This week's edition of The ChartWatchers Newsletter has arrived, featuring exclusive market analysis and technical commentary from our team of world-renowned, expert contributing analysts.
February 29, 2020
Hello Fellow ChartWatchers
Welcome to the end of the trading week. Wow, I can't tell you how comforting it is to finally say that.
Like me, I'm sure you're still digesting all of the madness that the global markets brought us this week. As my good friend Dave Keller would say, there is certainly a ton to "unpack" here, so instead of mentioning a new tool or feature or something going on around the site, this week I thought I'd highlight some of the work from our contributor team that deserves your attention.
As you know, we are proud to partner with many of the world's best, brightest, most tenured chartists on the planet at StockCharts, and their insights and analysis can be a hidden gem for many of our users. Leading that list is John Murphy, our Chief Technical Analyst, a renowned author and the father of intermarket analysis.
John's latest "Market Message" article breaks down this week's movement in the $VIX, takes a closer look at where we may find some support in the S&P 500, and covers the state of things in the Sector SPDRs. It's a must-read as you take some time this weekend to unravel the sharp declines.
Here in this week's newsletter, Martin Pring shares three unique charts and walks you through an analysis that suggests a short-term bottom may be near. In particular, his points about the ratio chart of the $VIX to the 10-year yield ($TNX) are powerful.
Next, in addition to David Keller's ChartWatchers article that you'll see down below, be sure to check out his "Wrap The Week" segment from the Friday edition of The Final Bar. In it, he walks through some historical comparisons to put this week's dramatic selloff into proper context.
Lastly, if you'd like to step back from the charts and reflect on your investing from a higher, more introspective level, my own "Traders Journal" article walks through the "Three P's" that I've been thinking about this week: Purpose, Process and Preparation. Chaos in the market provides opportunity to practice process and put routines to the test. I explore those concepts and leave you with a challenge for the off-hours time this weekend.
Purpose, Process and Preparation: My Week Has Been Fine, How 'Bout Yours?
by Grayson Roze
My fiancé texted me after the close on Monday afternoon with a link to some newspaper article about the major selloff. "You were right!" she added. I chuckled and tucked the phone back in my pocket.
See, every Sunday, Hannah graciously puts up with me as I take time out of our precious weekend together to sit down with my laptop and a good cup of coffee and run through my weekly portfolio review. It is without a doubt the most important part of my week, the cornerstone of my financial management and the most valuable routine in my arsenal.
It's a religion. Or, an obsession. Or, a great way to get your family to say "Oh come on... Now?! Here?! While we're on vacation?!" All apply, that's for sure.
This past Sunday, winding down after my review, Hannah asked what I was thinking about. I told her that based on the latest news out of South Korea and Italy as well as the clear movement in futures, the market was going to sell off aggressively on Monday, likely kickstarting a healthy pullback. She's great about entertaining my love of charting and all things stocks, so she pressed me a bit more.
"Aren't you nervous about that? Doesn't that make you worry or something?"
Now, before I continue, let me stop and admit that I first began writing this article on Tuesday evening. The week got away from me as it often does, so I'm returning to finish and publish here on Friday morning facing a very... different... market.
Throughout it all, however, the lesson that I first jotted down on Tuesday is one I've kept in mind during the rest of the week. When Hannah asked me if I was nervous or starting to panic about the markets, I felt comfortable telling her "no". And even now as the week wraps up, I'm still comfortable saying "no".
Am I watching closely? You bet. Taking the rapid trend change seriously? Absolutely. Concerned about the depth and duration of this selloff? Definitely.
But am I running around with my hair on fire, looking at the markets in completely new ways, abandoning my investing process or changing everything about it, trying new tools or indicators or experimenting with someone else's system because OH MY GOODNESS WHAT THE HECK IS HAPPENING?!
No, not at all. In fact, quite the opposite.
I know why I'm involved in the markets. I have a clear view of my financial goals. I'm comfortable with my investing timeline and know what is most appropriate for me based on my risk tolerance, available time, lifestyle, and more. I feel in touch with my "Investor Self" and respect the emotions involved in trading. I'm firm in only playing the long side of the market (as I discussed in this article two weeks ago) and know why I feel that way.
I could keep going here, but all of this is to say that I understand my purpose as an investor and the role that markets and my portfolios play in my life. That clarity of purpose is crucial as conditions change, trends shift and reversals take hold. Bulls may turn to bears and back again, but the only real danger comes if you let your overall purpose change along with the market.
