Category Archives: Technical Analysis

January 25th, 2012

“The Great Convergence”

In last week’s Recap Report recently sent to subscribers, I wrote and included the following chart:

“….. at the risk of being labelled melodramatic …. I see “The Great Convergence” coming to a head and finally getting resolved with the 18-month struggle between bulls and bears with (I hope it’s not just wishful thinking but an actuality) the bulls finally gaining the upper hand and finally being able to break into new higher ground.”

After today’s close and after closing higher for 20 of the last 23 trading days, the market is now up 10.01% since December 19.  Even more important is to note that today’s close was at 1326.06, almost exactly the level many chartists have touted as the breakout point that confirms an exit from this summer’s bear market and the continuation of last year’s bull market run off the lows.

It should also be noted that it’s almost exactly where the descending trendline connecting the 2007 and 2011 peaks is today.  However, rather than thinking in terms of points (e.g., 1325 or 1326) we need to think of a zone.  Every single trader doesn’t simultaneously decide to buy or sell which in turn causes a reversal at a single point.  Furthermore, the Index is composed of 500 different stocks in every economic sector and each of these stocks will have their own underlying market dynamics.  Market psychology does change when the market hits various levels but a change of psychology happens over time.

What the above chart indicates is a change in market psychology that’s been on-going since the bottom of the Financial Crisis Crash (see “Revisiting Housing and Banking With a New Ending” of a few days ago).  The ascending trendline since the bottom (higher lows) and the descending trendline from the pre-crash peak (lower highs) results in this “Great Convergence”.  The best momentum indicator (in my book) of moving averages across multiple time horizons are turning constructive adding to the conviction that a clear-cut signal to put, as they say in Wall Street, “risk back on”.

I believe there needs to be a 4-6% consolidation of this 10%, 23-day run and we’re going to look at it as a buying opportunity.  But if the market continues to zoom ahead another 2-3% without that correction, then it’s “damn the torpedoes, full speed ahead.”

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January 24th, 2012

The Outlook for FXI and Chinese Stocks

From the EconomicTimes of India:

“China’s economy is showing signs of slowing, with foreign investment falling for the second straight month in December and home prices dropping in most cities, the government said Wednesday.

The latest indicators came a day after data showed the economy expanded 9.2 per cent last year, narrowing from 10.4 per cent in 2010, as global turbulence and efforts to tame high inflation put the brakes on growth.”

From USAToday:

“China’s gross domestic product grew at its slowest pace in more than two years in the fourth quarter, and the worst may be yet to come, as weak exports and government tightening ripple through the world’s second-largest economy.

In the final three months of 2011, China’s GDP — the total value of goods and services — increased 8.9% from a year earlier. That was a fourth-consecutive quarter of slowing growth and the slowest expansion since the second quarter of 2009, when the economy grew 8.2%, the Chinese government said Tuesday.

For all of 2011, China’s economy expanded 9.2%, compared with 10.4% the year before.”

And finally, from The Guardian in the U.K.

“China’s economy is also “unstable, unco-ordinated and ultimately unsustainable”, a verdict delivered not by some capitalist running dog on a Canary Wharf trading floor, but by none other than premier Wen Jiabao. Nevertheless, any appraisal of China’s prospects must begin by admitting that the Middle Kingdom is the most astonishing development success story in the world today, and that its three decades of 9%-plus growth have been achieved in the face of widespread scepticism from foreign observers.”<

When we look at a chart of FXI, the ETF of Chinese stocks, we see a classic inverted head-and-shoulder or ascending triangle or any of a number of bottom reversals:

From the above chart it appears that the Chinese market would rebound in sync with the US market ….  should that come to pass.  The extent of that rebound, however, is bound by different constraints than the US market when viewed from a longer-term term perspective:

This short-term inverted head-and-shoulder may signal the beginning of a Chinese market recovery but a complete reversal of its long-term downtrend would also require a cross above a long-term descending trendline stretching back to the heydays of 2007 followed by a cross above the top boundary of what now looks potentially like a multi-year ascending triangle at 46-47.

The near-term inverted head-and-shoulders supports a move to 47 but moves above that need more umph and momentum to overcome their local economic and international trade challenges.

