Charting the Path: November 2024's Top 10 Charts to Watch

We’re just getting into November, and I’m excited to walk you through the top 10 charts to keep on your radar. But before we get into what lies ahead, let’s take a moment to reflect on October’s takeaways. October offered some valuable lessons on the dynamics of breakouts, trend-following, and the importance of strategic entry and exit points. By understanding what worked, what didn’t, and why, we set a stronger foundation for navigating November’s market opportunities with a sharper perspective.

A Month In Review

In October, we tracked stocks like Baidu (BIDU) and Dentsply (XRAY). Baidu, which fell over 18%, is a great example of why we emphasize risk management. It looked promising when it broke above the 200-day, but resistance near $115 threw up a caution flag. October reminded us that breakouts need more than just optimism—they need well-planned entries and exits.

On the other hand, stocks like Spotify showed the value of sticking with trends until they signal otherwise. It’s a good reminder to stay nimble and let charts guide us along the way.

Now, let’s see what’s lined up for November!

• AT&T (T): Carried over from October, AT&T catches our eye with a solid 5% dividend yield and price strength. But don’t ignore signs of bearish divergence—it’s held up well so far, but let’s stay alert.

• Comcast (CMCSA): Comcast’s earnings sparked some ups and downs, but the uptrend remains intact. Key level to watch: the resistance around $47.

• Stifel Financial (SF): 2024’s been kind to Stifel, with higher highs and lows. After an overbought spell, look for pullbacks toward support for a possible entry point.

• Texas Roadhouse (TXRH): A breakout darling that’s now testing support levels. It’s worth following to see if it holds above the pivot point.

• Parker Hannifin (PH): PH is showing a classic setup—pulling back to its 50-day moving average within an uptrend. Watch for a rally off this supportive level.

• Fastenal (FAST): Showing off a textbook cup-and-handle pattern. Let’s see if it can break above resistance for a confirmation.

• Home Depot (HD): With its recent dip to the 50-day moving average, Home Depot’s a balancing act to watch—can it hold and push higher?

• AMD (AMD): A miss on earnings sent AMD down, breaking below support. This one’s key to watch for overall market sentiment.

• Alphabet (GOOGL): GOOGL recently completed an inverted head-and-shoulders pattern but struggled after earnings. Support around 168 will be a telling level.

• Celestica (CLS): Rounding out our list, Celestica’s shown strength with its gap-and-run pattern. Staying above breakout levels is the test here.

November Forecasting

These charts are about spotting patterns—they’re about getting a feel for the market’s mood. Whether you’re thinking about holding onto your gains or looking for fresh opportunities, there’s plenty to dig into with November’s lineup.

Happy charting, folks, and here’s to November!

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

What’s Next for the S&P 500? October 2024 Update!

What’s your take on the S&P 500 as we wrap up 2024? Are you bullish, anticipating the index surging past 6000 before year’s end? Or do the recent signs of elevated volatility, breadth divergences, and other red flags have you more cautious, thinking Q4 might bring a downturn? Let’s explore the possibilities.

First, we’re here to stretch our thinking beyond biases by considering a range of scenarios for the S&P 500. By doing so, we open ourselves to the full spectrum of outcomes—whether extremely bullish or bearish. Second, I’ll guide you in deciding which scenario aligns most with your view, so you can prepare your portfolio accordingly. But remember: staying flexible is key, as any of these scenarios could become reality.

Our Game Plan and market context

I’ll lay out four potential scenarios for the S&P 500, each with specific conditions, key levels, and signals to watch. Think about these scenarios, and be sure to drop a comment below to share which one you think is most likely and why!

Let’s start with a quick look back. Over the past year, the S&P 500 has remained in an almost relentless uptrend with minimal pullbacks. The biggest drawdown, from the July peak to an early August low, was less than 10%! Since hitting that low in August, we’ve observed three straight months of strength into October. So, what’s next? Let’s review these four potential scenarios.

Scenario One: The Super Bullish Case

This scenario envisions a steady continuation of the trend off the August low, with the S&P climbing higher into December. If this pace holds, we could break above 6000 by early December, potentially setting new all-time highs. This would echo the low-volatility, consistent gains we experienced in Q1. Key signals to watch include a series of higher highs and lows and sustained momentum.

