Saturday, 16 August 2014

Market Analysis Aug 16th



I'm writing this post from a remote part of northern BC today. What better place to look at where markets ended the week than the quiet wilderness?

BONDS

Recently, I did a post looking at bonds in detail (see Signals from the Bond Market).

Our bullish thesis on treasury bonds saw significant follow through this week. $TNX (10-year Treasury YIELD) fell big after retesting a broken 1-year neckline with bearish divergence


$UST (10-year Treasury PRICE) confirms this as well. UST continues to rally after breaking out of a 1-year base with bullish RSI divergence. Again, this is positive for Gold and the Yen.


$JNK:$USB (Junk Bonds to 30-year Treasury Bond) Ratio has a strong direct correlation with US equities. Notice how it recently broke down from a topping process with bearish RSI divergence similar to in 2011 when the S&P 500 fell almost 20%. This is not the place to be long US equities.



CURRENCIES

EUR (Weekly): After breaking down from 2-year support, the Euro has been wicking the horizontal support for 3 consecutive weeks. A retest of the broken uptrend is likely, especially given how bullish the Smart Money is on the Euro. Longer-term, the Euro may potentially be forming a H&S top.



Meanwhile, the US Dollar has been stalling at resistance for 3 consecutive weeks. We may get a retest of the wedge breakout before resuming higher in the longer-term. 


The Yen is also on support with a very bullish positioning by the Smart Money:




GOLD

Another very volatile week in Gold, however the bullish message on the weekly charts is still intact.

Gold (Weekly) is retesting its 1-year downtrend breakout as new support



Gold Miners (GDX, GDXJ, GLDX) are still retesting their 1-year inverse H&S neckline breakouts as new support. GLDX gives the clearest picture of this.



The HUI:GOLD ratio continues to strengthen nicely after breaking out of a 3-year falling channel


The one hurdle that I'm watching is the $HUI weekly chart. Notice how this week's candle couldn't break above the 1-year inverse H&S neckline. I do believe the HUI will catch up with the other mining indices and breakout. Keep on an eye on this.


COMMODITIES

KOL (Weekly) has been a true champion after breaking out from a 1-year price & RSI base. 


URA (Weekly) posted a nice 3% gain this week, refusing to fall back to the all-time lows. The green line would be the first significant resistance.


Copper (Weekly) retesting the 3-year falling wedge breakout this week. Watch for these levels to hold


DBC (Weekly): This diversified commodities ETF is nearing major price & RSI support. Watch for those levels to hold.


Finally, here's the weekly chart for DBA - the agriculture ETF. DBA is finding support at the 61.8% fib retracement and RSI support. Watch for these levels to hold. 



EMERGING MARKETS

Both the Emerging Markets ETF (EEM) and Shanghai Index (SSEC) are consolidating after breaking out of multi-year wedges. Again, this ties in nicely with the bullish setups I'm seeing in the miners.



That's all for now. Enjoy your weekend!

Wednesday, 13 August 2014

Highlights from ChartCon Seattle


I've been doing most of my market analysis using StockCharts.com for 4 years now. It's got many of the same powerful features as high-end software packages while being simple, flexible and very low cost. In addition, their ChartSchool, Public ChartLists and daily blog are excellent resources for all traders to learn from.

This year, I decided to attend StockChart's annual 2-day conference in Seattle for the first time. I must say, it was good. There was lots of material presented by top technicians such as John Murphy, Alex Elder and Martin Pring. In addition, meeting so many other passionate, friendly traders made it a very fun experience.

Let's go over some highlights from ChartCon

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CHIP ANDERSON

Chip is the President of StockCharts and started the event with all the new additions on his site. Here are the five that I thought were quite good:

  • Ranger tool: Let's you select a start/end date to view and slide through it on your keyboard. Useful for learning from past market setups.

  • Relative Rotation Graph (RRG): This tool used to only be available in expensive Bloomberg terminals. It displays a group of stocks in one of 4 quadrants: leading / weakening / lagging / improving. The graph then animates the stocks, showing how they move clockwise over time as they gain/lose their relative strength & momentum.  This is very useful for identifying which industries/sectors/countries to further investigate.

  • Seasonality Charts: Interactive tool that let's you see a ticker's monthly seasonality trend anywhere between the last 1-20 years. You can also see the relative seasonality between 2 tickers. 



  • User-Defined Indices - Ever wanted to create your own index and do technical analysis on it? Well now you can! You will need to upload your index from a spreadsheet though.
  • Compare a stock to its industry and sector: Simply type "$INDUSTRY" or "$SECTOR" in the parameter field of the price indicator. You will automatically see your stock's industry or sector plotted below. You can also type "$SYMBOL:$INDUSTRY" or "$SYMBOL:$SECTOR" to get the relative performance of your stock to its industry or sector. 

