Small-Caps Consolidating Through Time

As we’ve discussed in the past, securities can consolidate in one of two ways – through price or though time. When a stock or index is in a strong trend, these consolidations tend to occur sideways through time, rather than in a counter-trend price correction.

A month ago we put up a post titled, The S&P500 Time Consolidation. At the time, S&Ps were stuck in a tight range for that two week period at the end of January. But although the market wasn’t able to go any higher, it wasn’t going lower either. This “time consolidation” was enough to work off some overbought levels and build a nice base to support the next leg higher. We’ve seen higher highs ever since.

We are seeing similar action in the Russell2000 these days. On February 3rd the iShares Russell 2000 ETF ($IWM) closed at $82.95. For the rest of the month, this small-cap index has been stuck in a 2.5% range literally going no where. But that’s the sort of healthy consolidation that we want to see in a strong uptrend. Don’t forget, $IWM is up almost 40% from the October lows but just 12% year-to-date because of this range-bound February.

 

The presumption here is that the breakout occurs in the direction of the underlying trend, which is clearly up in this case. I would watch the $81 lows as key support and manage risk accordingly.

Carter Worth, chief market technician at Oppenheimer Asset Management, said this week, “It’s perfectly normal to stop and pause, and I would just interpret it as that rather than maybe the foreshadowing of something worse in terms of small-cap underperformance”.

I agree.

 

Source:

Small-Cap Slowdown Just a ‘Pause’, Analyst Says (CNBC)

The S&P500 Time Consolidation (Allstarcharts Jan 31st 2012)

Tags: $IWM $RUT $SPY $SPX $ES_F

About that Crash in Natural Gas Prices

It’s looking like fresh lows are in the cards for nat gas. Where is the bottom? When is the blood bath over?

We’re going on over 3 1/2 years of destruction and 80% losses. There is an old saying on Wall St. that, “Bottom Fishing can be Hazardous to your Wealth”. If you didn’t know this, let the current state of Natural Gas and the ’08 Financials be a lesson.

But in this case, we’re not talking about a company that can go bankrupt right? This is a commodity after all. So the reversion to the mean process should begin at some point. But where and when?

Take a look at the recent consolidation in the United States Natural Gas Fund ($UNG). The breakdown here below the triangle is typical. This type of brief pause usually resolves itself in the direction of the underlying trend. In this case it is clearly down. As scary as it may sound, the 4 point base in the triangle gives us a target somewhere in the 17.50 area. We may not get that low, and we can just as easily go even lower. But I have a feeling that a vicious tradable rally will develop from this breakdown.

As Natural Gas makes fresh lows and pessimism in this space makes fresh highs, the right pieces are in place for a Rip-your-face-off rally. But let the trade come to you. Let it develop. It’s been about 45 months, so what’s another couple of weeks or days?

Look at the extreme lows recently put in RSI in the chart above. As $UNG makes new lows in price, I would want to see a higher low made in the Relative Strength Index. This potential bullish divergence could spark the rally. But we’re not there yet. We’re looking at a 17.50 target where we can start looking for entry points, but it could come sooner. A key reversal day would not surprise me. Perhaps a day where Nat Gas sells off early and rallies back hard in the afternoon? Or maybe a big gap lower after a weekend with a solid all-day rally throughout Monday. There are a few different scenarios that could work out here, but the most important thing to remember is that we are looking for the smallest amount of risk. We want a point of reference to help us manage risk with stop losses or put options.

The idea here is to find a risk/reward where we can risk less than 4-5% with the potential to get back to the mean. In this case, a 200 day moving average that could be twice the value of the entry point. And remember that we are in a reversion beyond the mean business. In other words, we typically see prices exceed the mean. So the potential here is huge. The difficult part is the risk management in a crashing security. That is where the patience comes in.

And now for the $UNG haters (everyone hates this ETF). It is a disliked vehicle for good reason – all it does is go down. I’ve never seen anything like it. But at the end of the day, it’s liquid and is very highly correlated with the commodity itself. So if we’re looking for an equity vehicle to trade this space, $UNG will have to do. Look at the very positively correlated $UNG & $NG_F:

So I’m going to be patient. No positions yet and don’t plan on initiating anything yet. But the face-ripper will come. Stay tuned….

