Polarity Could Be A Problem For S&Ps

It’s show me time for the S&P500. If you remember, 1420 was the key support level that we were watching six weeks ago. We said that as long as the buyers held on to that price, the path of least resistance was higher. Unfortunately for US Stock market bulls, that support broke and the correction was on. We saw another 5.5% to the downside after that.

But here we are closing out the month of November and the S&P500 is approaching that level once again. As technicians we have to recognize that the former support at 1420 should serve as some resistance. How much so, and how long it could take to recover 1420 is still to be seen.

Here is the chart showing the level we’re watching:

This is why I think it’s show me time for the S&P500. You held on to the 61.8% Fibonacci Retracement from the rally off the June lows – great. You got back above the 200-day moving average and retested it successfully – great. Now prove to us that you can recover those key 1420 levels and continue to march forward in this bull market. That sort of strength would tell us a lot about equities as an asset class.


Tags: $SPY $SPX $ES_F

Interesting Elliott Wave Count Emerging

Readers of the blog know that I’m not the kind of guy to count every single wave on intraday charts. It’s not my style to take any indicator to that sort of extreme. The way I use Elliott Wave is as one tool of many that us technicians have to work with. It’s a way to help manage risk while at the same time maximizing potential rewards. And this is the most important thing we can do.

I’ve been writing allstarcharts.com for a few years now and I’ve mentioned elliott waves maybe two or three times. It’s rare that we discuss it, because it’s rare to see a pattern that I like enough to bring up. But today I’m looking at a sweet setup in Emerging Markets Stocks relative to US Equities that I can’t possibly keep to myself.

Here’s the chart. Let’s discuss:

We have a two year decline that fits my description of a five wave count. We have 3 impulse waves (one, three & five) and 2 corrective waves (two & four). The third wave within wave three of this two year decline is the most vicious. This 3 of 3 characteristic is probably what draws my attention the most. We normally see this type of behavior in the middle of the advance. Look at the 2008 decline – wave 3 of 3 was in the Fall (Lehman, Merrill, AIG etc). Remember the end of Europe last Fall? (see here) – Look at Wave “3 of 3” on that decline. Nice results from those bottoms, to say the least.

Now look at the symmetry in the $EEM vs $SPY chart above. The waves are similar in duration. Wave 1 and Wave 5 are similar in length.

Also look at what else is going on outside the wave count. The 50 day moving average (blue dotted line) has reversed and turned higher. The 200 day moving average is beginning to flatten out for the first time during this massive bear market. Look at momentum: RSI has been diverging positively since last Fall. The wave 3 of 3 that we brought up before took RSI down to levels we haven’t seen since, even with price making lower lows, and then even lower lows after that (wave 5). The most recent bullish divergence at the end of the summer may have marked the end of this two year decline.

I’m looking at the current move since early September as the beginning of a change in trend. And it’s not just about the Elliott Wave count. The beauty of technical analysis is that we can incorporate a lot of the tools that we have at our disposal. More Most importantly, from a risk management perspective, we know we’re wrong early on this one. If this sucker rolls over proving my 5th wave to not be what it appears, then goodbye. Trade over and as Shawn Carter said, “On To The Next One”.

The upside here if we’re right though, could be tremendous…


Related Posts:

Are Emerging Markets Ready to Outperform? (Nov 1, 2012)

Reuters TV: Using Pairs To Find Trends (Nov 13, 2012)


Corporate Insiders Are Buying, Should We?

Insider buying has always caught my attention throughout my career. I remember in my early days of trading, Aubrey McClendon and Tom Ward were gobbling up Chesapeake Energy stock like I had never seen before. This was back in 2005 when these guys were Chairman and President of $CHK. We would use a website called Form4Oracle, cleverly named after the Form 4 that corporate insiders must file with the SEC when they make purchases and sales of their own company’s stock.

This always made some common sense to me. I figured that these guys knew more about their companies than anyone else, including inside information that we were not privy to. So if they’re buying relentlessly, they’re not doing it because they think the stock goes lower right?

Back in 2005 when McClendon and Ward were loading the boat in $CHK the price of the stock was around 17-18 and they kept buying into the 20s. The stock more than doubled and went to 40 before eventually breakout out again reaching the mid-70s in 2008. “This is easy”, I would say to myself. “Just buy when these guys are buying, duh!”. But then Chesapeake Energy stock came crumbling down and Aubrey was getting margin calls up the wazoo as his shares got back down to the single digits. I was heartbroken. It’s really not as easy as it seems after all.