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JOHN MURPHY

John is the Chief Technical Analyst for StockCharts. He's the author of "Technical Analysis of Financial Markets" which was first published in the 80's and is now required reading for the CMT exams. John is also considered to be the father of Inter-market Analysis.

A big part of my own work focuses on inter-market relationships that I've learned from John. Of all the speakers at ChartCon, I'd say that my style & views matched John's presentation the most. Here are some of the things that John discussed:
  • Everything is related in the markets and therefore ratio & correlation analysis is critical
  • In the short-term, the following ratios are giving warning signs for US equities:
    • HYG:TLT ratio (high-yield bonds to treasury bonds)
    • RUT:SPX ratio (small-caps to large-caps)


  • In the long-term, believes US equities will outperform treasury bonds since the SPX:USB ratio broke out of a 15-year falling channel

I managed to catch John after and discuss his thoughts in more detail. It's amazing that he shared many of my long-term views (see my previous post What If I Told You):
  • Gold began a secular bear market in 2011, but in the short-term, it can rally
  • Stocks began a secular bull in 2013, but in the short-term they look poised to correct
  • Bonds started a secular bear market
And here's me hanging out with the man himself:


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ALEX ELDER

This guy is funny. He also gave 2 brilliant talks.

Off the bat, Alex asked "What is your trading edge?" Is it fundamental analysis? technical? insider information? (hope not) or do you trade on gut instinct? This is an important question that every trader should be able to answer quickly.

In his first talk, Alex discussed his trading method:
  • Only trusts horizontal support/resistance lines on a chart
  • Loves false breakouts
  • Believes you need 5 indicators (and no more). He uses: 
    • Moving averages: 13 and 26 EMA
    • Envelopes: Keltner or EMA envelope (for stocks) and Bollinger Bands (for options)
    • MACD: Looks for divergences
    • Force index: A volume-weighted indicator
    • Secret one 
  • You must use at least 2 time-frames. Analyze the larger time-frame to get overall trend, then the shorter time frame for entries/exits. 

The next day, Elder talked about psychology & risk management. Highlights:
  • Trading is intellectually simple, but emotionally, it's the hardest game in the world
  • Far too many people treat trading as entertainment and is the reason why they lose
  • A written trading plan is a MUST
  • Make decisions alone and don't talk about your trades with others
  • 3 tools of winning traders:
    • Risk mgmt (risk no more than 2% on one trade; stop trading for rest of the month if you lose 6%)
    • Trade Sizing: Total shares you can buy = (total $ risk on trade) / (entry price - stop price)
    • Trade Journal: Elder is a master of detailed record keeping. I was impressed with his trade diary software:

"Show me a trader with good records and I'll show you a good trader"


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GATIS ROZE

Gatis has had quite the career. He did 4 successful entrepreneurial ventures and retired in his 30's after his last venture went public. Since then, he's been a full-time trader for over 20 years and completed an MBA at Stanford.

Right away you could tell Gatis is a data junkie (as he admitted himself). He has an incredible list of over 1,000 charts that he goes through daily. Though, he's got them organized in a meticulous way to make the task time efficient (an aspect that reminded me of myself).

Like Elder, Gatis mentioned how its important to analyze the big picture first and then slowly move towards shorter and shorter timeframes. I'm a big believer of this approach as well.

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JULIUS DE KEMPENAER

Julius is the creator of Relative Rotation Graphs (RRG) that was discussed briefly above.

Julius first explained how investors are faced with too much data and have too little time. Choosing between stocks or bonds is simple, but trying to find the best asset class/country/industry/sector combination can get very ugly as the decision tree below shows.


RRG's simplify this task. They show us a visual animation of how individual tickers have strengthened/weakened in a group. I thought it was clever that this talk was done right after Gatis Roze showed us the huge volume of charts he goes through daily.

RRG is NOT a trading system - it does not generate buy/sell signals. It is simply a visual tool that tells you what sectors you should look more into. Couple interesting properties of RRGs:

  • The bigger the rotation radius, the more volatile that stock or ETF
  • If the stock is rotating ONLY in the left-half of the graph, that means it is stuck in a down-trend. Similarly, a stock rotating in the right-half is stuck in an uptrend.   
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DICK ARMS

Dick has spent nearly 50 years trading & writing about the stock market. He's popular for his Arms Index and TRIN indicator.

