Shanghai Composite remains relatively weak

Despite a big bounce on Monday's currency news, the Shanghai Composite ($SSEC) remains within a trading range and continues to show relative weakness. After a sharp decline in April-May, the index formed a triangle consolidation around 2550. Watch these boundaries for the next directional clue. Also notice that the index remains below its early June high, but the S&P 500 broke above this corresponding high. The missing candlesticks represent holidays.

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Yuan Fund surges to long-term moving average

News that China adjusted its currency's peg to the Dollar sent the Chinese Yuan Fund (CYB) surging back above 25. While the three week move may seem impressive, the ETF is really just making it back to its 52-week average. In fact, the ETF spent most of 2009 trading between 25.2 and 25.6. With today's move, it is right back in last year's range.

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FIXED INCOME ETFS GAIN GROUND

While some money is starting to creep back into stocks, investors are still showing enthusiasm for bonds. And I'm not talking just about Treasuries. More impressive gains were seen in other bond categories like corporate bonds and TIPS. Chart 1 shows the High Yield Corporate Bond ETF (HYG) closing above its 50-day line for the first time in two months. Chart 2 shows the Investment Grade Corporate Bond ETF (LQD) breaking out of a short-term "symmetrical triangle". It did so on noticeably heavy volume as well. Chart 3 shows the TIPS Bond Fund also turning higher. To me, that suggests that investors are willing to embrace more risk, but aren't yet ready to abandon bonds for stocks.

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Chart 1

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Chart 2

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Chart 3

SOME OF THESE THINGS ARE NOT LIKE THE OTHERS

Hello Fellow ChartWatchers!

Now this will probably give away my age, but one of my first memories of television was from the educational children's show called "Sesame Street" and the song that they used to sing called "One of These Things is Not Like The Others".  In case you aren't familiar with this, click here to see the song performed by one of the show's biggest stars.

Granted, that game is seems pretty straightforward - even for a monster! - but I find myself thinking about that song every time I use our CandleGlance feature; especially when I use it in conjunction with our Sector Bullish Percent Charts:

SectorBPIs

These are nine of our sector-oriented Bullish Percent Indexes.  They are based on the P&F charts of hundreds of stocks and show the percentage of those stocks that have "bullish" P&F chart signals.  (For all the gory details, please see this article.)

But given this display, all we have to do is what Cookie Monster was doing - find the chart(s) that are behaving differently and see what that tells us about the market.

The first thing to notice is that almost all of the indexes have recently turned around and are moving higher - a very good sign for the market overall.  Looking closer you should see that the Energy index ($BPENER) is the only index that is currently higher than it's 50-day Moving Average (the red line).  Healthcare, Industrials and Materials are all positioned well above their 20-day Moving Average (the blue line) and just below their 50-day - a pretty good indication of strength returning to those sectors.  Consumer Discretionary, Consumer Staples, Financial stocks and Technology stocks currently have the weakest looking BPIs - while all are now moving higher, they are all still under (or just over) their 20-day Moving Average and haven't displayed the same kind of strength that the other sectors have.  You might also notice that the 20-day Moving Average for those stocks is still heading down which it has turned up for the others.

The fact that Consumer-oriented stocks as well as traditional bull-market sectors like Technology are still lagging should cause ChartWatchers to pause and reflect about the strength of the current rally.  I'll be watching our BPI CandleGlance page closely for signs of more participation by Consumer stocks (bullish) or weakness in the Energy and Financial sectors (bearish) in the coming days.

- Chip

TIME FOR JUICED ETFS?

The market is at a crossroads short-term.  We've been bouncing back and forth after that early May drubbing.   So is the rally ending or is it just starting?  Well, we can only look at the technical, sentiment and historical indicators and come up with a "highest probability" scenario.  Regardless of how you're approaching the market, you need to maintain a sense of skepticism and be prepared to acknowledge that your short-term call is incorrect.  So with so many questions unanswered, why is now the time to consider juiced ETFs?  It's simple.  We're at resistance levels across our major indices.  Juiced (or leveraged) ETFs are appropriate, in my view, in rare circumstances when the potential reward justifies the risk being taken.  I don't believe in them as an every day trading vehicle.  The odds are stacked against the trader who tries to call the market direction every day and who uses ETFs as a way to possibly profit from such calls.  Holding for more than one day can cause erosion in the price of both juiced longs and juiced shorts.  I've produced videos detailing the effects over time of holding onto these juiced ETFs and it makes little sense to hold over longer periods of time as the risk/reward strongly suggests you'll end up losing.
 

Let's look at the market technicals first by reviewing a chart of the QQQQ (ETF that tracks the NASDAQ 100 index):

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The reversing candlestick (doji) at resistance with stochastics in the 90s after the recent uptrend calls into question any further rally here.  Can the market continue this rally?  Absolutely.  But we're looking for highest probability.  The technicals suggest this could be an area where a reversal takes place.
 
