Hello Fellow ChartWatchers!

(This is a repeat of an article I wrote in 2007.  Seems like now is a great time to review its message. - Chip)

Last month I had the pleasure of sitting in on several local Technical Analaysis User Groups and seeing how they used many different tools to do group stock analysis. It was a very educational experience for me and I strongly recommend that everyone reading this newsletter join your local technical analysis user group. (If there isn't one in your area, why not start one?) Doing technical analysis with other people is probably the best way to improve your investing success - period.

But as I was sitting in the back of one of the classes, I watched them fall into one of the more insidious "traps" in technical analysis these days. See if you can spot it as I tell the tale:

The group was looking at an ETF for one of the more interesting market sectors these days. The person running the meeting pulled up a chart of the ETF on the screen for everyone to see (I was happy it was a chart!). Someone in the group commented that the chart had a possible "double top" pattern and they were right - it certainly looked like a double-top. Someone else chimed in that the volume bars appeared to confirm that double-top hypothesis (I thought to myself "Yea! They are using volume to confirm chart patterns!") The group leader then suggested that they add some indicators to the chart to see what they showed - so they added a MACD and a Chaiken Money Flow plot to the chart. The MACD looked weak, but the CMF looked bullish. This caused the group to pause and check out a couple of other CMF plots with different parameters. Hmmmmm. Most of the CMF's were bullish. Eventually, the group decided to ignore the CMF data and move on.

Anyone spot the problem yet?

First off, the problem was NOT that the group ignored conflicting information from the CMF plot - it is very common that some indicators will be bullish while other ones are bearish. You need to think about which indicators you trust more and why. In this case, the group discussed it and decided that they trusted the MACD signals and the double-top chart pattern more than the CMF and that was a good decision.

The problem comes from the nature of ETFs. ETF stands for "Exchange Traded Funds" and they are all the rage right now. These are financial vehicles that are designed to track some index very closely and can be traded just like a stock. They are very useful to investors and the number of ETFs has increased dramatically in the past couple of years.

A typical example of an ETF is SPY which tracks the S&P 500 ($SPX). If the S&P 500 index goes up, SPY goes up. If $SPX goes down, SPY goes down. You can buy and sell SPY much easier than you can buy and sell the 500 stocks that make up $SPX and so SPY is a very useful tool in many investors' arsenals.

Have you spotted the trap yet?

Before I reveal the problem, let's look at two charts. Here is a chart of $SPX and one of SPY. See if you can spot the key difference:


Look at the On Balance Volume indicator line. Notice the difference in the direction of those lines? I've added a moving average line to each plot to help you see that the OBV for $SPX is going up while the OBV for SPY is going sideways/down.

Have you spotted the trap yet?

The price plots for $SPX and SPY look extremely similar - just as they should. When $SPX goes up, SPY goes up and vice-versa. But now look at the volume bars. They don't look identical do they? First off, the volume scales are very different - $SPX ranges from 2 Billion to 6 Billion while SPY's volume ranges from 200 Million to 600 Million. But the bigger problem is that the "shape" of the volume bars aren't exactly the same. They are similar - but there are subtle differences in the position and magnitudes of the taller volume bars. Those differences are what caused the OBV plots to be different. But why would the volume plots for $SPX and SPY be different? Could this be the trap? Will Chip ever get to the point!? ;-)

ETFs are different from stocks because of this fact: While the price of an ETF closely tracks the underlying index's value, the volume of an ETF only reflects the popularity of the ETF itself - NOT THE SUPPLY OR DEMAND FOR THE THING THE ETF TRACKS.

Consider the following hypothetical example: Let's say that for some reason an amazingly rich Jillionaire decides that they wants to invest in the market - so they buy 1 Billion shares of SPY in a single day. What would SPY's chart look like?

Despite all of this new demand for SPY, SPY's price chart would continue to mimic the value of the S&P 500 index. It would go up and down in the exact same way as before, just like $SPX does. Of course SPY's volume would have a HUGE spike in it, but that volume spike would have no impact on the price of SPY.