Scenario Two: The Mildly Bullish Case

In the mildly bullish scenario, the S&P 500 edges higher, but struggles to cross the 6000 threshold. We may see resistance due to psychological price barriers, valuation concerns, or underwhelming earnings reports. This scenario would likely see the S&P hovering around 5900-5950, with market breadth indicators possibly weakening—a signal that could set the stage for a more pronounced correction heading into year-end.

Source: StockCharts.com

Scenario Three: The Mildly Bearish Case

Here, the market loses momentum without breaking down entirely. In this scenario, the S&P pulls back slightly but holds above the critical 5650 level and stays above the 200-day moving average. This would imply continued long-term strength, even as short-term caution creeps in. But if the Magnificent 7 names experience any sort of drawdown into November, a scenario like this becomes much more likely.

Scenario Four: The Super Bearish Case

In the most bearish outcome, we see a significant downturn reminiscent of late 2018, with a powerful downtrend emerging in Q4. This scenario would mean a break below both 5650 and the 200-day moving average. As institutions pivot to defensive plays, sectors like utilities, real estate, and consumer staples might start to lead the market.

As we look to early December, earnings reports, the U.S. elections, Federal Reserve announcements, economic data, and global events will all shape the S&P’s path.

So, where do you stand? Do you see a super bullish rally continuing? A mild move up or down? Or a more bearish turn for Q4? Drop your thoughts below with your reasoning—what indicator or driver do you think will trigger your chosen scenario?

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

One Volume Chart You Can't Ignore

Volume analysis in the stock market is crucial. Understanding the flow of volume provides insights into market dynamics that price alone can't reveal. While I don't utilize volume analysis often in my daily routine, there's one volume indicator that has consistently proven its worth: the Chaikin Money Flow (CMF).

Before we get to CMF, it's important to understand how volume analysis has evolved. When I was getting started in the early 2000s, volume analysis made sense because the trading environment was different. Traditional volume indicators were effective in a market less influenced by dark pools and electronic trading. But as these advancements have changed the landscape, traditional volume indicators seem to have lost some of their edge.

S&P 500 with Chaikin Money Flow.  Source: StockCharts

Having said that, I actually do use some volume analysis in my work, mostly in the form of volume-based indicators that look for volume trends. Legendary market strategist Joe Granville made great strides when we created On-Balance Volume (OBV) in the 1970s. This was revolutionary for its time, measuring volume based on whether the day ended higher or lower than the previous day. Think of it as a cumulative advance-decline line for volume. However, it had its limitations—it treated an entire day's volume as either bullish or bearish, which isn't ideal.

That's where Mark Chaikin made a leap forward with the Chaikin Money Flow. This indicator evaluates the closing price relative to its high-low range and quantifies the daily volume's bullish or bearish nature. If we close near the day's high, it suggests bullish volume; near the low, it's bearish. The indicator tracks this daily volume reading over time, providing a nuanced view of volume trends.

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When examining the S&P 500 using CMF, two main applications stand out. First, volume trends over time reveal accumulation and distribution patterns. Understanding whether the market is being accumulated or distributed can offer powerful insights into future price movements. For instance, the CMF was exceptional at identifying key turning points in August, March, and July of 2024.

The second crucial application is spotting divergences. A bearish divergence, where the market price keeps climbing but CMF starts trending downward, is a red flag. This discrepancy suggests that while prices are rising, there's an underlying sell-off—indicating that some investors are offloading their holdings despite the bullish price action. We saw this clearly before significant downturns in previous months and should watch for it moving forward.

As of October 2024, we haven't yet seen a bearish divergence, but staying vigilant is key. The current bullish trend might still be robust, but watching for CMF to turn lower could signal that we're nearing a market top. Recognizing these signs early—before the broader market catches on—can be incredibly advantageous.

So, what do you think about the Chaikin Money Flow? Does it offer valuable insights that align with your trading strategies? Drop a comment, and let's discuss. And remember, it's always a good time to own good charts.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Market Breadth ALERT! What's Happening Now?

I want to take a look at a critical question: Does the market have bad breadth? Spoiler alert – not quite yet, but we may be getting close. We’ll break down three market breadth indicators, explain how they're still holding up, and discuss what would tell us we’re in trouble. Let’s dig into the charts.

The Question of Breadth

Does the market have bad breadth? As of early October 2024, the answer is “not yet.” The overall market breadth still looks okay, but some signs suggest we may be reaching an exhaustion point. Let’s go through three key breadth indicators and see what they’re telling us right now.