On to sentiment.  In late April and early May, the VIX surged as fear grew and the major indices experienced a fall that was eerily reminiscent to September/October 2008.  Since that fall in the indices, however, the VIX has been drifting lower as investors have collected themselves and fear has been alleviated to some degree.  But on the chart below, the VIX has touched a key support level.  Check it out:

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If the VIX bounces, even temporarily, it's likely to trigger more selling of equities in the near-term.  That's another short-term negative.
 
How about historically?  How do U.S. equities tend to perform in mid- to late-June?  Well, since 1950 on the S&P 500, the June 18th through June 26th period has yielded 45% of days that have closed higher than the previous day.  This compares to the "norm" throughout the year of 53%.  Clearly, the market's tendency is to trade more bearishly during this period.  Furthermore, the annualized return on the S&P 500 since 1950 during this period is -24.98%, a full 33 percentage points below the "norm" of 8.5% annual returns on the S&P 500.
 
Technicals suggest we are in an area where we could be topping.  Sentiment in the form of the VIX says we're at a level where the VIX could bounce, leading to weakness in equities.  And history tells us to be very careful this time of year.  The odds appear to be stacked against the bulls.  Therefore, trading a juiced ETF that moves inversely to the market might make sense here, with fairly tight stops in place of course in the event the recent bull rally marches on.
 
If you prefer to look at individual stocks, I used StockCharts scanning engine to produce a list of stocks that are likely to move lower if the overall market stumbles.  I recorded this as a very brief tutorial on setting up a simple scan searching for technically unhealthy stock candidates to short.  If you'd like to view this chat, CLICK HERE

We also offer a FREE Chart of the Day and Video Chart of the Day at Invested Central.  The chart for Monday came from the scan that I performed above and can be viewed by CLICKING HERE.

Happy trading!

THE VOLUME ISSUE

One of the issues that has concerned many analysts is the lack of volume supporting the rally from the June lows, but looking back over the last year we can see that volume has not been at all impressive for either of the rallies beginning in July 2009 or February 2010. This is a great illustration of why we do not use a volume or breadth component in our primary timing models. In my opinion, only price movement is relevant when a decision point appears to be at hand.

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This does not mean that we don't use volume and breadth indicators as secondary tools to further assess what price is telling us, and to dig deeper than the raw volume bars, which since the beginning of the bull market have not shown enthusiastic support.

One of the tools we use is the McClellan VOLUME Oscillator, which is calculated the same as the McClellan Oscillator except that we use daily advancing and declining volume instead of advances and declines. The core element of the Oscillator's construction is to calculate a fast and slow exponential moving average of the daily advancing volume minus declining volume. These moving averages are displayed below as the 5% and 10% Indexes. Subtracting the 5% Index from the 10% Index results in the McClellan Volume Oscillator reading. The cumulative total of the daily Oscillator reading gives us the Volume Summation Index.

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While the raw volume has been pretty consistently below average throughout the bull market, it is what it is, and prices have been rising. The Volume Oscillator and its components allow us to view the internal quality if that volume. The convergence and divergence of the two moving averages expresses the short-term momentum of advance-decline volume through the Oscillator, and the Summation Index presents a medium-term view.

What we see are fairly usual index/indicator formations and ranges. The exception being that the recent correction brought the 5/10% Index complex more deeply below the zero line than is typical for a bull market (or bear market, for that matter).

The recovery out of the recent lows looks normal and healthy. The 5/10% Indexes are back above the zero line, which is where they need to be in a bull market, and the Summation Index has bottomed, although it is still below zero. The Oscillator is in the overbought range, which is a problem for the short-term.

Summary: While raw volume continues to be a problem, looking below the surface shows that advance-decline volume relationships and behavior are normal, and in general support a bullish outlook.

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A BREADTH THRUST FOR THE MCCLELLAN OSCILLATOR

Before getting into this breadth thrust, let's review the McClellan Oscillator and McClellan Summation Index. Basically, the McClellan Oscillator is the 19-day EMA of Net Advances less the 39-day EMA of Net Advances (advances less declines). Like MACD, it is a momentum oscillator for Net Advances. The McClellan Summation Index is a cumulative measure of the McClellan Oscillator. The summation index rises when the Oscillator is positive and falls when the Oscillator is negative.

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The chart above shows the Nasdaq McClellan Oscillator ($NAMO) in the lower indicator window. Notice how the oscillator surged from below -50 to above +50. This 100+ point swing from negative territory to positive territory is a bullish breadth thrust. A similar bullish thrust occurred in February. The main window shows the Nasdaq McClellan Summation Index ($NASI). Notice how it declined steadily from late April to early June as the McClellan Oscillator remained consistently negative. The bullish breadth thrust in the McClellan Oscillator pushed the Summation Index above its 10-day SMA for the first time since late April. The chart below shows the NYSE McClellan Oscillator and Summation Index for reference. You can click on these chart to see the settings.

