Jordan Kotick on Chinese Dow Theory

Charlie Dow would absolutely love this!

For those who don’t know, Jordan Kotick is without a doubt one of my favorite technicians of all time. He’s someone who I looked up to as a young lad when I first started looking at charts. Today, Jordan is the Head of Technical Strategy at Barclays and his Intermarket work is second to none.

This week, Jordan Kotick took Intermarket Analysis to a whole new level with his Dow Theory China. I’m not even going to explain. Just watch – he crushes it:

 

Source:

Kotick – What To Watch in Q2 (CNBC)

Tags:  $SSEC $FXI $CHINA $EEM

Hey Energy, It’s Your Turn Again

Here is this week’s post for SFO Magazine:

SFO Daily

Friday, March 30, 2012
By J.C. Parets

It’s time for energy to step up again. No doubt about it.

Two months ago on Feb. 3, I wrote that the underperformance and base-building in the Energy space could be a blessing in disguise. The stocks that make up the Energy Select SPDR Fund ($XLE), have massive market capitalizations and therefore have a major impact on the direction of the S&P 500.

FEBRUARY RALLY

Energy stocks wound up rallying for most of February, crude oil futures broke out to the highest levels since last May, and the S&P 500 made new 52-week highs. The sector rotation we were waiting for came just in time, and the major averages certainly benefited.

SECOND RALLY

Now it’s energy’s turn again. Natural gas prices have broken down to the lowest levels in over a decade, and crude oil futures have corrected as much as 7.5% from the highs earlier this month. The energy stocks have suffered in the meantime. In fact, a lot of the S&P 500 sectors are still in overbought territory, but just 16% of energy stocks are above their 50-day moving averages. So energy stocks actually have managed to get down into oversold territory. (See Bespoke)

Since the highs in late February, $XLE has come down about 8% back to the original breakout level from two months ago. The 200-day moving average and 50% retracement from the December to February move is just under $70. With prices currently above $71, we see support for several of these reasons, with the most important coming from former resistance in the fourth quarter and early January.

 

I mentioned two months ago here on SFO magazine that this break out in energy could be huge for the S&P 500. It was then, and it is now. I think that another rotation into energy is critical for S&Ps to go on to new highs.

Keep Reading at SFO Magazine

 

Tags: $XLE $SPY $USO $CL_F

About that Divergence in New Highs

Yes, this is a problem.

You see the indexes, although often discussed and traded as individual securities, are in fact are a basket of stocks. The holdings within these baskets impact the direction of the index itself. A great example of this is the effect that America’s favorite stock $AAPL has on the major averages. There are estimates that if $AAPL was part of the Dow 30, we would be approaching historic highs for the index. But it’s not. The Nasdaq100, however, has plenty of Apple stock. More than it knows what to do with actually, so the weighting keeps getting readjusted. And sure enough, the Nasdaq100 ($QQQ) is sitting at decade highs, over 25% above its 2007 peak. The Appleless Dow Industrials are no where near their ’07 highs.

The point is that the components of these averages take them higher or drag them lower. The less and less stocks making new highs, the more vulnerable the average. When new highs are made in the S&P500, you want to see an increased number of components making new highs as well. When you see less, the internals are weakening.

We saw this phenomenon in 2007. I remember joking around with Josh Brown at the time saying that if you weren’t trading $AAPL, $RIMM, $AMZN, $GOOG or the Ag names, don’t even bother coming to work. The reason was because those were the only stocks still heading higher. The banks had already rolled over and it was clear that less and less stocks were making fresh highs. Sure enough, the top of the market was near and stocks eventually got decimated.

The opposite was also true in the Fall of 2008/Spring 2009. As some of the averages were making lower lows in early 2009, there were less and less stocks making new lows. Not only was this a sign that the bottom was near, but those components that held their Fall lows and made higher lows in the Spring wound up being the leaders off the bottom.

According to Ari Wald, Technical Analyst at Brown Brother Harriman, we have a similar divergence on our hands today:

“The number of S&P 500 companies setting new 52-week high has shrunk as the rally has advanced. On Feb. 3, the net new 52-week highs — that is, the number of New York Stock Exchange companies at 52-week highs minus the ones at 52-week lows — peaked at 280 companies. At that time, the S&P 500 was at 1345.