Now consider what would have happened if our hypothetical Jillionaire had invested in a real stock instead of an ETF. In addition to a huge spike on the volume chart, there would also be a huge jump in the price of the stock since the price of a stock is directly related to the demand for that stock's shares.

The key point here is that many kinds of technical analysis make an assumption that is not always true for ETFs. Any form of T/A that relies on studying both price and volume - including chart pattern analysis and price/volume indicators like the CMF - assumes that volume and price are directly related. Since there is no direct relationship between price and volume for an ETF, those analysis techniques should be used very carefully when looking at ETFs.

(Note: The volume for popular ETFs like SPY actually do a pretty good job of mimicking the demand for the underlying index, but that is due to indirect factors. As shown in the charts above, sensitive indicators can be thrown off by those differences. In the case of less popular ETFs, the differences are even greater.)

As I sat in the back of the class observing the give and take around their study of the ETF, I thought about speaking up. Unfortunately the class was almost over and I was late to my next appointment. Fortunately for you, I made a note to myself to write about it in the next newsletter.

- Chip

Overall Uptrend Remains As SPY Battles a Pair of Gaps

The S&P 500 ETF (SPY) is hitting resistance from last week's gap down, but may just find support from this week's gap up. The latest round of gaps started with a gap down from a new high on 22-February. The ETF rebounded later that week, but fell sharply on Monday with a long black candlestick. This candlestick met resistance from the 22-February gap. SPY firmed above its late February low and gapped up on Thursday. However, once again, the ETF met resistance from the 22-Febuary gap with a decline on Friday. This puts the ETF between a rock (gap down) and a hard place (gap up). The first one to be filled will offer a good clue on the next directional move.

Click this image for a live chart

Overall, the trend on the daily chart remains up. SPY is holding the support zone around 130 and RSI is holding support in the 40-50 zone. This zone held in November and late January. A move below 40 in RSI and 129.5 in SPY could signal the start of a correction that retraces a portion of the September-February advance.

Gap Continues to Mark Resistance for QQQQ

For the second time in two weeks, the Nasdaq 100 ETF (QQQQ) surged and met resistance from the 22-Feb gap. While failure at the gap is negative, the overall trend remains up as QQQQ battles the lower trendline of a rising price channel. Also note that Thursday's gap up is coming into play. A move below this gap zone and this week's low would be quite negative.

Click this image for a live chart

How can I plot an indicator of an indicator?

Chartists can apply a variety of indicators to indicators. While this might seem like throwing some rice on your pasta, sometimes a moving average or Rate-of-Change can help identify turning points in the indicator. The indicator of an indicator option can be seen by clicking on "advanced options", which is just to the right of the selected indicator.

The example below shows three indicators with three helping indicators. First, a 12-period Rate-of-Change was added to RSI. Note that the Rate-of-Change scale is on the left side. Moves into positive territory signal an upside surge in RSI. Moves into negative territory signal a downside plunge in RSI. Second, a 50-day SMA was applied to the Accumulation Distribution Line. There is also a 50-day SMA for QQQQ. Chartists can now compare how the ETF reacts to its 50-day and how the indicator reacts to the same moving average. Third, a 10-period EMA was applied to the Money Flow Index (MFI) to identify upturns and downturns. Downturns from overbought or oversold levels can help anticipate turns in the ETF.

Click this image for a live chart

Industrials Lead the Way by Lighting up the Market Carpet

The S&P Sector Market Carpet provides an easy visual to identify the leaders and laggards over a given timeframe. Clicking on the sector name puts the focus on that sector. Hover over the squares to see the name, ticker and percent change. Robert Half (RHI), a new-school industrial stock, is leading the way with a 5% gain. Even the worst performer, Quanta (PWR) shows a small gain today.

Click this image for a live chart

Costco Forms Bearish Engulfing Near Prior High

A bearish engulfing forms when a long black candlestick engulfs the body of the prior white candlestick. This means the open is above the prior close and the close is below the prior open. It is a reversal day that can foreshadow lower prices. Costco formed such a pattern on the highest volume in three weeks. See our pre-defined scans page for many more bearish engulfing patterns.

