Friday, January 13, 2012

What the Charts Say to Expect for the Next Few Months

News was light on both sides of the pond yesterday, and investors took a breather. It almost seemed like a holiday week with low volume and a lack of market leadership. The biggest news was that Europe’s banks continue to ship money to the European Central Bank at a record pace, indicating that they have little incentive to put the money to work by lending to other banks.

And it’s no wonder the Europeans are fearful. Germany’s economy contracted by 0.25% in Q4, and Spain’s industrial output fell 7% in November, following a decline of 4.2% in October. And an auction of German government five-year paper was gobbled up despite a yield of under 1%.

Our market closed mixed with the Dow Jones Industrial Average off 13 points at 12,449, the S&P 500 was up fractionally at 1,292, and the Nasdaq gained 8 points to close at 2,711. NYSE volume totaled 758 million shares, and the Nasdaq traded 445 million. Advancers were ahead of decliners by about 1.3-to-1 on both exchanges.

VIX Chart
Click to Enlarge

In Tuesday’s Daily Market Outlook, we discussed the sentiment or contrarian indicators, one of which was the CBOE Volatility Index (VIX). This is often referred to as the “fear index” because it is based on a blend of various options on the S&P 500. Options prices tend to increase when more volatility is present and fall when uncertainty is low. This fear gauge is mostly used to identify tops and bottoms of markets.

SPX Chart
Click to Enlarge

I published this chart a couple of weeks ago in order to illustrate the influence of headline news on the S&P 500 in 2011. Notice the direct correlation to the big swings in the S&P 500 and the swings in the VIX.

The spring of 2011 was quiet until the Bank of England announced an inflation rate of 4%, and the Greece debt rating was cut to B1 followed by the Japanese earthquakes and tsunami.

But the real kicker hit when the U.S. rating was cut to AA+, and the VIX rocketed to the high of the year at 48 on Aug. 8, followed by the “out of box” error that drove the VIX up again. From Aug. 8 until the end of the year, investors were pummeled with one headline after another, and both the chart of the S&P 500 and the VIX illustrate the enormous swings.

The VIX has been criticized as having little predictive value. But it is useful in determining oversold and overbought market conditions. Note the relative complacency of the S&P 500 from April to late June when the VIX traded as low as 15 just before the June rally and then the market sell-off.

The high readings over 40 told us that the market was deeply oversold but that we should expect extreme volatility. And the last five months of the year turned out to be some of the most volatile on record with price swings directly tied to the latest European headlines.

Now, with the VIX back in the “complacency” zone, stocks have turned positive. The VIX is telling us that the recent breakouts are genuine but that the market will probably trade in a narrow zone much like the beginning of 2011. Nothing, however, can forecast the impact of bad headline news, and when that occurs, the VIX and every other indicator lose their predictive value and become followers.

Russell 2000 Chart
Click to Enlarge
Trade of the Day Chart Key

After lagging the other indices, the small-cap Russell 2000 finally broke through its 200-day moving average. This confirms that the intermediate trend of the broad market has turned. But with such low volume, stocks could trade in a relatively narrow range for several months.

“Please move into gold,” urges Richard Russell

Since its precipitous decline of more than $350 from August to December last year, gold bullion has regained almost $100 of its loss. The yellow metal two days ago managed to climb above its 200-day moving average in what appears to be an upside break from a mini inverse head-and-shoulders pattern.


I remain bullish on the fundamental outlook for gold for, among others, the following reasons:

  • Stress in sovereign debt markets.
  • A likely recession in Europe (and commensurate quantitative easing in whatever form).
  • L0w real interest rates.
  • Central bank buying.
  • The least bullish positioning of investors in gold since 2008. (Also see yesterday’s post “Gold bounces off most oversold level since ’08 – buying time?“)

Having said this, I believe gold has more consolidation ahead before resuming its bull market. Pull-backs during this period should be used for adding to positions.

I often get asked what Richard Russell, 87-year old writer of the Dow Theory Letters, nowadays says about the outlook for gold. In short, he sees a world “economic train wreck” ahead, and views gold as the “last man standing”. A few of his comments are below.

“For a decade I have been urging my subscribers to move into gold – either physical bullion or otherwise. Now I am at it again PLEASE MOVE INTO GOLD. Those who think gold has lapsed into a bear market simply do not know what they are talking about. Gold has simply been correcting in an on-going bull market.

“This is a time when almost every central bank in the world is grinding out paper currency, grinding it out by the car-load. This is a time when people are searching for safety. People are frightened and confused. Where is the land of safety?

“There is only one safe asset on the planet: that safe asset is gold. Uninformed people believe gold is just a commodity. Wrong, gold is absolute money. Gold alone is the world’s only completely safe currency. Gold has no counter-party against it, and no central bank has ever found a way to create gold.

