Another insightful issue of the ChartWachers Newsletter has arrived!
March 2, 2019
Hello Fellow ChartWatchers!
I'm coming to you this week with a special invitation. For those of you in and around New York City (or anyone looking for a convenient excuse for a trip to the Big Apple!), our very own Julius de Kempenaer, creator of RRG and Senior Technical Analyst here at StockCharts, will be speaking at this month's TradersEXPO in midtown Manhattan.
Presented by The MoneyShow, this unique event runs from March 10th to 12th, with Julius’s presentation scheduled for Monday, March 11th. Registration is completely free, so we strongly encourage you to add this to your calendar and explore what will surely be an insightful and energizing show.
For more information about Julius’s presentation, you can read his recent blog post here. Also, be sure to check out the TradersEXPO information card below, or click here for registration info and complete details about the event.
Major Stock Indexes Continue to Test Overhead Resistance Near Their November Highs
by John Murphy
Editor's Note: This article was originally published in John Murphy's Market Message on Friday, March 1st at 11:55am ET.
After having one of the strongest starts to a new year in history, major stock indexes find themselves testing yet another potential overhead resistance barrier. And they're doing so while in an over-extended technical condition. But they've been looking over-extended for most of the past month. Chart 1 shows the Dow Industrials testing their early November intra-day high at 26,300 (first red circle). A decisive close above that previous peak would clear the way for a retest of last October's record high. But it has to clear its November high first. The Dow remains above its 200-day moving average (red arrow). Its blue 50-day average, however, remains below its 200-day line. On a more positive note, its 20-day average (green arrow) remains above the other two longer averages. If the Dow does pull back, that would the first moving average to be tested. Maybe even the 200-day. One cautionary note is fact that its daily MACD lines (lower box) have been converging over the last month and are close to turning negative. That would be their first time in negative territory since the end of December. That might be enough to signal some short-term profit-taking. Or possibly a period of consolidation to work off its overbought condition.
Chart 2 shows the S&P 500 in a similar technical condition. The SPX is testing its November intra-day high at 2815. If it does pull back, it could retest its 20 and 200-day averages (green and red lines). Chart 3 shows the Nasdaq Composite Index also testing its November intra-day high at 7572. The lower box in Chart 3 shows its MACD histogram bars in danger of falling below their zero line (red circle). That would signal that the MACD lines themselves are turning negative.
S&P 500 Clears the 200-day. Should we Take the Bait?
by Arthur Hill
We are all well aware of the S&P 500 and the 200-day moving average, but how well does this moving average work for broad market timing? Pretty well, it turns out, but only on the long side.
I put the 200-day moving average to the test for the S&P 500 and other indexes in "On Trend" on February 21st (Youtube link here). In a nutshell, I found that closes above/below the 200-day work well overall, but a second moving average is needed to smooth closing prices and reduce whipsaws. While there is no such thing as the perfect setting, I settled on the 20-day SMA and 200-day SMA combo. A 20-day SMA sits between the closing price and the 50-day SMA. Thus, it offers fewer whipsaws than the close/200-day cross and less lag than the 50/200 day cross.
The chart below shows the S&P 500 in the top window with the 20-day SMA (green) and 200-day SMA (red). A bullish signal triggers when the 20-day SMA crosses above the 200-day SMA (green vertical lines), while a bearish signal triggers when the 20-day SMA crosses below the 200-day SMA (red vertical lines). As the chart details, there were 34 crosses over the last 25 years.
Chartists trading SPY based on these signals would have performed well on long signals, but not on short signals. Notice that there were 11 winners and 6 losers for when trading only long positions, and 14 winners and 20 losers when trading long and short positions. The vast majority of short positions resulted in losses.
The table below summarizes the results. Note that SPY includes dividends. I did not test with an inverse ETF because the data for the ProShares Short S&P 500 ETF (SH) only goes back to 2006. As the table shows, the Compound Annual Return is higher when trading only long positions and lower when short positions were added to the mix. The long-only strategy generated higher returns and was in the market just 72% of the time. Not only to did short positions reduce the returns, but they also increased the drawdowns.
