Monday, July 21, 2008

Stockcharts.com Weekly review

The birth of Isabel, child numero 2, kept me offline last week. Lots of catch up for my blog here and on Zignals. I'll start with a Stockcharts review as it's a good quick way to get a grasp of the general opinion out there.

Maurice opens the week up - go read his piece on Samson the Bull (the hairy, 4-legged kind). Take home message of his tale:

Bulls may get some scraps and bruises when you are blocking their path, but if you are in their way you will be stomped on by the stampede.

Maurice goes on:

You bears had better take heed to the message that the market is sending. The technical situation has greatly improved and on July 17 the buy signal was given. But if you bears are going to run in front of the bulls, you are going to get trampled. Not only has the technical situation greatly improved, but market breadth is now in favor of the bulls. The McClellan Oscillator is momentum indicator, and is explained in detail in John Murphy's (the founder of stockcharts.com) wonderful book Technical Analysis Of The Financial Markets. The McClellan Osillator confirmed our buy signal on July 17th.

But if you look at the chart below you can see that the McClellan Oscillator (4th chart below) significantly moved above its zero line for the first time since the sell signal that came shortly after prices topped on May 19. On that same chart I have included the bullish percentage of the S&P 500, which flashed a buy signal on July 16 as it moved above the 5-day EMA. We also saw the volatility indexes (VIX & VXN) move to extremes on July 15. Take a look at market breadth with refference to the NYSE Advance-Decline Issues (A-D line). It moved in concert with the McClellen Osillator this week and broke its decelerating trendline as it sharply turned up. My chart on the stocks above their 50-day moving average on the S&P 500 also reached extremes this past week. The same extremes that were made as the lows were being carved out during March, January, and August.

But this bottom is different than those previously made. Because with this bottom we now have divergences and confirmations being made between price and the MACD histogram on the weekly charts. A divergence rarely comes along on the weekly chart, but when it does it is the most powerful of all divergences.

We are also testing the support of the long term trendline on the S&P's 500 monthly chart, and bouncing off the trendline made back from the 1987 crash. The candlesticks on the monthly charts of the DJIA and S&P 500 are hammers, which forms during a bottom. The financial ETF (XLF) put in a huge hammer on both its weekly and monthly charts. XLF rose by 10.65 % for the week, putting in record volume of 1.9 billion. That allowed the histogram to put in a higher bar causing the slope to now be rising.

The DJIA also put in record volume since the bull market began back in 2003, with a whopping 5.7 billion shares traded. The DJIA rose by 396 points, climbing by 3.57 %. That took the DJIA out of bear market territory. Moreover, the other averages are also out of bear market territory. The bears continue to poo-poo this rally calling it a suckers rally, but this week the technicals on weekly charts reveal that there is substance behind this rally. One of the most important events occurred, the stochastic line got a bullish cross on the DJIA, S&P 500, Nasdaq. Ultimately I believe that the bears will be proven wrong.

The daily index charts all got break outs from their decelerating trendlines this week. Their RSIs broke the declining trendlines, the ADX lines peaked, which means less volatility going forward. The slow stochastic (20, 20) and full stochastic (14, 3, 3) both moved above 20. Their full stochastics moved above 50. They broke above the 10-day EMAs, their histograms moved above their zero lines.

Not only do the technical indicators validate this reversal, but we witnessed it on the price chart itself. Many of the index charts put in Morning Star candlestick reversals last week, but July 17th marked the first time a candlestick reversal pattern had been confirmed during this downtrend.

Many reversal patterns cropped up on the journey down, but I find it ironic that not one pattern received confirmation until July 17. Last week it was the banking scare that brought about capitulation, the reason why we didn't get capitulation the prior week was because Iran was testing their missiles.

Crude oil broke its rising accelerated trendline last week as a double top pattern was confirmed breaking below its confirmation line. It is now on resting on the rising intermediate trendline from the January double bottom. I think crude oil will backtest the broke accelerated trendline and find resistance near the 136 to 140 area. Overhead resistance is at 136. Once the backtest happens it I believe January's intermediate trendline will breakdown. I predict that crude oil will move back to the 61.8 Fibonacci retracement at $109 dollars a barrel. That should help the market rise. Crude oil had it largest weekly the drop since 2004.