Click this image for a live chart

Sector Action Turns Defensive on Market Summary Page

All sectors were down in afternoon trading on Tuesday, but some were down less than others. In particular, the Utilities SPDR (XLU), Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) were holding up relatively well with modest losses. Money can be seen moving out materials, consumer discretionary, finance, industrials and technology. 

Screen shot 2011-03-01 at 20.39.12
Click this image for a live chart

Dollar Cannot Hold a Bid as it Eyes October-November Lows $USD

The US Dollar Index ($USD) extended its losses on Monday with a decline below 77. After a two week fall, the index is near its early February low. This level may offer support, but the trend is clearly down after the failure at 79 and wedge break. The next real support level is around the October-November lows.

Click this image for a live chart

Welcome the London Stock Exchange

Last week we announced the addition of the London Stock Exchange and with that comes changes in the Scan Engine to allow for targeting of those stocks.

In both the Standard and Advanced Scan UI specifying the exchange as 'LSE' will yield stocks listed on the London Stock Exchange. 

In the Advanced UI, the syntax is:
[exchange is LSE]

Conversely the LSE can be excluded using the Advanced UI via:
[exchange is not LSE]

Additionally there are updated country specifications available.  In the Standard UI the country is listed as "United Kingdom". 

The Advanced Scan UI will accept either "UK" or "England":

[country is UK]
[country is England]
[country is not UK]
[country is not England]

Regions debut
As is often the case, new additions bring new complications!  Previously, scanning 'all' stocks yielded just US and Canadian stocks.  Now the London stocks are also present and over time other exchanges may be added.  We realize that many would rather not see all stocks and creating scans which (dis)qualify a set of exchanges can begin to get quite verbose as more are added.

To accommodate this, the notion of regions has been created.  Currently there are two valid values: North America and Europe.  Specifying the region as North America will give a combination of US and Canadian stocks (as it was before the addition of the LSE). 

Users who wish to only look at European stocks can specify a region of Europe.  Currently the 'Europe' region only contains the LSE so in effect it gives the same result as 'exchange = LSE' or 'Country = UK'.  However, using a region of Europe will allow for inclusion of any additional European exchanges that may get added in the future.

Like exchanges and countries, regions allow for an additional level of filtering.

In the Standard UI, all the additions are in the Group menu in the Group Filters area:


Screen shot 2011-02-23 at 12.24.27 PM

The 'regions' option in the Advanced UI is under the Ticker Properties list in the Scan Builder area (along with exchange and country options we have been discussing):


Screen shot 2011-02-23 at 12.27.27 PM


In the Advanced Scan UI, the syntax is as follows:

[region is NorthAmerica]  // Note: there is no space between 'North' and 'America'
[region is Europe]

Predefined Scans
The Predefined scan page has also been updated to include stocks from the LSE.  You can find the predefined scans here .


Bollinger Bands Narrows as Coal Vectors ETF Consolidates

The Coal Vectors ETF (KOL) has been stuck in a tightening trading range the last five weeks. After the sharp January decline, the ETF formed a triangle in February. As volatility decreased, the Bollinger Bands contracted to their narrowest range since early November, seen of a triangle breakout. Watch the current triangle boundaries for the next direction clue from KOL.

Click this image for a live chart

How can I apply a customized P&F chart style to all stocks in a favorites list?

SharpCharts subscribers have the ability to create a customized P&F chart style and then apply it to all securities in a favorites list. This makes it simple to scroll through a security list looking for P&F signals. The first step is to create a favorites list or use an existing one. Select a favorites list from the drop-down at the top or access the "create new list" option by clicking "view all favorites". Second, open a chart in this favorites list. Third, convert it to a P&F chart by clicking the "point & figure chart" link at the bottom of the page with the chart. Fourth, customize the P&F chart with your preferred settings. In this example, the Scaling Method was set at "user defined" and the Box Size was set at .20 (20 cents). A smaller box size produces a more sensitive P&F chart with more reversals. The image below shows Wal-Mart as part of a favorites list that is called "stocks-pnf-sp500". The other P&F settings can be seen at the bottom of this image.

