Monthly Candlestick Review: Crash Edition

May 1, 2020

The best part about the end of the month is that there's always a fresh batch of Monthly Charts waiting for us. We only perform this exercise once the candlesticks are completed, which in this case was Thursday April 30th. It takes me about half an hour to get through them all, which represents roughly 6 hours of my entire year's work. I promise you from the bottom of my heart that there is no single part of my entire process that I find more helpful than this monthly chart review.

You see, this process forces us to take a step back, and gives us no choice but to identify the direction of the primary trends. We use these to put shorter-term trends into context. So no matter what your timeframe is, I think first identifying primary trends, and then working our way down from there, is a huge advantage over a blind bottoms/up approach.

Here are the things that stood out most during my review:

First of all, a lot of people ask me about which charts I like to analyze during this monthly process. I encourage you to make your own list. But here's mine, and I'm constantly adding to it and replacing some charts with others. My Chartbooks are always a work in progress. I hope this helps you create your own:

Okay, let's go!

The S&P500 is back to this major overhead supply area that has been trouble since the beginning of 2018. We can argue that this is when this massive consolidation first started. Last year could have just been a false start and the real breakout is still coming.

I think this is probably the higher probability outcome vs this being a major 2+ year topping out process ending this massive structural uptrend:

You can make the same argument about the Dow Jones Industrial Average. Again, not appearing like "The End of Days", but more so a huge consolidation that had a false start last year. The key here is that there's still work to do. We're below all that overhead supply:

Here's another look at that but using just bars. Both the false start and price stuck below overhead supply is quite apparent:

The Dow Transports, on the other hand, look much different. This indexes is much more messy. The way I see it, we're exactly in the middle in between overhead supply near 9300 and above support near 7600. So not much of an edge in either direction here, from what I can tell. This is the definition of a "Hot Mess":

As usual the Nasdaq is in beast mode on a relative basis. Nothing in the world, equities-wise, looks like the Nasdaq. Trust me, we look at a lot of charts. They do not look like this:

It's the Nasdaq100 holding above 181 that has been a big one for me. We've identified this level time and time again. If we're above that, the world is not ending. In fact, the Nasdaq100 went out just 16 cents from new all-time monthly closing highs. According to my calculator, $QQQ missed an all-time high this month by just 0.073%.

The relative strength out of the Nasdaq is just tremendous. There's no other way to put it.

Small-caps are tactically above our key 126 level. We haven't wanted to be shorting them if they're above that. So that's my level shorter-term. Bigger picture, which is what these monthly charts are for, 117.50 is more that area. This of 117.50 as the equivalent to $QQQ 181. That's the point of no return. Above that and I think we're good:

Mid-caps need to get above 325. I can't tell you how many times I've pointed to that level over the years. There's a ton of overhead supply here, which makes me question just how easy it will be to break through that. My bet is, not that easy.

Micro-caps are below 87. That's the big level of overhead supply. Like in mid-caps, I think it will be hard to break out above that any time soon. They got some work to do:

Speaking in broader terms, the S&P1500 which includes all 500 large-caps, 600 small-caps and 400 mid-caps, is below 689. That's that big level. This has essentially been consolidating since early 2018. Like it's technically supposed to represent, it looks like a mix of all of these indexes above. Makes sense right?

We don't have bull markets in America without Financials. If $XLF is above 21, I think that's tactically a good thing for the bulls. Bad things are happening to equities globally if Financials are below their 2015 highs. At this points, we're more so in no-man's land, although on the offensive side of mid-field.

Here's Goldman Sachs which I think tells the Financials story perfectly. Zero progress since just before the financial crisis when they peaked in 2007. Until they take out 250 and hold it, the sellers are in control. When Goldman breaks out of this massive base, I promise I'll be right here pounding the table about it and I have a funny feeling we'll be buying other financials as well. But today, it's a mess:

Regional Banks are a great example of a topping pattern. This was one of the easier ones to catch because not only were they completing this massive top in February, but were already making new all-time relative lows well before any crashes.

The issue here is that all of that support near 51 will now be overhead supply. While tactically being above 35 is a huge positive for stocks as a group, especially this group, bigger picture, 51 is that structural level above current prices.

