Reports of a trade agreement between the U.S. and China pushed global stock prices sharply higher today. Chart 1 show the S&P 500 reaching record territory. So did the Nasdaq. Small cap stocks continued to show relative strength. Chart 2 shows the Russell 2000 iShares (IWM) hitting another 52-week high. Eight of eleven stock sectors rose today with financials, technology, and healthcare hitting new records. Energy stocks also had another strong day. While materials hit the highest level in nearly two years (more on that shortly). The three sectors in the red were staples, utilities, and REITS. Those bond proxies were also hurt by a big jump in bond yields which pushed the 10-Year Treasury yield to the highest level in a month. Chart 3 shows the 10-Year Treasury yield jumping 10 basis points to 1.90%. That helped make financials the day's strongest sector which were led higher by banks, life insurers, and asset managers.

Chart 1

Chart 2

Chart 3

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Editor's Note: This is an excerpt of an article that was originally published in John Murphy's Market Message on Thursday, December 12th at 5:08pm ET. Click here to read the full article.

We are seeing breakouts and new highs galore in the stock market. Does this sound the all clear? Hardly. Investors waiting for the all clear will probably be waiting a long time. Moreover, the "all clear" could even mark the top, because that's just the way Mr. Market operates.

Note that the new high in the S&P 500 SPDR is not a "new" new high and this uptrend is hardly new. The chart below shows unadjusted SPY (_SPY) with 52-week Price Channels, also known as Donchian Channels, which were used by the famous Turtle Traders. A price bar that exceeds the upper channel line indicates a new 52-week high.

As the chart above shows, SPY recorded its first 52-week high of the year in late April, and then recorded another dozen new highs. The trend was clearly up with the initial 52-week high and this uptrend proved to be the dominant force at work. Even though SPY pulled back the next four weeks, it quickly recovered and recorded more new highs over the next six months.

The next chart shows SPY with the weekly PPO(4,40,0) over the last five years. This is a trend indicator because it turns positive when the 4-week EMA moves above the 40-week EMA. This EMA pair is comparable to the 20-200 day moving average pair. As expected with trend following indicators, the PPO has its fair share of whipsaws, but it also catches some nice trends that more than pay for these whipsaws.

The left side of the chart shows whipsaws from August to December 2015. The PPO then turned positive in March 2016 and this foreshadowed a massive advance into October 2018. This exceedingly simple indicator would have gotten one out ahead of last December's meltdown and back in for the bull run over the last ten months.

As with trend following in general, the PPO is not perfect, but it ain't half bad. Whipsaws are unavoidable and part of the investing process. We must learn to live with the whipsaws to catch the big trends. Want to learn more about trend following? Subscribe to TrendInvestorPro.com or see below…

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Note that I will be speaking at MarketVision 2020 on January 4th and the presentation is entitled:

The Method and the Madness behind Trend Following

I will start by discussing the nature of trend following and setting realistic expectations. I will then explain some key trend indicators and signals, and test these over a twenty year period. And last, but not least, I will show how some basic market timing can greatly reduce drawdowns and improve risk-adjusted returns.

John Murphy and another seven of your favorite analysts from StockCharts will also be speaking at this online event. Pre-registration is free and has its benefits. First, you get access to the mini-series webinars and recordings from each presenter. These webinars run from late November to late December. Second, you get a discount with special access to early bird pricing (click here).

 

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With the tensions between the USA and China this week, there was a definite surge in the charts related to the negotiations earlier in the week. One of the industry groups that made a big move earlier was gambling, but the big names faded or were flat on Friday. This would be something to monitor.

Intraday returns on Friday

One of the other areas I have been watching has been the industrial metals. Copper has been on a big run the last few weeks. However, the large mining companies were largely unchanged Friday following the announcement. It could have been any random day going by the response.

With that as a backdrop, we have to be a little cautious here that it was a "buy the rumor and sell the news" event. There was some positive price action in other areas of the market, but the China-related follow-through was pretty underwhelming based on a few areas in the market.

Coming up next week is the high-volume quadruple witching day on Friday. While it is not always a factor, after the big run we have had, we'll see if the market has more buyers investing for the Santa Claus rally.

I'll be speaking at the Market Vision 20/20 conference on January 4th, 2020 with a host of other StockCharts analysts. For more information on the early bird special, follow this link: Market Vision 2020.

After 20 years of teaching at over 200 continuing education classes, dozens of seminars and conferences and many other events, I've seen, heard, read, and watched it all. Witnessing 5,000 students over these years, I could write another book on the thousands of observations I've made about those attributes most necessary to successfully manage your money. But in this blog, I've condensed my insights down to the most critical top ten. The caveat here? This list is not all-encompassing, but if you can embrace these ten axioms, you'll be well on your way.

