Dow Transports Are Looking Beefy

beef·y  /ˈbēfē/

  1. Muscular or robust.
  2. Large and impressively powerful.

The relative strength we’ve seen in the Dow Jones Transportation Average has been awfully impressive. And not just recently, but actually going back to the year 2000. While the Dow Jones Industrial Average is up less than 30% from those early 2000 lows, the Trannies are up over 120% during the same time period.

Here is a ratio chart of the Transports vs Industrials going back 12 years:

On Thursday, as US Equities were staging a comeback after lunch, the Dow Transports were the first ones to turn positive. Then came the mid-caps in the green while the rest of the major averages stayed red into the close.

Here is a long-term chart of the Dow Transports bumping up against key resistance.

It looks to me like 5400-5500 is major major resistance for the Dow Jones Transportation Average. We’ve seen four serious tests of this supply zone since 2007 and well on our way for number five. I think it’s inevitable for this resistance to be taken out. And once the ceiling is penetrated, this level should serve as support in the future.

Now without getting ahead of ourselves, let’s do some math. When a chart looks anything like an inverse head & shoulders, I can’t help myself but add up the numbers for a potential target. So we take the distance from the head to the neckline and add it to the neckline for our upside target. In this case 5500 neckline minus 2150 head = 3350 plus the 5500 neckline give us a measured move up to 8850 for the Dow Jones Transportation Average.

So yea, I think the transports are looking beefy!



Overbought Conditions Would Be A Good Thing For Stocks

Contrary to popular belief, overbought conditions are a positive for stocks. Think about it, if stocks are overbought, then we have unquestionable evidence that buyers are present. But the problem is that what does overbought even mean?

As you guys already know, I am not an oscillator junkie. Far from it. I don’t have 27 indicators underneath price in the charts that I put together. That never made much sense to me. I pride myself in being more of a ‘keep it simple stupid’ type of technician. We look at the Relative Strength Index as a supplement to price, and that’s pretty much it for my arsenal of oscillators.

We always talk about divergences, positive and negative when it comes to RSI. But today, I wanted to look at what ‘mode’ the indicator is in: Bullish or Bearish. The Relative Strength Index compares the magnitude of recent gains to recent losses in a range from 0-100. When RSI is in ‘Bullish Mode’, the oscillator tends get up into overbought conditions (above 70) but never reaches oversold conditions (below 30) and usually bottoms out in the highs 30s or 40. The opposite is also true when RSI is in ‘Bearish Mode’, it tends to reach oversold conditions down under 30 and peaks in the low 60s never getting into overbought levels.

These readings help us determine whether we should have a bullish or bearish bias when looking at price, or perhaps maintaining a bit more neutral position. And right now, after reaching oversold conditions in May, the major averages are working those off trying to get back into the bullish mode that we saw coming into the beginning of the year.

So yes, I think overbought readings in these averages would certainly be a positive. Here’s a look at where we are today. Notice the resistance in RSI right at 60 in the S&P500, Nasdaq100, and Dow Jones Industrial Average:




I think penetration of these bearish mode resistance levels would be a positive for stocks. After reaching overbought conditions in RSI, I would then look for pullbacks to find support around 40, confirming the new bullish mode in the major averages.



Copper Also Likes To Live Dangerously

This is one of my favorite measures of risk. If you want to know where risk assets are headed, you have to listen to Dr. Copper. It’s that simple.

Three months ago we put up a post titled, “Are You Ready For This Monster Move In Copper?”. The basic premise behind it was that base metal had been consolidating for several months in a triangle-type formation. After a 30% move in just 4 months, Copper was at the tail-end of a well-deserved break. The correction was defined by a down trendline up above serving as resistance and an upward sloping trendline below acting as support. At that point, the price of Copper was approaching the apex and a break of either of these trendlines would decide the direction of the next big move.

Based on the outcome, we would know a lot about copper as well as the overall risk-on environment. Just guessing at the time, I figured there was a higher likelihood of a break out higher because that was the direction of the short-term trend. Fellow Technician Peter L. Brandt took the side of the bears and as it turned out, he was 100% right. This is why we have to keep an open mind in this market. No egos here.

Since Copper decided to break down, the base metal is down 13% in just 3 months. More importantly, US equities have struggled to stay above water. During this risk-off environment that Dr. Copper was warning us about, the S&P500 has seen a 10% correction and we’re still not out of the woods.


So now what?

Below is a weekly line chart of Copper where we can see that it is currently testing a key trendline. This is the 4th test of support and as we always say, The more times a level is tested, the higher the likelihood that it breaks. And we’re flirting with some dangerous levels here folks. Meanwhile, the relative strength index (RSI) has not shown us any evidence of bullish activity. Quite the opposite, in fact.