Dick took a seat in the middle of the audience to present to us a candle style he created. It's a powerful charting style that thickens & narrows candles based on volume.



Dick walked us through examples of how you can still apply traditional charting patterns (flags, channels, etc) with this candle style. As of last fall, Dick's candle style is available in StockCharts (select "Arms CandleVolume" under chart type).

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MARTIN PRING

Martin is another very respected technician and author of "Technical Analysis Explained" - a popular book that is also required reading for the CMT exams. Like John, Martin does a lot of inter-market analysis for the StockCharts.com blog.

Martin presented 2 indicators he created that are now available on StockCharts. He calls them: KST ("Know Sure Thing") and Special K.

Martin began with saying the market can be decomposed into three trends: Primary, Intermediate and Short-term.



Most people look at a momentum chart featuring just one time span. What the KST does is it weights Rate of Change (ROC) momentum indicators from 4 time-frames into one indicator (read more here). The Special K is similar, but weights ROC indicators from 12 time-frames (read more here).

Because of this, both KST and Special K follow the broad trend but also react relatively quick to intermediate & short-term changes. The result is a more responsive indicator with relatively little false signals.

Just like other momentum indicators like RSI and MACD, chartists can use KST and Special K to look for divergences, overbought/oversold readings, signal line crossovers and centerline crossovers.

Here's an example of the NYSE and its Special K. Notice how the Special K is breaking down before the NYSE



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TOM BOWLEY

Tom spent 20 years in public accounting before becoming a full-time trader in 2004. He gave two talks at ChartCon: one on seasonality and the other on MACD.

I thought Tom's talk on Seasonality was killer. Tom showed seasonality for US equities on several time-frames using 65 years of data:

  • Day of the Week: Monday has the worst performance; while Wed & Fri have the best. The chart below shows just how bad Monday is! 
  • Day of the Month: Beginning and middle of the month are the best (due to paychecks and option expiry). Take a look at the chart below. It shows that all of the S&P 500's returns came from the first 6 and last 4 days of the month!

  • Month of the Year: You may of already heard of the popular catchphrase "Sell in May and go away." It's true. Nov-Apr are the best 6 months of the year for US equities. Here's the chart:



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BRUCE FRASER

Bruce has been teaching for almost 30 years at the only university to offer a graduate-level program in technical analysis. He's considered to be one of the foremost experts on the Wyckoff Method and has been trading for the last 14 years using this method exclusively.

This was one of my favorite talks. Here's what Bruce had to say:

Richard Wyckoff was a trader in the early 20th century and believed that the ticker tape (price) was all that was needed for intelligent, scientific trading. He was one of the few traders that Jesse Livermore invited into his trading room. Here's a classic quote of his:
"The percentage of profit did not influence me. The fluctuations were interesting but whether the stock went up or down, I decided to wait for it to reach a certain point before I would take profits. This meant the point where the insiders began to sell." - R. Wyckoff
Wyckoff's basic model was that prices go through 4 stages: accumulation, uptrend, distribution and downtrend. This is much like Stan Weinstein's popular Stage Analysis method that forms a big part of my own market analysis.


Bruce then looked at each of the 4 stages. Here's a look at how the downtrend phase enters into accumulation:


During the downtrend period, I always look at sentiment and trend. During the accumulation phase, I look at: 
  • Basing pattern (range, double bottom, inverse H&S, etc)
  • Momentum (especially divergences in RSI, MACD)
  • Volume (falls during basing period, but surges on the breakout) 

It was nice to hear Bruce describe how strong & weak hands cause all this:
  • Downtrends are caused by weak hands liquidating. 
  • Accumulation (Basing) periods are caused by a Composite Operator ("Smart Money" or "strong hands") going on a buying campaign. The CO slowly builds a position so as not to cause the stock to go higher (hence the price basing sideways). Volume falls during this period because the CO is accumulating a significant number of shares & causing their supply to fall.
  • Uptrends are caused by strong hands holding their position
  • Distribution (Topping) periods are caused by a CO going on a selling campaign, slowly selling their position without affecting the price. 

I found it very interesting that Bruce uses Point and Figure charts to establish the upside price targets. This is something I will explore more.

Here's a look at the basing period for IBB (Biotech ETF) in early 2009 before it made a 4-fold gain:


Interestingly, Bruce applied the Wyckoff method to GDX today - something I've discussed on this blog a lot


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ART HILL

Art is a Senior Technical Analyst at StockCharts and probably their most active blogger.