To meet my purpose, I have constructed a thorough set of processes – daily, weekly, monthly and beyond. I have a specific toolkit that I know well and lean on with no hesitation. I return to that toolkit day in and day out, week in and week out, with a rigid adherence to the process because that consistency is what makes it work. In short, I have a system.
In seminars, conferences and other events, I frequently speak to investors about the importance of having a system. I define this very clearly as something that is:
Intentional (it is there for a reason that is true to you)
Describable (it is clear and can be communicated)
Repeatable (it is something you can follow again and again and again)
Appropriate (it is yours, something that is uniquely fit for you)
I like to say...
You find your edge by crafting your system. You sharpen your edge by fine tuning and tailoring that system to fit you even better.
With a process that I trust and know intimately, I can embrace my purpose and go after it strategically. Even when the markets fall apart the way they have this week, I have a system to lean on and a process to evaluate what's in front of me. I'm not searching for that process in the middle of the turmoil because I've worked hard to build and refine it over many years. That means that when the time comes to put it to the test (like... now!) I am ready.
Knowledge of my purpose and a well-constructed process for taking action are nothing without the discipline to carry out those routines. My weekly review every Sunday is about one thing: preparation. I'm preparing for the week ahead, regardless of what it may bring.
If the markets are up, great. I have any necessary trades ready and I'm keeping a close eye on my watchlists to make new moves as they present themselves. If the markets are down, that's fine too. Again, I have my scenarios mapped out and ready to roll.
The point is this: I am prepared to execute my process over and over again, throughout all market conditions, in order to turn my purpose into results.
So I have a challenge for you this weekend. With the markets closed and the pandemonium paused, consider the "Three P's" I've described above and ask yourself:
Do I have a personalized purpose as an investor, one that is true to me, and do I understand why I am ultimately participating in the markets?
Do I have a real process in place, a systematic approach that is intentional, describable, repeatable and truly appropriate for me?
Do I properly prepare for what the markets have in store by staying disciplined and consistently executing my routines?
March 21: "Mastering The Stock Market At All Ages"
Next month, Gatis and I will be presenting in Los Angeles to the AAII about "Mastering The Stock Market At All Ages". In this special event, we're taking over for a full morning (9:00am - noon) with three mini presentations designed to bring young and older investors together into the same room. We'll share how we manage our money, how we invest both separately and together, and discuss the most important lessons that we've learned throughout more than 45 years of combined market experience.
For more information about the event or to register, CLICK HERE.
Three Charts That Suggest an Interim Bottom is at Hand
by Martin Pring
It's been quite a week, but the charts are starting to look to me as if a bottom is close at hand. In order to identify one, I look at a couple of factors. First, are there any signs of a one or two bar reversal pattern? Take Chart 1, for instance. It features the Wilshire 5000, arguably the broadest measure of "the" market. It shows two things. The first thing is that a bullish hammer was formed on Friday. Beyond that, though, take a look at the huge volume. There is nothing in the rule book that says the volume won't increase some more on Monday, but the hammer suggests that it might be time to head higher. The problem is that other averages are not sporting a hammer, with the exception of the S&P Composite. That's a shame, as more hammers or other reversal phenomena would increase the of odds of a reversal.
The second thing I like to see is a selling climax, and we have a really big one in Chart 2. The data is arranged so that we can observe a 9-day RSI oversold condition, required for a selling climax, with an overbought reading in the price volume oscillator (PVO). That high reading in the PVO tells us that the oversold condition is characterized by a massive increase in volume. The arrows point up those periods when the RSI was oversold and the PVO was overbought. Typically, a rally follows.
Finally, it wouldn't be a bottom without some measure of fear being present, and that's what we see in Chart 3, which displays the ratio between the VIX and the 20-year yield. When the VIX rises, it indicates fear, and when treasury yields drop, that reflects a flight to quality. By relating the two, the falling yield has the effect of driving the VIX even higher. I showed this chart earlier in the week, when the ratio was already at an elevated reading. Now it's at a record level. Clearly the current level is unsustainable, which means that a peak is at hand.
These indicators tell us nothing about the long-term trend; they merely show that, based on historical precedent, we should expect to see an end to the recent short-term decline. That could take the form of an immediate rally or, more likely, an extended trading range as prices probe for a more durable bottom. Since many important long-term MAs have already been violated, it seems to me that they had better be successfully challenged in the next couple of weeks or so; otherwise, the technical picture will start to look more like a primary bear.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.