I think the stock market will move sideways for a bit to regain our footing and then ultimately a powerful new rising trend will ensue. That should take the market higher until at least early September. It should start taking off by early August, once the 2 quarter GDP number comes in positive and every realizes that they have been duped by the recession camp once again. You and I already got our buy signal on July 17, but as the market continues to rise in August more and more bears will jump back into the market in frustration. Now I believe that the market will pull back and put in a higher low next week. During this time the bears will try talk the market down again and scare everyone. But this will be a buying opportunity, because the market needs time to consolidate its recent gains.

When prices pull back next week, it should help form the right shoulders on the indexes 60 minute charts. Currently the DJIA, S&P 500, Nasdaq, DIA, SPY, QQQQ are forming inverse head and shoulders patterns on their 60-minute charts. Once the right shoulders are completed, the patterns should break out and begin developing a minor rising trend channel.

Over the next two weeks you are going to hear a lot about bear market rallies, but don't believe it. The Transports never confirmed the DJIA breakdown into bear market territory. It only decline by approximately 14 %. The transports are now forming the right handle on a huge cup with handle pattern.
Last week we saw the collapse of IndyMac bring about capitulation. The selloff started on Monday and bottomed on Wednesday. By Friday the banking in BKX broke out and is significancy higher than when the scare began. Citigroup, Wells Fargo and JP Morgan brought stability back to the financial sector.

The government is wrapping up sending out the rebate checks to recipients. They were very wise to stagger the payments over time to keep consumer spending in positive territory and should show up in second quarter GDP. We should also start to see the rate cuts kick in this summer.

I'll say it once again, if you bears are going to run in front of the bulls, you are going to get trampled. If you think that this is a quicksand rally, you had better study the weekly charts below and then study my charts of market breadth and momentum indicators. Because in my opinion, only a buffoon runs in front of a bull. Don't get in the way of the bulls.

Lastly, we contiue be told by the 'experts' that this is meat grinder bear market. Well I haven't seen any evidence at all of this being true. If we are in a meat grinder bear market, 'where's the beef?' thechartpatterntrader.com

Make sure the study pages 1-3. The daily and monthly charts are on page 2 and the intraday charts are on page 3.




Plenty more charts are available on his public page.

Yong Pan has seen a larger shift towards bulls, but there are still some worrying bearish indicators to pay attention to:


I still think the VIX hasn't extended enough to mark a bottom - but everything else looks good for a retest. It will be the retest which will catch the bears out. Keep an eye on Yong Pan's VIX envelope; there was the briefest of extensions, but nothing like found in prior market bottoms.


However, it is a trader's rally - moving average ribbons all down, which is a reason enough to remain cautious. Sideways action would be the most likely outcome from here:


Major channel support holds:


A more bearish take on what Maurice had for this same chart:


Joe Reed stays bearish:

7-3-08 *** Current Economic Environment - STAGFLATION. What is it?
The economy is growing sluggishly, less than 1%, but the price of living is more costly - Inflation. Now the FED RES is stuck between a rock and a hard place. They don't want to lower interest rates further because that feeds Inflation. Big Business is slow , therefore, cutbacks and layoffs are common. Spending is down and borrowing money is difficult. A Recession is all about Tight Money.

7-17-08. *As I predicted, the Tropical Cyclone Season has been Extremely Active, very early. I think it's just a matter of time before a Biggie hits land and\or the Gulf oil rigs.


However, oil stocks continue to break - Joe's ConocoPhillips COP has become a cropper, following Exxon Mobil Corp (XOM) lower. Use Zignals stock alerts to watch for further breakdowns.


But Energy Bullish Percents are close to a bottom:


Finally, Richard Lehman is looking for broadening up channels, but downside likely in the short term:

7/19 -- A look at these charts may make you much less bullish here. The Dow is my usual primary benchmark, but it is the ONLY index that remained within its initial uptrend this week. The others all suggest that the primary thrust off the bottom is the first leg of an uptrend that will flatten and get much wider now. The SPX, XLF and all the small caps exited their short term upchannels already. That means sideways or down early this week to establish another bottom point above last week's low to form the second point of a lower support line of a more slowly rising channel. (The channel on the SPY is probably most reflective of what I mean. The XLF and XTC show even flatter possibilities.)

Also...The tech index hasn't even broken its short term downchannel yet. The XLF has had the biggest pop, but we all know why. I do not expect it to lead the remaining charge from here in the same manner. VIX remains in an upchannel. Gold has approached a strong support line. I expect this rally to morph into something less steep and more sustainable. Then we'll see how far it can go.



Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts and stock charts website
 
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