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What is the difference between a hanging man and a hammer?

Individually, the hanging man and the hammer look exactly the same. These two candlesticks are differentiated by the prior move or short-term trend. Both candlesticks have long lower shadows and small bodies. On a daily chart, the long lower shadow reflects the intraday low. The bodies reflect the change from open to close. A small body indicates little change from open to close. Hammer and hanging man candlestick indicate that prices declined intraday, but recovered and closed near the opening level.

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A hammer forms within a short-term downtrend. It is, after all, a bullish reversal pattern. Therefore, there must be a downtrend to actually reverse. The hammer shows selling pressure continuing during the day with the intraday low. Despite this selling pressure, buyers stepped in and pushed prices off their low for a strong close. One candlestick patterns require confirmation with further upside to complete the reversal. Simon Property (SPG) formed a hammer last week and confirmed the reversal with a surge and MACD(5,35,5) crossed above its signal line. Keep in mind that candlestick patterns are short-term and only valid for a week or so.

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In contrast to the hammer, a hanging man forms within a short-term uptrend. It is a bearish reversal pattern that also requires confirmation. The hanging man shows selling pressure with the intraday low, but buyers recovered by the close and pushed prices back to the open. Confirmation with further downside is required because intraday selling pressure did not stick. DR Horton (DHI) formed a hanging man in early May and confirmed it with a move below the hanging man low. Also notice that this decline filled the prior gap to make it an exhaustion gap.

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Staples forms bearish engulfing

Staples surged with the rest of the market over the prior seven days, but hit resistance from broken support with a bearish engulfing candlestick on Thursday. Also notice that the falling 200-day EMA and the 50% retracement mark. 

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GE forms rising flag near support

GE is trying to bounce off its February low, but the bounce look feeble so far and the stock shows relative weakness. The stock shows relative weakness because the S&P 500 broke above resistance and GE remains below corresponding resistance. The support zone around 15-15.5 is holding so far, but a break below flag support would argue for a break to new lows.

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Apple challenges resistance

Apple (AAPL) remains one of the strongest stocks as it surges to resistance from the April-June highs. The stock formed a triangle over the last 2-3 months and broke the upper trendline today. Volume was light though. QQQQ traders should note that Apple accounts for 18.84% of the ETF.

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Airline Index closes in on 52-week high

Airlines continue to show relative strength and upside leadership. First, the Airline Index ($XAL) is challenging its April high with a big move on Tuesday. A break would forge a new 52-week high. Second, the price relative broke out in late May and recorded a new high this week.

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Commodities follow stocks

With the exception of precious metals, commodity indices have gone the way of the stock market over the last eight weeks. The PerfChart below shows the S&P 500 six commodity related indices. Only the GSCI Precious Metals Index ($GPX) shows a gain since mid April.

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How can I quantify volume?

Volume is an important indicator that can be used to confirm or refute certain price movements. In particular, we may want to know if a stock is advancing on expanding volume or contracting volume. An advance on expanding volume is deemed more robust than an advance on contracting volume. The most straight forward way is to show volume with a moving average. Volume is above average when above the moving average and below average when below the moving average. There are around 250 trading days in a year. As such, a 250-day moving average of volume would provide a good measure of average volume. Using "colored" volume bars, it is easy to identify up and down days with high or low volume. Volume bars are black when price closes higher and volume bars are red when price closes lower. The chart below shows Best Buy with volume and the 250-day moving average of volume. The stock surged with above average volume in early March and broke down with above average volume in early May.

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A lot of fill black candlesticks

Looking through the pre-defined scans page, it was surprising to see a high number of filled black candlesticks on Thursday. These candlesticks form when the close is below the open and the close is above the prior close. Even though the stock closed up for the day, the stock moved down after the open and buying pressure was limited to the open.

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Bullish Percent Indices below 50%

Stockcharts.com tracks the Bullish Percent Indices (BPI) for six major indices and 10 sectors. The BPIs for the major indices are below 50% and eight of the ten sectors have BPIs below 50%. Only telecom and utilities have BPIs above 50%. These numbers can be found at the bottom of the Market Summary page. Click here to read more about the Bullish Percent Index.

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Dow breaks Ichimoku cloud

Ichimoku Clouds, a form of Japanese technical analysis, show a trend reversal in the Dow Industrials. The senior average broke below the cloud formation and the "Standard Line" moved below the cloud formation. This is the red line, which is a moving average of the 26-day high-low range. Learn more in our chart school article.

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