Is it reasonable to expect that next week will see the markets recover at least a bit after this week's mayhem? Absolutely. But here are three charts suggesting that any short-term market bounce will most likely be followed by further downside for stocks.
First, we have to remember that indexes like the Dow Jones Industrial Average ($INDU) are not just oversold but extremely oversold, with an RSI below 20. This is actually incredibly rare.
This has only happened four other times since the March 2000 market peak. In every one of those cases, the market at least retested the low and, in three of the four, the Dow actually saw a lower low in the next 3-8 months.
So, while an oversold condition usually suggests short-term upside for any market, the extreme oversold condition actually has often identified elevated risk for further downside.
Second, we now have over half the S&P 500 index trading below their 200-day moving averages.
In shorter cyclical pullbacks, this key breadth indicator has stopped at the 50% level. This would mean that half of the S&P members have remained above their 200-day moving average.
As of this Friday, only 26% of the S&P stocks remain above their 200-day, which now it puts in rare company this week. This breadth breakdown has only happened two other times since 2014; in both cases, this identified deeper market declines.
It's worth noting that, in the 2012-2015 period, this "50% sell" signal happened three times. In each case, the market recovered quickly. The difference there is that the S&P 500 never confirmed a breakdown of its own 200-day moving average during that period.
Finally, we have the 52-week highs and lows. As of Friday, 20% of the S&P 500 stocks had established a new 52-week low.
Here, we're showing the S&P 500 index, followed by the new 52-week highs and lows on the New York Stock Exchange (middle panel) and the 52-week highs/lows for the SPX (bottom panel).
This extreme low reading has only happened three other times since 2014. The first two times were in 2015 and 2016, in which the market moved lower in both instances. The opposite occurred at the 2018 market low, when over 200 S&P names reached a new 52-week low and the market completed a V-bottom soon after. The difference there is that the SPX had already been in a severe decline off the October 2018 peak, as opposed to the one-week decline we've experienced thus far in February 2020.
So there are three charts illustrating how the current market is showing similar characteristics to other cyclical declines. Is this is a guarantee that the market will move lower? Of course not.
But the greatest value of charts, in my opinion, is the benefit of market history. Long-term charts help you put the current market environment into proper historical context.
Based on these three charts, I would not be surprised to see a brief recovery followed by further downside.
David Keller, CMT
Chief Market Strategist
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.
The selling we saw this week was one for the ages. Yes, I've been extremely bullish for a long time and it's primarily because of the economic environment. There's never been a time when we've been looking at moderate growth, historically-low interest rates AND the opportunity for the Fed to further lower those rates. The inability of inflation to even keep pace with the Fed's moderate 2% target has given them a blank check to keep interest rates low for the foreseeable future. Last week's nearly unprecedented drop in global equity markets provided them an entire checkbook.
So, after picking up the pieces during the aftermath of a very rough week, here's a handful of key takeaways for me:
Gaps were king
The ETF (SPY) that tracks the S&P 500 closed on February 21st at 333.48. One week later, it closed at 296.26. That represents a drop of 37.22 points. You might be surprised to know that opening gaps accounted for 22.14 points to the downside, while actual selling during the trading days accounted for the other 15.08 points lower. I'm not sure how anyone else interprets this, but it appears the coronavirus was worse while the U.S. stock market was closed.
To put this another way, 59.48% of the loss this past week occurred when the opening bell rang. The fear mongers certainly got what they were looking for - panic. Someone was clearly buying throughout the trading days last week. Was it you? It wasn't me. Don't be surprised to see the stock market rally next week now that certain pockets have been lined with shares.
The talking heads are all comparing the fear this week and the drop from the coronavirus to the financial crisis of 2008. Puh-lease! That was true panic, a near-financial system collapse. From the October 3rd, 2008 close to the October 10th, 2008 close, the SPY took a massive tumble. Opening gaps lower accounted for just 24.47% of that week's loss (compared to 59.48% losses from opening gaps this past week). The overwhelming majority of the selling (75.53%) occurred during the trading day. THAT was true panic and REAL SELLING in a dire environment.
The coronavirus is a serious health risk, but I doubt its impact will rival the trillions of dollars lost in equity markets over the past week. Maybe I'm wrong.
