Pivotal week coming up–Stage 3 top?

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The current earnings report season is supporting this market while rising interest rates weigh it down. What happens after earnings season is over in a few weeks? Sell in May? The GMI2 is at 3 (of 8), indicating that only 3 of my very short term indicators are positive. A weak close of the QQQ on Monday could turn the QQQ short term trend count down after only 3 days of a new short term up-trend. I know that I timidly went to 100% cash early without waiting for the indexes’ 30 week averages to turn down. Was I wrong to exit? The jury is still out….

This weekly chart shows that the SPY is sitting right on its still rising 30 week average (red solid line) but below its 10 week average (blue dotted line). A close back below the solid red line would indicate to me considerable technical weakness and that a possible Stage 3 top is forming. Note the 4 week average (red dotted line) is below the 30 week and 10 week averages. Compare this to the pattern from last September through January, when the 4wk>10wk>30wk average, the pattern of a sustained up-trend (component #5 in GMI2) when holding stocks or index ETFs was likely to be profitable. When that pattern comes back I will be comfortable getting back into the market in my university pension and my trading accounts. (No, I never get in at the bottom, only after I think one is in  place—the fate of a trend follower.)

 

How I track stocks at all time highs; GLB: $LULU

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During weak markets like the one we have had recently, I find it useful to mine the daily new high list to create a watchlist of stocks hitting all time highs. A stock that can come through market turmoil and still hit an all time high is a stock that might take off when the market strengthens. That is how I found and wrote about the leader GMCR in April, 2009, when it emerged to an all time high early in the new bull market. Unfortunately, I cannot easily use TC2000 to search for stocks at all-time highs because that system returns a null result on a filter if the stock did not exist in the time period examined. For example, if I wanted to write a formula that gives me all stocks that hit a 10 year high, any stock that was not trading for the full 10 years would drop out. This is a major problem for stocks that came public in the past few years.

To get around this limitation I use barchart.com. I go to that site and click on “Stocks” at the top left,  then select “New highs and lows.” When the table comes up, I change the 1 month default drop down to say all-time high. Once I get the spreadsheet of stocks at all time highs, I drag down across all stocks and copy the information. I then open an Excel spreadsheet and paste the information into it. Then I select the column of symbols, copy them and open TC2000. I create a new watchlist for all time highs and paste the symbols into it. I now have a new watchlist containing all stocks that hit an all time high that day. I repeat this process periodically creating a larger watchlist of stocks.

Next I open my all time high watchlist and go to a monthly chart and perform two procedures. First, the barcharts.com list is not perfect and I delete from my watchlist any stock that is not really at an all time high. Second, I draw a horizontal green line at a monthly high that has not been surpassed for three months (3 bars). I then look at each of the stocks to find gems to focus on.  I monitor this watch list daily to see if any of the stocks exhibit any of my set-ups for purchase.

As an example, one stock on my recent all time high list had a green line break out to an all time high last Wednesday on above average volume and a green dot signal on Thursday — LULU.

As the GMI is on a Red signal and we remain in a QQQ short term down-trend (D-5), if I buy anything, I will set a very close stop loss to get out if the stock falters.

Time for cash, GMI=1 (of 6), turns Red

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The technicals for the major indexes are pretty weak even though tonight’s futures indicate an up opening on Monday.  Friday was the first day of a new QQQ short term down-trend. About 40% of these short term down-trends last under 5 days. This is a good time for me to retreat to cash in my trading accounts. However, the put/call ratio on Friday was 1.25, about as high as it gets. This means that many more put than call options were traded–relatively more traders were betting on a decline or buying insurance for their holdings. This is a contrarian indicator–extreme bearishness tends to precede a short term bounce up in the markets. Another contrarian indicator, the Worden T2108 is at 26% but it reached a more extreme 8.6% during the February decline. A T2108 below 10% is a really good sign for me of an oversold market. Finally, the 10.4 daily stochastics indicator is at 9, a level at which the market indexes I monitor tend to bounce. The QQQ has advanced in only 2 of the last 10 days. This daily chart shows the QQQ’s recent failed break-out and subsequent decline. Re-test of the February lows coming?

 

With the end of quarter coming this week, we may see some mutual fund window dressing and a respite from this decline. We could then subsequently see a rise into earnings in mid-April, leading to the “Sell in May and go away and come back at Halloween” maxim. This strategy may actually work this year, or it may not.  Either way, it appears to me that the multi-year bullishness we witnessed since 2016 (2009?) has dissipated. It amuses me when media pundits say there is no problem for stocks now because the economy still looks fine. The market always discounts the future. There were very few media bulls in 2009 when the market bottomed and began to move up. There will be few media bears at the top……..

I have not transferred from mutual funds into money market funds in my university pension— yet. I typically do so when the market indexes enter a Weinstein Stage IV decline. That has not happened yet. If it does, it might signal the beginning, not the end, of a major decline.  It is troublesome to me that the DIA and SPY have closed below their critical 30 week averages for the first time since 2016.  The QQQ remains above its 30 week average but is heading down towards it. The 30 week average is the solid red line in this chart.

In comparison, here is the SPY. The SPY may be leading the techs down. The market may be getting ready to slaughter the multitude who were told to seek refuge in this “safe” market ETF.

When the 30 week average for the QQQ curves down, it is a sign for me to exit the market even in my university pension.  That signal got me out before the 2000 and 2008 market debacles. I am a chicken and would rather retreat and reinvest later when the 30 week average turns up. Trend followers rarely exit/enter at the exact top or bottom. We follow the trend.