By March 13, though, despite the S&P 500 tacking on another 50 points to trade roughly at the level we’re at today, there were just 170 net new highs, Mr. Wald points out. And as of today, there are 63 stocks at a 52-week high, and 25 at a 52-week low, for a net of 38.

“This is a bearish sign of selectivity that tends to occur when strength by big-cap stocks masks weakness in the broader market,” he warns, adding that this sort of behavior is typical of “a tired trend, and becomes worrisome when it persists through longer periods.”

The answer is YES. This is something to be concerned about.

 

Source:

Analyst: Fewer Stocks Doing the Heavy Lifting = Not Good (WSJ)

Tags: $SPY $DJIA $SPX $DIA

Gap Filling Frenzy on Wednesday

“A gap, in the language of the chart technician, represents a price range at which (at the time it occurred) no shares changed hands……Gaps on daily charts are produced when the lowest price at which a certain stock is traded on any one day is higher than the highest price which it was traded on the preceding day”

– Edwards & Magee

Gaps were filled across the board on Wednesday. The Japanese call these holes in the charts, “Windows”. So the gaps were filled and the windows were shut. So what?

Well the way I look at it, we’re obviously in a strong uptrend in stocks. Monday’s monster gap higher left a hole in a lot of these charts. And with today’s fills, we now have a pivot point. New lows below today and things get hairy. But with the rally off the lows across the board, the benefit of the doubt still goes to the bulls.

Look at these charts. One by one, we keep seeing the same thing:

S&P500 $SPY – Gap Fill and Rally

 

Dow Jones Industrial Average $DIA – Gap Fill and Rally

 

Dow Jones Transportation Average $IYT – Gap Fill and Rally

 

Russell 2000 $IWM – Gap Fill and Rally

 

MidCap 400 $MDY – Gap Fill and Rally

 

Euro $FXE – Gap Fill and Rally

 

Now on the flip side: US Dollar Index $UUP – Gap Fill and Selloff

 

US Treasury Bonds $TLT Filled last Wednesday’s big Gap and then Sold off

 

But wait! What about the really strong areas that didn’t fill any gaps? The Nasdaq100 – “BEAST” didn’t close anything. That strength can’t be ignored. $QQQ

 

And Finally here is a the most interesting gap fill for me Wednesday. Freeport McMoran ($FCX) is a stock that I look at as a gauge for global growth, industrial demand and really the commodity space as a whole. These sectors consist of companies with humongous market capitalizations. And most importantly, Freeport is THE copper stock. Want to know where this market is going? Watch Copper here (see my 3/26/12 Post).

So to start 2012, Freeport got going with a Gap higher to start the year and rallied as much as 34% in January before retreating. That gap from January 3rd was filled today before the stock rallied off its lows:

 

Was that it for Freeport? Or will the stock (and in turn Stocks as an asset class imo) continue to sell off? I don’t think all of these gaps were a coincidence. If new lows are put in below these filled gaps in the charts above, I would start to get much more defensive. But chances are that today’s sell off closed those windows, filled those gaps, scared some weak hands out of the market and new highs will be put in soon.

Only time will tell. But I thought the gap-filling frenzy today was worth mentioning. Have a good one folks.

Cheers!

 

Source:

Robert D. Edwards & John Magee – Technical Analysis of Stock Trends

Wide World of Charts

Eli Radke: Waiting for the Market to Make Sense (TraderHabits)

Gold Ready to Attack New Highs $GC_F $GLD (PeterLBrandt)

Chart of What Tech Sector Earnings Would Look Like Without Apple (MoneyGame)

Stocktwits as Predictor…Research Says Yes! (HowardLindzon)

Nikkei 225 Average Resting Under Important Resistance (AndrewNyquist)

Parabolic Trading Behavior: Some Observations (SlopeOfHope)

Sectoral Changes in Post-Recession Employment (ChartPorn)

Is the Death of the Government Bond Rally Really at Hand? (ChrisKimble)

Greg Harmon on the Curious Case of Silver, Gold and the S&P500 (DragonflyCapital)