Axiom #1: KNOW THY SELF

If you are incapable of being brutally honest with yourself — as in acknowledging that the biggest risk to your financial well-being is actually yourself — then you’ll often be screaming into your pillow. I've found that keeping a personal "Traders Journal" is the single best tool to get into a winning investment mindset and learn to understand your personal roadblocks and demons. Hence, the official name of this blog that I started writing back in 2012. I liken the ethos of a successful investor to that of a winning entrepreneur. Preparing beforehand for multiple stormy scenarios is mandatory. Call it extravagant preparation. You don't wait for the ballroom to clear out during the chaos of a market correction to address the reality of climate change. You use your personal Traders Journal to address your issues and your strategic reactions BEFORE the storms hit. As Warren Buffett said, "It's only when the tide goes out that we learn who's been swimming naked!"

Further Reading...

Axiom #2: SET GOALS AND SAVE MORE

If you can convince yourself of the magic of compounding and can play the long game, you'll discover what Warren Buffett coined the "8th wonder of the world". If you aren't motivated by clear long term personal goals, you won't save enough money. Compounding works its magic best for those who save more. I realize this is very hard for the average person, but there are no average investors. Thank God for enforced savings such as Social Security. It's automatic and works in the background to require you to save. Let's be candid. With life expectancies growing and with Social Security likely to be underfunded in the future, most people need to become supersavers on their own with catch-up strategies starting today. The alternative is not pretty — a retirement crisis with millions of destitute individuals.

Further Reading...

Axiom #3: DISCIPLINE AND COMMITMENT

It's always shocking to me when certain "professionals" take one of my seminars and say something like "I've got three hours — teach me all you know about investing." Really? Let’s do a barter deal — then you can teach me how to be a dentist in the next three hours! Far too many people want to take the elevator. The correct answer is TAKE THE STAIRS.

Ever notice on a cruise ship how the heavy-set folks always take the elevators and the fit ones are always climbing the stairs? It helps if you get truly engaged. Take classes, join an investment club or the AAII, come to investor meetups. Do whatever it takes to develop some passion for your portfolio. Make it a hobby. Make it fun. No one else will care about your assets as much as you. I guarantee that if you give it just a bit of weekly mindshare on a consistent basis, you'll discover within yourself quiet investing super-powers.

Further Reading...

Axiom #4: TOOLS AND RESOURCES MATTER!

I'll be the first to lecture investors that fees and expenses matter and should be scrutinized very carefully. Having said that, there is a baseline dollar investment that one must be willing to make to support their future financial prosperity. In our book, Tensile Trading, this is really what Stage 2 – "The Business of Investing" – is all about. Don't scrimp on your tools, all the way down to the hard goods. You need a good computer with a large screen and printer, plus an effective working desk and comfortable chair. Likewise, subscriptions such as StockCharts.com, Morningstar and cloud-based portfolio management websites are basic and a must. Finally, don't overlook the wonderful free resources your brokerage house offers. In fact, this is why I'd urge you to have multiple brokerage accounts. Warning: don't let yourself get overwhelmed, however, with too many tools and resources. Learn to focus on your tool kit.

Further Reading...

Axiom #5: MACRO AND MICRO INVESTING FRAMEWORKS

I absolutely believe that successful investing is not that difficult if you are willing to allocate some personal bandwidth to the exercise. But remember that it’s in Wall Street's self-serving interest to convince you that investing is very complex and to make you think you are incapable of managing your money yourself. So here's my straightforward investing ecosystem. Start with a MACRO investing roadmap. The best one out there that I've ever found is — surprise — our Tensile Trading: The 10 Stages of Stock Market Mastery book. The most frequent comment that Grayson and I hear from our readers is their surprise that Buying doesn’t come until Stage 7 of the book — well after we cover six other stages. That's correct. The first six stages provide the essential foundations you need before buying anything. Remember the elevator versus stairs analogy.

Then there's your MICRO investing blueprint. This is where you make your equity trains run on time. It's all about focusing on the process and not the outcome. Over the long term, executing your process consistently will drive profitable outcomes. If you focus on profits first, your process will fail you. The blueprint, for example, is the manner in which you organize and populate all your ChartLists. This becomes your process. Following it will generate profits. If you want to take the elevator in this one instance, instead of hiking the stairs, it's okay to download the ChartPack which will give you an immense leg up.

Axiom #6: METHODOLOGY

Think of this like a big canister into which you feed all your potential equities and from which your personal "formulator" then spits out attractive candidates and discards the rest as garbage. I wrote this blog back in 2014 about William O'Neil's CAN SLIM methodology — one of the most successful and transparent formulators in existence. I myself have three separate formulators in my toolbox. One each for stocks, ETFs, and mutual funds. Whatever methodology you choose is fine, just don't leave home without it!

