Lifting Up The Market’s Hood: Lemons Or Leaders?
Every senior index (DOW, S&P 500, NASDAQ, and the Russell 2000) all gapped higher on the news of the demise of Osama Bin Laden. The S&P 500 and Dow Jones Industrial Average were all set to continue the 4-day winning streak and the NASDAQ was looking at extending an 8-day winning streak, all of which lead to intraday fresh-new multi-year highs. The exuberance lasted for a couple hours after the market opened and then one-by-one the leaders began to rollover. In today’s update, I highlight a few examples in an effort to raise awareness that "higher targets" down the road in the broader averages are likely, but that doesn’t mean that stock-by-stock and sector-by-sector won’t under go some corrective action.
WFMI – Possible Bump And Run Pattern Breakdown
PNRA – Possible Head And Shoulders Top Breakdown
DECK – Possible Rising Wedge Breakdown
FOSL – When Bullish Patterns Fail In Leading Stocks
From a technical perspective nothing unusual about yesterday’s action gives me pause or concern, for the medium and longer term trends higher. The only problem short-term is what we started seeing as early as last week, and that is the higher the market goes the less, or fewer, stocks within the broad averages actually participate. The chart that sums it up the best continues to be the one I brought to your attention last week called the “NASDAQ New High Index Chart.” As you can see below for all of 2011 we continue to make fewer and fewer new highs while the index continues to advance. As you can see below for 6 straight months as highlighted in "yellow squares" the higher the market goes the fewer stocks the index takes with it to new highs.
NASDAQ New High Chart – (Click Chart To View Larger Image)
For the most part earnings season as been better than what most analysts seemed to expect, and we can see that by the amount of stocks that are crushing the top and bottom line, so from a fundamental back drop one could not ask for a better market to continue to invest in. However, if fundamentals were the only thing traders looked at they would be scratching their heads, as I am sure they are right now, as too why with such great news, great earnings, M&A that continues to pick up, share buy backs, and all this great value that the market didn’t close up 500 DOW points yesterday, especially in light of the Osama Bin Laden news. Truth be told, if this happened back in 2003, 2004, 2005, or even 2009 not a doubt in my mind the DOW would have gapped up 1,000 points or more.
But we have to trade what is happening now, versus what could have happened in the past and this is the bottom line when it comes to the short term – my “Buy America” theme of 2011 has had a healthy run for the first 4 months of 2011. A little pause and consolidation is not unusual when momentum gets this stretched and stocks and sub-sectors remain this overbought. Now let’s review what technicians view as overbought by using a couple of different charts to put this in a little bit better perspective.
These charts are called “Bullish Percent Index” and put simply: the Bullish Percent Index offers something for all sorts of traders. Bottom pickers can look for bullish reversals when the index drops to the 30%-40% range. As you can clearly see that was a great time in 2010 to swing long with a relatively low risk. Of course that came on the back of the flash crash so “emotionally” buying then when blood was in the streets when we had so many mixed signals wasn’t for the faint of heart. While top pickers can look for bearish reversals above 80 to 90% level however, it must be said that these are the more risky entries because tops can extend over time. Additionally, they can often get a re-test of the prior high within the bullish percent index because as we all know “tops are not an event” they have and will always be a “process”.
As you can see with the BPSPX it quickly reversed higher after only hitting a low reading in the 70% range, post-Japan crisis. Those that have been short all the way up from those March 16, 2011 lows, have clearly been in as much pain as those that were long and wrong May 2010 through about July 2010. In both cases of the S&P 500 (BPSPX) and NASDAQ (BPCOMPQ) we might not be at levels that warrant any top calling because that isn’t what these charts are designed for or represent. The Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure buy signals within an index or a sector. Much like the “NASDAQ New High” chart it’s simply one other way to measure how the engine is running underneath the hood and to keep us on our toes of conditions that might not be caught as quickly by just looking at a price chart of any senior index.
Bullish Percent Index SP500 (Click Chart To View Larger Image)
Bullish Percent Index NASDAQ (Click Chart To View Larger Image)
So in conclusion, what I see “underneath the hood” is a rally a wee-bit long in the tooth, that has leadership stocks that led the advance now retreating, while laggard stocks are starting to lead, which again should be no surprise to anyone because that is exactly how the pattern this market is in the "Expanding Triangle" in the S&P 500 is supposed to act, at this stage in the rally, as I pointed out on the SPY ETF chart back on April 12, that we would see a few more days of selling down to SPY 130 before a parabolic rally north that would lead every major index to new 52-week highs before the end of April 2011. You can review that update here at this link "Expanding Triangles – Tortoise and the Hare"
SPY – Expanding Triangle Chart From April 12th (Click Chart To View Larger Image)
Now here is where our job as traders, gets a little tricky. When we have a shift in market momentum and leadership sectors and the big boys forget to send out a notice that says “By the way, starting next week, what worked last month isn’t going to work this coming month and what will work this coming month we would like to keep a secret until we are fully invested but we will be sure to notify you via a slew of upgrades after we backed up our truck.” That’s Wall Street for ya, but I digress. The clues are actually already right in front of us, we just have to make sure we are paying attention to what everyone knows by now is called “sector rotation”. As we begin to see this occur this month I will show you a few tricks of the trade I use to ‘see it’ before it actually happens.
