USING THE SLOPE TO DETERMINE THE TREND FOR QQQQ AND SPY -- LOW SLOPE READING SHOWS RELATIVE WEAKNESS IN SMALL-CAPS -- DOW TRANSPORTS FAILS TO CONFIRM DOW INDUSTRIALS -- BOND ETF FORMS BEAR WEDGE AS FED MEETING STARTS

USING THE SLOPE TO DETERMINE THE TREND FOR QQQQ AND SPY... Link for todays video. Using the Slope indicator, chartists can quickly determine if a specific trend is up or down. First, chartists must choose their time horizon. Sharpcharts sets the Slope at 20 periods by default. This is 4 weeks on a daily chart, 4.65 months on a weekly chart and 1.66 years on a monthly chart. The timeframe depends on charting style and analysis requirements. For these examples, I will use daily charts with a 20-day Slope.

The Slope measures the rise-over-run of a Linear Regression, which is the line of best fit for a series of data points. A 20-day Linear Regression is the line of best fit for the last 20 closing prices. The Slope is positive when the Linear Regression slants up, and negative when the Linear Regression slants down. Chart 1 shows the Nasdaq 100 ETF (QQQQ) with the 20-day Slope and three examples of a 20-day Linear Regression, which is the middle line of a Raff Regression Channel. The green channel shows a steep positive Slope. The red channel shows a slightly negative Slope. The blue channel shows a positive Slope. In essence, an uptrend is present when the Slope is positive and a downtrend when the Slope is negative. After all, prices have a downward when the Slope is negative and an upward bias when the Slope is positive.

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Chart 1

There have been four Slope changes over the last six months. The two moves into negative territory were relatively short-lived (red dotted lines). The early September move in positive territory lasted just over two months and the early December move is currently seven weeks old (green dotted lines). Even though the current Slope is not as steep as September, the Slope is still positive. A move into negative territory would be required to call for a trend reversal here. Chart 2 shows the S&P 500 ETF (SPY) and chart 3 shows the Russell 2000 ETF (IWM), both with the 20-day Slope in the indicator window.

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Chart 2

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Chart 3

LOW SLOPE READING SHOWS RELATIVE WEAKNESS IN SMALL-CAPS... Notice anything different with the IWM slope above? Yep, the Slope turned negative today. Of the five major index ETFs, the Russell 2000 ETF is the only one with a negative Slope. DIA, SPY, MDY and QQQQ all have positive Slopes. The relatively low Slope reading for IWM confirms relative weakness that was reported in last weeks Market Messages. At this point, the majority of evidence remains bullish. After all, four of the five ETFs still have positive Slopes. A tide could change when three of the five turn negative. I would not call for a major trend reversal, but this would suggest that a correction was underway. Watch the 20-week Slopes for clues on the bigger trend. Charting hint: Plot the Raff Regression Channel over the last 20 days to see the Linear Regression in the middle. Click and hold the middle part of the middle line, and then move the indicator to the left to see how the Linear Regression (slope) adjusts. Remember, the Linear Regression is the line of best fit for the last 20 closes.

DOW TRANSPORTS FAILS TO CONFIRM DOW INDUSTRIALS ... Dow Theory is built on the principle of confirmation. The Averages should confirm each other in uptrends, downtrends and Dow Theory signals. When the Dow Industrials moves to a new high (low), the Dow Transports should confirm that new high (low) with a corresponding move. Failure to confirm results in a non-confirmation. Chart 4 shows the Dow Industrials recording a new 52-week high today, but the Dow Transports remaining well below last weeks high. This non-confirmation is only a few days old, but it should be watched for further deterioration. At the very least, it shows relative weakness in the Dow Transports.

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Chart 4

A small non-confirmation preceded the late April peak. Notice that the Dow Transports moved to a new high on May 3rd, but the Dow Industrials did not follow suit. The Dow Industrials formed a lower high and this marked a non-confirmation that preceded the May-June decline. Despite the current non-confirmation, the Dow Industrials shows NO signs of price weakness and some sort of reversal is needed in the senior Average before taking this non-confirmation seriously.

BOND ETF FORMS BEAR WEDGE AS FED MEETING STARTS... The Fed starts its two-day meeting on Tuesday with a policy statement expected on Wednesday afternoon. After a sharp decline in early December, the bond market has been treading water with a consolidation the last 4-5 weeks. Chart 5 shows the 7-10 year Bond ETF (IEF) breaking down in November-December and then forming a rising wedge. This looks like a bearish consolidation and a break below last weeks low would signal a continuation lower. Broken resistance from the February-March highs marks the next support level

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Chart 5

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Chart 6

Chart 6 shows the 10-year Treasury Yield ($TNX) also consolidating the last 4-5 weeks. Bond yields move opposite of bonds. Yields rise when bonds fall and yields fall when bonds rise. The 10-year Treasury Yield surged from early October to mid December and then formed a triangle. Watch for resolution of this pattern for the next directional clue. In fact, we can just watch the January high-low for clues. A break above the January high would break consolidation resistance, which would be bullish for yields and bearish for bonds. A break below the January low would be bearish for yields and bullish for bonds. Before leaving this chart, notice how the CRB Index advanced the last six months. Rising commodity prices may be putting upward pressure on rates because of inflation concerns down the road.