So now that I’m older, wiser, and more experienced (theoretically), I find it more helpful to look at insider buying/selling as whole. Mark Hulbert put out a great piece over on Marketwatch talking about how the bullish insider behavior recently is pointing to a stock market rally. Vickers Weekly Insider Report, published by Argus Research calculates the ratio of all shares that insiders have recently sold in the open market compared to the number that they’ve purchased.

For the week that ended last Friday, this sell-to-buy ratio stood at 1.58 to 1, which is less than half the average level over the last decade of 3.4 to 1.

At the bull-market high earlier this fall, in contrast, the insiders’ sell-to-buy ratio got as high as 6.86 to 1.

In other words, at least when measured according to this indicator, the insiders are more than four times more optimistic about their companies’ shares now than two months ago. This much insider enthusiasm is a good sign.

In fact, since the bull market that began in March 2009, there have been just three occasions prior to now in which the sell-to-buy ratio dropped below 2 to 1. Each came within a few weeks of a significant low in the market.

We’re actually seeing similar activity in Canada. INK Research monitors the buying and selling activity by corporate officers within their own companies. Their TSX sentiment indicator recently hit 136.6%, up from 120% the prior week. As a comparison, this indicator was below 100 back in October.

The indicator is derived by taking the number of stocks with buy-only transactions over the last 60 days, and dividing that with the number of sell-only transactions. The indicator ignores stocks that have both buying and selling in an effort to give a more accurate reading.

Last Thursday, when the S&P/TSX index was stung with a 118-point loss and the 11,800 level came under attack, insiders were particularly active snapping up stock. There were 121 companies with insider buying versus 40 with selling. This 3-to-1 ratio is unusually high, Mr. Dixon notes.

Insiders in the energy sector seem especially bullish. INK’s energy indicator is now at 283 per cent, up from 263 per cent last week, with the ratio of buyers to sellers the highest of any of the top 10 sectors of the TSX.

Sentiment is just one piece of the puzzle for us. But this is certainly a check mark in the favor of the bulls.



Insider Trading Suggests Market Heading For A Rally (GlobeAndMail)

Insider Behavior Points To Imminent Rally (MarketWatch)


Booms and Busts Happen More Often Than You Think

When stock markets crash, you can’t pick up a newspaper or turn on the television set without someone writing or talking about it. The economic implications are clear, and therefore it deserves the press. But the price action itself is pure. The psychology behind it and the reversal in sentiment cannot be denied. So we need to keep in mind that although in some cases there is a ripple effect into our daily lives, other price crashes don’t necessarily have those repercussions. But it doesn’t mean that the price action isn’t exactly the same.

Here is a chart of 6 popular booms and busts in stock markets that have certainly made headlines over the years. We can see a lot of similarities in the behavior of these markets:

But crashes don’t HAVE to come in stock markets. They also don’t HAVE to come in absolute values. They can come in other assets classes and they can come in one market relative to another. One market crash, that I believe is still in the process of crashing is the Crude Oil to Natural Gas Ratio. While averaging about 10:1 since 1990, this market hit 54:1 this April and has been declining rapidly ever since. Last week we hit new 52-week lows of 22:1 in this market and we don’t see any evidence of the crash coming to an end yet.

I’ll be on Canada’s Business News Network today at 11AM EST discussing this ongoing market collapse. Check it out live if you can, otherwise I’ll post the video once it’s out.

* live interview postponed for Wednesday 11AM because of this: Goodbye Carney

Here is what the chart currently looks like:



The Greek Stock Market Collapse In Historical Perspective (PragCap)

Tags: $UNG $USO $NG_F $CL_F

Know Your Japanese Candlesticks

Legend has it that the Japanese used technical analysis to trade rice as early as the 17th century. Although Charlie Dow didn’t come around until 1900 or so, a lot of the main principles were similar:

  • The “what” (price action) is more important than the “why” (news, earnings, and so on).
  • All known information is reflected in the price.
  • Buyers and sellers move markets based on expectations and emotions (fear and greed).
  • Markets fluctuate.
  • The actual price may not reflect the underlying value.

Steve Nison is the man when it comes to Candlestick charting. If you’ve never read his books, do yourself a favor and go read them immediately. According to Nison, candlesticks first appeared sometime around 1850. Much of the credit is given to a rice trader named Homma from the town of Sakata.

I use candlesticks religiously because visually we get the most information about a specific period of trading (daily, weekly, monthly, etc). Sometimes when I look at ratio charts, or if I simply want to eliminate some of the noise in a chart, I’ll look at a line chart of closing prices. Here is a good example of that: S&P500 Tests Important Trendline (Oct 11, 2012).

