ideas"
Use Relative Rotation Graphs To Get A Handle On International Markets
by Julius de Kempenaer
With the US stock market declining investors (may) need to look for alternatives in order to preserve capital. Sure enough, there are good opportunities in the US with bonds, IEF is doing very well, and cash is a very viable alternative if you do not "need" to be invested.
If you are in a position where you do need to be invested in stocks or you want to keep an allocation to stocks in your portfolio, even if it is an underweight position, you might need to look outside the US for alternatives.
The Relative Rotation Graph above shows the rotation for some major stock market indices around the world. The benchmark is the Dow Jones Global Index ($DJW).
There are a few tails that stand out on this plot. These are the $CNX500 for India and the $HSI for Hong Kong which both just entered the leading quadrant at a positive RRG-Heading and $BVSP which is far away to the right of the canvas and rolling over towards the weakening quadrant.
As a reference, the US market ($SPX) is rotating inside the weakening quadrant and heading towards lagging (negative RRG-Heading).
In the past six months, this market rotated from leading through weakening and lagging back into leading again. Especially the fact that the distance between the observations is increasing in the most recent part of the tail, indicates relative strength behind the move.
A look at the price chart of $CNX500 in combination with relative strength against $DJW shows a break of relative strength out of a multi-year marginally upward sloping channel. This break is now supported by both RRG-Lines rising sharply above 100 pushing $CNX500 rapidly further into the leading quadrant making it one of the stronger stock markets from a relative perspective.
Support for $CNX500 has been established a few weeks ago near 8.450 while there is still some upward potential towards the former rising support line.
After a strong start, the Hong Kong stock market spent all of 2018 in a falling trend channel. This downtrend was caught by support at 24.500 in the second half of October. Out of the newly formed low a rally emerged which topped against the falling resistance line just above 27.000.
At the moment $HSI is coming off that peak again and on its way to support near 24.500. That area seems important as it is also the area where the market peaked in September 2016 and March 2017 before breaking higher and embarking on its journey towards the high at 33.500.
As a side note, I am not a big user, nor an expert, of Fibonacci analysis but it happens to be the 61.8% retracement of the 2016-2017 rally.
Given the fact that markets like $SPX have broken below their late 2018 support levels, $HSI is jumping in relative strength with the RS-Line against $DJW turning around and RRG-Lines steeply rising above 100. Together with India, this is likely to be one of the stronger stock markets at the beginning of this year.
The Brazilian Bovespa index very recently broke to new highs. A picture completely different from most stock markets at the moment.
Its relative strength started to show at the end of October when the RS-Line broke to new highs followed by the JdK RS-Ratio line crossing above the 100-level which pushed the market into the leading quadrant.
During the Q4-2018 turmoil, Brazil managed to keep up and just recently even managed to break to new highs in price.
With a number of major markets recovering somewhat from their recent losses the relative strength for Brazil is rolling over now. However, given the position on the RRG, far away to the right at very high RS-Ratio levels, this seems more of a breather within a strong relative uptrend rather than the end.
The area around 87.500 seems to be a good support level to watch now.
Create Exposure Through ETFs But Beware Of The Currency Risk
You can create exposure to these international stock markets by using ETFs. For example, for India, you can use INDA, for Hong Kong EWH and for Brazil EWZ. Just search country name +ETF in the Stockcharts database and various tickers will show up.
Just be aware of the currency risk when you invest in these ETFs. These ETFs are quoted in US dollars while their underlying markets are NOT!!! The price of the ETF, the thing you're actually buying is the price of the index times the USD exchange rate for the country's currency. This can have a big impact on your returns measured in USD.
Currency risk is nothing to be scared of but it is something you need to be aware of and it means that you always have TWO decisions to make when you decide to invest abroad #justsaying
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Julius de Kempenaer | RRG Research
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