 

Dr. Copper Up Against Key Resistance

The market keeps rocking and we’re seeing an underlying bid across the board. Dips continue to get bought up and sectors have been rotating as they should. But now what?

Copper is a great tell for the global growth names. When Copper is doing well we should expect emerging markets and commodity stocks to outperform. This Risk-on type of action is a positive for the market as a whole. I think we continue to be in an environment where we can buy and sell individual names and worry less about the S&P500 levels. But with that in mind, we need to make sure we’re not fighting any strong trends here. Although the market is up a ton off the October lows, we continue to see sector rotation. This is an important characteristic of bull markets. When the rotation goes towards the defensive sectors like Healthcare, Utilities, and Staples then we’ll get much more defensive. For now I think Copper is what we need to watch:

Support just under $4.00 in the Spring and Summer last year broke down in the Fall and has now turned into resistance (Green circles). Earlier this month Copper attempted to break through this key area, but failed as one would expect on the first try. All that we’re seeing here is a recognition of supply. We know that the laws of polarity are coming into play – former support turning into resistance. Now does this mean that price can’t break through? No, just that it will take more than one try in order to succeed.

This $4.00 level is key for multiple reasons. Besides the polarity mentioned above, the 61.8% Fibonacci retracement from the summer highs down to the lows in the Fall are coming into play right here. Also, the psychological resistance of a round number like 4 cannot be dismissed.

Guys this is big level for Dr. Copper. We cannot ignore it. But if the recent highs are taken out convincingly for more than a day or two, I would have to expect a retest of those $4.50 highs from last year. The bearish divergence in RSI worries me a little, but the fact that it got overbought and has been in bull mode for about 4 months or so has to be taken as a positive. We’re getting some mixed signals here, but at least we have a point of reference with the recent highs. As long as the Feb 17th lows hang in there as a higher low, then I’ll remain opimistic. If we’re trading below those levels, I would advise caution not just in Copper, but for the risk-on global growth names as a group.

 

Tags: $JJC $HG_F

Wide World of Charts

Currency Performance Chart Reflects Risk-On Environment (StockCharts)

Gold Holding Support, Threatening Breakout (AfraidToTrade)

Louise Yamada: The ABC’s of Reading Stock Charts (YahooBreakout)

Platinum Set to Retake the Status as “Top Metal” (TheArmoTrader)

Why 1345-1370 on the S&P500 is likely to Fail as Resistance (Minyanville)

Audio: Interview with UBS Technician Peter Lee (MTA Podcast)

Societe Generale Technicals: Brent Crude May Rally to $127 (Bloomberg)

Top 10 S&P500 New Year Starts (StockTradersAlmanac)

Video: Dan Fitzpatrick on Dow Theory and DJ Transportation Average (CNBC)

Will Gold Breakout Help Crude Oil and S&P500 do the same? (ChrisKimble)

Patience and Precision: H&S Pattern in Solars $TAN (chessNwine)

Months Supply of Homes Close to 6-year Lows (CarpeDiem)

Patrick Ceresna: Why Intermarket Analysis (MoneyShow)

Bull Market in Sugar Begins – Target is 65 Cents (PeterLBrandt)

Sign Up for Trading Seminar March 3rd in NYC with Joe Fahmy (Trading Big Winners)

 

 

 

 

 

 

 

 

Tags: $DJIA $IYT $TRAN $USO $CL_F $BNO $SPY $SPX $ES_F $GC_F $GLD

Energy Sector Finally Showing Relative Strength

We’ve been waiting patiently for Energy to make its move. During January and early February the stock market was rocking and rolling but the Energy space was lagging. We said on February 2nd that it was time for Energy to step up to the plate. Its components’ huge market caps have a heavy weighting in the S&P500. So if the market overall was going higher, it needed some participation out of these Energy names (Exxon, Chevron, Conoco, etc).