The Predictable “Bull Trap” of New-Highs False Breakouts (BigPicture)

Robert Sinn: Nasdaq Party Like it’s 1999 (StockSage)

Cost Per Mile Driven is 28% Less than in 1980 (CarpeDiem)

Hyperinflation – it’s Still Not Coming (PragmaticCapitalism)

Is it Decoupling or Dangerous Divergences in Risk Assets? (dshort)

Sector Breadth Readings – Energy Has to Pick Up the Pace (Bespoke)

S&P500 Earnings vs Consensus Analyst Estimates (Dr. Ed Yardeni)

 

Tags: $NKY $NK_F $NIKK $NKD_F $NKY_F $AAPL $Si_F $SLV $SPY $QQQ $ND_F $NQ_F

Are You Ready for this Monster Move in Copper?

It’s going to happen.

The move is going to be big, it’s probably going to happen very quickly, and it should get going soon.

But in which direction?

Ahh yes – that is the question!

Let’s take a look at the Copper ETF $JJC. I want to apologize first for this kaleidoscope looking chart. I can’t stand charts like this with too much going on. But I’m going to try my best to make some sense of all these lines shapes and colors. Bear with me:

Alright, so the first thing we want to look at is my favorite ‘keep it simple stupid’ support/resistance connection. As we mentioned a month ago (Feb 27th – Dr. Copper Up Against Key Resistance), the important support levels from last May and again in August (green arrows) broke down in September. This critical breakdown via Gap lower turned into resistance in early February. The fact that this exact level is also the 61.8% Fibonacci Retracement from the 30% plus August-October decline makes this resistance all that more important.

 

Now, since this resistance was first tested about 6 weeks ago, Copper has been consolidating in a symmetrical triangle looking formation which is very typical of a security resting before continuing its current trend. In this case, this is a monster uptrend off the October lows. The presumption here is that the correction resolves itself in the direction of the trend and retests last summers highs up around $59.00.

As far as the moving averages go, we have a 50 (blue) and a 200 day (red) coming together with ‘golden cross’ type of behavior. The truth is that I don’t really care if the cross is golden or fuchsia (see my Pay No Attention to Golden Cross and How Bullish is the Golden Cross? via Barry Ritholtz). What I do care about is the security’s potential to trade higher above upward-sloping 50 & 200 day moving averages. This is the sort of behavior that you want to see in an strong uptrend. And if Copper does indeed break out of this triangle, then that is exactly what we’ll have here.

What is the Relative Strength Index (RSI) telling us? Only that it’s been in bullish mode since coming off that Bullish Divergence in early October (Orange line & circle). The overbought RSI conditions in late January and recent support found around 45 confirms just that. Chalk this one up as another positive.

And finally the correlations. Some traders refuse to look at the ETFs and focus only on the futures. That’s fine. But as we can see in this chart, the ETF $JJC and Copper futures have a 0.99 correlation. To me, that means they do the same thing. Use whichever vehicle you want because the charts are identical.

 

When we have a series of lower highs above a series of higher lows we know for a fact that this cannot last forever. In a symmetrical triangle, by definition, one side needs to eventually win. There are no ties here like hockey or old school NFL. Think of it as a playoff game where they’ll keep battling it out until one team comes out victorious.

I’m going with the trend here so I’m on the side of the bulls. But two technicians can look at the same thing and come up with different conclusions. For example, I have a ton of respect for technician Peter L. Brandt, and he sees things differently here. And he’s been doing this a lot longer than I have. It’s all good. This is an art, not an exact science.

So let me bottom line it: We can be conservative with this one if that’s your game. You want to wait for confirmation? Fine, wait ’til we break out of the upper downtrend line resistance. Want to be ultra-conservative? Fine, wait ’til we take out February’s highs which is also the 61.8% Fibonacci retracement. Don’t want to trade it at all? Fine watch for a breakout or breakdown as a tell for equities as an asset class. We love copper as a leading indicator. Don’t want to watch Copper at all? That’s OK too 😉

But the point is that I think this consolidation is the real deal. I would expect a monster move in the direction of the breakout/breakdown. After a correction of this nature takes this long to resolve, the resolution is typically vicious.

