IWM AND XLI FOLLOW UP, BULK OF THE EVIDENCE, SMALL-CAP BULLISHNESS, FINDING SHORT-TERM PULLBACKS, CRUDE FLAGS, XES RELATIVE WEAKNESS, AEROSPACE & DEFENSE ETF BREAKS AND MORE
IWM AND XLI STRATEGY FOLLOW UP... Link for today's video.. Today I am going to step back and focus a little on strategy. The first part will show a basic chart strategy to identify the bigger trend and find pullbacks within this chart. The second part will show how I approach the broader market with a "weight of the evidence" approach.
Chart 1 shows the Russell 2000 iShares (IWM) with a strategy I showed on May 15th. This strategy is built on the premise that pullbacks within an uptrend create opportunities. One of these pullbacks will evolve into a bigger decline and the uptrend will reverse at some point, but this strategy seeks to partake in the current trend, not the future trend, whatever that may be. As with all strategies, it is certainly not fool proof and will have its share of losers. Looking fore the holy grail? It can be found on the last page of the internet. Just Google "last page of the internet" for a weekend chuckle.
All kidding aside, the single security strategy has three parts. First, the long-term trend is up when the Percentage Price Oscillator (25,125,1) is positive. This means the 25-day EMA is above the 125-day EMA. Second, there is a short-term correction when 10-period RSI moves below 40. This is the pullback within the uptrend. Third, StochRSI surges above .95 to signal an upthrust. This indicates that the correction is ending and the uptrend is resuming. IWM triggered a bullish signal on May 14th and the early May low marked first support. I am raising support as IWM continues higher and will now mark support at 123.50.
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Chart 1
Chart 2 shows the Industrials SPDR (XLI) with several signals over the last few months. The ETF triggered a bullish signal last week and then fell back below the prior low, on an intraday basis, twice this week. In general, I prefer closing prices to generate signals and trigger stops on daily charts. This means one does not have to watch the market during the day and get caught up in news-related fluctuations. This will not eliminate whipsaws, but it keeps me out of the minute-by-minute price action, which in turn keeps me somewhat sane. XLI did not close below this low and ultimately held support in the 55-55.5 area with a bounce on Thursday. Once again, this support zone is holding and I still think the industrial cup is half full as long as support at 55 holds.
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Chart 2
THE WEIGHT OF THE EVIDENCE APPROACH... When it comes to the broad stock market, I like to use a "weight of the evidence" approach to defining my bias, which is bullish or bearish. Note that fellow technician Greg Morris, who writes the excellent Dancing with the Trend blog, also favors a weight of the evidence approach. Greg's blog is great because he makes us think. And sometimes it hurts me brain! Turning back to the evidence, I set up my indicators so they are either bullish or bearish to limit subjectivity. We all have to make some assumptions and my assumption is that a trend in motion stays in motion. This means I expect further gains as long as the weight of the evidence is bullish. And, as Charles Dow stipulated, the trend remains in effect until proven otherwise. Therefore, if I am bullish, I will wait for bearish evidence to materialize before changing my stance.
Before looking at the weight of evidence, let's look at one chart with my selection of broad market indicators. First, I am looking at indicators for the Nasdaq 100, S&P 500, S&P MidCap 400 and S&P Small-Cap 600 for market coverage. Second, I am looking at long-term and medium-term indicators for trend bias, not short-term indicators. Short-term indicators are best used for mean-reversion, which I will explain later. Third, I am using bullish and bearish thresholds to quantify these indicators. Instead of using a simple cross above/below the zero line, I am putting the bullish threshold just above zero and the bearish threshold just below zero. Let's look at some examples. Note: you can learn more about the indicators below in our ChartSchool articles on Market Indicators
SMALL-CAP BREADTH IS ALL BULLISH... Chart 3 shows the S&P SmallCap iShares (IJR) with the 60-day EMAs of S&P SmallCap AD Percent ($SMLADP) and S&P SmallCap AD Volume Percent ($SMLUDP). 60 days is about three months and an exponential moving average puts more weight on recent data. A move above +3% is bullish (green arrows) until countered with a move below -3% (red arrows). There will be whipsaws and bad signals, but that is all part of the process. I am simply looking for some guidance on medium-term breadth. As the chart shows, AD Percent turned bullish in late October and remained bullish. AD Volume Percent also turned bullish, but whipsawed a bit in December-January before turning, and staying, bullish in mid February. Both indicators are currently bullish.
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Chart 3
The bottom window shows S&P 600 High-Low Percent ($SMLHLP), which is a pretty stable long-term indicator. A move above +5% is deemed bullish until countered with a move below -5%. This indicator turned bullish in late October (green arrow) as well and remains bullish. There were several dips into negative territory, but these did not last long and did not exceed -5%. In other words, selling pressure was rather minimal. Most recently, High-Low Percent exceeded the +5% level several times this month.
