GOLD MOVES LOWER DESPITE STRENGTH IN STOCKS -- TREASURIES FALL AS RISK-ON TRADE TAKES HOLD -- NYSE NET NEW HIGHS SLOWLY STRENGTHEN -- NASDAQ NET NEW HIGHS ARE SLOW TO IMPROVE -- P&F DOUBLE TOP BREAKOUT VERSUS DOUBLE BOTTOM BREAKDOWN
GOLD MOVES LOWER DESPITE STRENGTH IN STOCKS... Link for todays video. For whatever reason, stocks and gold have been positively correlated since late September. It is a strange pairing, but chart 1 confirms this relationship. The first indicator window shows the Gold SPDR (GLD) in red and the S&P 500 ETF (SPY) in black. These two moved in opposite directions until late September. This positive correlation started in late September when both declined. These two lines have been moving step-for-step ever since. The second indicator window shows the Correlation Coefficient for the S&P 500 ETF (SPY) and GLD. This indicator moved into positive territory in late September and remains positive.
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Chart 1
Despite a positive correlation, gold and stocks are moving in opposite directions on Monday. Stocks are sharply higher, while gold is modestly lower. It is too early to call for a complete divorce, but chartists should keep a close eye on the chart. After a big surge in July-August, GLD corrected with a sharp decline and then moved into a narrowing range. The contracting trendlines mark the first support and resistance levels to watch. The November high and low mark the second, and key, resistance/support levels. Chart 2 shows the Silver Trust (SLV) hitting resistance just below 33 the last three days.
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Chart 2
TREASURIES FALL AS RISK-ON TRADE TAKES HOLD... The risk-on trade continued on Monday. Stocks, oil and the Euro moved higher, while the Dollar and Treasuries moved lower. Hopes are once again on the rise as EU leaders meet this week and the European Central Bank (ECB) makes a policy statement on Thursday. Treasuries and the Dollar are at the center of this risk-off/risk-on trade. Money moves into these two when the market seeks a relative safe-haven. Conversely, money moves into stocks and the Euro when the market embraces risk. Chart 3 shows the 20+ year Bond ETF (TLT) falling sharply with a move back to support around 115. Broken resistance and the early November lows mark support here. A break below the November lows would be bearish for Treasuries and bullish for stocks. Support is holding for now and last weeks decline looks like a falling flag. A move above Fridays high would break flag resistance and keep the bigger uptrend alive. The indicator window shows the Correlation Coefficient for the S&P 500 and TLT. This indicator has been in negative territory for the last six months. Chart 4 shows the 7-10 year Bond ETF (IEF) with similar characteristics.
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Chart 3
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Chart 4
NYSE NET NEW HIGH SLOWLY STRENGTHEN... Breadth indicators are the vital signs for the stock market. There are a number of breadth indicators available through StockCharts.com. Chartists can plot AD Lines, AD Volume Lines, Net New Highs, Bullish Percent Indices and more. Today, I am going to look at two sets of breadth indicators. First, chart 5 shows NSYE Net New Highs Percent in the indicator window and the Cumulative Net New Highs Line in the main window. Net New Highs is simply new 52-week highs less new 52-week lows. The Net New Highs Ratio is Net New Highs divided by total issues, which is shown as a histogram in the indicator window. A 10-day EMA was added to smooth the data. Net New Highs Percent turned negative in late July and plunged deep into the red in August-September. After a dip below .40 (-40%) in early October, the indicator recovered and turned positive again in mid October. There was a shallow negative dip in November, but the indicator is once again positive here in early December. Even though the Net New Highs Ratio has yet to exceed +10%, positive readings for this indicator favor the bulls. This simply means there are more new highs than new lows.
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Chart 5
The main window shows the Cumulative Net New Highs Line bottoming in early October. This indicator is simply a running today or Net New Highs. The indicator has been edging higher since mid October and shows a slight uptrend. Notice that the Cumulative Net New Highs Line moved above its 10-day EMA over the last few days. This indicator should be considered bullish as long as it holds above the late November low.