1. New 52-Week Highs and Lows: The Divergence to Watch

First up, let’s talk about new 52-week highs and lows. This indicator is a great way to gauge the strength of a market. When the market is in a healthy bull phase, you’ll see lots of stocks making new highs. That makes sense, right? When the S&P 500 or the Nasdaq is hitting all-time highs, you’d expect the individual stocks within those indexes to follow suit.

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Looking at the chart, the green bars represent new 52-week highs, and the red bars represent new 52-week lows. In a bull market, you won’t see many new lows because most stocks are riding the overall upward momentum. But here’s where things get interesting: toward the end of a bull market, we often see a divergence. The market keeps making new highs, but fewer and fewer individual stocks are hitting new 52-week highs. Instead, some stocks are starting to make new lows. This divergence can be an early warning sign that the market is running out of steam.

Right now, in early October, as the S&P 500 closed above 5700 for the first time, we’re seeing fewer new highs and even a few new lows sneaking in. It’s not time to hit the panic button, but it’s something to keep an eye on. If new lows start to consistently outnumber new highs, that’s when I’d start to worry about a more serious market pullback.

Source: StockCharts.com

2. Percentage of Stocks Above Key Moving Averages: Long-Term vs. Short-Term Signals

Next, let’s look at the percentage of stocks above their key moving averages. This is one of my favorite breadth indicators because it gives us both a long-term and a short-term view.

In the top panel of this chart, you’ll see the S&P 500 over the past two years. Below that, I’ve plotted two key breadth indicators: the percentage of S&P 500 stocks above their 200-day moving average (currently about 76%) and the percentage above their 50-day moving average (about 75%).

The 200-day moving average is a long-term indicator. I like to use the 50% level as a key threshold—when more than half of stocks are above their 200-day moving average, it suggests the long-term trend is still intact. Right now, we're well above that level, which tells me the long-term breadth is still positive. The last time we dipped below 50% was back in September 2023, which coincided with a pullback in the broader market.

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Now, the 50-day moving average gives us a short-term view. I’ve drawn horizontal lines at 75% and 25% on this chart, and we’re currently just below the 75% mark. Historically, when we drop below 75%, it suggests a short-term pullback may be coming. We saw this happen in late August during the most recent pullback, and it’s something we should be prepared for now as well.

But, remember, this indicator isn’t foolproof. Earlier this year, in January, the “Magnificent Seven” stocks were so strong that they kept pushing the indexes higher even though the breadth was weakening. We could see a similar scenario play out now, so while the short-term breadth is a little shaky, the long-term picture still looks solid.

Source: StockCharts.com

3. Bullish Percent Index: Point and Figure Charts Tell the Story

The third indicator I want to highlight is the Bullish Percent Index (BPI). This is a breadth indicator based on point and figure charts, which are a bit different from the more traditional line or bar charts we usually look at. The BPI tracks how many stocks in the S&P 500 are giving a buy signal based on point and figure patterns.

I like to focus on the 70% level here—when more than 70% of stocks are on buy signals, it usually means we’re in the later stages of a bull market. Right now, we’re sitting around 78-79%, so the market is still in pretty good shape. But, just like with the other indicators, I’m watching for when we drop below that 70% level. When that happens, it’s often a sign that the bull run is losing steam.

If you look back over the last couple of years, you’ll notice that whenever the BPI drops below 70%, we tend to see a pullback shortly after. This happened in January, though the “Magnificent Seven” kept the market artificially strong for a while. But in most other instances, a break below 70% has been a reliable signal that the market is transitioning from a bullish to a more cautious phase.

Source: StockCharts.com

What These Indicators Are Telling Us

So, what’s the takeaway here? Overall, the market breadth indicators are still pointing to a relatively healthy market, but there are definitely some cracks forming. The new 52-week highs are drying up, fewer stocks are holding above their 50-day moving averages, and we’re nearing a critical level on the Bullish Percent Index.

None of these indicators are flashing “sell” signals just yet, but they’re all telling us to be cautious. As we move further into Q4, keep an eye on these charts. If new lows start to outnumber new highs, or if we see the percentage of stocks above their 200-day moving averages drop below 50%, that’s when I’d start to be more concerned about a potential market downturn.

