11.21.14 – Blog Will Resume Monday

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11.20.14 – Pushing ‘Em Forward

Yesterday the market pulled back; today it pushed forward with the Dow Jones Industrials adding 16 points to close at 17,701.85.  The S&P 500 Index gained .20% while the Nasdaq Composite tacked on .56%.  Chipmakers were higher after Intel raised its dividend.

Gold continues to perform well, with GDX, the gold miners ETF, gaining 3.34%.  Its little brother GDXJ did better, climbing 5.54%.  XOP, the S&P Oil & Gas Exploration and Production ETF, was up 3.23% but is still in the downtrend that began last June.  FCG, the natural gas trust ETF, floated 3.65% higher.  Please click on the symbols for details.

Bollinger Bandwidth continues to narrow as it coils tighter.  The BandWidth is now .261; anything below .30 is considered Squeezed.  We have a very similar pattern in the Nasdaq VIX, the VXN, where the BandWidth has narrowed to .2751:

VXN-QQQ

It isn’t a matter of if, it’s when.  Volatility will increase and revert back to its norm.

I like what I’m seeing in the price action of IWM, the Russell 2000 ETF, but what I don’t like is the volume action.  Please take a look at the daily chart below:

IWM

After topping on July 1, 2014, IWM pulled back and bottomed on October 15, 2014.  After that it recovered a little more than 78.6% of the decline (blue Fibonacci series) and then it pulled back to the 61.8% level.  It bounced sharply higher today.  A more recent Fibonacci time analysis shows that IWM retraced 23.6% of the price rise since bottoming in October (red Fibonacci series) – a shallow and potentially bullish development.  See where the red and blue lines almost overlap?  That’s called a Fibonacci price cluster.  These clusters tend to act as strong support or resistance levels.

But what about the weak volume?  The more-or-less horizontal black line running through the volume bars is a 50-day SMA of volume.  The price thrust that sent IWM to its high last week was on very low volume and generally speaking, low volume on a price advance is not very bullish.

But take a look at the Price Zone and Volume Zone Oscillators, PZO and VZO.  Developed by my friend Walid Khalil, the oscillators reflect buying and selling pressure in a security.  It’s bullish for VZO to have a greater value than PZO when the ETF is rising in price, and bearish for PZO to have a greater value than VZO.  PZO is on the left and VZO is on the right:

IWM VZO

Today PZO was 13.38 and VZO was 13.70.  So despite volume being well below average, there seems to be no major selling underway in the small caps.

Well, that wraps up the week for me since I’ll be unavailable tomorrow afternoon.  Enjoy your weekend.

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11.19.14 – Taking ‘Em Back

Yesterday’s gains turned into today’s losses with the market pulling back as Fed minutes show the governors are concerned about deflation.  The Dow Industrials slipped only 2 points to close at 17,685.73 while the S&P 500 Index fell .15%.  Hard hit Tesla and Netflix contributed to the Nasdaq Composite lost .57%.  Treasury yields rose, which usually is consistent with higher equity prices.

UNG, the natural gas ETF, gained 3.86% but was turned back trying to get through its 200-day SMA.  UVXY, the leveraged VIX short-term futures ETF, rose 5.00%.  JO, the coffee ETN, gained 3.46%.  SRTY, the leveraged short Russell 2000 ETF, was up 3.16%.  Please click on the symbols for details.

The Bollinger Bandwidth on the VIX, discussed in Monday’s blog, narrowed to .2962.  A value below .30 is considered “Squeezed” so an increase in volatility should be expected soon.  Given how the market has really done nothing but move higher since making its V-bottom in mid-October, it’s likely there will be a pullback from here.

That may impact how gold performs.  A few weeks ago GLD, the gold ETF, fell below important support around 114.65 – 114.70 as well as closing below a long-term rising trend line.  It also closed just below a 50% retracement of the rise from the July 2005 low to the September 2011 high.  This month it’s tried to recapture the 50% level but stalled and pulled back upon reaching the former support line, which is now acting as resistance.  You can see this in the monthly chart below, which can be made full-screen by clicking on it:

GLD

The former support now resistance line is blue.  A pullback in stocks of more than just a few points may provide the oomph for GLD to push through resistance.  Whether it’s able to accomplish this is something we will know, in the fullness of time.

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11.18.14 – Nothing But Clear Sky Ahead?

Equity indexes closed at new highs as health-care and raw-material companies rallied.  The Dow Industrials added 40 points to close at 17,687.82 while the S&P 500 Index gained .51%.  The Nasdaq Composite was up .67%.  Gold and silver rallied today and volatility continues to fall.

GDXJ, the junior gold miners ETF, was a big winner yesterday and it did it again today, climbing 6.76% on almost double average daily volume.  GREK, the Greece 20 ETF, jumped 5.92% but it’s still far below its 50-day and 200-day SMAs.  SIL, the silver ETF, was up 5.60% and TAN, the solar ETF, was shining as it gained 4.97%.  Please click on the symbols for details.