Axiom #7: EMBRACE PROBABILITIES

This often requires some inner recalibration, but teaching yourself to trust and believe in probabilities has many benefits. The two biggest benefits are these:

a) Knowing probabilities reduces personal stress and heartburn associated with investing.

b) By consistently deploying specific probability enhancers and only investing in high probability candidates with specific attributes, your percentage of winning trades will increase.

In other words, there is no such thing as a 100% probability for any certain trade. But there are different trades with clearly higher probabilities. By executing only high-probability trades and passing on the lower-probability trades — doing this consistently over time — your positive bottom line will reflect and reward this discipline. If you need detailed specifics and examples, refer to our book.

Further Reading...

Axiom #8: PROFITS COME FROM KNOWING WHAT IS HAPPENING — NOT WHY

Most investors are highly educated people who have been trained to ask "why". Engineers, accountants, doctors, lawyers, etc. The assumption is that if you know why, you'll do the right thing. But this doesn't work in the stock market. If you wait to find out why, you'll be the last one to leave the party. Investing is all about understanding how people behave with money. It doesn’t matter what they say or why they say it — it matters what they do.

As investors, we simply want to see if they are voting with their money as buyers or as sellers. Think of your charts as a weighing machine. All of this is reflected in the price and volume charts of an equity. I refer to technical analysis as reality investing. It gives us a 360-degree view of what is actually happening. Simply put, I don't know why the dog is wagging its tail, only that the tail is wagging. Often, you only discover why something happened until weeks or months later.

For me, what’s behind the curtain doesn’t matter. I make money by focusing on what’s happening on stage in front of the curtains.

Further Reading...

Axiom #9: ASSET ALLOCATION

Warren Buffett's biggest strength is that he’s proven to be a brilliant asset allocator. His superior long term record is not the result of his ability to outperform in up markets. Rather it's due to his losing less in down markets. Many academic studies have shown that about 90% of diversified portfolios superior results are directly attributable to asset allocation decisions and not individual equity picks. You should build a portfolio to bend but not to break.

Your doctor will tell you one secret to a long life is the "rainbow diet" — eating colorful fruits and vegetables. I’m here to tell you that the same applies to your investing. Rainbow portfolios with carefully allocated asset classes will weather all market cycles and thereby result in a long healthy financial life. This is done by selecting an assortment of asset classes that are not highly correlated. In our book, we present 59 different asset classes and show correlations for each class to the S&P 500.

Personally, I subscribe to a variation of John Bogle's "Core and Explore" approach to asset allocation. I add a third category which I call Super Explore where I go for a few moonshots — but with limited exposure just to keep life interesting.

Further Study...

Axiom #10: ABILITY TO EMBRACE CHANGE

A "buy and hold" strategy — or what I call fossilized investing — is dead. It's as scary as the old cliche about a visitor saying "I'm from the government and I'm here to help you." Investing your money requires some portion of each of the previous nine essentials in this blog. The mission is never complete. It's never over. You must maintain your monitoring disciplines and to some degree an action orientation. It's your money and you must accept the appropriate role as its steward.

Further Reading...

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So, there you have it! My 20-year career of teaching investments wrapped up in the ten most important axioms. As you take time to reflect during this holiday season and head into the new year with your resolutions for what to do better in 2020, I hope these lessons can inspire you to achieve more with your personal finances and your investing. My wish for you, my friends, is nothing more than peak financial prosperity in the new year and beyond.

 

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

Periodically, I'd like to look at some of my previous "DP Diamond" selections and show you some successes (darlings) and failures (duds). They don't all do what they should, after all. I have to say though, I find far more "darlings" in my Diamonds than "duds" as I went back to look at some of the diamonds in the rough I presented about a month ago. I'll start with two "duds" and follow up with two "darlings."

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DUD: Enbridge Inc (ENB) - Earnings: N/A

THEN: Below are the original charts that I annotated on November 12th. We had a great set-up on the indicators; the only issue I had was that it had rallied high enough that I thought we might see a pullback. On the weekly chart, I expressed concern that there was overhead resistance arriving, but overall upside potential was high should it break out.

NOW: Right now, you'd be at a small gain had you bought on 11/13, but overall it hasn't done much. The daily chart has problems, mainly with the Price Momentum Oscillator (PMO), which is in decline. Overall, OBV volume is still suggesting more upside, and there is potential for it to bounce off the 20-EMA, but, given the daily PMO, I'm not confident. The weekly chart is still favorable.