On the bright side, Copper has NOT yet broken that trendline, and RSI is trying to hold on to the upper 30s, where we could see the beginning stages of bullish momentum. But we’re not there yet and may be getting ahead of ourselves.

The next chart is a closer look at the Copper ETF $JJC. This is a daily chart showing the consequences of that breakdown below the triangle consolidation. Now that price rolled over, it dragged the moving averages with it. We have declining 50 & 200-day moving averages and therefore have to give the benefit of the doubt to the bears. Copper is now guilty until proven innocent (as alphatrends likes to say). So if we can’t hold on to these lows from former support in November and December, we are likely to revisit the lows from October where this 30% rally mentioned above started in the first place. And that’s not good for stocks in general.


Want to know where risk assets are headed? Listen to Dr. Copper. If we see some positive developments in upcoming weeks we’ll reevaluate what’s going on. But for now, nothing great to speak of and we’re watching some uncomfortable flirtation with dangerous ground.

Stay tuned….


Also See:

Copper Prices May Be Pointing To Lower Blond Yields (PragCap)

Can We Dip In Commodities Here? Maybe Just Maybe! (StockCharts)

Tags: $JJC $HG_F $QC_F

It Would Be Too Quick Now To Have Another Spike In Volatility

Occasionally we’ll bring up the volatility index if we think that it’s something worth noting. More often than not we just consider it a negatively correlated asset to US Equities. So whatever stocks are doing, the VIX should be doing the opposite.

But every now and then, two weeks ago included, we’ll notice something a bit more actionable in the so called ‘fear index’. On Monday, Carter Worth, Chief Market Technician at Oppenheimer, came on CNBC to talk technicals with Maria. Put simply, he feels that the VIX is still quite elevated relative to the lows of the past decade. But more importantly, the spikes that we see up towards 35-40 over the last few years tend to come after a certain amount of time has passed. In other words, there are intervals between them. And it would be too soon right now for another spike.

Carter also notes that we are currently at the exact average price that the VIX has traded since its inception in 1992. I thought that was interesting. I don’t think it really means much right now, but I suppose it’s just good to know a little history to help put things in perspective.

From CNBC:


Also See:

What Can We Learn From The Volatility Index (June 12, 2012)


Talking Numbers: Fear The Fear Index (CNBC)

Tags: $VIX $VX_F

Tech and Small-Caps Dominate the End of June

Seasonality is a very powerful thing. In my opinion, ignoring market tendencies during certain times of the year can potentially put you at a disadvantage. At the very least, we try to pay attention to history in order to assist with our risk management. After all, we use every single one of our technical tools to help us do just that – manage risk.

In this case, we’re talking about the seasonal strength in Technology and Small-Cap stocks going into the last week of June. What I find most interesting here is specifically the relative strength that we see in these names as the Dow Industrials and S&P500 usually struggle during this period. My friend Jeff Hirsch has a great post up on the Stock Traders Almanac Blog describing what typically happens in this space to close out the second quarter:

“Historically speaking, the ends of quarters tend to exhibit weakness, as portfolio managers tend to position themselves for the next quarter. The end of June is not much different, but technology shares and small caps appear to offer the best probability of gains from now until the 30th.

Semi-annual Russell index reshuffling may be the driver that pushes NASDAQ and Russell 2000 stocks highest. The last day of the second quarter is a bit of a paradox as “portfolio pumping” has driven the Dow down 15 of the last 21 years while buoying the NASDAQ and Russell 2000 higher in 13 and 14 of those years, respectively.

Over the last five days of June NASDAQ and the Russell 2000 are clear consistent winners the past 25 years while the DJIA and S&P are significantly weaker on average. All the averages did well last year over this end-of-Q2 week, but with the rally from June 4 currently under pressure techs and small caps are set up to beat their larger brethren next week.”


These are some fascinating numbers. Head over to the Stock Traders Almanac to check out the rest of the stats.

Nice job Jeff.



June Last Five Days Boon For Tech and Small-Caps (StockTradersAlmanac)


Stock Market Needs To Hydrate, And That’s OK

SFO Magazine: Equity Pause Is Healthy, Blessing In Disguise

Friday, June 22, 2012
By J.C. Parets

The U.S. stock market remains stuck in a five to seven percent range. While the action may seem frustrating on the surface, I think this could be a blessing in disguise for the second half of the year.


A month ago, in this magazine, we warned that the S&P 500 was entering a period that should be more range bound than trending. After close to a 30% rally off the early October lows, stocks have been consolidating those gains. And, there isn’t anything wrong with that.