The reason I bring up candles today is not to go over their history, although it is pretty interesting. It seems like more frequently lately I’ve been getting asked about what the difference is between hollow candles and filled ones. Why is one color different than the other? As it turns out, I walk by fellow market participants’ trading screens and see that their candlestick settings are all off. Their charts aren’t providing them with the information that they’re looking for. And right on cue, Arthur Hill from Stockcharts.com puts out a post explaining this perfectly:

Candlestick colors and fillings tell chartists the story of the trading day. Colored candlesticks are made up of four components in two groups. First, a close lower than the prior close gets a red candlestick and a higher close gets a black candlestick. Second, a candlestick is hollow when the close is above the open and filled when the close is below the open. The table below shows the four combinations.

Each candlestick reflects the day’s price action. In particular, the hollow candlesticks tell us that a security moved higher after its open. A filled candlestick indicates that a security moved lower after the open. This is important information. Moving lower after the open reflects weakness, while moving higher after the open reflects strength.

Red-hollow and black-filled candlesticks also convey important information on price action. Take for instance the red-hollow (no, it’s not a bird). Even though the close was below the prior close (red), prices managed to move higher after the open (hollow). Despite closing lower on the day, there was some evidence of buying pressure during the day. The black-filled candlestick is the opposite. Even though the close was above the prior close (black), prices moved lower after the open (filled). Despite closing higher on the day, there was some evidence of selling pressure.

On my charts, I replace the color black with green. The information is the same, but since I use black backgrounds in my day-to-day charting, green just works better. Also, recognize the fact that Arthur hill uses this information for daily charts, but they can also be used across all time frames.

Check your settings in whichever charting software you’re using and make sure that your candles are giving you as much information as possible. These little guys tell a story. It’s important to listen.



What is the Deal with these Colored, Filled, and Hollow Candles (Stockcharts)

Introduction to Candlesticks (Stockcharts)

Why Technical Analysis Matters

Early in my career, I learned (the hard way) that if I didn’t study price action, I was in trouble. Sure, sexy stock stories are great for cocktail parties, but boring old price is the only thing that’s going to pay. So Technical Analysis is the study of the behavior of the market and it’s participants. If price is what pays, then that is where we focus our attention. It may seem obvious to do that, but you’d be surprised as to how much time people spend on all the other nonsense.

Back in 2006, Chartered Market Technician Michael Kahn wrote a great piece for Barron’s about why technicals matter. Now is probably as good a time as any to share a few of my favorite lines:

Unlike Fundamental analysis, which is dependent on future earnings and revenue estimates, technical analysis helps investors by focusing on what the markets have actually been doing.

At its core, technical analysis, also known as stock charting, is simply a method of determining if a stock or the market as a whole is going up or going down. Once we identify these trends, and that is something we can do by simply looking at a stock chart, we are way ahead of the game with regard to assembling a winning portfolio.

Like other technical analysts, I use data generated from the stock market and from the actions of people in the market. Such data includes the amounts of stock being bought and sold each day, the rate of change of price movements (momentum) over a given span of time and analysis of price levels that have served as turning points in the past.

For example, if a price of $50 for a stock brought out the sellers on one or two occasions in the recent past, this price level is considered to be “resistance,” where the supply of stock increases relative to the demand. People think it is expensive so they attempt to sell. Simple economic theory suggests that prices will stop going up, if not actually decline.

Technical analysis also attempts to measure the collective investor psyche, calling heavily on the psychology of crowds and the cycle of greed and fear. If everyone thinks one way, the odds that the market thinks the other are usually high.

Contrast that to the more ephemeral fundamental analysis, the standard analytical backbone of Wall Street for several generations.

Fundamental analysis, which seeks to uncover the intrinsic or true value of a stock, is dependent on future sales, earnings and cost estimates of a company being studied. Often, these numbers change as circumstances, such as the overall economy or the competitive landscape for a company, change.

By contrast, the inputs of technical analysis — the price of shares and the volume being sold — never change after the fact. Charts are never revised later.

Since chart watching is not infallible, an even more important aspect is that it will tell us quickly if our assessment of the market’s mood is incorrect. For example, if prices move higher from the triangle pattern in the chart and then fall back within that pattern, we will know that we were incorrect in our original decision to buy. Either we missed something on the chart or the market simply changed its mind and decided to go down. We sell immediately and book our small loss, leaving our egos at the door.Something chart watchers keep pasted to their computer screens is a sticky note that says. “All big losses begin as small losses.” When the initial reason for buying is gone we don’t hang around hoping it will go back up. Hope is a four-letter word in the world of investing.