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DUD: Hartford Financial Services Group, Inc. (HIG) - Earnings: 2/3 - 2/7/2020

THEN: The breakout on HIG, combined with the PMO BUY signal on 11/12, are the bullish characteristics I pointed out. Volume was also coming in. On the weekly chart, I saw a long-term flag that had executed with this breakout.

NOW: Looking at the daily chart today, we can see that the BUY signal failed to hold and, while price did rise in the short-term, if you had been holding it since then, you be down about $0.60. I think it could rally, but overall the daily and weekly charts have turned quite bearish.

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DARLING: MSCI Inc (MSCI) - Earnings: 1/29 - 2/3/2020

THEN: I was looking at the ascending wedge to execute and drive prices higher. The PMO was not overbought and the weekly chart was promising. It was at $246.18 and today it is at $260.09.

NOW: In the short term, this one is likely in for a retest of support at the summer highs. Based on the weekly chart, however, I believe this will continue to rise overall given the weekly PMO. It may not be quite time to enter if you haven't already.

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DARLING: Globus Medical Inc (GMED) - Earnings: 11/6/2019

THEN: One of my very successful Diamonds was pointed out to me by a regular reader. On GMED, I was looking for a continuation of the rally as it had just broken to the upside from a symmetrical triangle. The PMO had just triggered a BUY signal. The weekly chart showed a potential upside target at overhead resistance at the all-time highs.

TODAY: GMED has gone from $52.85 to $58.36 since 11/9, when I originally wrote about it. It continues to look favorable as it is in a nice rising trend channel and the weekly chart looks fantastic, with today's breakout taking out all-time highs. The weekly PMO is rising sharply and is not at all overbought. In the short term, we could see a pullback toward the bottom of the rising channel, but, in the intermediate term, it looks very healthy.

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Full Disclosure: I do not own any of the stocks presented.

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Market Vision 2020 - Sign Up for Details

I am so excited to participate in "Market Vision 2020", an online financial conference on Saturday, January 4, 2020, to kick off the new year. Make sure you’re subscribed to the Market Vision 2020 newsletter in order to receive the latest updates on the event (and save a lot of money if you decide to attend!). *Click Here* to subscribe to the free newsletter. There will be lots of giveaways and free educational events for everyone who follows along – don’t be left out!

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Erin Swenlin will be presenting at the The MoneyShow Las Vegas on May 11-13, 2020! You'll have an opportunity to meet Erin and discuss the latest DecisionPoint news and Diamond Scans. The conference is free to attend or view online!

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Watch the latest episode of DecisionPoint with Carl & Erin Swenlin LIVE on Mondays 5:00p 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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NOTE: The stocks reported herein are from mechanical trading model scans that are based upon moving average relationships, momentum and volume. DecisionPoint analysis is then applied to get five selections from the scans. The selections given should prompt readers to do a chart review using their own analysis process. This letter is not a call for a specific action to buy, sell or short any of the stocks provided. There are NO sure things or guaranteed returns on the daily selection of "diamonds in the rough."

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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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**Don't miss DecisionPoint Commentary! Add your email below to be notified of new updates"**

When Charles Schwab recently announced they were cutting their online brokerage commissions to zero, the other major brokerage houses fell in line. Then, shortly after, Schwab announced they would be buying Ameritrade. Game on!

The most amazing part of this major development is it gives traders a tremendous amount of flexibility; essentially, with commissions out the door, traders are free to make as many in and out trades as they want at no cost. This is particularly true as long as you maintain sufficient equity in your account - that is, at least $25,000 at the start of the trading day - to avoid being labeled a Pattern Day Trader, which comes with certain restrictions.

One could argue that the elimination of fees could lead to too much trading, which is a valid point. On the other hand, grabbing profits quickly or minimizing losses by acting quickly could benefit traders as well. So yes, there are some trade offs, but one that could come with some big-time advantages if managed properly.

For example, look at the chart below on Chipotle (CMG), a stock on our Strong Earnings ChartList that beat both top and bottom line expectations when they reported their numbers on October 22. In spite of the earnings beat, the stock proceeded to move lower for two weeks straight before resuming its move higher after touching its 200-day moving average exactly. But there were a lot of support/resistance levels that were hit over that two-week period that could have presented trading opportunities, unencumbered by commissions. And there were certainly chances for traders to lock in nice profits or reduce losses based on those support and resistance levels.

With all of this in mind, we are going to conduct a FREE webinar this Monday, December 16, where EarningsBeats.com Chief Market Strategist Tom Bowley and I will be covering this exact topic, including some possible trading opportunities on specific stocks. Given the nature of this event, I know we will have a full house! But you can find out how you can join us for this unique and timely event by clicking here.

At your service,

 

John Hopkins

EarningsBeats.com