Stay tuned…

 

Related Posts:

Copper, Stopper, Build a Topper (PeterLBrandt)

What Can We Learn From the CRB Index? (Allstarcharts March 12, 2012)

Dr. Copper Up Against Key Resistance (Allstarcharts February 27, 2012)

 

Tags: $HG_F $JJC $QC_F $FCX

What’s Up With the Small-Cap Underperformance?

Throughout the month of February, small-caps got crushed relative to large-caps. But the ratio has somewhat stabilized in March. Can we expect the small-cap Russell 2000 to get back on track vs the larger-cap S&P500? I mean we did see 4 months of absolute dominance in smaller-capitalization stocks off the October lows.

Think about it, from the October lows up to February 3rd, the Russell2000 was up a monster 38% compared to a 25% return in the S&P500 and just 23% for the Dow Jones Industrial Average. Since then the Russell 2000 is actually down (as of Friday’s close) while the large-caps have continued on to higher highs.

 

So here’s how I see it: The Russell2000 started to roll over relative to the S&P500 last July, breaking down well before the major large-cap averages (in other words – leading us lower). After finding some temporary support throughout August, the ratio rolled over again in September making lower lows down to early October. That last rollover was devastating as the former range of support turned into 2 months worth of resistance for the rest of the year.

And that’s when the fun started again. The stock market exploded to begin 2012 and the small-caps were the leaders in January. It had taken 2 months (Nov & Dec) to break through resistance, but the little guys got it done.

But then February came, where large-caps once again took over. The small-caps got crushed compared to larger-cap stocks and brought the ratio back to that former range of resistance. Will that resistance (that was support back in August) turn into support again?

Well it certainly looks that way. The Russell2000 has been outperforming throughout March and the Relative Strength Index (RSI) has remained in Bull Mode even during the recent correction. This is a positive, not just for the Small-caps, but for the US Stock Market overall.

If money is trying to be aggressive and has to be put to work, you are likely to see smaller-cap (theoretically riskier) names outperform larger (theoretically less risky) names. As we saw in July, this ratio tends to lead the broad markets. If small-caps can keep going here, both on an absolute basis and relative to large-caps, then I think the bias in trading individual names needs to stay on the long side.

If small-caps start to roll over and this potential support (that was formerly 2 months of resistance in November and December) cannot hold, then I would be much more gun-shy about initiating new long positions. A more defensive stance would be more appropriate in that case.

But here we are on a Monday morning with the Russell2000 up twice as much as the S&P500. Here we go again? Let’s keep this ratio handy.

 

Tags: $RUT $SPX $SPY $ES_F $IWM $TF_F $RUTX $DJIA $DIA

Martin Pring Looks at Gasoline Prices

He’s the author of one of my favorite books: Technical Analysis Explained

He’s also one of the first technicians that I consistently followed early in my career. He coined the phrase, “Good Luck and Good Charting”. And now Martin Pring is putting up videos on You Tube. This is great!

This week he takes a look at how previous peaks in Google searches for ‘gasoline’ have come at or near peaks in the actual prices of gasoline. Check it out:

 

Tags: $UGA $USO $CL_F

What are Individual Investors Saying and Doing?

Looks to me like they’re not buying into this bull market, at least not yet. The S&P500 has more than doubled in 3 years. But the individual investor is still disgusted and could not care less.

According to the good folks at Bespoke Investment Group, “It seems as though no matter what the market does, individual investors remain reticent to embrace the bull market.  With the exception of just one week in February, the weekly bullish sentiment survey from the American Association of Individual Investors (AAII) has been under 50% for the last year!”

Even with the S&P500 making fresh Bull Market highs this week, the most recent survey shows that bullish sentiment dropped again from 45.6% down to 42.4%:

This is what they’re saying.

So what are they doing?

Barry Ritholtz at the Big Picture Blog wrote today that, “Despite the recent Goldman Sachs decree that this is the best possible time to be buying equities, the public is not participating” (See ‘Calling All Muppets’ @ WSJ).