Take a look at the recent breakout to new highs in the Energy Select SPDR ETF ($XLE). It appears as though a retest of the 2011 highs near 80 is now in the cards. More importantly, the relative strength in Energy compared to the overall market is finally breaking out to the upside. Other than a couple of quick counter-trend rallies, this sector has been underperforming the overall market for almost two years. No longer the case:

 

Now take a look at the United States Oil Fund ($USO). I don’t think it’s a coincidence that we are seeing a breakout here at the same time that the energy sector is finally showing signs of life. Throughout the Fall, $USO was having trouble just under the $40 dollar level as we can see with the red arrows. Now that we have broken out with a gap higher this morning, any retests of that level should serve as support in the future.

 

I would look for a breakdown back below $40 in $USO as a heads up that something could be wrong in the energy space and, as a result, the market overall. As far as $XLE is concerned, I would not expect breakouts above $80 without at least some consolidation, either through time or through price. But I think the recent action and rotation is very constructive.

 

Related Posts:

Is this Massive Base in Energy a Good Thing? (February 3, 2012)

Time for Energy to Step Up to the Place (February 2, 2012)

Tags: $CL_F $XOM $CVX $COP $SPY

Gold Miners Gearing Up For Trendline Test

Happy Presidents Day everyone. I’ve been on a little bit of a blog vacation over the last couple of weeks but we’ll be back in full force going forward. Here is my morning post for SFO Magazine this Friday:

 

SFO Daily: Gold Miners Gearing Up For Trendline Test

Friday, February 17, 2012
By J.C. Parets

After nine consecutive days of losses, the gold miners finally had their up day. And this wasn’t just any positive candle either. The Japanese have named this particular type of daily formation, a “bullish engulfing pattern.”

STRONG TECHNICALS

The body of this candle has essentially engulfed the previous four days of trading. The more full days engulfed by just one, the more bullish the set up. Most importantly, yesterday’s action brought the $GDX back above its 50-day moving average.

All of this short term action comes within the context of a much bigger and much more powerful trend that is already in place. The critical highs in $GDX came in early 2008 and again in late 2009 around the low to mid-$50’s. That key resistance was broken in the Fall of 2010 and the new found support has held throughout the past year. These laws of polarity could not be more apparent that in this recent price action.

GOING FORWARD

For the last year or so, the gold miners ETF has been consolidating in about a ten point range. The breakout this past September turned out to be a false one leaving $64 as the most critical level. Since the false breakout, the downtrend line that is in place should be tested again very soon.

As we say and see all the time, “the more times that a level is tested, the higher the likelihood that it breaks through.” In this case, we have witnessed 4 tests of resistance with the fifth setting up this week.

If this breakout above the trendline occurs soon, I would expect another test of that $64 resistance mentioned above. This would be the fourth or fifth test depending whether you are using pencils or crayons to draw your trendlines.

Once again, “the more times a level is tested, the higher the likelihood that it breaks.” In this case, you are looking at about a $10 range coming to an end, so the measured move is about $10, giving the gold miners ETF a target somewhere in the mid-$70.

Keep Reading at SFO Magazine

 

Tags: $GDX $GLD $GC_F $GDXJ

Dow to Gold Ratio (Updated)

One of our favorite charts is the historic ratio between the Dow Jones Industrial Average relative to Gold prices. I bring it up today because we’re at an interesting point here in the short-term. Long-term, nothing has changed; we fully expect the 12 year downtrend in stocks to eventually continue lower relative to precious metals.

For a little background, this ratio peaked 12 years ago north of 42:1. In other words, one share of the Dow bought you 42 ounces of Gold. As the years have gone on, this ratio has declined to 30:1, 15:1, 10:1 and ultimately down below 6:1 this August. Today we are sitting just around 7.3:1 with the Dow at 12,850  and Gold around $1750. Have we seen the end of this bear market rally? Or will we continue higher towards the long-term average near 10:1?

 

The key level of support over the last year and half was right around the 8:1 level. Late last summer, this important support was broken. The break turned out to be devastating as the ratio went on to new decade lows below 6:1. As important as the 8:1 level was for a year and a half, it would be naive for us to think that this wouldn’t at least serve as some resistance on any retests.