“Almost every nation on earth has indulged in the same kind of fiscal madness. To cover the insane spending, nations have had to create an almost endless amount of fiat currency. This avalanche of “money” has steadily reduced the buying power of almost every currency. The result is that it takes increasingly more paper currency to buy one ounce of real money – gold.

“Gold may now be ending its latest correction. If I am correct in this, gold is in a buying zone.”

The long-timer has spoken!

Source: Dow Theory Letters , January 11, 2012.

Stocks With Triangle Chart Pattern Set-ups: CMG, INTU, JBL, MSI

Chart patterns come in many shapes and sizes, but one of my favorites is the triangle chart pattern. Triangles are formed when the price action of a stock consolidates into a narrower and narrower range. As the price action becomes confined to a smaller area - becoming more tightly wound - a breakout is soon to follow. Triangles come in three forms: ascending, descending and symmetric. No matter which form occurs, how the pattern is traded remains constant. The following triangle patterns may present breakout opportunities in these stocks relatively soon. (For more, see Triangles: A Short Study In Continuation Patterns.)

Intuit Inc (Nasdaq:INTU) stock has been consolidating since November in a symmetric triangle pattern. A rise above $54.25 will break the pattern to the upside, providing a target of $60 to $60.50. On the other hand, a drop below $51.90 will break the pattern to the downside and could trigger selling into $46. Therefore, both sides of the pattern should be watched. Stops are placed just outside the pattern, on the opposite side of the breakout. If the stock moves above $54.25, a long entry can be taken and a stop placed below $51.90. $56 to 56.50 has been a strong resistance area throughout 2011; in the event of an upside breakout watch this area closely as the stock will need to get through this level to reach the profit target.

Chipotle Mexican Grill (NYSE:CMG) has struggled to get to, and hold above, $350. This has created an ascending triangle formation as the stock continues to make higher lows since August. Ideally an ascending triangle should reach similar highs, whereas CMG has been making slightly higher highs on each price swing, forming a pattern called a rising wedge. Despite this slight deviation from the classic pattern, the stock still sets up well. If the stock can break above $353, it indicates a breakout to the upside. Keep in the mind the stock has been making slightly higher highs so a buffer can be added to avoid false breakouts. The target for an upside breakout is $425. Stops can be placed below the lower trendline below at $310. On-balance volume is diverging a bit with price, indicating potential underlying weakness. A breakout higher should be confirmed by a rising OBV reading.

Jabil Circuit Inc (NYSE:JBL) has had a strong start to the year and is very close to breaking out of an ascending triangle. If the stock breaks above $21.50, the pattern will be broken, providing a target of $24.50. Stops can be placed below $19 - the lower trendline. Therefore the reward to risk ratio is not that great currently. The $22 and $23 levels have proven to be strong resistance in the past though, so these levels should be watched as well. On-balance volume is rising though, confirming the strength seen so far this year and a potential upside breakout.

TransCanada Corp (NYSE:TRP) has been consolidating in a large ascending triangle formation since June. The stock will need to push convincingly above $45 to signal a breakout to the upside. The profit target is the psychologically significant $50, followed by $52 if it can hold above $50. The stock action has been choppy, and the corrections deep, which unfortunately means the reward to risk is not great currently. The pattern indicates stop level between $39 and $38. Near $40 is an alternative stop area. On-balance volume is in a significant downtrend, indicating breakouts to the upside should be traded cautiously and exited at the first sign of trouble. (For more, see On-Balance Volume: The Way To Smart Money.)

The Bottom Line
Triangles can be traded for both downside and upside breakouts. Stops are placed just outside the pattern, on the opposite side of the breakout. These formations can provide a good reward for the risk, especially as the stock becomes more and more tightly wound. Other indicators, such as on-balance volume can be used to aid in determining strength and the likelihood of a breakout succeeding or failing.

Time to Buy Natural Gas?

Natural Gas continues to push to new lows, taking down the UNG with it. How much longer can the downtrend continue?

The U.S. Natural Gas Fund ETF (UNG) hit yet another 12 month low today of $5.77. The ETF has lost 1/3 of its value in the past 3 months and more than 1/2 in the last 12 months. Natural gas gets cheaper every day, but how long can this trend continue?

Mastery would love to say now is the time to buy as we have hit bottom. Everyday has been worse than Groundhog day for the UNG, the decline knows no limits. Nat gas keeps dropping along with the UNG because the price is low and there is plenty of supply.

At some point the madness should stop but the question is when? Mastery believes we are nearing oversold territory on the UNG but its difficult to know when the turning point will occur. Natural Gas prices are down more than 6% today, taking the UNG down near 4%. Today the Energy Information Administration said supplies are 13.4% higher than what they were a year ago and 17% above the five-year average.

