The S&P500 Time Consolidation

Nothing goes straight up right? Of course not.

Remember, the Market behaves a lot like us humans. We can’t just sprint and sprint forever. At one point or another we need to stop, chill out a bit, take a nap, and then we can keep going. The market acts the same way. These “chilling out” periods, or corrections, can take place one of two ways: through price or through time.

When uptrends correct through price, you often see a sell-off that can get down to anywhere between 38.2% – 61.8% of the previous up move. Other times, you don’t see a price correction at all. You actually see a pause in trend with some sideways trading action. I typically chalk this up as evidence of a strong trend.

Two Thursdays ago on January 19th, the S&P500 closed at 1,314.50 and the Dow Jones Industrial Average closed at 12,623.98. Today, the S&P closed at 1,312.79 and the Dow finished up at 12,637.83. Both pretty much unchanged after 8 trading days of consolidation. Meanwhile, the Russell2000 ($IWM) is up 1.1% during that time period, the Nasdaq100 ($QQQ) is up 1.1%, Emerging Markets ($EEM) are up 1.7% and Commodities ($DJP) are up 1.7%. That is the sort of relative strength you want to see while the broad markets are busy consolidating.

So yes, the Dow and S&P haven’t been going up. But more importantly, they haven’t been going down. There is an old saying out there that ‘you never want to short a dull market’. And guess what? It doesn’t get more dull that this….



Chart of the Day: US Homeownership Rate 1975-2011

This one caught my attention this morning:

Today’s Census Bureau data shows the lowest homeownership rate since 1997 with no bottom in site. From Mark J Perry:

“The political obsession with homeownership in the 1990s and early 2000s raised homeownership in the short run to an artificial and unsustainable level of 69% by 2006, but failed in the long run to create a homeownership rate that was sustaintable.  In the process, numerous government policies turned good renters into bad homeowners, created a housing bubble, waves of foreclosures, and a subsequent housing meltdown and financial crisis.

Amazing stuff



Home Ownership Rate Falls to Lowest Level Since 1997 (CarpeDiem)

Recognition of Supply: Euro Edition

We talk about it all the time. Former support turns into resistance and former resistance turns into support. This phenomenon continues to repeat itself over and over again in assets classes all over the world. I’m not sure why so many market participants ignore the most basic principle in technical analysis.

Whether you’re a technician or not, make sure you have a little post-it note to remind you:

Today’s example is in the $EURUSD. The October lows and November lows served as key support around the high 131s & lows 132s. This level was broken in mid-December and the $EURUSD continued lower for another month. We’ve been talking about the amount of Euro shorts that have shown up in the market lately (see Jan 14th & Jan 20th). And we actually saw a nice little rally off those lows.

But now we’re up against some resistance, that’s all. If you thought the market was just going to get back above those key levels without at least recognizing that there is supply, then check your post-it note. It’s normal. It’s healthy.

As you can see in the chart above, this new found resistance level also represents the 38.2% Fibonacci Retracement of the Oct-Jan move. More reason to expect some supply. The US Dollar Index also looks weak to me, so I think some further downside pressure there should be expected. This obviously would help the $EURUSD eventually get over that hump.

So bottom line: I’m not convinced that this is the beginning of a new leg lower for the Euro here, just a well-deserved breather.


Tags: $FXE $UUP $DX_F

Pay No Attention To This Golden Cross

We have more important things to worry about.

Technical Analysis is an Art and NOT an exact science. There are a lot of haters out there that just don’t get that. Just because a random talking head says to do something based on some “indicator” doesn’t mean you should do it . And it certainly doesn’t mean that all technical analysts should be grouped together. Think about what you’re looking at with some common sense before making portfolio altering decisions.

In this case, we’re talking about the “Golden Cross” for the S&P500. The media gets all excited (because they get paid to) when the 50 day simple moving average breaks above the 200 day simple moving average. This is happening in the S&P500, and supposedly it’s a sign of good things to come. If you watch enough television you would also be led to believe that the opposite is true when the 50 day drops below the 200 day. They like to call this the “Death Cross”. Sounds scary doesn’t it? It’s supposed to. If you don’t get scared, you don’t buy newspapers or watch financial television.