As far as the markets go today these are some sectors, indices, and ETF’s that for the first trading day of May managed to squeeze out a new 52-week highs, but in most cases they reversed to close on or new lows.
Futures Making New-52 Week Highs
ES #F (SP500 Futures)
YM #F (Dow Jones Industrial Futures)
NQ #F (NASDAQ 100 Futures)
TF #F (Russell 2,000 Futures)
Cash Indices Making New 52-Week Highs
$SPX (SP500 Index)
$INDU (Dow Jones Industrial Index)
$TRAN (Dow Jones Transportation Sector)
$UTIL (Dow Jones Utility Sector)
$COMPQ (NASDAQ Index)
$NDX (NASDAQ 100 Index)
$NYA (New York Stock Exchange)
$RUI (Russell 1,000)
$RUT (Russell 2,000)
$RUA (Russell 3,000)
$VLE (Value Line Index)
$SML (SP600 Small Caps)
$MID (SP400 Mid Caps)
$OEX (SP100 Large Caps)
$RLX (Retail Index)
$BTK (Biotech Index)
ETFs Making New 52-Week Highs
SPY (SP500 Tracking ETF)
DIA (Dow Jones Tracking ETF)
QQQ (NASDAQ 100 Tracking ETF)
IWM (Russell 2,000 Tracking ETF)
IYT (Transportation ETF)
HHH (Internet ETF)
MDY (Mid Cap ETF)
GLD (Gold ETF)
The hardest hit would be the high beta “small cap index” or what we call the Russell 2000 which dropped hard yesterday with a loss of 1.17% on the day putting in what we call an “Outside Daily Bearish Key Reversal”. An engulfing pattern (bearish) or what we also call “Outside Daily Bearish Key Reversal” develops in an uptrend when sellers outnumber buyers; this action is reflected by a long red real body engulfing a small green real body. Keep in mind these are "daily reversal bars" so some perspective should be noted;
1. One day doesn’t change a trend
2. Confirmation is required
3. Even if we do get confirmation, the trend doesn’t instantly change, only our position size and management of current trades should be reviewed
Engulfing Pattern (Outside Daily Bearish Key Reversal) — Bearish
IWM – Outside Daily Bearish Key Reversal
OIH – Outside Daily Bearish Key Reversal
MDY - Outside Daily Bearish Key Reversal
$SOX (PHLX SemiConductor Index) - Outside Daily Bearish Key Reversal After Stalling At Resistance
ES #F (SP500 Futures) 240 Minute Chart Of the Expanding Triangle (Click Chart To View Larger Image)
ES #F (SP500 Futures) Daily Chart Of The Bullish Ascending Triangle (Click Chart To View Larger Image)
Best and Worst Benchmark (Sectors, Indices, ETF’s) So Far for 2011
Classic Patterns
Classic is a term used to refer to a group of patterns that typically have a longer-term horizon (greater than 12 days) and which have distinct price swings such that the price swings form distinctive patterns. The names of classic patterns often reflect the shape of the formation such as the Double Top, Double Bottom, Head and Shoulders Top, Ascending Triangle and so on.
Bullish:
- Ascending Continuation Triangle
- Bottom Triangle
- Continuation Diamond (Bullish)
- Continuation Wedge (Bullish)
- Diamond Bottom
- Double Bottom
- Flag (Bullish)
- Head and Shoulders Bottom
- Megaphone Bottom
- Pennant (Bullish)
- Rounded Bottom
- Symmetrical Continuation Triangle (Bullish)
- Triple Bottom
- Upside Breakout
Bearish:
- Continuation Diamond (Bearish)
- Continuation Wedge (Bearish)
- Descending Continuation Triangle
- Diamond Top
- Double Top
- Downside Breakout
- Flag (Bearish)
- Head and Shoulders Top
- Megaphone Top
- Pennant (Bearish)
- Rounded Top
- Symmetrical Continuation Triangle (Bearish)
- Top Triangle
- Triple Top
Short-term Patterns
Short-term patterns are based on the shape and relationship of the candlestick(s) or price bar(s) representing one or multiple consecutive trading days. This includes patterns such as the Hanging Man and the Gap Up. The technical event is the confirmation that the pattern has formed in the price bar(s). These Technical Event® opportunities are useful for suggesting possible short-term price movement. They are also useful for supporting or refuting the possible price movement suggested by classic patterns. Short-term patterns are often considered as supplementary information.
Bullish:
- Engulfing Line (Bullish)
- Exhaustion Bar (Bullish)
- Hammer
- Inside Bar (Bullish)
- Inverted Hammer
- Island Bottom
- Key Reversal Bar (Bullish)
- Two Bar Reversal (Bullish)
Bearish:
Other:
Indicators
Indicators that are currently supported are based on moving average calculations.
Bullish or Bearish:
Oscillators
Oscillators are based on mathematical formulas that incorporate historical or recent prices of the stock.
Bullish or Bearish:
- Bollinger Bands
- Commodity Channel Index
- Fast Stochastic
- KST (Short-term, Intermediate-term, Long-term)
- MACD
- Momentum
- Relative Strength Index (RSI)
- Slow Stochastic
- Williams %R
John Lansing is a longtime professional technical analyst, trader, and founder of Trending123. After John decided in the mid-1990s that the hotel and restaurant industry wasn't for him, his penchant for numbers led him to his true calling: technical analysis. [
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