Not only did a break above that level fail late last year, but the Dow to Gold ratio has been stuck in this very well-defined trend channel since those August lows. I find it hard to believe that a new rally can begin here that would be strong enough to break back above 8:1, especially since it took over a year and a half to break down initially. The higher probability scenario is a breakdown below this trend channel and at least a retest of those August lows. If we are going to lean in any direction here it should be in the direction of the underlying trend. In this case, not only is the trend lower, but it is currently one of the most powerful trends in the global markets.

To fight that would be a little counterintuitive no?

 

Related Posts:

Gold ETF Up Against Trendline Resistance (January 23, 2012)

Media: Talking Gold & Silver with Jeff Macke (January 4, 2012)

Was that a False Breakdown in Precious Metals? (January 3, 20120)

Tags: $GLD $GC_F $DIA $DJIA

Semiconductors Make Technical Strides

The semiconductors are rocking and rolling.

They remind me a lot of a Devin Hester Kickoff Return. It all looks bleak and you don’t want him to return it because he’s 8 yards deep in his own end-zone. But he does it anyway. Then you have 10 angry guys trying to knock him down (and a kicker with no hope). Hester takes it out – he jukes left, spins right, breaks a couple of tackles and eventually gets past every defender. As he crosses mid-field there’s no one left in front of him – just a bunch of opposing players in defeat trying to catch up.

Well same thing with the Semi’s. In early October the Philadelphia Semiconductor Index was still making new lows. Meanwhile, the Relative Strength Index (RSI) was putting in a bullish divergence. This slingshot type action was the first thrust out of the end-zone. Then came that downtrend line (in green), or the first defenders. Once the $SOX got through that level it was all green until the 61.8% Fibonacci retracement from the February highs down to the October lows. A few weeks of consolidation here and the Semi’s got through. As you can see in the chart below, $SOX made new highs last week and are looking forward to those February highs from a year ago.

Today, Semi’s feel the same way Hester does when he breaks the kicker’s ankles around mid-field and there’s no one left between him and the end-zone. Can someone technically come from behind and catch him? Sure. Can semi’s roll over here and get back below that 61.8% fib retracement? Sure, anything is possible. But would I bet on either one of those to happen? Not really.

We look at Semi’s as a leading indicator. If there is demand for anything electronic, you’re going to need chips. That’s the bottom line. So if you see demand in chips (making new highs, breaking resistance), then we presume there is demand for electronics. This is a positive for equities as a whole. This is a bullish $SOX chart and it looks to me like it’s going much higher. To be safe, we want to see the $SOX stay above that 61.8% fib level around 415. When you think about it, we’re not at a bad risk/reward point here at 422 or so. As long as we remain above there, just picture Devin Hester doing the “Deion Sanders” down the sideline.

A lot of you football fans enjoy watching Hester do his thing in the NFL. But as a die-hard Miami Hurricanes fan, he’s been impressing me since he was just a pup putting on a show in the Orange Bowl. Here are a few highlights of him in Miami so you know what I mean. Seriously, make sure you watch this video. Incredible stuff.

 

Tags: $SOX $SMH $PSI $SOXL $SOXX $USD $XSD

Dan Fitzpatrick: We’ve Transitioned into a ‘Buy Weakness’ Market

Technician Dan Fitzpatrick did a great job this morning explaining how moving averages transition from downward-sloping smoothing mechanisms to upward -sloping. When asked about these ‘Golden Crosses’, he suggests looking at it as more of a confirmation of an uptrend rather than an initial buy signal. I couldn’t agree more.

Here is the video in full:

 

Source:

Technicals Signaling a Pullback (CNBC)

Tags: $SMH $XLF $SPY $FXI $SSEC

Monday Morning Look at the S&P500

First of all I want to congratulate the NY Giants and more specifically Eli Manning. As an outsider living in New York City, I see how hard it is to be a quarterback here, especially the Giants (no one important cares about the Jets). This kid just keeps his mouth shut and wins. Good for him. Welcome to Canton Eli.

And now it’s officially basketball season. And that means it’s February, which isn’t the best news for this bull market. Historically, February is one of the worst months of the year. Of the best 6-month period for the market (Nov-April), this is where the hiccup usually occurs. “The Worst House in a Great Neighborhood”, as my friend Phil Pearlman puts it.