Market timing with the 200-day SMA can produce decent returns with reduced risk, but only on the long side. Despite some good short trades in 2001-2002 and 2007-2008, short trades as a whole did not make money over the last 25 years. The S&P 500 is above its 200-day SMA some 70 percent of the time and trends higher more often than lower. Why fight it!
As we look at the strongest ETFs for February, you'll notice how Chinese-related ETFs have soared of late, as shown in the list below.
Commodity-related ETFs also did very well, as did the technology-related industry groups. From palladium to water, from oil to sunshine to silver, the commodities can be very fast-moving. As solar stocks are part of the energy sector, I like to correlate them into the commodities. One of the things about the commodity area is how fast they can move. In January, gold stocks were doing very well. In February, however, gold was actually down on the month and gold miners fell twice as fast. It is for this very reason that commodities need to be traded, not owned.
Now that the market has rallied, it will be more important than ever to focus on the winning areas or industry groups. Using the tools on StockCharts can help you stay on top of the strongest areas of the market. In my Friday Market Buzz, I showed how to scan for any stocks that made new highs at some point in February. You can click on the image below to watch the video. You may find some stocks that might be suited to your portfolio.
If you would like to learn more about the basics of charting, check out Stock Charts for Dummies. The first section of the book walks through all the chart settings you need to help you get the charts you want, the second section explores why you might use charts for investing and the third section is about putting it all together.
Gold ($GOLD) performs its best in a falling U.S. Dollar ($USD) environment. There is a solid inverse relationship between the direction of GOLD and the direction of the USD that has existed for decades. The following chart illustrates this relationship from 2001 to 2010:
"Gold thrives when the dollar dives." Now let's move on to current reality. The U.S. Dollar has been in an uptrend since 2011 and I'd let the chart tell us when this uptrend is over. One major factor in the dollar direction is the relationship between our treasury yields and foreign treasury yields. In my research, I've found that the relationship between the U.S. and Germany is the most positively correlated in terms of equity performance. I've also discovered that comparing the 10-year U.S. Treasury Yield to the 10-year German Treasury Yield offers up some great clues about the direction of the dollar. Think about it. If economic performance is expected to strengthen, treasury yields will typically move higher. If the U.S. treasury yields are moving up faster than Germany's, it's an indication that our economy is strengthening at a faster clip. Hence, the stronger dollar.
Take a look at this relationship and how the dollar is impacted:
When the dollar bottomed in 2011, the $GOLD:$SPX ratio topped. Since then, the dollar has been trending higher and the $GOLD:$SPX ratio has been declining. At the top of the chart, the second red arrow highlights the 10-year U.S. Treasury Yield topping vs. the 10-year German Treasury Yield and that coincided with the resurgence in gold during Q4 2018. But check out those red circles. There's a new sheriff in town in 2019. Despite the overall weakness in the 10-year U.S. Treasury Yield, the relationship between U.S. and German treasury yields ($UST10Y-$DET10Y) has improved and we've seen the dollar begin strengthening again.
Meanwhile, although $GOLD performed well in 2019 until the past two weeks, its relative performance has once again turned lower. If GOLD cannot outperform the benchmark S&P 500, I'm not interested.
As GOLD uptrended into 2019, I gave it a begrudging "short-term buy" endorsement, but with U.S. treasury yields picking up steam once again, I expect GOLD to be an underperformer in 2019.
SO MANY stocks that recently reported earnings beat expectations and gapped up sharply on very strong volume after their results were released. Those stocks include OLED, TTD, W and PANW, among others. In fact, take a look at the chart below on TTD, which reported its earnings before the bell on February 22, and you'll get a snapshot of what a lot of stocks that beat expectations looked like.
Just take a look at that powerful gap up on massive volume, which occurred when traders heard about the company's numbers; it climbed 33% from the prior day's close to the high of the day of the earnings report!.
Of course, it would have been great to own the stock into the report; who doesn't like a 33% pop on a trade? But it goes both ways, as we've also seen plenty of stocks that got hit hard on their numbers. Nonetheless, TTD is now one of many stocks that traders have their eyes on, looking to snag on any decent pullback.