If a chart watcher follows breakouts, he or she will inevitably have losing trades. But if he or she is disciplined and responds to breakout failures, the losses will be small and easily overwhelmed by the profits from winning trades.

Chart watching can trace its roots back more than 200 years to Japanese rice trading. Charles Dow, a forefather of modern technical analysis and a co-founder of Dow Jones & Co., the parent of Barron’s Online, made his ground-breaking observations in the late 19th century.

Analysis was done with paper and pencil for decades until personal computers made their appearance and with computers, the sophistication of the analysis blossomed.

Over the past 20 years or so, charting has spread from a few Wall Street analysts with access to price and volume data to the mainstream. With the explosion of trading activity by individuals in the 1990s, the markets became incredibly liquid and technical analysis was perfectly suited to take advantage of the activity.

I recommend restricting technical analysis to stocks that trade at least 100,000 shares per day so that there is a liquid market for the stock.

Michael Kahn made some great points in his article. He wrote this for Barron’s over six years ago, but the things he says are obviously sill very relevant today. “Inputs of technical analysis — the price of shares and the volume being sold — never change after the fact. Charts are never revised later”. Love that!

Go check out Michael Kahn’s blog at QuickTakesPro

And be sure to follow him on Stocktwits and Twitter at @mkahn



Why Technical Analysis Matters (Barrons)

Some Cool Gold Charts

My email inbox has been bombarded with some awesome gold charts over the past 24 hours. And I feel that it would be irresponsible of me if I didn’t share at least some of them with you guys.

The first one comes from my friend Ari Wald over at The PrinceRidge Group:

“Rising inflation expectations and a weakening U.S. dollar are two factors that have bullish implications for the price of gold when working together.  Gold’s upward breakout in August can be attributed to rising U.S. breakeven inflation rates (i.e. implied inflation) and a 6% drop in the U.S. Dollar Index (DXY).  These trends have reversed in recent weeks and consequently coincided with a pullback in the spot price of gold.  While a stronger U.S. dollar could pressure gold prices in the near-term, an improving supply/demand relationship for the yellow metal bodes favorably for a continuation of its secular uptrend.”

The next two charts come from technician Peter L. Brandt, a true expert in classic pattern recognition. If you haven’t seen his Post about the History of Gold Charts, you better go check it out right away. But in the meantime, here is what Gold looks like today:

Comments from Chartist Peter Brandt:

  • Gold always rings a bell before making a major move.
  • Absent a clearly defined chart pattern it is doubtful that Gold will develop a sustained trend.
  • Clearly defined chart construction has now shown itself. This chart construction could become a bearish rectangle (requiring a close below the Sep 2011, Dec 2011 and May 2012 lows) or become a bullish rectangle (requiring a close above the Nov 2011, Mar 2012 and Oct 2012 Highs).
  • The stage is set for a major move. A decisive close above 1800 would reestablish the dominant bull trend in Gold.

This is a historic chart of Gold that goes back over 200 years. How cool is this?

And finally, here is a chart that is near and dear to my heart. I talk about the Dow/Gold ratio all the time (see Yahoo Finance & Reuters), but the good folks at Chartoftheday.com sent over a nice updated one this week:

“For some perspective on the long-term performance of the stock market, today’s chart presents the Dow priced in another global currency — gold (i.e. the Dow / gold ratio). For example, it currently takes less than a mere 7.5 ounces of gold to ‘buy the Dow’ which is considerably less than the 44.8 ounces it took back in 1999. Priced in gold, the Dow has been in a massive 12-year bear market. The current downtrend channel is the third of this bear market. While this latest channel is the least steep of the three, the Dow priced in gold has just failed to punch through resistance for the fourth time.”

Good stuff right?



Chart of the Day – Dow/Gold (2012-11-21)

The History of Gold Charts (PeterLBrandt)

Ari Wald: A View From the Ridge (PrinceRidge Group)

Tags: $GLD $GC_F

Dow Transportation Average Near the End of Correction




I had this published over at MarketWatch today. It’s titled, “Dow Transports Near the End of its Correction”. Here is an excerpt:

It might be about time for the sleeping giant which is the Dow Jones Transportation Average $DJT to finally wake up. If you hadn’t noticed, this thing has done absolutely nothing over the past year. Literally, nothing. The Transports closed out last November at 4946, and here we are a year later just a couple of points above that.

As they say, The bigger the base, the higher in space . And this is one massive base being built since last fall. We saw an impressive rally off the early October lows last year that took the iShares Dow Jones Transportation Average Index Fund $IYT up over 35% in just four months. But since then, it’s been a boring and frustrating sideways correction that was needed to absorb those huge gains.

