RISK-ON TRADE SURFACES AS EURO BOUNCES -- FINANCE SECTOR LEADS US EQUITIES HIGHER -- CUMULATIVE NET NEW HIGHS LINES TRENDING HIGHER -- AD VOLUME LINES SHOW NO SIGNS OF WEAKNESS -- %ABOVE 50-DAY SMA REMAINS STRONG
RISK-ON TRADE SURFACES AS EURO BOUNCES... Link for todays video. A successful auction of Portuguese bonds lifted banking shares in Europe and the US on Wednesday. The Euro moved higher as worry over European debt subsided. This confidence boost brought the risk-on trade to the forefront. Gold and bonds declined as money moved out of safety and into riskier assets. Chart 1 shows the 7-10 year Bond ETF (IEF) hitting resistance around 94 and falling over the last two days. A small rising wedge is taking shape. This pattern appears to be working off the oversold conditions from the November-December decline. A break below wedge support would signal a continuation lower for bonds and a rise in rates. Chart 2 shows the Euro Currency Trust (FXE) getting an oversold bounce after breaking support last week. Broken support around 130-131 turns into the first resistance zone. Key resistance is set at 134 though. It would take a break above this level to actually reverse the downtrend in the Euro. Chart 3 shows the Gold SPDR (GLD) stalling near support from the December-January lows.
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Chart 1
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Chart 2
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Chart 3
FINANCE SECTOR LEADS US EQUITIES HIGHER... The finance sector led US stocks higher in early trading on Wednesday. Chart 4 shows the Finance SPDR (XLF) jumping over 1%. The ETF has been on a tear since early December with a 13+ percent advance. After breaking above its November high, XLF raced to the upper trendline of a rising price channel. This area may offer some resistance to the overbought ETF, but I see no evidence of weakness or selling pressure. The April high marks the next resistance level around 17. The indicator window shows the Price Relative, which shows the performance of XLF relative to SPY. After showing relative weakness from April to November, the Price Relative turned up in late November and broke the down trendline in December. Finance is now showing relative strength.
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Chart 4
CUMULATIVE NET NEW HIGHS LINES TRENDING HIGHER... Now I would like to turn to some breadth indicators. These medium-term indicators can help investors and traders identify the balance of power within the major equity indices. Trading in the direction of this balance can greatly enhance ones success. The Net New Highs indicators for the Nasdaq and NYSE show no signs of weakness. Net New Highs equals new 52-week highs less new 52-week lows. Because it takes at least 52 weeks to form a new high or new low, the Net New Highs indicators are considered lagging indicators. Despite some lag, these indicators are important in determining an overall trend bias for the overall market.
Chart 5 shows Nasdaq Net New Highs ($NAHL) as a histogram in the indicator window and the Cumulative Net New Highs Line behind the Nasdaq price plot. There are two things to watch: the direction of the Cumulative Net New Highs Line and the overall level of Net New Highs. A bullish situation prevails when the Cumulative Line is rising and Net New Highs are positive, such as now. The Cumulative Line is well above its 10-day EMA and has been above since mid September. A downturn in the Cumulative Line and negative Net New Highs would turn this indicator bearish.
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Chart 5
Chart 6 shows NYSE Net New Highs ($NYHL) in the lower indicator window and the Cumulative Line in the main window. Notice that the Cumulative Line turned up in mid July and broke above its May-June highs to start an uptrend earlier than the Nasdaq version. The NYSE Cumulative Net New Highs Line has been trending higher for around six months. The 10-day EMA defines this uptrend. A move below would signal a downturn that could lead to a correction. For now, Net New Highs remain firmly positive and there are simply no signs of weakness. Subscribers can click on these charts to see the settings and save them to a favorites list.
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Chart 6
AD VOLUME LINES SHOW NO SIGNS OF WEAKNESS... In contrast to net new highs, the AD Volume Lines are not lagging indicators. These lines are mostly coincident indicators, but sometimes they can divergence and foreshadow a reversal. The AD Volume Line is a cumulative of Net Advancing Volume, which is the volume of advancing stocks less the volume of declining stocks. Advancing volume represents buying pressure, while declining volume represents selling pressure. Chart 7 shows the Nasdaq AD Volume Line moving above its November high in December and extending its gains in January. First, notice how the Nasdaq AD Volume Line (red) tracks the Nasdaq (gray). Both formed higher lows in late August and broke their summer highs in September. Even though the line has yet to exceed its April high, there is no denying the current uptrend. The AD Volume Line can sometimes foreshadow a reversal with small divergences. Small bearish divergences formed in April, June and early August. A small bullish divergence formed in early February. So far we have yet to see even a small bearish divergence so this indicator remains firmly bullish. Chart 8 shows the NYSE AD Volume Line for reference.
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Chart 7
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Chart 8
PERCENTAGE OF STOCKS ABOVE 50-DAY SMA REMAINS STRONG... The percentage of stocks above a specific moving average is a breadth indicator available for three different moving averages and seven different indices. Sharpcharts users can track the percentage of stocks above the 50-day SMA, 150-day SMA or 200-day SMA for the Dow, Nasdaq, Nasdaq 100, NYSE, S&P 100, S&P 500 or TSX Composite. A full list of available symbols can be found at the end of this article.
Technically, the bulls have an edge when more than 50% of stocks are above their 50-day SMA and the bears have the edge when less than 50% are above. While this sounds good in theory, using the 50% line for signals results in many whipsaws. Raising the bullish threshold a few percent and lowering the bearish threshold can reduce whipsaws. A bullish signal is triggered when the indicator moves above 55%. A bearish signal is triggered when the indicator moves below 45%. These signals remain in force until reversed. In other words, a move above 55% is bullish until there is a move below 45%.
Chart 9 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) and chart 10 shows the S&P 500 %Above 50-day SMA ($SPXA50R) indicators. The Nasdaq 100 represents the technology sector, while the S&P 500 represents the broader market. The red and green dotted lines mark the bullish and bearish crossovers. No indicator is perfect and there will be whipsaws (bad signals), but this indicator does a pretty good job of identifying the balance of power. Both the Nasdaq 100 and S&P 500 versions have been in bull mode since early September.
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Chart 9
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Chart 10
What about the bearish divergence and overbought conditions? Technically, these indicators are overbought when above 80%. Realistically, these indicators can become overbought and the underlying indices can continue their advance. A bearish divergence is also working over the last four months as these indicators remain below their prior highs and the indices forge higher highs. While this shows fewer stocks participating in the rally, the vast majority (>75%) are above their 50-day SMAs. This is the metric that really counts.
Click here for a full list of breadth indicators based on the percentage of stocks above a specific moving average.