Barry posted charts from Bianco Research showing the Net New Cash Flows into a variety of Equity Mutual Funds: Domestic, World, Hybrid and the combination of all of them. Individual Investors still aren’t buying. (Check out the data at The Big Picture)

So what do we make of all of this?

I was taught early in my career that the individual investor is usually wrong, especially at turning points. Can we consider this a “turning point”, even three years in? I don’t think so. But I do believe that we should take this individual investor skepticism as a net positive for stocks. If you’re bullish on the stock market, would you prefer your neighbor questioning your views or telling you that, “You need to be buying Tech bro!! Decade highs in the Q’s! Load the boat”?

A cab driver the other day did tell me that I should start buying cotton. That was weird. Anyway, the majority of conversations that I have with friends in the industry are actually more of the same: “But JC what about Greece?”, “What about the amount of debt that this country has?”, “What if a bad headline comes out?”, “How are these banks going to make money?”, “Obama…..”, “This market is about to crash, how do you not see that?”…..

I’m not even joking. It’s very rare that I’m having drinks with a colleague who is long and strong and willing to admit that he/she isn’t long enough. Granted, some of this is anecdotal, but there is some hard evidence out there that the retail investor is still out and waiting for a chance to get it. Maybe that’s why the stock market continues higher and higher without a pause, to frustrate as many participants as possible. As usual.

Bottom line: I have to take this lack of participation as a good thing for stocks. What do you guys think?

 

Sources:

Bullish Sentiment Declines (Bespoke)

The Public Is Still Not Buying Equity Mutual Funds (TBP)

 

Tags: $SPY $ES_F $SPX $QQQ $NDX

About that Inverse Head and Shoulders Pattern in Gold

It keeps coming up in conversation so let’s discuss:

First of all, whenever discussing Gold prices we need to keep in mind that the precious metal has been trending higher for over 12 years. This is the case both on an absolute basis as well as on a relative basis when compared to Stocks (See Historic Dow:Gold Ratio).

Most recently, Gold prices went up 180% from their 2008 lows up to last year’s highs. The correction that began from that peak is now about 7 months old. We’ve seen these corrections before and in all likelihood we’ll see them again in the future.

Here is the potential Inverse Head & Shoulders pattern that’s getting everyone all worked up: The left shoulder in the Fall, Head around New Years and the right shoulder is currently under construction:

 

The potential Head of this continuation pattern actually bottomed out in late December finding support at a former key resistance level from 2011. That polarity came into play and a false breakdown around the Holidays created a nice 2-month squeeze. (Jeff Macke and I discussed this on Yahoo Breakout).

But here’s the problem: Notice how I keep using the word Potential. This is because we won’t know if this pattern is confirmed until price takes out the neckline. Unfortunately Gold prices are around $1,650 with the neckline up near $1,800. So it doesn’t do us any good right now except for acknowledging that the possibility is there and recognizing the implications if the pattern is completed.

If this is indeed an inverse head & shoulders pattern, then you’re looking at about a 250 point measured move from the neckline that would take Gold to about $2,050. The math is simple: Head to Neckline is about $250/oz ($1,800-$1,550). You take that number and add it to the neckline around $1,800 and that gives us the $2,050.

But all of this is meaningless until we see confirmation. Below is a near-term look at $GLD (SPDR Gold Trust Shares). The last week and half has been spent below upward-sloping 50 and 200 day moving averages. We have to give the benefit of the doubt to the bulls here for that simple reason alone. The presumption is that if the price of $GLD can get back above these moving averages, that increases the chances that the neckline gets taken out on the next test. But Gold still has some work to do:

 

New lows in Gold and $GLD here would almost certainly take prices down to last year’s lows, but more importantly the moving averages would roll-over making this a bigger mess than it already is. That would signal to me that a lot more time is needed before Gold can go on and continue it’s long-term uptrend.

So the bottom line is that we can acknowledge the possibility of the Inverse Head & Shoulders pattern. But we cannot on confirm that or really make a high conviction trade until we see more information. But with the long-term uptrend still intact, I think that the yellow metal is in the innocent ’til proven guilty category. Remember that anyone who has called a top in Gold prices over the past decade has been wrong. And I don’t like shorting into a trend this strong. So we’ll stick to the long side and pick our spots.