Stocks are like human beings—we can’t just sprint and sprint and keep running forever. At one point or another we need to stop, relax, hydrate, take a nap, and then we can keep running the next day. Same thing in equities.

After such a violent move higher (I think 30% in five months qualifies), a sideways correction is much more constructive than a deep sell-off. When S&Ps broke their key support levels in early May (below 1360 or so), it did some damage to the charts. That former support should serve as resistance going forward, and that’s exactly what happened this week. Prices rallied hard off the June lows and basically ran into a brick wall of sellers at the former support. This is normal and I think it would be naive for us to expect anything else.


Prices should not be able to break though that resistance on the first attempt. Realistically, it should take a few tries before breaking out, and this normally takes some time. Of course you’re going to get headlines about Europe, and Bernanke, and debt downgrades, but don’t be fooled —former support turns into resistance —and it’s as simple as that.


Now to the downside, we have a few key levels of support that we’re watching. The first is 1325-1330 in the S&P 500 that was resistance in late May. So far, this is holding and has served as solid support.

If this level does not hold, a retest of the 200-day moving average down just under 1300 is probably in the cards. But we’re in the camp that these pullbacks should be bought. Eventually, whether it is later this month or after the July 4th holiday, we should break out of this range and go on to retest those 52-week highs at some point in the third quarter.


If we start to break down below the 200-day and can’t stay above it, then we’ll have to reevaluate our bullish position. But because of the smoothing mechanism’s upward slope, we believe that this is a low probability scenario. Bottom line? We don’t want to fight this buoyancy in stocks.

Also See:

Fibonacci Resistance on FOMC Day (June 20, 2012)



Stocks: Equity Pause Is Healthy, Blessing In Disguise (SFO Daily)

Tags: $SPX $SPY $ES_F

Can Past Data Be Used To Predict The Future?

This is a ridiculous question that I get all the time regarding technical analysis. I really don’t understand why.

The simple answer: What other information do we have?

I mean, let’s be serious. If we had information from the future, it would be incredible. Could you imagine? That would be some Back to the Future Part II type stuff. In the movie, Michael J. Fox traveled to 2015 and bought the Grays Sports Almanac planning to take it back to 1985 to bet on sporting events. And sure, if you could figure out a way to get some information that is not from the past, and somehow from the future, sign me up for that newsletter please.


For a more formal answer to this question, I’ll pass the mic to legendary technician John Murphy:

“….the validity of using past data to predict the future. It is surprising how often critics of the technical approach bring up this point because every known method of forecasting, from weather predicting to fundamental analysis, is based completely on the study of past data. What other kind of data is there to work with?

The field of statistics makes a distinction between descriptive statistics and inductive statistics. Descriptive statistics refers to the graphical presentation of data, such as the price data on a standard bar chart. Inductive statistics refers to generalizations, predictions, or extrapolations that are inferred from that data. Therefore, the price chart itself comes under the heading of the descriptive, while the analysis technicians perform on that price data falls into the realm of the inductive.

As one statistical text puts it, ‘The first step in forecasting the business or economic future consists, thus, of gather observations from the past.’ (Freund and Williams) Chart analysis is just another form of time series analysis, based on a study of the past, which is exactly what is done in all forms of time series analysis. The only type of data anyone has to go on is past data. We can only estimate the future by projecting past experiences into that future.

So it seems that the use of past price data to predict the future in technical analysis is grounded in sound statistical concepts. If anyone were to seriously question this aspect of technical forecasting, he or she would have to also question the validity of every other form of forecasting based on historical data, which includes all economic and fundamental analysis.”

Could not have said it better myself



Technical Analysis of Financial Markets (John Murphy)

Fibonacci Resistance on FOMC Day

We’re talking about the two month sell-off from April to June. It was like a magnet. That 61.8% Fibonacci retracement was tested for the first time Tuesday and backed off. I get the feeling the low 1360s could be trouble this week.


And it’s not just these Fibonacci numbers. The reason this level really matters to me is because it also served as key support throughout April and then resistance briefly in early May. This is the first time we’re back to this point and I find it hard to believe we break through there right away without any problems.

Now, can Uncle Ben come out and say something that will make the markets rally and completely ignore these aforementioned levels? Sure. But the more realistic outcome is that a lot of what he may say is priced in and we could see a temporary ‘sell the news’ type action. I’m certainly hoping for that because I don’t own enough of my favorite stocks and I’d like to add to long positions on any dip.


Tags: $SPY $SPX $ES_F

Crude Oil: Is The Bottom In?