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January 19th, 2012

Revisiting Housing and Banking With a New Ending

There was much conversation today about how the housing and banking industry was leading the market higher ….. which reminded me of a post I made close to a year ago on May 11, 2011 entitled “Homebuilders and Financials: The Economy’s and Market’s Missing Wheel“.  The S&P 500 closed at 1342.08 that day, 2.06% above today’s close of 1314.50.  I concluded that piece by saying

“If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be “all-in” believing the market will continue heading towards the all-time high. If not, stay on the sidelines because rather than riding a car to the top it would be like riding a three-wheeler powered by the rest of the economy including: healthcare, retail, tech & internet, commodities, industrials and consumer non-durables.”

Because of the new more constructive view of housing and banking with the hopes of continued advances for stocks in those groups, I repeat that blog, including those charts, below:

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Two Industry Groups stand in the way of further market advances: financials and homebuilders.

Home building industry spokespeople go on CNBC regularly each time of the housing statistics are announced, like monthly sales, financing and refinancing, starts, or permits issued. And the spokespeople each time differentiate between the sales of new homes and resales, especially those that are in foreclosure or underwater; they also attempt to differentiate between national statistics which include negative information from extremely skewed markets like Las Vegas, Phoenix and Florida and the rest of the national housing market.

Discussed less frequently are conditions and prospects for banking, insurance, asset managers and the rest of the financial industry group. Since the bottom in 2009, I have believed the sector was a key to launching a true bull market:

  • On 3/20/09 in Financial Stocks are Laggards I wrote: “It’s often said that financial stocks are the Industry Group that leads the market out of the average Bear Market. In this case, however, the financials not only lead us into the Bear Market but they were the principal cause.
  • On 5/18/09 in XLF (Financial Sector ETF): What Now? I wrote: “XLF seems to be making what looks like the beginning of an inverse head-and-shoulder, a stock pattern that looks similar to the S&P 500 Index pattern….There’s only a one-in-four chance that XLF will be able to cross the resistance at the 13.00 neckline allowing it to move up to 17.00. It’s almost certain that 12-18 months from now XLF will be double what it is today [closed at 12.29 on that day], we just can’t say when.
  • On 6/7/2009 in XLF (Financial Sector ETF) = Market Health I wrote: “…the key to solidifying the market’s turn, to a true change in momentum from bear to bull is financial stocks starting to move up…..The financial sector is tied up with economic health, exchange value of the $US, interest rates and the health of the financial system itself. I’ll rest easier when I see the XLF successfully and with conviction cross above it’s neckline. “
  • On 9/16/10 in Housing and Finance: Two Superimposed Crises and Bear MarketsI wrote: “[The] graph clearly depicts what I see as two coincidental and superimposed Crises the country has faced. We often see them merged into one continuous stream of bad news but, in reality, there was a Financial Crisis (impacting business) that was preceded by Housing Bubble and Bust (impacting consumers).” and inserted the following graph, now updated to last night’s close (click on image to enlarge):

A year later, while the rest of the economy has regained its footing enabling the market to push higher (up nearly 20% since then), those two industry groups are still stuck below significant resistance and unable to breakthrough and push significantly higher:

  • Homebuilders
  • Financials

If you believe that these two sectors will be able to successfully cross their resistance hurdles and begin advancing to levels last seen in 2008 then you should be “all-in” believing the market will continue heading towards the all-time high. If not, stay on the sidelines because rather than riding a car to the top it would be like riding a three-wheeler powered by the rest of the economy including: healthcare, retail, tech & internet, commodities, industrials and consumer non-durables.

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If those groups start advancing this time, the rest of the market may not be much far behind.

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January 18th, 2012

The Challenge of Assembling a Watchlist

Since the market looks like it’s firming (my opinion and, yes, I’m aware that many believe the market is actually topping out and will soon be making its final leg down to new lows), now’s a good time to begin assembling your watchlist of stocks that may be ripe for the picking as soon as a bull market begins unequivocally.  I’ve assembled four such Watchlists for members of Instant Alerts, each based on one of the following four scans:

  • 5-yr Highs(scan run on December 23): a truly momentum-based scan that produced a list of 51 stocks that crossed into all-time new-high territory .  The premise is that a stock that has made “all-time new highs” has a low risk of reversing course and is likely to continue making new highs.
  • Relative Strength (scan run on December 30): another momentum-based scan that produced 22 stocks that had a the top 10% relative strength vs. the S&P over the past year plus were in the top 10% in shares traded over the previous five days.
  • “Stocks on the Move (scan run on January 7): a scan that produced 53 stocks based on a combination of both fundamental and technical indicators as follows:
    • Price > $15
    • Price % change today > top 25%
    • Relative Strength Indicator (RSI) > top 50%
    • “Moneystream” Surge for past week > top 50%
    • EPS % change for past 4 qtrs > top 50%
    • Volume Surge today > top 50%
  • Momentum (scan run on January 13): another stab at a combined fundamental and technical scan that produced 128 stocks
    • Earnings Growth Rate over 5-years – top 25%
    • Sales Growth Rate over 5-years – top 50%
    • P/E Ratio – top 50%
    • Price > $10
    • Volume ($) for the day – top 50%
    • Relative Strength vs. S&P 500 past year – top 50%