So, does the market have bad breadth? Not quite yet. But the warning signs are there, and it’s always better to be prepared than caught off guard. As always, I recommend keeping a close eye on these indicators, doing your own due diligence, and staying informed.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Top Ten Charts for October 2024: What I'm Watching and Why You Should Too

I’m going to walk you through my top ten charts to watch for October 2024. We’re covering a mix of sectors, investment ideas, and chart patterns—all of which, I believe, present compelling opportunities this month. Make sure you hit the video below for all the beautiful charts to support the discussion! Grab a coffee, settle in, and let’s explore some charts together.

1. Comcast (CMCSA): A Rounded Bottom Worth Watching

Starting with Comcast, which, to be frank, has been a "nothing burger" for much of the past six months. (Yes, that’s a technical term.) However, recently, this chart has started to look a lot more promising. Comcast is showing signs of forming a rounded bottom, meaning it’s transitioning out of a downtrend and stabilizing.

For several months now, it’s been hovering around $37, bouncing every time it tested that level. The big move recently was when the stock broke above its 200-day moving average. A sustained move above $41.50 would confirm that buyers are truly stepping in. If that happens, Comcast might finally be ready to start climbing.

2. AT&T (T): Consistent Uptrend

Next, we have AT&T—a chart that has made my top ten list consistently. AT&T is a classic example of a steady uptrend: higher highs, higher lows, and consistent performance. With a dividend yield of around 5%, it also offers income potential, which can be particularly attractive in a choppy October market.

The price remains above two upward-sloping moving averages, a good sign for continued growth. For anyone looking for stability, AT&T has been an excellent candidate, providing a strong backbone to portfolios during uncertain times.

3. Baidu (BIDU): A Revival with Chinese Internet Stocks

Baidu is next, and it’s a particularly interesting one given the recent policy changes out of China. With the Chinese government implementing easing measures, many Chinese internet stocks, including Baidu, have experienced an impressive rally. Baidu recently broke above its 200-day moving average—a significant event, as it had struggled to do this for over a year.

When the Relative Strength Index (RSI) moves above 80, we call it "the good overbought"—an indicator that the trend is still in play. Baidu is giving off those signals now. If it manages to hold above $100, this could continue to be a solid opportunity moving forward.

4. Spotify (SPOT): Riding the Uptrend

Spotify is another chart worth your attention. Unlike many other big names, Spotify has largely ignored broader market volatility and maintained a strong uptrend throughout 2024. It consistently bounced from its 50-day moving average, making it a great candidate for a "buy the dip" strategy.

If we see a pullback into the $320–$340 range, it might present an appealing entry point. Spotify’s chart resembles that of a bouncing ball—every dip is met with renewed buying enthusiasm, reinforcing its steady trend.

5. Meta Platforms (META): Assessing a Breakout

Meta Platforms is an important chart to monitor this month, especially considering its position within the broader "Magnificent Seven" tech names. After months of resistance around $540, Meta finally broke above this level, making a new all-time high.

Now, the real question is whether it can sustain that breakout. Holding above $540 will be key for continued gains. If it does, the uptrend could very well continue. However, if it falls back below this level, it could indicate a failed breakout, requiring a reassessment.

6. VF Corp (VFC): A Transition from Weakness to Strength

VF Corp is a compelling story of turnaround—a textbook example of moving from a distribution phase (decline) to an accumulation phase (buying). For much of the year, the stock was in a downtrend, but after hitting a low in April, we started seeing higher highs and higher lows. The breakout above the 200-day moving average and the subsequent strength have signaled a potential long-term accumulation phase. VF Corp is now innocent until proven guilty; as long as it remains in an uptrend, it deserves a spot on the watchlist.

7. Lennar (LEN): A Strong Case

Lennar represents an entire group that’s interesting to watch—the homebuilders. Lower interest rates are generally good for homebuilders, and Lennar is no exception. After a notable decline in 2022, Lennar has rebounded and maintained an impressive uptrend, bouncing from its 200-day moving average multiple times.

Recently, we’ve seen Lennar hit new highs above $170 and then use that level as support—a classic case of resistance becoming support. This sector might benefit further if interest rates continue to decrease, making Lennar a notable chart to watch in October.

8. Dentsply Sirona (XRAY): Bullish Divergence

Dentsply Sirona presents an example of a bullish momentum divergence, which is essentially a fancy way of saying that even though price was falling, momentum indicators were improving. This divergence often signals an impending reversal, much like when you try to hold a beach ball underwater—it eventually pops back up.

