HOW TO BLEND DAILY AND WEEKLY SIGNALS -- STOCK WINNERS AND LOSERS -- WATCHING % OF STOCKS ABOVE 50-WEEK MA FOR CLUES -- PRECIOUS METAL SUPPORT LEVELS -- TREASURIES RALLY -- S&P 500 SUPPORT LEVELS
WHICH IS BETTER?... One of our readers asked whether it's better to use daily or weekly signals on price charts. The answer depends on the time horizon for your trading decisions. If you're a relatively inactive investor, who only makes decisions at important turning points, weekly signals are better. If you're more short-term oriented, dailies are more useful. Most traders, however combine the two. I'll explain how to do that. But first a comparison of the two approaches. Chart 1 applies daily MACD lines to the S&P 500 since the March bottom. Buy and sell signals are given when the two lines cross. After giving an important buy signal in March, the MACD lnes have flipped several times since then. A second buy signal (from below the zero line) was given in early July which lasted into early August. The daily lines have turned negative after forming a "negative divergence" during September. [A negative divergence exists when the two lines form a lower high while prices continue to rally]. Short-term traders might use that as reason to take some profits. The weekly lines in Chart 2, however, show only one signal which was a major buy during March. A longer-term investor could have bought the S&P 500 and stayed long since then. The two lines are starting to converge a bit but are still positive. A longer-term investor might only consider taking some profits when the weekly lines turn negative. Of the two charts, the weeklies are always the more important. There's a tradoff however between daily and weekly signals. Daily signals are more frequent and are earlier. Weekly signals are less frequent (and more reliable) but are slower. I suggest combining the two. Here's how.
Chart 1
Chart 2
COMBINING DAILY AND WEEKLY SIGNALS... The way I combine daily and weekly signals is to use the weekly as a trend filter on the daily. Use the weekly signals to determine which side of the market you're going to trade from. Since March, that would have been from the long side. You could have ignored the short-term sell signals on the daily charts (or given them less weight) and concentrated only on the short-term buy signals. Or you might use short-term sell signals (especially after a negative divergence) to trim some profits. You wouldn't do any serious selling, however, until the weekly charts turn negative. The best of both worlds occurs when the daily and weekly charts give trading signals in the same direction and at the same time as occurred during March.
WEEKLY WINNERS ARE DEFENSIVE NAMES ... In a sign that investors may be getting a bit nervous, three of this week's top performing sectors were all defensive caterogies -- consumer staples, healthcare, and utilities. I've selected one of the top stocks from each group. Chart 3 shows Sara Lee gapping up to an eleven month high on Friday. Chart 4 shows Abbott Labs ending the week on top of its 200-day moving average. [The biotech stock Celegene, which I showed on Monday, also had a strong week]. Chart 5 shows Duke Energy ending the week near a ten-month high. All three relative strength ratios show these stocks to be underachievers since the stock market bottomed in March. The fact that they're starting to attract some attention may carry a defensive market message.
Chart 3
Chart 4
Chart 5
WEEKLY LOSERS ... Three of the week's worst stock performers come from more economically-sensitive groups like homebuilders, railroads, and technology. Chart 6 shows KB Home falling below its 50-day average at week's end. Chart 7 shows Norfolk Southern doing the same. A 17% plunge on Friday made Research in Motion the biggest loser for the week in the Nasdaq 100. Chart 8 shows RIMM plunging 17% on Friday (on huge volume) to fall to the lowest level in more than two months.
Chart 6
Chart 7
Chart 8
NYSE % ABOVE 50 DAY MA ... With some 50-day moving averages starting to be threatened, it's a good time to review an indicator based on the percent of NYSE stocks trading over their 50-day MAs. Chart 9 shows that indicator over the last three years. As a rule, readings below 20% are oversold while readings above 80% are overbought. Peaks and through in the indicator usually concide with peaks and troughs in the market itself. The March market bottom coincided with a very oversold reading below 10%. Currently, the reading is in overbought territory at 82% and is starting to weaken a bit. But there's more to it than that. It's not enough for the line to be overbought and oversold. It has to change direction. Early warnings of upturns and downturns are often given by positive and negative divergences. The March bottom, for example, followed a positive divergence in the black line (see green arrow and line). At present, a potential negative divergence exists (see red arrow and line). Chart 10 shows the current situation more closely. It shows the May peak reaching 93% before correcting. The September peak reached 91% which is slightly lower. That may be an early warning of some loss of upside momentum. A more serious warning would be a drop in the $NYA 50R below its early September low at 74%. A drop below that level would probably signal at least a short-term top and a likely market pullback or period of consolidation.
Chart 9
Chart 10
PRECIOUS METAL PULLBACK... Most commodities saw selling late in the week. Gold prices fell back below $1000 but didn't suffer any serious chart damage. On market pullbacks, support is often seen near previous peaks. And that's where we're looking today. Chart 11 shows the Gold ETF (GLD) testing its June peak near 97. If that doesn't hold, more substantial support is likely near its August peak and 50-day moving average. A similar picture exists for Silver iShares (SLV) in Chart 12. The Market Vectors Gold Miners ETF (GDX) is also testing support along its August peak near 42 (Chart 13). For the recent uptrend to remain intact, the GDX should hold above that support level.
Chart 11
Chart 12
Chart 13
TREASURIES TEST OVERHEAD RESISTANCE... While stocks and commodities struggled this week, Treasury bonds started to attract some defensive money. Bonds are a natural place for investors to turn if they're nervous about an overbought stock market. This week's drop in commodity prices (and a bouncing dollar) reduces short-term inflation expectations which is also good for bonds. Chart 14 shows the 7-10 Year T-Bond Fund (IEF) testing a resistance line drawn along its 2009 highs. Needless to say, a decisive close above that line would be a short-term positive sign for Treasury prices (and could signal more profit-taking in stocks and commodities).
Chart 14
FIBONACCI RETRACEMENT LEVELS ... Arthur Hill explained yesterday how Fibonacci retracement lines can be applied to any portion of a market trend. Chart 15 applies those potential support lines to the latest S&P 500 rally that started in early July. It shows that the 38% and 50% lines coincide roughly with the August/September lows. The 62% retracement line coincides with the June peak. The first line of defense for the S&P 500 is the late August peak near 1040 (green arrow). The SPX would have to decisively break that first support line to signal a more substantial pullback to its September low or its 50-day moving average (blue line).
Chart 15