You would expect that the same names would appear on multiple lists because the criteria overlapped to some extent. Interestingly, that didn’t happen.  While 254 stocks appeared on all these lists, there were 237 unique stocks …. only 17 names appeared multiple times.  In other words, each scan produced pretty much different names.

To see how this list compared to stocks that have performed well, I produced another scan: stocks whose four moving averages (50-, 100-, 200- and 300-dma’s) were in a perfectly bullish alignment from the fastest on top to the slowest at the bottom.  Out of 5100 stocks,  436 met this criteria.

You would expect that many if not all the stocks in the previous scans would be on this broader list of stocks with favorable price momentum but this wasn’t the case:

  • Only 89 of the 237 stocks in the previous scans, or 37% had bullish price trends as indicated by their moving averages.
  • Fully 80%, or 347, of the 436 stocks with bullish price trends weren’t caught in the previous technical/fundamental scans.

There actually was little correlation or overlap between the different scans.  It’s actually very difficult to narrow the field down:

The conclusions I draw from these statistics are that:

  • scans are a good place to begin but there’s no substitute for good judgmental chart reading and
  • good market timing always trumps stock selection.

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January 13th, 2012

Cement, Concrete and Aggregate Group: EXP

As subscribers know, my searches for suitable stocks to buy follow a strict process: evaluate the market through the guidance provided by the proprietary Market Momentum Meter, drill down to find the Industry Groups and, finally, zero in on those stocks with the best chart patterns.

I can’t tell you the Meter’s specific reading because that’s available exclusively to members but I can share with you that there appears to a glimmer of hope, a prospect of a slightly more positive tone after nearly a year of frustrating horizontal action.  So it’s appropriate to begin looking for some of the most promising Industry Groups.

I use IBD’s Industry Groups rankings three ways:

  1. The top ranked Industry Groups are those with the stocks currently showing the best relative strength performance.
  2. The Industry Groups that have advanced the most over the past four months (granted, an arbitrary time horizon) to offer a preview of which might soon become the top performers in the near future.
  3. The Industry Groups that have advanced the most above the 20-week moving average of their ranks.

The Industry Group ranked highest by IBD last Friday were 9 stocks comprising the Cement, Concrete and Aggregate Industry Group.  Another fact that makes this group so enticing is that, as the graph below depicts, Friday’s highest rank put it 112 places higher than its 20 week moving average …. the greatest span of any of the 197 Groups.  Plus, its rise in rank over the past 4 months was greater than any other Group.  In short, this Industry Group performed better than any other when measured by these three conditions:

One typical stock in the Group is EXP (Eagle Materials), a manufacturer and distributor of gypsum wallboard and cement in northern Nevada, California, the greater Chicago area, the Rocky Mountain region and Texas:

If I were a fundamental investor, I could probably come up with any number of stories, rationales and explanations for why stocks in the group should be bought.  Could it be because infrastructure spending will finally be evidenced?  Is it because the construction drought might finally be ending?  But I’m actually a Stock Chartist who looks at the pattern of price movements and sees that for the past four years, this stock as well as several others in the Group, has been stuck for the past four years. Whether one sees a double bottom or a horizontal trading range, it’s clear that the stock is now bumping up against a resistance trendline (or you may call it a “neckline”).

After such an outstanding climb, the odds are in favor of some profit taking now.  But this is a stock and industry group that probably should be watched and bought on the dips (unless the market surprise us by losing the little momentum it’s trying to build by turning and collapsing …. then all bets are off).

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January 9th, 2012

Golden Crosses are Necessary but Insufficient

An event occurred last week that was pretty much under most investors’ radar screen; it was a Golden Cross in the DJ-30 Index.  If you don’t know what Golden and Black Crosses are, you should take a look at this excellent description from Bloomberg:


The moving averages of the S&P 500 Index haven’t yet formed that Gold Cross and won’t for another 15-20 trading days based on the recent rate at which the 50-dma is ascending.