The stock has now moved back above its 50-day moving average and looks poised for further gains. The next step is to see if it can break above its July highs and its 200-day moving average, which would confirm a strong trend reversal.

9. Freeport-McMoRan (FCX): A Reversal After a Head and Shoulders Top

Freeport-McMoRan recently completed a classic head and shoulders top pattern, which initially suggested a decline—and that’s exactly what happened. The stock hit a target near $40, then rebounded. It’s now making higher highs and higher lows, indicating the potential for a new uptrend.

This is one of those textbook rotations that trend followers love to see. If we get a pullback and then a continuation higher, it could present a great entry opportunity.

10. Gold Miners (GDX): A Reliable Hedge

The last chart to discuss is GDX, the gold miners ETF. Gold has been a go-to hedge in times of uncertainty, and gold miners often perform well when the metal itself is in an uptrend. GDX has repeatedly found support at its 50-day moving average, making each pullback a buying opportunity.

If October proves as unpredictable as it often can be, GDX might be a great place to allocate some capital. As long as the uptrend remains intact, gold miners look like a solid bet.

Final Thoughts

These charts include a mix of long-term trends, potential breakouts, and interesting turnarounds, each offering unique opportunities depending on your risk appetite and investment approach.

One thing to keep in mind is that trend-following is all about observing where the momentum is and riding that wave for as long as it lasts. Like my mentor always said: "In an uptrend, you know we’re going up—just make sure we make a higher low." It’s about staying nimble, managing risk, and letting the charts tell the story.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

The Relationship Between Rate Cuts, Yield Curves, and Stock Prices

The Federal Open Market Committee (FOMC), commonly known as the Fed, made headlines last week with a 50 basis point cut to their target rate. This marked the first rate cut in several years and sparked one central question: is this move good or bad for stocks?

To be clear, it's a bit of both, depending primarily on your investment timeframe. Let's delve into historical trends, patterns, and the broader implications of such a rate cut on stock performance.

Understanding Historical Context and Market Reactions

First off, it’s essential to acknowledge that rate cut cycles are rare, happening only four times in the past 25 years. This rarity alone makes each cycle a significant event worth scrutinizing. These cycles correspond to prolonged economic periods and are secular in nature, rather than cyclical or tactical reactions. For long-term investors and institutions with extended timelines, understanding these patterns becomes crucial. So, what happens after the Fed's initial rate cut?

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Looking at past data, the S&P 500's response to initial rate cuts shows a mixed bag. In the long run, markets often rally, but the short-term scenario frequently portrays volatility. For instance, after the first rate cut in July 2019, the market continued its upward trend despite some turbulence and the subsequent chaos brought by the COVID-19 pandemic. This pandemic period was exceptional and disrupted many typical financial patterns, making it an unreliable reference for drawing long-term conclusions.

Earlier instances provide a clearer picture. Take the Great Financial Crisis of 2007-2009, for example. The initial rate cut in September 2007 signaled the start of a downturn that saw significant market weakening until the March 2009 low. Similarly, the tech bubble burst in early 2000 followed a different script. After the first rate cut in January 2001, the market held relatively stable initially. Still, subsequent rate cuts hinted at a deeper downturn, exacerbated by events such as 9/11, leading to an October 2002 low. These examples underline that while rate cuts might bode well for long-term growth, they often bring short-term instability.

Another critical factor in this equation is the yield curve. A normalized yield curve, where long-term yields exceed short-term ones, signals robust economic health. In contrast, an inversion (where short-term yields surpass long-term yields) indicates skepticism about future growth. Interestingly, the transition from an inverted to a normalized yield curve often precedes market sell-offs and potential recessions, as seen in 2001, 2007, and briefly in 2019.

Yield Curve Dynamics: A Double-Edged Sword

Is a normalized yield curve purely positive? Historical data suggests otherwise, at least in the short term. Each time the yield curve has normalized post-inversion, it has been followed by market downturns before economic stabilization. For instance, in 2001, the yield curve normalized only to see stocks sell off and a recession to follow. The same pattern occurred in 2007, and even in 2019, the brief normalization period preceded a market downturn driven by the pandemic.

So, normalization of the yield curve may seem bullish, but it often signals an impending turbulent period for the market. While long-term outlooks remain positive, with stabilization and growth expected after the recessionary phases, the short term is characterized by volatility and uncertainty.