That first correction into June held the 38.2% Fibonacci retracement of the October to February 35% move. And we just saw another retest of that key level last week. Once again, we saw them bounce off it nicely with some pretty solid follow through into Monday. So now it’s caught our attention.

Was that it? Was that the end of the correction in the Transports? No one knows of course, but at least we have a strong point of reference to go by. This is important because the upside in something like this is pretty tremendous. Don’t let the relative underperformance we’ve seen recently fool you. Unlike the Dow Jones Industrial Average and S&P 500, the Transports managed to get back to their 2007 highs last year before correcting. The other guys, not so much. So we know that in the big picture, there is underlying strength here that we just cannot ignore.

Keep reading the entire piece at MarketWatch



Dow Transports Near The End Of It’s Correction (MarketWatch)


Flexibility in Markets is Key to Success

I think this Dilbert comic strip says a lot about how we look at markets:

Persistence is a key. Always keep looking for new trading ideas.

Knowing when to quit is another key. If you’re wrong, admit it and move on. Managing risk is the name of the game.

But flexibility, in my opinion, is the toughest one. Just because you’re long and get stopped out, doesn’t mean you can’t turn around and go short it if the market tells you it’s a good idea. In fact, my favorite trades are when traditional charting patterns don’t work out the way the book says they should. Turning around and doing the opposite, a lot of times, offers the best risk/reward.

And most importantly, you can’t marry your ideas. If the market proves you wrong, pay attention. No egos remember? I came in a few weeks ago looking to short treasury bonds on a breakdown. And they ripped right in my face. So what?

It’s not about being right, it’s about making money.

Be flexible



Dilbert by Scott Adams (Nov 20, 2012)

Do We Need To Be In Japan?

Here is an interesting chart that I’ve watched develop throughout the year. We’re looking at Japan’s Nikkei 225 Stock Average Index for 2012. What stands out to me here is very simple: we’ve seen 5 tests of resistance since the beginning of the summer. And when that happens, a breakout is usually coming:

We know there are sellers at the 9100-9200 level. That’s clear. But logic tells us that with each test of resistance, more sellers that were willing to sell at those levels will have already sold. So in theory, these sellers will eventually dry up leaving only buyers to rule at those prices. That’s when we get the pop.

The target is pretty clear. I think we’re headed towards the March highs, which is about 1000 points away. And the best part is that Japan doesn’t have any strong correlation to US Stocks. Finding non-correlated assets to position ourselves in is always a goal of ours. Finding one set up this well is the hard part. It looks to me like we have both in this case.


Tags: $NKY $NK_F $NKD_F $NKY_F

China China China

You guys see this thing? Talk about nice risk/rewards.

$FXI is the iShares FTSE China 25 Index Fund. I think this would be a logical place to enter a trade with limited risk and a nice reward opportunity. But before we even get into the chart, understand that the relative strength out of this space has been tremendous. After underperforming the United States for a solid three years, China has been on fire since early September relative to the S&P500. This is really the reason we’ve been watching so closely.

Now to the chart. This thing is beautiful. Look at the support from March and April that broke down and turned into 5 months worth of resistance. As always, the more times that a level is tested, the higher the likelihood that it breaks. And in this case, it took 4-5 tests of the mid-35s to get back above. So now polarity should theoretically come into play turning that killer resistance into new found support.

But wait! There’s more! Look at the rising 50-day moving average (in blue) coming up and catching that price action as it also tests the 200-day (red):

Momentum also favors the bull case here for China. The October breakout in $FXI took the relative strength index into overbought conditions. We love that as it shows us evidence of an extreme amount of buying. Also, support here in the low 40s for RSI is definitely a bullish characteristic.

We’ve been talking about the potential for Emerging Markets to start outperforming (see Reuters and MarketWatch). So if we’re going to be right on that call, then we should start to see a rally here for China. As far as upside? We could see mid to high 40s in $FXI when all is said and done.

And I think the best part about this position is the simple risk management aspect that it brings. Remember that it’s not all about being right and trying to figure out how high something is going. For us, the most important thing to ask is, How much are we willing to risk on this one? When we’re wrong, we don’t want it to matter. And on this, we wouldn’t want to be long below 35.40, which is only about 1% from current prices. So to risk 1-2% for a 35-40% potential is the perfect trade for us. And I’ll say it again – for us. Everyone is different. We like to assume that we’re wrong before entering positions. Most people I speak with assume they’ll be right. That doesn’t seem like the right mentality to have.

This is how we trade…