FINDING SHORT-TERM OVERSOLD INDICATIONS ... Chart 4 shows the "percent above" indicators. The first window shows S&P 600 %Above 200-day EMA (!GT200SML), which is a long-term breadth indicator. Basically, more stocks are above their 200-day EMA when this indicator is above 50% and more stocks are below their 200-day EMA when this indicator is below 50%. Instead of the 50% line, the bullish threshold is set at 60% and the bearish threshold is at 40% to reduce whipsaws. This indicator turned bullish in late October and has yet to even near 40%. The bullish and bearish thresholds for the S&P 600 %Above 50-day EMA (!GT50SML) are a bit wider because this medium-term indicator is more volatile. This indicator turned bullish with a move above 70% in late October and never touched its bearish threshold at 30%. I am using bearish thresholds to make sure there is enough selling pressure to force a trend reversal.
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Chart 4
The bottom window shows the S&P 600 %Above 20-day EMA (!GT20SML). This indicator is used to find short-term oversold conditions when the other indicators are net bullish and short-term overbought conditions when the other indicators are net bearish. In other words, I am looking for a pullback within an uptrend or a counter-trend bounce within a downtrend. With the bulk of the medium and long-term evidence bullish, I am only interested in short-term oversold conditions and pullbacks within the uptrend because pullbacks create opportunities. Notice that this indicator became oversold (<30%) in early May and this marked a very good entry point. At the very least, these short-term oversold conditions alerted chartists to watch for a bullish short-term signal to partake in the bigger uptrend.
SIX BREADTH INDICATORS ON ONE CHART... Chartists can put all these indicators on one chart as chart 5 show the same indicators for the S&P 500. Simply substitute SPX for SML in each symbol. You can do this for the S&P MidCap 400 (i.e. $MIDADP), Nasdaq 100 (i.e. $NDXADP) and the nine sector SPDRs, such as the Technology SPDR (i.e. $XLKADP). In fact, I keep tables for the major stock indices and the sectors. Monday I will show the table for the nine sectors. Returning to the S&P 500 indicators, notice that AD Percent and AD Volume Percent turned bearish on June 8th. Even so, High-Low Percent, the %Above 200-day and %Above 50-day remain bullish. This means three of the five are still bullish and support an uptrend in the S&P 500. The S&P 500 %Above 20-day EMA (!GT20SPX) became oversold on June 8th and 9th to mark a short-term low.
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Chart 5
BULK OF THE EVIDENCE REMAINS B---ISH... Chart 6 shows a table summarizing the signals for the four stock indices. This is a simple table created in Excel with some color-coding. The red boxes are bearish and the green boxes are bullish. The date in the box shows when the indicator triggered. There are 20 bull-bear boxes on this table and sixteen remain bullish. This means the bulk of the breadth evidence is bullish for stocks. The blue boxes mark the oversold dates for the percentage of stocks above their 20-day EMA.
Chart 6
FLAGS FALL FOR LIGHT CRUDE AND BRENT... Oil surged last week and looked poised to break flag resistance, and a little follow through was all that was needed. US stocks surged with the Russell 2000 iShares hitting a new high this week and the Dollar fell as US Dollar Index declined over 2.8% this month. This looked like a recipe for a breakout, but oil did not oblige and remained stuck below flag resistance. Failure to breakout could foreshadow weakness in the coming days or weeks.
Chart 7 shows August Light Crude Futures (^CLQ15) in the top window and the USO Oil Fund (USO) in the bottom window. The futures contract is the best security for analysis because it is the source. USO is a hybrid security made up of several futures contracts with rollovers and management fees. Light Crude Futures have been working their way lower in what looks like a falling flag, which is a bullish consolidation. There is only one problem: the flag is still falling. This means the immediate trend is still down. A break above 62.5 on the futures and 21 for USO would reverse the six week slide. Short-term, chartists can watch this week's lows for signs of a breakdown within the flag. A move below 59 on the futures contract and 20 on USO would be bearish. Chart 8 shows August Brent Futures (^BQ15) and the US Brent Oil ETF (BNO) with similar characteristics.
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Chart 7
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Chart 8
XES UNDERPERFORMS XLE... Chart 9 shows the Energy SPDR (XLE) with continued weakness, both absolute and relative. The ETF peaked at the falling 200-day moving average in early May and broke support in mid May. XLE is on the verge of breaking wedge support today. Note that this wedge looks quite ominous on the weekly chart.
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Chart 9
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Chart 10
Chart 10 shows the Oil & Gas Equip & Services SPDR (XES) failing to hold its double bottom breakout and moving below support this week. A strong breakout should hold and this breakout has failed. Chartists can mark first resistance at 29. The indicator window shows XES underperforming XLE as the price relative (XES:XLE ratio) turns down. This could be negative for oil because the stocks in XES are generally more sensitive to the price of oil than the major integrated oil stocks that dominate XLE. Note that these bearish trends could reverse quickly IF oil breaks flag resistance.
IN OTHER CHARTING NEWS......
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Chart 11
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Chart 12
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Chart 13
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Chart 14
VIDEO DETAILS... Link for today's video.