Art's title was "The Closest Thing to a Free Lunch." He described some simple TA strategies, their back-tested performance and how they protected your portfolio from major bear markets. Here are some of the strategies:

  • Moving Averages (hold SPX as long as its above its 12-Month MA): 7.15% CAGR,over last 60 years
  • Price channels (Buy SPX if it hits 12 month high; sell SPX if hits 12 month low): 8.24% CAGR over last 60 years
  • Relative Strength (System looks at 5 ETFs covering all asset classes. Each month, Buy the 2 ETFs that performed the best over the past 6 months): 14.8% CAGR over last 40 years.   

About 5 years ago, I read about these very simple strategies from books & papers by Mebane Faber (see his blog here). It was at that time I realized how powerful Technical Analysis was and began getting serious about it.

Keep in mind the above are extremely basic trading systems. With research, you can develop more sophisticated systems that provide better results.


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PANEL DISCUSSION


6 of the speakers (John, Martin, Art, Erin, Tom, Greg) briefly explained their market outlook. Interestingly, all of them were currently bearish on US equities. Some of their reasoning included:

  • Small caps under-performing large caps
  • Money flowing out of equities and into treasuries 
  • Euphoria (Margin debt, put/call levels)
  • Nikkei H&S top
  • Momentum divergences

Where they differed was their long-term view.

John and Art believe US equities are in a healthy bull market. Both see just a small pullback (eg. 15%) that will create a buying opportunity for the long-term. Some of their reasons included:

  • SPX:USB broke out of a 15-year channel last year
  • SPX has kept making new highs all year. There has been no long topping process that precedes bear markets

Tom, Erin and Greg made no comment of how low their short-term bearish view can take equities.

On the complete opposite spectrum, Martin said we are still in a secular bear market. He used the Shiller P/E to make that argument. (Please see my previous post on why I think this is flawed). It was funny to hear John calling Martin crazy for having this view.

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CLOSING

As you can see, there was a ton of material presented. I know I'll be spending the next couple weeks trying to digest it all. Things I find interesting and will explore further are:

  • RRG (Relative Rotation Graphs)
  • Point & Figure Charting
  • Wyckoff Method
  • Seasonality Tool

I missed a couple talks by other great speakers: Greg Schnell, Erin Heim, Gord Greer.

On top of all the great material presented, I met a lot of interesting people that I know I'll be keeping in touch with. The conference itself was very well put together - popular TA books at a deep discount, great food, and even a boat cruise to top it all off.

Hope to see you there next year!

Thursday, 7 August 2014

Signals from the Bond Market


Earlier this week, I posted exclusively on the gold sector and its current bullish setup (see Golden Retests). Today I want to focus just on bonds (both US treasuries and corporates).

Bonds are an area that very few traders look at, yet it carries huge implications for other asset classes (equities, commodities and currencies). Let's first take a look at what I mean by this.


The Importance of Bonds

TNX (10-year Treasury YIELD) monthly chart. TNX has traded in a falling channel for over 2 decades. Each time TNX hit channel support, it was a major buying opportunity in US equities. Conversely, each time TNX hit channel resistance, it marked a major top in US equities.



UST (10-year Treasury PRICE) has been strongly correlated with the Japanese Yen as well as Gold.




Thus, if Treasury Bonds are forming bullish chart patterns, that's good news for the Yen & Gold while bad news for US equities. 

Now let's take a look at what is happening currently in bond land.


TREASURIES

UST (10-year Treasury PRICE) weekly chart. UST has been basing on 15-year support with bullish RSI divergence.



A close-up of the above chart shows that UST is breaking out of a 3-year downtrend!



TNX (10-year Treasury YIELD) daily chart is confirming the same thing. TNX is breaking down from a 1-year topping formation with bearish RSI divergence




CORPORATE BONDS

While Treasury Bonds (of all maturities) are considered to carry low default risk, Corporate bonds come in 2 major categories: Investment Grade and Junk.  


Junk bonds are speculative and actually act more like equities than treasury bonds. Below are charts for 2 junk bond ETFs: HYG and JNK.  

Notice how both these ETFs are highly correlated with the S&P 500 (shown in the background in light gray). Both are breaking down from massive, 5-year rising wedges. This is a very negative implication for US equities - which is consistent with the message being given by Treasury bonds as well.




Finally, here's the JNK:USB ratio chart (USB = 30-year Treasury Bond). Notice how in 2011, this ratio broke down from a H&S top with bearish RSI divergence before US equities had a big correction. We're seeing the same type of setup currently:



In summary, treasury bonds are carrying bullish setups while corporate junk bonds are bearish. Given the correlations of bonds with other asset classes, this is good news for gold and the yen, while bad news for US equities.