The stats sound good though. From Bloomberg:

“There were 26 instances in the past 50 years when the S&P 500’s short-term average crossed above the long-term gauge, according to Birinyi. The index rose 81 percent of the time with an average increase of 6.6 percent in the next six months, the data show.

Stocks posted bigger returns when the S&P 500’s 50-day rose above a falling 200-day, Birinyi data show. The index jumped an average 10 percent over the next six months, according to the study.”

But think about what we’re talking about. Moving averages, by definition, are lagging indicators. The 200 day moving average consists of data that goes back almost a year. And the 50 day has data from this Fall (no pun intended). If I’m going to look at moving average crossovers as an indicator, I’m at least going to use Exponential Moving Averages that add more weight to the recent data (But this is a conversation for another day).

Look at the S&P500 with the most recent crossovers in green (golden cross) and red (death cross). Back in July of 2010, the silly death cross would have told you to sell just when you should have been doing the complete opposite. Not only was it NOT time to sell, but it was actually THE BOTTOM and time to be buying. (See Reuters Article from July 6, 2010). The Golden Cross a few months later would have finally told you to buy, but you would have paid up dramatically.

Now look at the next sell signal in August last year. Not only did this “Death Cross Sell Signal” come 3-4 months too late, but once again, it was a time to start buying and NOT selling. Although, the S&P500 made a new low a few months later, more stocks had diverged positively and were already heading higher. So now after a 20% rally it’s time to start buying? Oh ok….

You see how little sense this makes?

For now, I think we have more important things to worry about than whether or not a lagging indicator is crossing above or below an indicator that lags four times as much. Some of those more important things were also mentioned by Birinyi Associates:

“S&P 500 has gained more than 20% in the past 78 trading days, a phenomenon seen 15 times since 1945. On average, they say, the market has gained 6.96% in the six months after those episodes and fallen only twice in those 15 instances.

The bottom line is that I’m paying more attention to what individual stocks are doing these days than I have in a long time. As we discussed on Friday, it’s important to listen to what the major averages are telling us but I’m relying more on the individual names. There are plenty of stocks to buy and plenty to short out there – I’m not trading the S&P500 Index. We might be back to a ‘market of stocks’ and less of a ‘stock market’. I’m hoping anyway. We’ll see. For now at least, we’ll be taking advantage of it while we can.



S&P500 Near ‘ Golden Cross’ After 20% Rally (Bloomberg)

Golden Cross Watch (WSJ)

Tags: $SPX $SPY $ES_F

Audio: Interview With Ralph Acampora

This is great stuff guys.

Legendary Technician Ralph Acampora sits down with Jim Puplava for a nice bullish interview about the Blue Chips. Ralph still sees strength in the components of the Dow Jones Industrial Average. Loves that $IBM and $MCD are making all-time new highs. Names like $INTC and $MSFT are coming out of bottoms and he thinks they’ll be playing a game of catch-up soon.

He says, “Charts are worth a million words” and “I am very very positive on Papa Dow”.

Click here – the interview gets going about 2/5 of the way through:

Also See:

Ralph Acampora Interview with Maria Bartiromo August 13, 2011



Ralph Acampora: Stocks Headed for Higher Ground (Financial Sense)

Tags: $DJIA $PFE

What’s Up With the Doji in the S&P500?

Get ready to hear all about this Long-Legged Doji that appeared in the weekly chart of the S&P500. They’re scary when they show up after a big move. I look at Japanese Candlestick Charts because I think they give us the most information in the simplest way possible. This type of doji candle signals indecision about the future direction of the S&P500.

The fact that it showed up after a big run up in stocks makes the candlestick that much more significant. It’s telling us that the forces of supply and demand are nearing equilibrium. This happens a lot when there is a shift in trend taking place. Look at all of the reversals that came after those long wicks in the candles.