An Eye on Long-Term Performance

So, whether Fed rate cuts are bullish or bearish for stocks is a nuanced issue, highly dependent on the investment horizon. Long-term portfolios stand to gain from a low-rate environment that fuels growth and profitability. However, the near-term outlook is much more complicated. Historical patterns suggest that the short-term may face volatility driven by economic projections and yield curve adjustments, implying a period fraught with risk and uncertainty.

Understanding the complex relationship between Fed rate cuts, yield curve dynamics, and stock performance equips investors better to navigate these uncertain waters. As we analyze historical data and patterns, it's clear that while the long-term effects of rate cuts can be positive, short-term volatility is almost an expected fallout. The Fed's decision is but one puzzle piece in the intricate market dynamics.

So, what’s your take on this analysis? Drop a comment below to share your insights or questions.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Dow Theory and Market Momentum: What Recent Charts Reveal

It was a tough end to the week for risk assets as the major equity indexes finished lower on Friday. Before we look at the charts, it's crucial to understand the broader context influencing these movements. September has historically been a weak month for equities, a period often characterized by inflection points and heightened volatility. Today, we are reviewing three specific charts signaling potential market tops: the S&P 500 on weakening momentum, the surge in volatility, and key insights from Dow Theory.

Chart 1: S&P 500's Weakening Momentum

To kick things off, let’s take a look at the S&P 500. The index finished about 4.25% lower for the week. This decline reinforces the idea that the late-August peak was a failed attempt to reach new all-time highs. Revisiting the foundational work of Charles Dow from the early 1900s, his insights on trend following and the behavior of market peaks and valleys remain invaluable. The S&P closed below the 50-day moving average for the first time since late July. What's concerning here is the momentum picture.

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In mid-July, as we approached 5650, the RSI indicator showed momentum over 80. Fast forward to late August, and the RSI stalled around 60, indicating a bearish momentum divergence. Characteristically, for a robust bull market, we want the market to move higher on increasing momentum. However, the recent momentum signals reveal weaker conditions, not supporting a move to new highs.

Chart 2: Rise in Volatility (The VIX)

Next, let's look at volatility, a critical data point that has been particularly telling. The VIX, often dubbed the "fear gauge," finished above 38 on a closing basis, reaching an intraday peak above 65—one of the highest readings historically. A VIX below 20 generally indicates low volatility and constructive conditions. Conversely, a VIX above 20 signals elevated uncertainty and potential drawdowns in equity prices. What's perplexing is how quickly the VIX tumbled to the mid-teens soon after its spike, only to surge back above 20 this week.

This rapid fluctuation in the VIX underscores the elevated uncertainty in the market. Each day the VIX remains above 20, the likelihood of further market volatility and drawdowns increases. This volatility is a significant red flag for risk assets, making it a critical element to watch going forward.

Chart 3: New Dow Theory

Finally, we evaluate the new Dow Theory. Charles Dow's original work on indexing and market behavior remains foundational. Traditionally, Dow theory compares the Dow Industrials and Dow Transports. However, I lean towards a more modern take, comparing the equal-weighted S&P 500 with the equal-weighted Nasdaq 100. Recently, the S&P reached a new all-time high in late August, whereas the Nasdaq 100 did not achieve a new high, resulting in a bearish non-confirmation.

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This divergence suggests a market inflection point. Typically, market tops are characterized by such non-confirmations—one segment of the market breaking out while another lags. Currently, industrials, financials, healthcare, and materials are leading, whereas growth sectors like technology and communication services are lagging.

Forward Momentum

In this seasonally weak period, these charts should be front of mind for making informed decisions. For those seeking a deeper dive, my premium members at Market Misbehavior benefit from a closer look at these signals, tracking market moves in real-time. Members get actionable insights to navigate this volatile landscape.

These three charts—the S&P’s weakening momentum, the elevated VIX, and the new Dow theory divergence—are flashing warning signs. While September often brings challenges, it also offers unique opportunities for those prepared to act. For a more detailed exploration, including macro indicators like the Hindenburg Omen, check out our Premium Memberships.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Semiconductor Trends and Their Influence on Equity Markets

Nvidia epitomizes the heart of the AI theme, and its strength over the last six to 12 months has been astounding to witness. But are we seeing signs of a potential top in semiconductors, and what could that mean for the equity markets? Before exploring the charts, there's an essential technical analysis tool I'd like to introduce.