 

Tags: $GC_F $GLD $XAUUSD $IAU $GLL $DGP

Wide World of Charts

Katie Stockton: Best is Yet to Come for Bank Stocks (Yahoo Breakout)

Gold is Entering Season of Strength (StockTradersAlmanac)

Robert Sinn: The Australian Dollar Flashes Warning Lights (TheStockSage)

Technicians Talk Stocks: Carter Worth, Mary Ann Bartels & Jordan Kotick (CNBC)

Collection of Employment Charts (Ritholtz)

Market Update: Still a Lost Decade (CalculatedRisk)

$SWKS – Taming the Biggest, Baddest Bear of Them All (chessNwine)

$FXM – How to Trade Currency ETFs & Impress Your Hot Neighbor (Greg Harmon)

Weekly Gasoline Update: Regular Up 64 Cents in 13 Weeks (dshort)

Hedge Funds Ditch Treasuries in Droves (Reuters)

Stovall: Stocks Gain Most When Yields Rise to Near 4% (Bloomberg)

Scott Redler: Look to Trade the Leaders in this Tape (WallStreetPit)

Arthur Hill: Crude Oil Volatility Index Plummets (StockCharts)

Baltic Dry Index: Up 19 Days in a Row, Still Down 49% YTD (Bespoke)

Mark Arbeter: ‘Relentless’ Rally Still Vulnerable (TheStreet.com)

The Truth About the US Dollar….Can You Handle It? (Chris Kimble)

Chart of 30-day Realized Volatility in S&P500, Oil, & Gold Since 1993 (TomBrakke)

Dancing Candles

 

Tags: $GLD $GC_F $SPY $UGA $TLT $TNX $OVX $VIX $NG_F $UNG $AUDUSD $FXA $CL_F

How Will the 2007 Top in the S&P500 Affect this Bull Market?

When S&Ps are making new highs and all resistance levels, to speak of, have been broken to the upside, we need to look back. In this case, back to a time that many market participants have already forgotten:

Raise your hand if you remember this chart.

 

This was the transition period from Bull to Bear Market back in 2007-2008. The topping action took over a year to develop and provides further evidence that tops are not events but more of a process that takes time.

To refresh your memory, this historic peak in the stock market was set up by a very common and well-known pattern. The infamous Head & Shoulders Top was the end to a solid bull market off the tech bubble lows 5 years prior. The left shoulder is the top from summer 2007, Head in the Fall of that year, and then a small, weak, half-ass attempt at a right shoulder just before 2008. When that neckline broke, that was all she wrote. A retest of that breakdown level came in May of 2008, which obviously failed and set up one of the most horrific stock market crashes of our lives.

But what we want to take from this chart are the levels of the neckline. As usual, the stock market isn’t perfect, and there is not one exact number for neckline support/resistance. In reality, it wound up being more of a range – about 1440-1460.

Well here we are, 5 years after the first run into the resistance levels that would eventually be the neckline for the Head & Shoulders Top. My opinion is that since there was so much commotion at these levels (resistance, then support, then support again, then a key breakdown, then resistance again), I have to believe there’s gonna be trouble here for the S&Ps.

Below is a continuation of that first chart with the all-important neckline extended through today:

 

As bullish as I’ve been since the Fall, I cannot imagine that the S&P500 is going to continue higher without at least acknowledging this key level of resistance. 1440-1460 is definitely going to be an area where I would anticipate some trouble. I don’t think that this alone will change the big picture, and bull market. But I would not be doing my job as a risk manager if I didn’t expect to see at least some selling here.

My guess is that during the correction that begins around this area, the media will blame a combination of Earnings disappointments and European uncertainty (but those are only guesses). We may even have something new to “worry about”, just to keep the printing presses going and televeision commercials pumping.

But in reality, I think it will just be a recognition of formerly important levels. That’s all. When the time comes, we’ll throw up some Fibonacci levels to see where the selling could potentially stop once the correction begins. But let’s keep in mind that last year’s summer highs were recently exceeded and could be a key level of support down the road.

For now, I think the market rally continues higher, but this neckline is definitely going to come into play….

 

Tags: $SPX $SPY $ES_F