The S&P is up over 22% since the October lows and 14% from the Thanksgiving bottom. That’s a lot fast. So a reversal will come. The question is when? The doji doesn’t necessarily mean that the reversal is here, but it is definitely a warning sign. For example, look at the candlestick the week of August 15th. The extended wick below the candle did NOT precede a reversal. The market continued lower regardless, which is a really bearish sign in and of itself. We will make the same conclusion if the market continues higher in the face of this long-legged doji. That would be intermediate term bullish.

Candlesticks are just one tool of many for a technician. We’re not going to take this single data point and make portfolio altering decisions based on it. But if the stocks in this stock market were all looking toppy and other things we look at were bearish, that’s one thing. But a) I’m not trading the S&P500 Index, and b) there are individual names out there that look great and keep rocking. There are also plenty of stocks that you could sell short. Isn’t it great that we can actually trade individual stocks again? I’m having so much more fun than when it was this ridiculous risk on/off stuff. Hopefully correlations peaked last Fall. We’ll see.

Also some of the other major averages don’t look like the S&P500 this week. Their candles actually look much healthier and constructive. The RSI in weekly S&P just made a new recovery high and there is still plenty of room for it to run. So I’m definitely not in the ‘sell everything’ camp just because of this one candlestick. I think we keep trading what has been working. No need to get cute. A big red filled candle next week would be confirming action of this potential reversal. So we’ll at least be looking out for that.

If you’re interested in learning more about Japanese Candlesticks, Steve Nison is the man. He wrote my favorite book on the subject.


Tags: $SPY $SPX $ES_F

Wide World of Charts

Carter Worth: Dow Jones Industrial Average has Memory here (CNBC)

Psychological Leverage for Traders (DerekHernquist)

‘Extreme’ S&P500 Momentum, $VIX Signal Drop (Bloomberg)

Greg Harmon Charts the Problem in Europe (DragonflyCapital)

James Bianco Charts: Living in a QE World (Ritholtz)

Chart o’ the Day: Spanish Unemployment (TRB)

Arthur Hill: Spot Light Crude Forms Bull Wedge (StockCharts)

US Debt Limit vs Gold Prices (ZeroHedge)

Video: Phil Pearlman on Short Term Trading (GlobeAndMail)

Ugly Action in Regional Banks (ChrisKimble)

All the GDP Charts You’ve Ever Wanted (dshort)

Video: Robert Prechter on the Mind of Money (ElliottWave)

Real GDP Increased 2.8% Annual Rate in Q4 (CalculatedRisk)



Are Stocks Really Up This Year?

If you’ve turned on the evening news or picked up a newspaper, you would probably think that the stock market is doing great this year. And it has, if you price your stocks in US Dollars.

If you’re comfortable pricing your assets in a denominator that can be diluted at the snap of someone’s finger, then sure, your stocks are knocking the cover off the ball. But if you want to price your assets in REAL money, in a currency that cannot be “printed at will”, then price your stocks in the oldest form of currency that we know of: Gold.

Priced in Gold, instead of in US Dollars, the Dow Jones Industrial Average is actually down Year to Date. On an absolute basis, the $DJIA is up about 4.5% for 2012. But meanwhile, $GC_F is up more than twice that amount:

And this is nothing new. Gold has been outperforming stocks for well over a decade. This secular trend, in my opinion, is stronger than ever. You’ll see rallies in equities vs gold, plenty of them, but they’re just counter-trend moves within a secular bear market.

And remember, counter-trend rallies are typically vicious in nature. We’ve seen a huge move in the Dow/Gold ratio since the August lows.  After its peak above 42:1 in 1999, the Dow priced in Gold broke below 6:1 at the end of this summer. Today we’re right around 7.5:1 and I wouldn’t be shocked if it went as high as 10:1, which is a historic average in this ratio. But none of that changes the fact that the trend is still down.

And this year’s action has just been more of the same. Don’t forget that.


Also See:

Talking Gold & Silver with Jeff Macke (January 4, 2011)

Tags: $GLD $DIA $UUP $DX_F

Are We Overbought?