Now, the Broker Dealers Index is the one already bumping up against key levels. We'll call it 59, those are the 2007 highs before the financial crisis. If $IAI can manage to get above that, I will be very impressed and will likely tell us a lot about the trend for financials, and the rest of the market:

Consumer Discretionary looks a lot like the S&P500, Dow and Nasdaq. Stuck below overhead supply, but not too far off. This is one of the stronger areas of the market (thank you $AMZN):

Same thing with Tech, obviously. Pushing up against new highs, already. Just think about how great of a sale Tech was at the end of January, but we're already right back here again. I'm impressed by that for sure:

Technology went out just 4.2% from new all-time monthly closing highs. How bad could things be?

Same thing with Semi's. They're just 6.8% away from new all-time monthly closing highs. The way I see it, I doubt Tech and Semi's go on to make new highs tomorrow. While I don't think it happens soon, I think it definitely happens. But more importantly, these are likely to be the leaders in the next cycle. All signs are pointing to leadership from Tech, Semi's and Discretionary on the horizon:

While you may think you know this already, this chart really just reiterates it. What's driving the relative strength in these sectors are the Internet Stocks. It's quite obvious as the Dow Jones Internet Index went out just 3 cents from new all-time highs! 3 CENTS!

On the Internet front, Facebook and Google (I refuse to call it alphabet), represent over 40% of the new communications index fund $XLC. Here is the Index itself with more history. If it's above 260, I think we err on more upside:

Now, as much as we like to point to the strength in Tech, Semi's, Discretionary and Communication, or "Internet" if you will, if things are gonna get better, we need Industrials to keep shining. The fact that they are above those 2015 highs, and also those 2018 lows, is impressive. It's hard to argue 'end of the world' scenarios, and easier to argue for a massive range if we're above that in $XLI. The path of least resistance here is higher and from the looks of it, we ARE in a range, and probably towards the lower end of that range:

Remember, all 20 stocks in the Dow Jones Transportation Average are in the S&P Industrials Sector. I know that could be confusing, but just stay with me. This story is the same as the situation above regarding Transports.

Everyone is asking me about Healthcare these days, and for good reason. They went out just 2% away from new all-time monthly closing highs. If $XLV is above 90 it's hard to be bearish. This looks like a rangebound market between 90-110 and we're right near 100. We're just middling around.

After the massive rally off the late 2008 lows where Biotech rallied 400% in a few short years, we've seen a 5-year well-deserved consolidation. This seems perfectly normal. What would also seem perfectly normal would be an upside resolution. The measured move here takes us to 180 in $IBB. This is only something to own if there's a 130 handle in front of it, otherwise, this is still rangebound. But so promising....

Medical Devices are also driving healthcare. At the end of the day, these are Tech stocks right? They look like tech stocks. If it walks like a duck and talks like a duck, it's probably not a chicken. The good folks at Dow Jones want to call them healthcare. So fine. But we know better. $IHI went out just 2.7% away from new all-time monthly closing highs. One day, I believe they'll break out. But this is something we only want to be long if we're above 260, not below that. Similar to Biotech, this is a rangebound "show-me" market:

Now let's look around the world. First of all, the Global Dow is right back to where it peaked in 2014 & 2015. See how nice that double top was? That turned into support at the end of 2018. Then last month we broke and now we're back. Right back to the scene of the crime. Should we expect it to just plow right through this area?

Now let's say it does. What's next? The 2007 highs a couple of hundred points higher? I think they have their work cut out for them.

Euro STOXX was able to hold above those 2016 lows.. That's impressive arguing for more of a rangebound market vs an end of the world scenario:

European banks are the problem for the bulls. What else is new? If the Nasdaq is Lebron, European Banks are J.R. Smith:

Look at them stuck below 2011-2012 lows. Until that changes, it's hard to be overly constructive towards Europe in general. It's almost like they don't know what the score is.