This weekly Guppy chart shows the market was in a strong RWB up-trend (see glossary)  for most of the time since 2013. There was a period in 2015/2016 when the market leveled off and the white band in the middle disappeared. Perhaps we are entering such a period. With the strong advance we had  since 2016, we got spoiled and it is easy to forget that the market can go sideways (or down) for many months. Perhaps we will enter such a period again.

The truth is that no one knows how long this decline will continue. It is up to all of us to analyze our tolerance for risk and to protect our capital. Contrary to popular advice, I do not have to remain in the market at all times. I am a boomer,  too close to retirement.

Meanwhile, the GMI (see glossary) is now down to 1 (of 6) and has flashed a Red signal. The Red signal can sometimes occur at a brief market bottom of a decline or at the beginning of a long term down-trend. Time will tell.

 

 

 

Green Dot strategy defined

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I have learned over the years that I have more success trading strong up-trending stocks that are turning up after they have had a small decline than buying break-outs. I find that if I think a stock has bottomed and turned up, I know exactly where to get out if I am wrong–if the recent bottom does not hold. I therefore can take a position and if I am wrong can exit with a small loss–that is the secret of success in this business–many small losses and a few large gains. I use a 10.4.4 daily stochastics indicator to find stocks that may be resuming their up-trend. I look for stocks in an up-trend where the fast stochastics (10.4) has recently crossed above the slow 10.4.4 stochastics, or signal line. I like the cross to occur at an oversold stochastics value, below 50. My co-instructor, David, has written a small program in TC2000 for our students to use. It places a green dot on the chart on the day the cross-over occurs and places the dot at the 5 day low as a likely support level.  I also add  this logic to one of my TC2000 columns so I can quickly locate stocks in any watch list that have a green dot.

I have found the Green Dot strategy useful for trading the market indexes as well as individual stocks and ETFs. Green dots can occur in declining stocks but many of them will fail. I therefore first make sure the stock is in a strong up-trend using the RWB daily or Yellowband techniques (see blog glossary). Any stock I buy must also be trading above its rising 30 week average (Weinstein Stage II). A pattern of rising green dots is preferable, but not necessary. If I buy a green dot signal, I must exit quickly if the stock closes back below its green dot or the fast stochastic closes back below its signal line. If my trade set-up fails I exit.

Here is a chart of the QQQ. The black arrows point out the green dots. The DIA and SPY also had green dots last week, foreshadowing the advances we had. (The QQQ pattern looks like a cup with handle break-out!)

Here is an example of how green dots have performed for $NKTR

 

 

And AAPL (note that some signals did not work out as well as others)

Green dots do not work well with a stock in a down-trend.

By the way, I try not to rely on a single indicator to make a decision. It is always best to look at other indicators (MACD, Bollinger Bands, moving averages) for confirmation of a buy signal. One should also plot the stochastics itself to see the level at which it is crossing. It takes 14 weeks to teach my undergraduate students these strategies! Let me know how the Green Dot strategy works for you…

The GMI is a perfect 6 (of 6).

 

 

 

 

 

Rising interest rates suggest market to form top

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I have been trading in the market since the 1960s. Over that time I have witnessed many market cycles. The late perspicacious Martin Zweig published a book that educated me about the force that the Federal Reserve’s actions exert on the markets. After the Fed raises interest rates several times the market eventually declines. I observed that when interest rates rise, there is typically a market decline and afterwards people, ever optimistic, believe that the market can survive rising rates or they won’t continue to rise. At some point, however,  investors eventually surrender to the rising rates and the market enters a sustained decline. We are now in the period after the bull market euphoria has been dissipated and people are turning their attention to interest rates. Pundits want to believe that the short correction is over and the bull market will resume. Still, every move and utterance by the Fed members will be scrutinized for an indication of how much and how rapidly they will raise rates. The Fed has to raise rates because they had to lower them to historic levels to bring the economy back from the horrendous debacle of 2007-2008. As the economy recovers they want to normalize rates and get most of the bonds they purchased to bring down rates (quantitative easing) off of their balance sheets. The resulting increase in the supply of bonds will reduce bond prices and raise interest rates.

As a psychologist and a chartist, I have found that the best way to predict behavior is to study the behavior itself. I therefore monitor a number of treasury bond ETFs as a way of understanding what is happening. I usually provide daily or weekly RWB charts (see glossary for definitions) to show trends. However, with the bond ETFs, I look at long term monthly RWB charts to see the major long term trends. I do not want to scare you, but these charts tell me that the multi-year RWB rise in bonds and corresponding decline in interest rates is over and bonds may be entering a significant BWR down-trend pattern. Note the huge RWB pattern in SHY through about 2013.

This chart zooms in on the recent past and shows the RWB pattern actually lasted until mid 2016 and now SHY is entering an ominous BWR decline (see glossary) for the first time since at least 2003 (as far back as I have data). Given that this is a monthly chart, it suggests to me that this trend could persist for months if not years.

Rather than looking at bonds to discern rates, TC2000 also offers a chart of the short term interest rates themselves. This monthly RWB chart shows the Fed reducing rates after the collapse of the internet bubble in 2000, then raising them again until the 2007 housing related crisis when they lowered them tremendously through 2015. Now look at how rates have been rising so much that they now form a steep RWB up-trend.

If we are indeed entering a period of a persistent decline in short term bonds and a rise in interest rates, the market may be forming a long term top. The lure of higher rates will eventually suck money out of relatively more risky stocks, especially by anxious boomers nearing retirement. With that in mind, I am willing to own some stocks but am keeping one foot out the door so that I will be ready to exit quickly if my market technical indicators should weaken…..

Meanwhile the market indexes are currently rebounding, as shown by the GMI being Green and the SPY and QQQ having closed above their 10 week averages for the 2nd week in a row. Note, however, the paucity of new highs among US stocks on Friday (90). Prior to January 29, there were  more than 200 new highs each day.