Keeping an eye out for companies that beat or miss earnings expectations is a labor of love for us at EarningsBeats.com. Yes, it takes a lot of time to zero in on those companies that beat/miss expectations and have charts that could turn them into high reward-to-risk trading opportunities. Once you've identified those companies, though, you will have access to a treasure chest that is just waiting to be unlocked.
As an example, we recently conducted a webinar featuring StockCharts.com Senior Technical Analyst Tom Bowley, where he unveiled his Top Ten Picks that came from our Strong Earnings Chart List. During the event, Tom showed how his previous Top Ten Picks, which came from a previous Strong Earnings Chart List in late November of last year, CRUSHED the S&P, with a gain of over 17% on average compared to .64 on the S&P over a 3-month period. In other words, strong proof that traders gravitate to the "Best of the Best."
I've decided to conduct another webinar this Monday (March 4), where Tom will again join me and show how to combine Relative Strength with our ChartLists. It's reserved for our members, so if you want to learn more about how you can attend this highly educational event (and get access to over 250 stocks on our Strong/Weak Earnings Chart Lists), just click here.
The market has been on a tear since its late December bottom due to one primary reason: strong earnings. You, too, can benefit from following those stocks that knocked it out of the park.
Learning From Legends: Gerald Loeb's Timeless Investing Wisdom Stands The Test Of Time
by Gatis Roze
I’m sure you’ve heard the expression, “the more things change, the more they stay the same.” Gerald Loeb used this phrase frequently. I’ve always had great respect for Mr. Loeb. True, he was an extraordinary investor and a best-selling author. But what I most respected him for was his business acumen. As one of the founding partners of E.F. Hutton, he was often quoted preaching to investors about the need to approach investing as a business and with a business mind.
Early on, I took his advice to heart. From the very beginning, I always made certain that I organized my investing activities in a manner that yielded timely investment reports and minimized taxes. I also sought out the best professional accounting, legal, tax and estate planning advice because this is what Gerald Loeb advocated.
Personally, his advice has been validated over the decades. Having known a large number of traders, I’ve observed that the most profitable ones have seldom been the smartest or boldest. They are usually organized individuals who are willing to focus on the small details. They are those people who are comfortable with routines and have the discipline to follow them. I’ve often noticed that they are unpretentious as well – even humble at times.
If you stop and think about this, being free from pride and willing to be subservient to something like the market – which is so much bigger than any of us – allows one to remain open to listening to the market and letting the market itself show us the way. This same mode of openness is a common denominator in the management styles of many of America’s greatest business models. Gerald Loeb simply challenged the broader spectrum of stock market enthusiasts – from traders to hobbyist investors – to adopt this business mindset in their speculative activities.
With a sincere and abiding respect for Loeb’s many contributions to the investing arena, I also want to recognize just a few of my favorite market wisdoms from the “most quoted man on Wall Street” according to Forbes magazine.
“You don’t need analysts in a bull market, and you don’t want them in a bear market.”
“The most important single factor shaping security markets is public psychology.”
“A willingness and ability to hold funds un-invested while awaiting the real opportunities is a key to success in the battle for investment survival.”
“There is a saying, “a picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations…prices and trends are really the best and simplest “indicators” you can find.”
“Accepting losses is the most important single investment device to insure safety of capital.”
In closing, I remind you that the market is notorious for its cyclical emotional discord and all its event-based intrigue. But much like Gerald Loeb, I too challenge you to continue to trade with a spirit of tenacity, organization, business acumen and always a sense of controlled risk.
Trade well; trade with discipline!
- Gatis Roze, MBA, CMT
Mid- and Small-Cap Relative Performance Matters! Don't Miss These Crossovers!
by Erin Swenlin
While comparing the relative performance of the OEX, IJH and IWM to the SPX, I found an attention flag. The market is very overbought, with momentum indicators rolling over in overbought territory. The same thing goes for all the sectors. A CandleGlance of the sector SPDRs and SPX are all in agreement concerning the PMOs decelerating and rounding into tops. The CandleGlance below strongly suggests a market top. Bright spots? Technology and Utilities have PMOs that are still somewhat rising.