Click this image for a live chart

Once you have a customized P&F chart and the correct favorites list showing at the top, you are now ready to convert all list charts to this customized P&F setting. All it takes is one click of a link at the bottom of the page. That link is: Use the current style on My Favorites in "list-name". After confirmation, you will have a complete list of customized P&F charts that can be viewed 10 at a time. Happy scrolling!

Click this image for a live chart

Feb. 24th @ 1:15pm – Some Intraday Data Missing Sporadically, Now Fixed

Grrrrr.  We hit the wrong button today during our London update process and accidentally lost some Intraday data for some North American stocks.  Users may sporadically see flat lines on part of their intraday charts.  We will have the problem fixed shortly.  Our apologies for any problems this has caused.

Update @ 1:30pm - Things are now fixed and the charts should look correct.

Positive Relationship between the Nikkei and the US 10-year T-Note Yield

It may seem a rather strange relationship, but the Nikkei 225 ($NIKK) and the 10-year Treasury Yield ($TNX) have a positive relationship working. The chart below shows both rising and falling together since November 2009. Despite a setback over the last few days, both remain in uptrends overall. John Murphy elaborated on this positive correlation in his classic book on Intermarket Analysis in 2004

Click this image for a live chart

A Double Top Point & Figure Breakout for H&R Block

A 25-cent daily Point & Figure chart for HR Block ($HRB) captures price action all the way back to July 2009. These X's and O's show the stock moving lower throughout 2010 and firming towards yearend. 2011 has been better with a double top breakout last week and a trendline break this week already.

Click this image for a live chart


Hello Fellow ChartWatchers!

Today I am very pleased to announce that we have expanded our market coverage to include stocks in the London Stock Exchange!  The exchange identifier for the LSE is ".L" which means that you can see a chart of Lloyd's of London right now by entering the ticker symbol " LLOY.L " on our website.


Here's a quick little FAQ about these changes:

Q: Does this cost me any additional money?
A: No.  Everyone has free access to LSE stocks starting now.

Q: Do I need a subscription to see charts of LSE stocks?
A: No.  However you do need a subscription to see intraday versions of those charts (which is true for all stocks we chart).

Q: Is the LSE stock data provided in real-time?
A: Not yet.  Right now, all LSE data is provided on a delayed basis.  We are working on adding support for real-time LSE data and expect to have that available as an option in the next couple of weeks.  Access to real-time LSE data will involve an additional fee to cover the exchange costs.

Q: Are LSE stocks included in the Scan Results?
A: Yes.  LSE stocks are now included in our Scan Engine and you can include or exclude them from your scans.  We also now provide an LSE column in our Predefined Scan Results page .

Q: What currency are LSE stocks charted in?
A: All of our charts are charted in whatever currency the stock's exchange uses.  In the case of the LSE, that currency is British Pounds Sterling (GBP).

Q: How do I get a complete list of the LSE stocks that you cover?
A: Members can run this simple scan to see a list of the 741 LSE stocks we now cover.  (At the moment, our Symbol Catalog doesn't include LSE stocks.  We will update the catalog in the next couple of days.)

Q: Are you going to cover other stock exchanges like Euronext, Nifty, Tokyo or Shanghai?
A: Eventually we hope to cover many more exchanges throughout the world however we do not know when that will happen.  Our current plan is to add the Euronext exchange very soon - within the next couple of weeks depending on approvals.  Beyond that, we cannot currently say what will happen.

Q: Are you going to provide predefined MarketCarpets/PerfCharts/Bullish Percent Indexes/etc. for London stocks?
A: Yes, but it will take a while for all of those additions to appear on the site.  Members will be able to create many of those things for themselves immediately however.