NASDAQ NET NEW HIGHS ARE SLOW TO IMPROVE... In contrast to the NYSE Net New Highs indicator, the Nasdaq Net New Highs indicators remain weak. Chart 6 shows the Cumulative Net New Highs Line and the Nasdaq Net New Highs Ratio. The Net New Highs Ratio edged into positive territory late last week, but the 10-day EMA has yet to follow suit. In the main window, the Cumulative Net New Highs Line moved to a new low in early December and remains below its 10-day EMA. An upturn and move above the 10-day EMA is needed to turn this indicator bullish. It will, however, take more than one day of positive Net New Highs to move this indicator.
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Chart 6
Why are Nasdaq Net New Highs lagging NYSE Net New Highs? The answer can be found in the listing requirements for the different exchange. In general, the NYSE has stricter listing requirements and this attracts established companies. The Nasdaq has less stringent listing requirements and this attracts more startups. The Nasdaq is full of young companies involved in cutting edge business, such as new technology and biotechnology. A simple scan at StockCharts.com shows that over 700 stocks on the Nasdaq are less than $1 per share. In contrast, the NYSE shows just 16 stocks priced below $1 per share. Companies with share prices below $1 have a much greater chance of being delisted.
P&F DOUBLE TOP BREAKOUT VERSUS DOUBLE BOTTOM BREAKDOWN ... The Bullish Percent Indices (BPIs) are based on Point & Figure buy signals. A basic Point & Figure buy signal occurs when an X-Column moves above the high of the prior X-Column. This is called a Double Top Breakout. This signal remains in force until there is a Double Bottom Breakdown, which is a basic P&F sell signal. Double Bottom Breakdowns occur when an O-Column moves below the low of the prior O-Column. A chart always has one signal or the other in force. Before showing two examples, note that these signals are not buy and sell signals in the strict sense of the word. These signals are very common, which means chartists need to incorporate other aspects of technical analysis to confirm or refute the signal. Chart 7 shows Coach (COH) with a Double Top Breakout this month. The red C represents December. Notice how this X-Column exceeded the prior X-Column. Chart 8 shows Big Lots (BIG) with a Double Bottom Breakdown. Notice how the current O-Column moved below the low of the prior O-Column.
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Chart 7
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Chart 8
KEY BULLISH PERCENT INDICES MOVE BACK ABOVE 50%... The Bullish Percent Index measures the percentage of stocks within an index that are on P&F buy signals (Double Top Breakouts). The remaining stocks are on P&F sell signals (Double Bottom Breakdowns). In general, a bullish bias prevails when the BPI is above 50%, while a bearish bias prevails when below 50%. Crosses above/below the 50% line can be frequent so chartists can consider using a buffer. Chart 9 shows the S&P 500 Bullish Percent Index ($BPSPX) crossing the 50% line at least 12 times in the last two years. A buffer can be set by requiring a move above 60% to turn bullish and a move below 40% to turn bearish. This reduces the number of signals to four. This methodology does not, however, prevent whipsaws. There will be bad signals no matter what the bullish or bearish threshold. Keep in mind that breadth indicators are designed to complement other forms of technical analysis, such as basic chart analysis or price indicators. At this point, the S&P 500 Bullish Percent Index is on a bullish signal with the October surge above 60%. The indicator held the 50% line on the November pullback and turned up this past week. The bulls have a clear edge as long as more than 50% of S&P 500 stocks have active Double Top Breakouts.
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Chart 9
Chart 10 shows the Nasdaq 100 Bullish Percent Index ($BPNDX) breaking above 60% in October. Even though the indicator dipped below 50% in November, it held well above the 40% level and turned up last week. Notice how the indicator moved above the 10-day EMA. Users can click on any of these charts to see the settings and save them to their favorites list.