So what?

What does that even mean? Truth is that it can mean a lot of things. But the one thing that cannot be argued against is that we see evidence of an extreme level of buying. This is a good thing. We said last week that we wanted to see RSI readings above 70 in the major averages. The overbought $DJIA $SPY $QQQ and $IWM confirm that we are now in Bullish Mode for each index.

It’s times like these when everyone takes out their John Maynard Keynes quote, “Markets can remain irrational longer than you can remain solvent”. But it’s true and we see it all the time. How long has Natural Gas been going down? Feels like forever. How long has Gold been outperforming Stocks? Again feels like forever. And in the short-term, how many non-believers have we seen throughout this rally? Not just the most recent melt up in stocks, but the whole thing from March 2009?

The point is that there are many different ways to measure overbought. And some oscillators, like RSI, may already be there. But they can stay overbought. And they can remain up there for a lot longer than you might expect.

But here is one gauge that has yet to reach the October highs. Bespoke Investment Group put together a chart of S&P500 companies trading above their 50-day moving averages:

The downtrend has been broken, but no new highs yet. Sit tight. Let it play out. Raise your stops and buy your puts if that’s what helps you manage risk. But there is money to be made in individual names, not just trading the indexes up and down. It feels nice to be able to say that.

Go get ’em today.



S&P500 Sector Percentage of Stocks Above 50-Day Moving Average (Bespoke)

Fed Fund Futures React to Statement

You can read the 10,000 articles that will be written over the next few days. Or, if you’re like me and need see a picture of something to understand, you can look at the Fed Fund Futures Curve. To be honest, you could tell me something a hundred times while beating me over the head with it, and it won’t be until you actually show me that I will finally understand.

So, what just happened?

This is what the Curve looks like today:

This is how it looked yesterday.

This is what they said to accomplish that:

“low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

It’s that simple folks. And the stock market likes it. Why? Because as Cullen Roche over at Pragmatic Capitalism put it, “Just 24 hours ago the curve was a full 25 bps higher than today.  This move was the equivalent of a rate cut. Unfortunately, rate cuts stopped working about 2 years ago….”

Check out how different the curve looked in June



Fed Goes Beyond What Market Expected (WSJ)

Pancaking the Curve (Pragmatic Capitalism)

Richard Ross: This Global Rally Continues To Have Legs

Chartered Market Technician Richard Ross has always been a favorite of ours here at Allstarcharts. The global technical analyst at Auerbach Grayson said today that he is bullish on global markets for the first time since last May. He was on India’s CNBC-TV18 where he went over a few positive developments:

“I think what’s important to take away from this is that the market is acting extremely well. We have seen a rally which began in the fourth quarter of last year which carried that momentum into the New Year with the surging gain, not just in emerging markets but developed markets here in the US and Europe.

So regardless of what happens, this market, whether it’s earnings, whether it’s the IMF kind of a warning that global growth will be slowing, whether it is on the political front or these European sovereigns fears which continue to be out there, the market is digesting them.

They are looking past these concerns and they are pushing stocks higher. We remain bullish now on the market for literally the first time since last May. We put out our piece on planning, we have had a change in sentiment from a bearish view to a now bullish view and we think this global rally continues to have legs here.”

I agree. Good news, bad news, no news, we’re seeing strength from the right areas. The reversion to the mean trade has been working in the stocks that were left for dead last year. Leaders (eh hem $AAPL & $MCD) are making historic highs. Treasuries can’t seem to rally even if stock market averages are down. Until further notice, the risk-on trade is working and it’s tough to fight it.

If you’re a member of the Market Technicians Association, Richard Ross will be speaking at the Bloomberg building in New York City next Tuesday January 31st at 5:30PM. Click here to register if you’re a member or affiliate of the MTA.

Can’t wait.


Also see:

Technical Analysis: You Can’t Handle the Truth – Richard Ross Oct 4th 2011



Bullish on Mkt for the First Time Since May (CNBC-TV18) $SPY $TLT