Meanwhile, the Japan chart would argue for more of a big rangebound volatile market vs a massive top. In fact, I'd argue this consolidation will most likely break out to the upside and at some point in the coming year(s) we will be talking about a massive Japanese breakout to new 30 year highs, that we most certainly will be buying. But they have work to do first:

Emerging Markets, like Copper which you'll see below, broke significant levels last month. We are now holding below all that former support. In copper it's 2.50, and in the Emerging Markets Index Fund $EEM, it's 39:

Look at Emerging Markets relative to US Stocks going out at new all-time lows. On a relative basis, this is lower that at any point since the fund launched in 2003:

China continues to be in a world of its own. I feel like we've seen this story before. The difference is that the prior two times, they broke out and really went. This has been a breakout and fizzle scenario. A breakout above 3000 would be impressive:

The strength in India has to be recognized. We do a lot of work on Indian Stock Markets. If we're above those 2015-2016 highs, near 8900, how are we not buyers of this market?

In commodities, we've been buyers of precious metals. The way I see it, if we're above all that former support in 2011 & 2012 that broke in 2013, then how can we not be buyers? Call it 1580 or 1600, either way, if we're above that, we have to be long. Not only do I think we retest those all-time highs, but most likely exceed it and proceed towards 3000. It will take time, but those are the implications of this massive base:

Speaking of massive bases, what do you want me to tell you? That I don't want to buy this base breakout?

I mean listen, it's come a long way off it's 2020 lows, so that's something we need to recognize. Things could get a little shaky, which makes sense considering we are still in a very volatile environment for equities. And this is a basket of equities, after all. But man, if we're above 31, how do we not own gold mining stocks?

Here is the S&P500 vs Gold holding below significant risk levels. Notice how the last time this ratio broke below this key level was October of 2007. Remember what happened after that?

Silver is a serial disappointment, to say the least. This is not the month it should have had considering what Gold and Gold Miners did. $13.80 is still that big level, and if we're above that it's hard to be bearish. Plus, if Gold and Miners do well, how bad could silver be? It just needs to show us soon:

In Copper, we're below that 2.50 level that had been support for so long. Now we're stuck below that. It's just what it is. Remember that Copper and Emerging Markets basically look exactly the same. So there are bigger implications here:

Natural Gas held those lows we were looking for. Again, if we're above those 2016 lows, this is a buy all day long. It could triple. I've seen it happen many times in this crazy contract:

As far as bonds go, if this ratio is below those 2007 & 2013 highs, it's hard to be overly optimistic about stocks.

Here are interest rates making new all-time monthly closing lows. That is not any sort of evidence of an uptrend:

Maybe that's why Treasury Bonds keep going out at new highs? We still like them from the long side.

The US Dollar is stuck in a range. There's nothing really going on here:

Same with the Euro. It's a mess:

Same with Yen:

British Pounds, on the other hand, look interesting. A rally back towards 1.40 would not be out of the question. Its ability to hold that 2016 support is impressive. If we're above 1.20, I like it long with a 1.40 target.

Doesn't Bitcoin look a lot like it did in early 2013 or early 2017? I think a breakout is coming. We want to be buyers of that breakout:

The way I see it, there are some positives and there are some negatives. It's a mixed bag. That's just what it is. To quote the great philosopher Crash Davis, "Sometimes you win, sometimes you lose, and sometimes it rains". I think it's raining and hard to avoid getting hit by the raindrops. We're below overhead supply in many of the important areas, but there are very clear leadership groups.

One way I like to get more offensive or defensive is to look at the Consumer Discretionary vs Consumer Staples Ratio. Notice how this guy is now back above 2. I must say, that is very impressive. If we're above 2, we want to be spending our time looking for stocks to buy, not stocks to sell. If we're below that, the opposite is probably true.

There are winners out there. $MSFT $NVDA and $AMZN all closed at new all-time monthly highs. Facebook came within pennies. $GOOG is right there too. To me, that screams Tech, Internet, Communications. If we're going to buy anything, it should probably come from these groups, as well as select names we've liked exhibiting extreme levels of relative strength and positive momentum.

From a broader perspective, this 10-month exponential moving average is a good one to watch. Good things happen to stocks when we're closing above it. Bad things tend to happen when we're closing below it. We've closed below it for 3 consecutive months. Let's see if that changes in May.