American's aren't using as much as they used to because they don't want to spend the money. There's excess production and supply, thus its getting cheaper and cheaper. But what about winter, couldn't that finally bump the price up?

MASTERY Bottom line:
The negative nat gas party can't last forever and that's what we want our readers to consider.

This week we've been watching the weather and headlines of record snow and low temperatures across the U.S. Snow is coming this weekend to Chicago, Connecticut, New England, Kansas City, Nashville, Tenn. and even Seattle.

Could this cold snap be enough to get natural gas futures to 'cool their jets'? Mastery believes it may, thus we think the UNG could bottom out around $5.50.



Jim Sinclair: 5 Major US Banks Could Fail From Derivatives

from King World News:

With gold rallying toward the $1,650 level, today King World News reached out to legendary trader Jim Sinclair to get his take on what is happening. Jim Sinclair’s KWN audio will be released today and when asked if the technical damage that many claimed existed in the gold market was a bit of nonsense and a scare tactic by the cartel, Sinclair stated, “Exactly, correct. (It was) a product of algorithms, of manipulation, of chart drawing, a product of the times. They (the commercials) will sell again at $1,681, but it’s just more delay in a drama.”

Jim Sinclair continues: Read More @

Volatility Suggests Falling Stock Prices

Volatility over the past six months has been off the charts. Volatility is more than just the performance of the Volatility Index or VIX (Chicago Options: ^VIX). Volatility includes the volume and conviction associated with the recent roller coaster.

Over the past six months, the Dow Jones (DJI: ^DJI - News) has seen 38 (almost every third trading day) 90% days. A 90% up day means that 90%+ of trading volume and point moves were to the up side (a 90% down day is exactly the opposite).

Of those 38 90% days, 16 happened to be to the up side, 22 to the down side. That is highly unusual. I've read interpretations stating that high volume, 90% up days (also called breadth explosions), are bullish for stocks.

Before drawing conclusions, let's try to decipher the emotions that cause 90% days. Fear, panic and certain news events cause severe down days. Most up days seem to be caused by positive news rather than a fundamental change.

In summary, we have erratic news-based buying and panic-inspired selling with 58% of the 90% days being down days (December 19 was the latest). This doesn't look like the beginning of a new bull market to me.

No Change = No Improvement

The U. S. financial system (NYSEArca: XLF - News) got into trouble because of falling real estate prices (NYSEArca: IYR - News). The European financial system got hammered by sovereign debt defaults.

U. S. real estate prices continue falling and entire European countries continue to struggle with pure survival. Neither the U.S. nor the European debt crisis has been dealt with properly.

QE2 was all the rage at the beginning of 2011, but its effect was limited and short-lived. The European Central Bank's (ECB) charter prohibits outright QE where newly printed money is given to banks.

However, the ECB has expanded its repurchase operation to 3 years. For 1% European banks can borrow money from the ECB. With the borrowed money, banks can now do what the ECB isn't allowed to - buy more toxic bonds from Greece, Italy, Spain, etc.

At first glance this looks like a profitable symbiosis. Banks pay 1% and get paid 3%, 4% or more via their bonds. Unfortunately, banks forget that they should be concerned about the return of the money more than about the return on their money.

Banks buying more unstable sovereign debt is a short-term Band-Aid but a long-term recipe for disaster. The expiration date of the 'long-term disaster' label may well run out early and bite banks and investors in the butt sooner than expected.

KISS - Keep It Simple S...

The past two years have made one thing painfully clear: I can't predict the news and how the market reacts to news. Often there's no rhyme and reason, that's why I don't even try.

What I can do is extrapolate the market's signals via technical analysis. This may sound abstract but is more accurate than any other market forecasting approach I've encountered (the chart below shows some of the trend lines and Fibonacci levels I follow). The S&P 500 (SNP: ^GSPC - News) shows remarkably consistent respect for trend lines, Fibonacci levels and other support/resistance points.

Earlier in 2011, the S&P got close to a multi-decade trend line that ran through 1,378 in May. Slightly lower was important Fibonacci resistance at 1,369. Additional Fibonacci resistance was found at 1,382.

Based on this resistance cluster, the April 3 ETF Profit Strategy update stated that: 'In terms of resistance levels, the 1,369 - 1,382 range is a strong candidate for a reversal of potentially historic proportions.'

The May top at 1,369 - 1,382 made sense because sentiment was very bullish and seasonality was turning bearish (sell in May, go away).