Powell is no pal of Wall Street
I've been highly critical of our Fed Chief in the past, so I won't spend a lot of time on this. But I'm quite certain Ben Bernanke would not be sitting back, saying the central bank is "prepared to act as appropriate." Jay, just look at this chart of the 10-year treasury yield ($TNX):
The bond market believes a 50 basis point rate cut would be appropriate immediately. But take your time Jay. After all, it took the better part of a year for the Fed to get it right with respect to the trade war. #worstfedever
Growth stocks lead value stocks
Ok, now this one was a huge surprise. In a market environment where earnings growth will be drastically cut, wouldn't it stand to reason that those stocks that crushed the benchmark S&P 500 in 2019 and 2020 would have their legs cut out from under them now? The Russell 2000 Growth ETF vs. the Russell 2000 Value ETF (IWF:IWD) gained ground last week:
Huh? In Q4 2018, when our GDP growth slowed dramatically, the IWF:IWD ratio tumbled (red circle), as I would expect. Why, with all the lowered earnings revisions and dire economic forecasts, would growth stocks outpace value stocks last week? Something doesn't smell right.
Software breaks out to new relative high
How can this be? Didn't Microsoft (MSFT) just issue a revenue warning? Check out how the software group performed vs. the S&P 500 ($DJUSSW:$SPX) on this 3-year relative strength chart:
Makes sense, right? We're on the cusp of a massive economic disruption and the aggressive software space ($DJUSSW) breaks to a new all-time relative high vs. the S&P 500. When the stock market recovers, this remains an area where you want exposure - in my opinion.
Biotechs avoid a closing breakdown beneath January low
Here's another group that you'll want to keep a close eye on. Yes, they once again failed on their recent absolute breakout, but how could they not, given the selling over the past week? More important is their relative strength, which broke out last week to a 10 month high. Check it out:
I believe that, when 2020 is all said and done, biotechs ($DJUSBT) will be among the leading industries.
If you can't tell, I don't trust Wall Street and I don't trust the media. Wall Street will make money at your expense and mine every single time. And if you believe every story out of the media, I have a bridge to sell ya.
I don't know how the coronavirus will impact the global economy, I wish I did. But I do believe it's a one-time drop in the market and we'll set sail right back on our secular bull market course once it's behind us. And that's also what many of the key takeaways above are telling me. We may not have seen the low yet, because fears will run rampant again, I'm sure, as we count coronavirus cases one by one. The Fed, however, will act very soon to lower rates and sentiment will turn, even if only temporarily. Friday's low was marked with a VIX reading near 50. Historically, extreme sentiment readings mark bottoms. We'll see if Friday marks a major low this time. Even if we bounce next week, I would expect we'll eventually see a test of Friday's low, perhaps even one more low.
I don't watch CNBC any more. I'm not kidding. Not ever. It clouds my vision. I can't recall the last time I actually put CNBC on my TV. I'd guess it's been at least 3-4 years. Let the charts and common sense do the speaking, not the clickbait headlines from the media.
If you'd like my free 3x per week articles on relative strength, earnings and other topics, please subscribe to our EB Digest newsletter. You can CLICK HERE to join.
Let's just say that this was not a boring week for the markets...... at all!
When markets go crazy and swings get out of control, I have learned to step back and look at the bigger picture - and keep it simple. While doing so, I remembered writing an article titled "This is My Trendline, Which One is Yours?". I actually needed to dig into the archive to find it; it was published August 6, 2019.
In that article, I introduced a trendline that starts out of the early 2009 low and, up to the article's publication, had been touched six to eight times (depends a bit on how strict you want to be on what is a "touch" ). I'd say that makes it a reliable trendline.
I referred to that trendline again, and added some other annotations, in my Sector Spotlight episode at the start of February. The video below starts at the moment where I look at the long-term S&P chart.
The chart at the top of the article is the same chart as in the video, but has now been updated to (almost) the end of the month. SPY has now arrived at the first support zone in the 290 area. Whether this means we have a buying opportunity remains to be seen; the power behind the current move is pretty big and you do not want to jump in front of a freight train.
If we see some sort of relief and support kicking in at these levels, a short-term buying opportunity may arise for daring, risk-seeking short-term traders. I would be looking for at least a few days of consolidation in this area, along with preferably a bounce, a second test of support and maybe the completion of a double bottom before pulling the trigger.
If that does not happen, and we break lower again next week (or bounce with the next move down falling below the current level), we are very likely in for another ride down. In that case, my second green oval becomes the next price target. That means 260-270 for SPY, roughly another 10% off current levels.