Having said that, a Golden Cross is a necessary but insufficient market timing indicator.  As I wrote on November 23, 2010 in Listen to One Opinion or the Sound of the Thundering Herd, when some saw the signs that the market was approaching a reversal (John Murphy of StockCharts.com wrote “A decisive close below the 20-day line would signal a deeper correction that could take it down to its 50-day average, recently at 1,164.”):

“…the balance of technical evidence is now weighing more on the side of a breakout on the upside from the 12-month trading range than there is of a new bear market.

I’ve established a new near-term target of 1320 sometime before the beginning of the “sell-in-May” escape. The projection is based on what I perceive to be continually strengthening upside momentum as measured by my moving average-based Market Momentum Meter. While Murphy is looking at 20- and 50-day moving averages, I’m focusing on the fact that the 100-dma is a day or so away from crossing back above the 200-dma.

It may sound insignificant but when that fact is combined with the facts that 1) the 50-dma long ago crossed above the 200-dma (the Golden Cross) and above the 100-dma, 2) each of the three are above the 300-dma, 3) all four moving averages are trending up and, finally, 4) the index itself remains above them all then, historically, this tends to be very bullish. Especially since the market is at the early stage of that alignment.”

Five months later, on April 28, the market was 15.5% higher and closed at 1363, not far from my target set the previous November.

As my subscribers know, the Market Momentum Meter is at an extremely critical juncture in an excruciatingly narrow range just 0.11% away from issuing a Red/Bear and 1.40% away from issuing a Green/Bull signal.

This past October, in A Bull Market Signal? I discussed the Golden Cross and wrote

”

The problem with the indicator is that it over-prescribes an “all-cash” positions, periods when investors who follow the rule are out of the market when they should actually have been fully invested.

The problem can be remedied by combining the 200-dma rule with another common indicator and moving into an all-cash position only when both selling rules simultaneously proscribe an all-cash, risk-off posture. Only when the signal of one of the rules confirms the other should you actually assume the worst.”

Don’t be miss lead anymore by the media, miss read the market yourself and miss out on the next momentum-based trading opportunity.  Learn more by clicking here or the subscribe button below.

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January 6th, 2012

Is the Secular Bear Market Close to Ending?

A recurring theme among some reporters and bloggers is the possible breakout of the mega-caps.  I believe one cause for this line of reasoning is the persistent dream of an end to what is now the 12th year of the secular bear market.  A name that continues to come up as emblematic of this breakout thesis is WMT (Walmart).  Any stock chart aficionado salivates over the potential of a stock like WMT.  When stuck in a horizontal trading range for over 10 years there’s the potential of a huge move should a breakout above that huge wall of resistance is ever successful:

But WMT isn’t the only large-cap stuck in the secular bear market trap.  As a matter of fact, half of the 30 Dow Industrial stocks are below where they were on December 30, 1999 (WMT is down 12.8%). There are a number of large-cap stocks not part of the DOW that also have charts that have attractive potential should they break above their own multi-year resistance levels:

  • MSFT (Microsoft)
  • AMGN (Amgen)
  • QCOM (Qualcomm)
  • DIS (Disney)

What we’re all waiting for are stocks to breakout like IBM because when more do, we’ll be certain that the 12-year secular bear market will have ended:

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January 3rd, 2012

First Trading Day Facts

There’s always much said about the relevance of the year’s first trading day and what it might portend for the way the rest of the year ends up so I decided to do my own research based on the S&P 500 Index since 1963 and found what I consider to be some interesting factoids:

 

  • The market closed higher 36, or 78%, of 49 years since 1963.
  •  Of those 49 first trading days in January, about half (26) resulted in a higher closing for the day.
  • When the first trading day resulted in a higher closing, 60% (16) of those years also followed with a higher closing.
  • Of the 23 first trading days that closed down, only 6 years also closed down.
  • The first trading day with the greatest gain was 3.59% in 1988; the market closed 12.40% higher that year.
  • The first trading day with the greatest decline was 2.80% in 2001; the market closed 13.04% lower that year.
  • The best correlations between the first trading day and the rest of the year was when the first days trading resulted in changes of 1% or more.
    • Of the 10 first trading days that closed higher by 1% or more, 8  were followed by higher year-end closes.
    • Of the 8 first trading days that closed down 1% or more, 6 resulted also in lower year-end closes.
  • Of the 31 years when the first trading resulted in a less than 1% change
    • 9 resulted in a lower first day close and 22 with a positive close for the day but
    • more than half (19) of the years closed in the opposite direction as the first day of trading.