The head and shoulders pattern is based on classic trend reversal dynamics, and represents a shift from a bullish phase to a bearish phase. Lately, there's been a buzz about whether the chart of the VanEck Vectors Semiconductor ETF (SMH) exemplifies a head and shoulders top. My quick take? Not yet. Price patterns like the head and shoulders top, triangle pattern, and others have three phases: setup, trigger, and confirmation.

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The setup phase is where a pattern starts to take shape. Currently, the SMH chart shows a potential head and shoulders setup, with a clear head formed by a double top in June and July, a left shoulder in March, and a probable right shoulder in August. Every peak (head and shoulders) has been marked by a bearish engulfing pattern—a strong indicator of short-term sentiment change. But for a head and shoulders top to be confirmed, two phases need to follow: the trigger and the confirmation.

The trigger occurs when a pattern breaks a crucial level, called the neckline. For the SMH chart, using intraday lows as discussed in Edwards and Magee's classic book on technical analysis, the neckline runs around $200. A break below this would complete the pattern. The confirmation phase requires a follow-through to avoid the dreaded whipsaw—when the market fakes out traders by reversing direction shortly after a signal.

So, while we might be in the setup phase, a clean break below the $200 neckline would be the trigger. For those preferring a more conservative approach, using closing prices, the neckline moves up to $215, aligning with the 200-day moving average. Thus, holding above the 200-day moving average signifies the market's resilience.

What does this imply for semiconductors and the broader market? Let's compare the year-to-date returns of semiconductors against major equity ETFs. From end-2023 to now, SMH is up 38.1%, whereas the S&P 500 is up a modest 18.7%, and the Nasdaq 100 by 16%. Meanwhile, the equal-weighted S&P 500 is up just under 12%. Interestingly, since the market peaked in July, semiconductors have underperformed. While the S&P 500 nearly rebounded to its peak, the equal-weighted S&P surpassed it. Conversely, semiconductors trailed, underscoring a sectoral shift away from AI-driven stocks.

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So, what does all this mean? If the SMH forms a head and shoulders top, it suggests semiconductors are in a vulnerable position. This vulnerability could drag the Nasdaq 100 and S&P 500. However, the equal-weighted S&P remains robust, indicating that other market areas continue to break out and show strength. Diversification into other sectors such as industrials, materials, real estate, utilities, and consumer staples might be a prudent strategy, given the current market dynamics.

As we move into September, it's crucial to reassess portfolios and consider areas with emerging strength outside the semiconductor space. For Market Misbehavior, I'm Dave Keller, and we'll connect again soon.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Admit When You're Wrong: Know When to Exit

Every successful trader and investor I've encountered over my years in the financial industry has one key trait in common: they know how to admit when they're wrong. Let that sink in for a moment.

The ability to recognize and accept when a trade or investment isn't working out as planned is crucial for long-term success in the markets.

As a technical analyst, I firmly believe that charts hold the key to making informed decisions. Learning to read and interpret charts is relatively straightforward; the real challenge lies in actually following through with what the charts are telling you. This is where the concept of risk management and exit strategies comes into play.

Approaches to Exit Strategies

There are three primary ways to think about stops or exit strategies from a technical perspective: a correction in price, a correction in time, or something more advanced based on factors like volatility. Most approaches fall into the first two categories, with price-based stops being the most common.

Price-Based Stops

The simplest form of a price-based stop is a percentage stop. Take the legendary investor William O'Neil, for example. He advocated for a flat 8% stop, meaning that if a position moves against you by 8%, you exit without question. This approach is effective because it's easy to understand and follow, and it helps limit losses. Remember, all large losses begin as small losses.

How To Avoid Confirmation Bias

Using Technical Levels as Stops

Another price-based approach is to use specific technical levels, such as swing lows or Fibonacci retracements. By placing a stop at a recent swing low, you can ensure that your position remains intact as long as the uptrend continues. Fibonacci retracements, like the 38.2% level, can also serve as potential exit points if the price breaks below them.

Moving Averages as Exit Signals

Moving averages, like the 50-day or 200-day, are also popular among technical traders. If a stock that has been in a consistent uptrend falls below its 200-day moving average, it may be time to consider exiting the position.

Advanced Price-Based Stops

More advanced price-based stops include indicators like the parabolic SAR system or the chandelier exit strategy. The latter, developed by Chuck LeBeau, uses average true range (ATR) to adjust the stop dynamically based on volatility. As the price moves higher, the stop is bumped up accordingly, helping to lock in gains.