Looks to me like we might have a bottom on our hands in the crude oil market.

I really dislike trading oil. The chart is a mess and it just feels like the best traders in the world are battling it out in this market that I usually prefer to stay away from. I know we talk about the Crude Oil vs Nat Gas ratio all the time, and that’s simply because the chart is a lot cleaner. It makes more sense from a risk/reward perspective to be in that market. But generally speaking, the Oil chart has just been a mess for a long time. And fortunately for me, no one has a gun to my head making me trade anything that I don’t want to.

But after further review, it looks like the bottom in Oil could be in. I think this $81 level is the “real” support for this market. I say this primarily because of the divergence that took place in the 3rd quarter last year. Look at this line chart of Crude Oil closing prices. Notice how when Oil made a lower low into early October, this was a short and sweet false breakdown that resulted in a 40%+ move higher in under 5 months. That’s a monster move folks. So the “real” support, in my opinion, which held at the August low is the level which seems to be most important. And this is where the low in Oil was put in last week:

Next, let’s look at momentum. Notice how that false breakdown in Oil going into October last year was done while the Relative Strength Index that we love so much was already putting in higher lows. That bullish divergence came at the same time that stocks were showing the exact same divergences. We’ve talked about this several times. It wasn’t a coincidence that this phenomenon occurred simultaneously.

Currently, while prices of crude oil made lower lows last week down to $81, RSI had already turned higher. And stocks have been showing the exact same bullish divergences. Sound familiar?



Was That A Generational Bottom For Natural Gas Prices?

This is a topic that we’ve exhausted here on this site. The infamous natural gas trade….

Coming into March, I figured that the trade of the year was going to somehow be related to Natural Gas. Whether it was trading futures, or the ETF, or even a pairs trade against Crude Oil, Nat Gas was going to be on the long side of our portfolios at one point or another. My friend Josh wrote a post about it. I was on Canadian Television with the belief that the low was near by. I put up post after post about the Crude Oil vs Natural Gas ratio hitting ridiculous levels that were unsustainable. But the best part was that when this trend reversed, we figured the action would be vicious. A face-ripper, if you will.

Peter Brandt, easily one of my favorite technicians, has a great post up about this potential bottom in NatGas prices.

“At long last, a bottom may be in sight. The Natural Gas market has been in a cyclic bear trend since late 2005, as seen on the monthly chart below. I believe strongly that the low at 1.902 will not be seen again in my trading lifetime. The continuation daily chart displays a classic H&S bottom. If this interpretation is correct the June low may serve as the right shoulder low.”

I think Peter is absolutely right with his analysis. After the Crude Oil / Natural Gas ratio peaked 2 months ago at a high above 54:1, we’re now approaching 30:1, down a cool 40% very quickly. The average since 1990 has been 10:1, so I don’t think it’s crazy to think that we’re still in the midst of a major crash.

On an absolute basis, Nat Gas has plenty of room to run. Remember, this was a commodity that was basically left for dead. And Peter does a nice job in his post explaining the thought process. I’m sure you’re annoyed with my thoughts and comments on this by now, so go see was Brandt has to say, At Last, A Bottom In Natural Gas.



Oil To Natural Gas Ratio (Bespoke)

At Last, A Bottom In Natural Gas (PeterLBrandt)

Tags: $UNG $NG_F $CL_F $USO

Real Estate Stocks: Homebuilders or REITs?

My good friend Alex recently brought this chart to my attention. It is a 4 year look at a basket of Homebuilders vs the Vanguard REIT ETF. Notice how for a long time now, these Real Estate Investment Trusts have been outperforming the Homebuilders. I suppose it makes perfect sense, as investors search for yield in a zero-interest rate environment while shying away from the disaster that has been homebuilding.

Here is the $XHB vs $VNQ chart:

The first thing that I notice is the break in the downtrend early this year. Meanwhile, for the last 2 years, the ratio has been forming what appears to be a massive Head & Shoulders Bottom. The fact that it has taken this long to develop is a good thing. Bottoms of this magnitude are a process, not a single event.

The neckline is sitting right around 0.35 just as the 40 week moving average has turned up and acting as support. But I don’t think there is a trade to be made right this second. Unless you want to take a shot with a stop below the recent lows from a couple of weeks ago.

I think the move is to wait and let this trade develop. We have a fixed level of resistance here going back several years that still needs to be taken out to confirm a change in trend.

But most importantly, I think this chart tells a great story. I’m curious to hear some what some of you fundamental guys think about this potential shift. How about the real estate guys – what do you think?

Hat Tip Alex