Last Friday we closed right at the the highs from last February of 1344. The S&P500 peaked right here last year before beginning its seasonal February decline. A breakout above these levels could take us somewhere in the neighborhood of 1360-1370, where we find the measured move of that inverse head & shoulders pattern and last year’s May highs. These targets don’t really help us much as everyone can see these levels and everyone seems to be talking about them. I don’t like that.

 

The Relative Strength Index (RSI) also doesn’t help us much. We do know that RSI is in bull mode and confirmed last week’s higher highs in the S&P500 with higher highs in the oscillator. The problem is that we cannot rely on this indicator for anything new at this point. It’s overbought, and it can stay overbought for a while. So we’ll circle back to this indicator when it can help us further. Right now it does nothing for us.

I don’t want to throw out the Fibonacci retracements to measure potential pullbacks here because I’m not convinced that we have see a top for this run. Once we get a key reversal and have a fixed top, we’ll look for some re-entry points with retracements. But not yet.

I wish there was more to say and I wish the levels were more clear. I also wish that my Miami Dolphins had won the Super Bowl last night. But life doesn’t always work out that way. Bottom line: I think it’s tough here to trade the index itself. I’ve been saying for a while now that I think the individual names themselves are where we need to be. There are long set ups and shorts as well. Take advantage of these lower correlated markets while we have them. It may not last forever.

 

Tags: $SPY $ES_F $SPX

Is This Massive Base in Energy a Good Thing?

Here are my morning notes for SFO Magazine:

 

SFO Daily: Stocks on Fire, Keep Your Eye on the Energy Space

Friday, February 3, 2012
By J.C. Parets

They loved the jobs number this morning and stocks are on fire. We’re seeing prices in the S&P500 not seen since last July, and levels in the Nasdaq100 not seen in 11 years.

MORE BULLISH FUEL

The sector participation continues to rotate into the more offensive industries. In my opinion, this is the most overlooked bullish characteristic out there. And that’s OK by me. The more this is talked about and written about, the closer we probably are to another period of defensive rotation.

LOOK BACK

Throughout 2011, the defensive sectors led the way. Utilities, staples, and healthcare were the best areas to be in last year. So far in 2012, Financials and Materials are the best performing sectors, followed by Industrials, Technology and Consumer Discretionaries. The worst performing sectors have been the Utilities and Consumer Staples. This is what you want to see in a bull market.

One area that we’ve been talking about here on SFO magazine where we’re still waiting for participation is in the Energy space.

$XLE is up for the year, but still dramatically underperforming its offensive counterparts. $XOM came out with earnings this week and apparently the measly $121 billion that they did in Revenues last quarter wasn’t enough (I hope that my sarcasm is truly noted).

OLD MARKET ADAGE

The truth is that the lack of Energy leadership thus far could be a longer-term blessing. The saying goes, “the bigger the base, the higher in space”. And this massive four-month base in $XLE should be enough to take the S&P SPDR up to the 2011 highs near $80, which represents over a 10% move from current levels. This is important to the overall market due to the larger than average market capitalizations of its components.

Keep Reading at SFO Magazine

 

Tags: $XOM $CVX $XLE $XLB $XLF $SPY $DJIA $QQQ

Time For Energy to Step Up to the Plate

I think we need to watch the big Energy names here.

These stocks have massive market capitalizations and are big time components of the major averages. It looks to me like the year-end rally in the US Dollar Index dragged down Energy as the rest of the stock market rallied through the holidays and into January. But now it’s ‘show-me’ time for the $XLE’s $XOM’s $CVX’s and $COP’s of the world.

After the breakout out above this triangle-like consolidation, the Large Energy names are having a tough time following through:

Last week’s highs just above $73 are the key levels to watch. This failed breakout attempt came at the same highs as the Halloween peak in $XLE. Recognition of resistance here is normal, but as we mentioned above, “show me”.

RSI looks positive and this is a big reason for my bullish enthusiasm here. We have an nice bullish divergence during the August/October Bottom. Overbought readings in late October is a bullish mode characteristic and so is the area where support came in November and December.

So now it’s all up to price. These are some big time components of the S&P500 and $XOM is the 2nd largest company we have.

You want to know where the S&Ps are going? I’d be watching these energy names…