How to Design a Market Trend Model

Time-Based Stops

Time-based stops, on the other hand, focus on the duration of a trade rather than the price movement. If a position hasn't moved in the expected direction within a certain number of price bars, say 12, it may be time to exit. This approach, popularized by Tom DeMark, is based on the idea that if a signal hasn't played out as anticipated within a specific timeframe, it probably wasn't a great signal to begin with.

Listen to the Charts

Ultimately, the most important thing is to listen to what the chart is telling you. As Justin Mamis once said, "If the stock isn't doing what you expect it to do, sell it." Technical analysis is about identifying patterns and configurations; if the chart indicates that your thesis isn't working out, it's crucial to acknowledge it and act accordingly.

The key to successful trading and investing lies not in being right all the time, but in knowing when to admit you're wrong. By employing a well-defined exit strategy, whether based on price, time, or a combination of factors, you can effectively manage risk and preserve capital. Remember, the markets are always sending signals; it's up to you to interpret them and make informed decisions based on what the charts are telling you.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

August 2024 Market Update: Sentiment Indicators Point to Extended Decline

The equity markets are experiencing a choppy August 2024, leaving investors uncertain about the future. Are we headed for further declines, or will we see a recovery from recent pullbacks? Today, we’re looking into three crucial market sentiment indicators, each suggesting potential weakness.

Setting the Stage: Understanding Market Sentiment

Market sentiment plays a pivotal role in determining the direction of equity markets. By analyzing various sentiment indicators, investors can gauge the collective mood and potential future movements. Let's explore three key indicators that currently suggest caution.

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The VIX: A Classic Volatility Measure

Our first indicator is the VIX, which reflects market volatility derived from options markets. This week, the VIX spiked over 65, marking the third-highest reading since the Great Financial Crisis of 2009. To put it in perspective, the COVID low in 2020 saw the VIX in the mid-80s, but readings above 60 are rare and typically signal significant pullbacks.

• VIX Insights: A VIX above 15 implies a shift from bullish conditions to a slight pullback, while readings above 20 suggest a 5-10% corrective phase. The recent climb above 60 could signal a more substantial and prolonged market decline, indicating that investors should brace for potential turbulence ahead.

The AAII Survey: Individual Investor Sentiment

Next, we consider the AAII survey, a critical gauge of individual investor sentiment. This weekly survey measures opinions on whether respondents are bullish, bearish, or neutral about the market for the next six months. Historically, a bullish reading above 50% indicates euphoric optimism, often preceding a market pullback.

• AAII Survey Dynamics: About four weeks ago, bullish sentiment spiked above 50%, serving as a red flag for potential corrections. Currently, bullishness has dropped from 52% to 40%, while bearish sentiment has risen from 22% to 38%, suggesting a growing pessimism. This shift indicates that investors are becoming more cautious, hinting at a potentially tradable low. However, it’s essential to wait for signs of accumulation before making any decisive moves.

The NAAIM Exposure Index: Professional Insights

Finally, we turn to the NAAIM Exposure Index, which tracks sentiment among professional money managers. Unlike the AAII survey, this index gauges how aggressively professionals allocate to equities.

• NAAIM Exposure Trends: Just like an AAII bullish reading above 50% signals euphoria, NAAIM readings above 100% indicate excessive leverage and optimism among money managers. Five weeks ago, this index was just over 100%, suggesting extreme bullishness. Since early July, however, there’s been a noticeable shift, with money managers reducing their equity exposure from leveraged long positions to more neutral or slightly underweight stances. This pivot toward a defensive posture suggests professionals are preparing for further declines.

Conclusion: Cautious Optimism or Further Decline?

In summary, the three sentiment indicators we examined—the VIX, AAII Survey, and NAAIM Exposure Index — each suggest potential market weakness ahead. Elevated VIX readings, shifting sentiment among individual investors, and money managers lightening their equity positions all indicate a possible extended pullback. While these indicators provide valuable insights, it's crucial to watch for signs of accumulation and a break above key levels to confirm any market recovery.

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What market sentiment indicators do you follow and use? Do you rely on any of those discussed here, or are there others you consider essential? Share your thoughts in the comments below! Also, feel free to suggest any other technical indicators, market sentiment gauges, or behavioral or technical ideas you’d like me to explore in future posts.

RR#6,
Dave

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. 

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.