In October, once again seasonality, sentiment and technicals were lining up for a major buying opportunity. The September 23 ETF Profit Strategy Newsletter predicted that:

'From its May high at 1,370 to its eventual low, the S&P will likely have lost about 300 points (22%). This kind of move validates a counter trend rally. The plan is to square short positions and buy long positions around 1,088. The rally, once underway, will probably re-inspire a certain degree of confidence into the market before it runs out of steam. The most likely target for this rally is S&P 1,266 - 1,282.'

2012 Outlook

The outlook for 2012 doesn't look good. Only some version of QE3 and more aggressive ECB intervention can mask up the technical damage visible on all major charts.

The rally from the October lows is still within the confines of a counter trend rally and has yet to move above common Fibonacci resistance and two major trend lines.

Short-term December/January Outlook

Trading volume has been tepid and unlike the Dow and S&P, the higher beta Russell 2000 (Chicago Options: ^RUT) and Nasdaq (Nasdaq: ^IXIC - News) have not been able to best their October highs. This doesn't prevent higher prices (in fact I'd like to see at least one more push higher) but it suggests that stocks are losing steam.

It seems like the generals (S&P and Dow) are marching ahead while the troops (Nasdaq, small caps and euro) are following behind. An army in disunity can't conquer and a fragmented market is a weak market.

Seasonal tailwindw will calm significantly in early 2012, sentiment is once again turning bullish (a contrarian indicator) and technicals are looking weak. It seems like another high probability set up (like in May and October) is in the making.

Chart of the Day - IHS Inc (IHS)

The "Chart of the Day" is IHS Inc (IHS), which showed up on Wednesday's Barchart "All Time High" list. IHS on Wednesday posted a new all-time high of $91.74 and closed up 0.50%. TrendSpotter just turned Long again on IHS on Tuesday at $91.11. In recent news on the stock, RW Baird on Jan 9 reiterated its Outperform rating and raised its target to $95 from $92 due to strong sales growth in certain segments. IHS on Jan 6 reported Q4 adjusted EPS of 99 cents, above the consensus of 93 cents. IHS Inc, with a market cap of $5.8 billion, is a leading global provider of critical technical information, decision-support tools and related services to customers in a number of industries including energy, defense, aerospace, construction, electronics, and automotive.


The Trend Trader For Trading On Friday, January 13, 2012




Trend Reading
S&P 500 - Mar ESH21291.75+ 0.271286.611272.08Bullish
Dow Jones - Mar YMH212413+ 0.201239112314Bullish
Nasdaq - Mar NQH22378.50+ 0.492366.442337.83Bullish
Russell - Mar TFH2768.00+ 0.41762.51746.40Bullish
US T-Bond - Mar ZBH2143-18− 0.30143-11142-25Bullish
US T-Note - Mar TYH2130-31− 0.18130-30130-19Bullish
US Dollar Index - Mar DXH281.036− 0.7181.29481.049Bearish
Australian Dollar - Mar ADH21.0260+ 0.321.02361.0208Bullish
British Pound - Mar BPH21.5331+ 0.161.53831.5481Bearish
Canadian Dollar - Mar CDH20.9801+ 0.090.98060.9779Neutral
EuroFX - Mar ECH21.2832+ 1.041.27671.2839Neutral
Japanese Yen - Mar JYH21.3037+ 0.131.30231.3003Bullish
Swiss Franc - Mar SFH21.0607+ 1.201.05431.0567Bullish
Feeder Cattle - Mar FCH2151.800+ 0.61151.175150.350Bullish
Live Cattle - Feb LCG2121.250− 0.06121.161121.225Bullish
Lean Hogs - Feb LHG283.950+ 1.2783.67584.517Neutral
Corn - Mar CH2611^4− 6.14643^6649^0Bearish
Wheat - Mar WH2605^0− 5.62631^2640^0Bearish
Soybeans - Mar SH21182^4− 1.701208^01211^4Bearish
Soybean Meal - Mar SMH2307.1− 1.82314.7315.0Bearish
Soybean Oil - Mar BOH251.46− 0.8351.8852.00Bearish
Crude Oil - Feb CLG299.10− 1.75101.27101.65Bearish
Heating Oil - Feb HOG23.0541− 0.343.08553.0332Neutral
Natural Gas - Feb NGG22.697− 2.782.8293.040Bearish
Gold - Feb GCG21647.7+ 0.491639.11605.3Bullish
Silver - Mar SIH230.124+ 0.7829.93028.776Bullish
Copper - Mar HGH23.6490+ 2.903.53883.4528Bullish
Orange Juice - Mar OJH2178.10− 5.32192.48175.85Neutral
Sugar - Mar SBH223.27− 1.7723.4023.61Bearish
Cocoa - Mar CCH22326− 1.0223192070Bullish
Coffee - Mar KCH2233.90− 0.43230.19222.50Bullish
Cotton - Mar CTH295.69− 1.2296.2794.73Neutral