Q: I live in North America.  What time does the LSE open and close?
Currently, the LSE opens at 3AM New York time and closes at 11:30AM.

Q: Is the LSE open on this Monday (which is a holiday for US and Canada)?
A: Yes!  It's the perfect chance to try it out for yourself. 

Q: Should I tell all my British friends the good news?
A: Absolutely!

Remember, Monday is a market holiday in the US and Canada.

- Chip


I'm not a believer in global decoupling. On the contrary, I believe that global stock markets are highly correlated and usually trend in the same direction. That's especially true of the relationship between emerging and developed markets. Chart 1 shows a strong correlation between emerging markets (black line) and the Dow Jones World Index of developed markets (blue line). The main point is that these global markets usually rise and fall together. The chart also shows that emerging markets have risen a lot faster than developed markets since the 2009 bottom. In fact, emerging markets gained 130% from that bottom versus 90% for developed markets. Growth in the larger emerging markets like China and India is often cited as the engine driving global economic growth and uptrends in stocks and commodities. Problem is stock markets in those countries have been falling since last November.



One thing that's been quite apparent to me over the past several months is that money is not leaving the equity market.  When one sector or industry group sells off, the money simply rotates elsewhere.  Then rinse and repeat.  This is truly a trader's dream because there are almost always opportunities to find low risk, high reward plays.  It's as simple as using the StockCharts scan engine to find stocks in patterns that afford us great opportunities.
I like to take a top down approach.  I first look at the overall market and the indicators I use to determine the intermediate- to long-term health of the stock market.  Those indicators have been bullish for months and remain that way.  The next step is to ignore the temptation to short stocks because they "seem" like they're priced too high.  The market has priced them there for a reason and as long as momentum remains bullish, I don't argue with the market.  My third step is to review the various sectors and subsectors, trying to identify groups that are beginning to lead on a relative basis OR groups that have previously led and have pulled back to key support levels or moving averages.
To give you an example, I sent our daily Market Chatter out on Thursday, February 10th.  Here was an excerpt:
"Energy (XLE) has been showing relative weakness of late, but it's a sector that has not seen a close beneath its 20 day EMA since August, a very powerful trend.  This morning, the XLE is trading at 72.83 in pre-market (at last check).  Its 20 day EMA is currently at 72.10.  So for those who would like a more conservative position, consider trading the XLE as it approaches its 20 day EMA.  If it fails to hold, exit with a fairly small
The XLE printed a bullish engulfing candle that day, just above its 20 day EMA and hasn't looked back since.   Now take a look at the XLE chart and I'll explain what I saw:

XLE 2.19.11

Note first that the relative strength of the XLE was quite strong, rising against the S&P 500 for months.  This clearly indicated to me that energy had bullish momentum on its side.  Any time I can jump on a sector like this when it's "on sale", I'll take advantage.
Just before the XLE hit that short-term bottom, we provided a setup on Hornbeck Offshore Services (HOS) - they provide specialty services to the offshore oil and gas exploration and production industry.  We liked the group and also the technicals at the time.  HOS is featured as our Anatomy of a Trade for this week.  CLICK HERE for more information on this setup and its subsequent performance.
As I look forward, I really like the action in the NASDAQ Insurance Index.  Take a look at the following chart:
INSR 2.19.11

A solid period of consolidation helps to set up a more bullish move upon breakout.  That's what has transpired here.  Insurance was outperforming the S&P 500 until late in 2010.  That's when a nasty long-term negative divergence formed.  Astute traders bailed on the group as insurance consolidated (and underperformed) over the next two months.  The price breakout late last week was encouraging, as was the relative downtrend breakout.  This is a group that is likely to see more buying in the near-term.  I am focusing on this industry group in this weekend's stock setups for our members.
Invested Central is hosting three events this week, beginning with a FREE "Meet Invested Central" event on Monday, February 21.  I'll be joined by my partner John S. Hopkins, Jr. as we discuss our services and methodology and our approach to education (among other things).  CLICK HERE to register and for more information.
Happy trading!