Rotation to Defensive Sectors Ongoing
On the Relative Rotation Graph, we see a continuation of the rotation towards defensive sectors. The chart above has the 60-month trailing BETA for each sector overlaid. Generally, the low BETA sectors are defensive while the high BETA sectors are more offensive.
Very clearly, we can see the strong rotations, long tails and strong headings for Utilities and Real-Estate. Both consumer sectors are still doing well on the weekly RRG but, on the daily version, Staples are now taking over from Discretionary (as expected), so we may need to take into account the possibility that XLY will start to turn around inside improving without hitting leading while XLP will start improving more and faster.
Two outliers on this chart: XLK, which is the only sector inside leading AND has a high BETA, and XLV, which has BETA below 1 (albeit only marginally so) while heading towards the lagging quadrant. For these two sectors, the daily rotations are catching up, showing XLK close to crossing over into lagging while XLV is now at a strong RRG-Heading inside improving.
The most important takeaways with regard to the rotations for defensive sectors is that these are in their early stages, which means that they have plenty of room to improve further and continue their rotations along their current paths.
Enjoy your weekend....
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Bottom Fishing - Three Candidates After Last Week's Sharp Selloff
by Mary Ellen McGonagle
It was a tough week for investors following last week's sharp drop in the markets, particularly as many individual stocks sold off even more than the averages. Selling was broad-based and on heavy volume, with the Dow Jones Industrial Average experiencing its biggest decline since the October 2008 banking collapse as coronavirus fears gripped the markets.
The relentless selling subsided on Friday, however, and a close look at that day's trading action points to a good chance that we may see a bounce into next week. Heavy buying on what was the market's 7th straight day of declines had the S&P 500 bullishly closing in the very upper portion of its trading range for the day.
Other near-term bullish factors also emerged - you can review them in my most recent MEM Edge Show here.
INTRADAY CHART OF GENERAL ELECTRIC (GE)
The first name that's due for a bounce is General Electric (GE), which got hammered during the coronavirus-inspired selloff, dropping as much as 26% before buyers came in and supported the stock. On a daily chart, GE bullishly closed on Friday back above its key 200-day moving average.
As with the other selected stocks in this article, I've marked up the intraday chart to highlight positive signals for the very near-term outlook. As you can see, the RSI is a hair away from turning positive, while the MACD bullishly crossed up above its signal line. Lastly, GE's rally on Friday bullishly pushed the stock back above its 5- and 8-hour moving averages.
INTRADAY CHART OF SHOPIFY INC. (SHOP)
Shopify (SHOP) is in an even more positive position to rally, after closing the week back above its key 50-day moving average following a Friday rally. The stock had been a huge year-to-date winner before peaking in price in mid-February. The 2-week selloff in the stock pushed it down as much as 30%, despite analysts raising earnings estimates.
On the intraday chart, the RSI for Shopify is now positive while the MACD has had a positive crossover. In addition, the price action on Friday pushed the stock back above its near-term moving averages.
INTRADAY CHART OF TRANSDIGM GROUP INC. (TDY)
The slump in Transdigm Group (TDY) began even earlier than the other candidates, as the stock peaked in price in early February despite reporting strong earnings and sales that had analysts raising guidance going forward.
The stock slumped more than 20% over the past 3 weeks before finding support at its 200-day moving average on Friday. It also bullishly closed in the very upper portion of its range for the day. On the intraday chart, the RSI is close to turning positive while emerging from an oversold position, and the MACD has had a positive signal crossover. In addition, the volume during the stock's break back above key moving averages is very impressive.
While the broader markets appear poised for a bounce, the longer-term outlook remains murky. Until we have a clearer picture of the coronavirus's true impact on global growth, we can expect the uncertainty that's been pushing the market's down to remain.
In the meantime, those interested in participating in a possible bounce in the markets will want to put alerts in place so that, if your stock breaks back below those ultra-short-term moving averages and negative RSI and MACD signals emerge, you can safely exit. This would be using an intraday chart.
For those who'd like insightful alerts regarding the broader markets during this difficult period, I urge you to take a 4-week trial of my MEM Edge Report for a nominal fee. In addition to being alerted to when the current downtrend has reversed, you'll receive regular updates on the markets complete with entry and exit points of high-quality growth stocks as the markets warrant.
Next Week, I'll Be A Panelist With 5 Other Experts Who'll Share Their Strategies For The Current Market Environment. The Event Will Be At No Cost And You Can Receive A Recording If You Can't Make It Live. For more information, CLICK HERE
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