Below is the chart you need to see. I looked at price relative and noted clear trend breakdowns and breakouts, which are marked where the market reversed in a big way. When mid- and small-caps are outperforming the SPX, rallies tend to continue. However, a negative crossover and subsequent underperformance mark the beginning of market downturns. Notice that the large-cap OEX tends to outperform in declines, but underperform during rallies. The reverse correlation is visible as, as mid- and small-caps outperform, large caps underperform. It almost looks like a mirror image. A breakout from the declining trend shows that large-caps are beginning to outperform the SPX once again. There is also a breakdown in relative performance by mid- and small-caps.
Conclusion: Despite an upcoming Long-Term Trend Model BUY signal on the SPX, I'm concerned in the shorter-term about the breakdown in mid-cap performance and the near-breakdown in small-cap performance, accompanied by a relative performance breakout by the OEX. Coupled with the PMOs that are rolling over across the sectors.... the technicals suggest a pullback at a minimum, but a correction seems more likely. The market is really overbought across the board - a correction is needed.
Watch the latest episode of DecisionPoint with Carl & Erin Swenlin LIVE on Fridays 4:30p EST or on the StockCharts TV YouTube channel here!
Technical Analysis is a windsock, not a crystal ball.
Materials (XLB) Are Failing To Break Resistance And Loose Relative Strength
by Julius de Kempenaer
The Materials sector, XLB, is testing overhead resistance around $56. This is the level where lows have been formed in 2017 and 2018 as well as two important highs at the end of 2018. For the time being, the attempt to break is failing, and this is visible on both the daily and the weekly charts.
The relative strength for XLB against SPY is in a solid downtrend since the start of 2018, and without a break higher on the price chart, it is hard to see how this can improve at short notice.
A Relative Rotation Graph can help to put things into perspective and shed some light on the "Big Picture" as it shows the relative movement, rotation, for all sectors that, together, make up the S&P 500 index.
Materials On A Relative Rotation Graph
The chart above shows the weekly rotation for the Materials sector, XLB, within the universe of US sectors against SPY. After the tail turned upward inside the lagging quadrant, XLB kept up with the performance of SPY and moderately outperformed the market until the sector started to lose relative momentum again in the week of 21 Jan and 28 Jan when the tail started to roll over downward again without having reached the leading quadrant.
This loss of relative momentum, declining Jdk RS-Momentum, is still ongoing and pointing the tail on XLB towards the lagging quadrant again.
Assuming a normal clockwise rotation, the sector can be expected to return towards and into the lagging quadrant in the weeks to come.
The Daily Rotation
On the daily Relative Rotation Graph, the curve looks very similar to the weekly image. The only difference here is that XLB has just crossed into the leading quadrant.
In general crossovers from improving into leading are positive, especially when they occur backed by strong relative momentum. I.E., also rising on the JdK RS-Momentum scale.
That is not happening here. The crossover from improving into leading on the daily RRG happened while RS-Momentum already started to decline. It seems that there is not enough fuel left to push the XLB-tail deep(er) into the leading quadrant.
This combination of rotations on the daily and the weekly RRGs suggest underperformance for the Materials sector in the coming weeks.
A more extensive article on XLB, including a look at some individual stocks in the Materials sector, was published last Friday (3/1) in the RRG blog.
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Julius de Kempenaer | RRG Research
RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered TradeMarks ®; of RRG Research
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We are all well aware of the S&P 500 and the 200-day moving average, but how well does this moving average work for broad market timing? Pretty well, it turns out, but only on the long side.
Commodity-related ETFs also did very well, as did the technology-related industry groups. From palladium to water, from oil to sunshine to silver, the commodities can be very fast-moving. As solar stocks are part of the energy sector, I like to correlate them into the commodities. One of the things about the commodity area is how fast they can move. 
Now that the market has rallied, it will be more important than ever to focus on the winning areas or industry groups. Using the tools on StockCharts can help you stay on top of the strongest areas of the market. In my Friday Market Buzz, I showed how to scan for any stocks that made new highs at some point in February. You can click on the image below to watch the video. You may find some stocks that might be suited to your portfolio.
Just take a look at that powerful gap up on massive volume, which occurred when traders heard about the company's numbers; it climbed 33% from the prior day's close to the high of the day of the earnings report!.