For whatever it’s worth, the Bulls must push for a positive close of 1% or more for Tuesday, January 3, 2012 to increase the probability that the year winds up on December 31, 2012 higher than it closed last week; an up close of less than 1% just won’t cut it. Those interested in the statistics can click here .

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December 27th, 2011

The Mid-term Election Year Cycle: Redux

Many hang their hat on old Wall Street sayings like “As goes the first week of January so goes January” or “As goes January so goes the year”.  Another Wall Street rule of thumb  is the “Mid-year election year” cycle.  A year ago, in “Mid-term Elections in 2010 and the Stock Market“, I wrote about the Election Cycle Power Zone from a firm called Alpha Investment Management. Alpha’s research came up with the following interesting statistics:

“The Power Zone is 15-months long, beginning 30 days before the mid-term elections. This 5-quarter period has not been down since 1931 (Dow Industrials’ Total Return)…..The average return has been 25.5% plus dividends. The average daily return since 1931 has been 7.7 times greater than the average daily gain for all other trading days. A $1,000 investment in the Dow only during the Power Zone (31% of the time) appreciated to $68,200 as of the end of 2009. A $1,000 investment in the Dow during all other trading days (69% of the time) grew to just $1,800 since 1931…..If there is any time to be invested in the stock market, it is this.”

Since the end of the most current mid-term election cycle that began on October 1, 2010 is quickly approaching, it’s appropriate to see whether this rule-of-thumb is true or whether it’s another that has to be thrown into the trash heap because of this unusual and volatile market.

We were savoring the truth of the mid-term election cycle this past April and were confident that the market would soon hit 1430 by year-end, a level that was the rule’s average 25% above the previous September 2010 close of 1141.20.  By the end of this last April, the market had already run up 19.49% to 1363.61; advancing another 6.0 over the remainder of the year to meet the average didn’t seem like to much of a stretch.  But then Europe blew up in our faces (click on image to enlarge).

Mid-term Election Cycle 2011

The market closed at 1131.42 on September 30, 2011, the exact anniversary of the “official” start of the cycle on September 28, 2010, for just shy of a 1% decline.  What had started out looking like a rule-of-thumb with a long history of accuracy was stolen in a brief 4 months by the European financial crisis.

We’re not in the business of predicting but with just 4 trading days left in the Cycle (and the year for that matter), it looks like the recovery since September could bring some respectability back to this rule-of-thumb.  With last Friday’s close of 1265.33, the market was a disappointing 10.9% above where the Cycle began and far short of the average but still higher.

Perhaps the Mid-term Election Year Cycle needs to have a qualifying clause added to it:

If there is any time to be invested in the stock market, it is this ….. so long as nothing external interferes [he says with tongue in cheek].

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December 21st, 2011

2012 Stock Market Predictions

‘Tis the season and predictions for 2012 abound.  Like the market, they are a confusing and contradictory bunch.  Here are a few that fell into my inbox just this morning:

  • According to the Wall Street professionals assembled by Barron’s, “all expect the market to rise about 11.5% next year, which is about what they expected to happen last year and in 2010.”  And in the next breadth, Barron’s seemed to undermine the prediction by inserting the following quizzical chart:What the chart says to me is that: 1) the divergence in Wall Street’s views are as wide this year as they had been the prior two years and 2) Wall Street is batting .500 by the average prediction being dead on correct once and being totally off the next year.  So how much credence would you give to Wall Street’s prediction for 2012.
  • USAToday also assembled their own, different Wall Street Crew for their views of what to expect in 2012.  “….a quick survey of New Year‘s prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term. A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks.”
  • If you want a fundamental-based set of explanations for why we’ve been experiencing such an exasperating market you can turn to IBT (International Business Times) who have assembled a Chinese menu sort of prediction for 2012.  Pick any predictions for column A (Bullish) an column B (Bearish) and come up with your own number:

I, for one, am not going to try to pick what I think might be the most probable outcome, I’m not smart enough for that. But I am going to stick with the long-term “reversion to the mean” projection that has been true since I first wrote about it here on December 9 2009 which you should read to understand how it was derived.  In short, the assumption is that we are at the end of a secular bear market similar to the one in the 1970′s and the path out might be similar to the last one.

It may be a queer anomaly but the market has been tracking fairly similar to the path laid out back in the 1970′s.  If it continues the path then the market might touch between 950-1000 sometime in the first half of 2012 and then begin and succeed in another attempt to cross into new all-time high territory in 2013: Would I be disappointed if this prediction failed?  Not at all; I’d be ecstatic.