It seems hard to believe the market can keep climbing without pulling back but despite JP Morgan Chase today telling its investors to dump U.S. equities, it ain’t happening yet.  In fact, I see confirmation of the move in the long-term (monthly) Volume Zone Oscillator (VZO) and Price Zone Oscillator (PZO) charts on SPY, the S&P 500 Index ETF.

The oscillators, developed by market technician Walid Khalil, reflect buying and selling pressure in the security being evaluated.  When the security’s price is above the 60-bar EMA and the oscillator is above +15 and rising, that’s bullish.  Please take a look at the PZO and VZO charts below, which can be made full-screen by clicking on them.  PZO is on the left and VZO is on the right:

SPY monthly

Normally, when the oscillator rises above +60 and then closes below, that’s a signal to sell. But there are times when the ETF trades sideways rather than pulls back even though the oscillator declines, and then the oscillator begins rising again.  That’s what happened back in June/July of last year and January of this year.  You can see how both PZO and VZO broke upwards through their descending trendlines at the end of last month.

So does this mean it’s clear sailing ahead for the stock market?  It’s hard to believe that will be the case but the market does climb a wall of worry.  In any event, the answer to that question is something we will know, in the fullness of time.

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11.17.14 – Getting Ready To Bust A Move?

The equity markets have drifted higher on weak volume since I last blogged two weeks ago.  Today the Dow Industrials inched up 13 points to close at 17,647.15 while the S&P 500 Index ticked up .07%.  The Nasdaq Composite slipped .37%.  Small-cap stocks were hit harder, with the Russell 200 Index falling .82%.  There are also concerns about Japan sinking into a recession.

Cold weather gripping much of the nation sent UNG, the natural gas ETF, up 5.40% on light volume.  GDXJ, the junior gold miners ETF, gained 4.36% on heavy volume.  SRTY, the leveraged short Russell 2000 Index EF, rose 2.40%.  Please click on the symbols for details.

The Bollinger Bands are tightening on the VIX, the CBOE Options Volatility Index.  This can lead to a “Squeeze,” the term John Bollinger coined for when the Bollinger Bands narrow and the Bollinger BandWidth decreases.  Bollinger BandWidth is an indicator derived from the Bollinger Bands.  StockCharts.com provides an excellent explanation of what Bollinger Bandwidth is and how it’s interpreted:

“BandWidth measures the percentage difference between the upper band and the lower band. BandWidth decreases as Bollinger Bands narrow and increases as Bollinger Bands widen. Because Bollinger Bands are based on the standard deviation, falling BandWidth reflects decreasing volatility and rising BandWidth reflects increasing volatility.”

Bandwidth is simply the difference between the value of the upper Band and the lower Band, divided by the value of the middle Band.  When the BandWidth is narrow, volatility tends to be low and the range of an ETF is also narrow.  Since one of the best ways to capture a gain is to buy or short when it breaks out of a narrow range, scanning for a narrow BandWidth can be an excellent method for finding ETF’s that are getting ready to break out.

But how narrow is narrow?  Put another way, can “narrow” be quantified?  The short is answer is Yes…and No.  What’s narrow to one ETF may be wide to another.  I find the most effective method is to look at a six month chart of an ETF with the Bollinger Bandwidth charted and look for periods of time where the Bands have narrowed.  The Squeeze occurs when volatility is very low.  The chart below shows the Bollinger Bands squeezing together on the VIX:

VIX-SPY

Below the VIX surrounded by its Bollinger Bands is the SPY and below that, the Bollinger BandWidth.  The red line is measuring the degree of Squeeze.  When the Bandwidth falls below .30, the Bands are squeezed together.  Today’s closing Bandwidth was .3732, the tightest it’s been since in over six weeks.  When the BandWidth falls below .30 there tends to be a sharp move shortly thereafter in the VIX and the stock market as volatility expands, i.e., reverts to its mean.

Last year, VIX Bandwidth started rising on December 2 and the SPY dropped 2.2% before bottoming.  Not a huge decline but in May of this year when the Bandwidth narrowed to .1581 (May 15) and then expanded, the SPY never fell at all – on May 15 it closed at 187.40 and moved steadily higher until the end of July.  In mid-September the BandWidth dropped to .1716 (September 11) and a few days later the S&P began what developed into a 7.7% pullback.  So just because the BandWidth is narrowing and then expanding doesn’t necessarily mean the market will fall.  All it means is that volatility is likely to pick up and the market will begin moving out of its range.  Which direction that will be is up to you to determine.

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11.3.14 – Blog Will Resume Monday, November 17

Subscribers Only! will be updated daily.

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10.31.14 – Take A Memo

To:   
From:   
Re:  

“In the next day or two either yields should continue higher or equities turn lower”

That’s what I wrote yesterday and even a stopped clock is right twice a day: Yields rose as equities caught fire yesterday and fanned the flames today.  The Dow Industrials raced up another 195 points to close at a new high of 17,390.52.  The S&P 500 Index made a new closing high by gaining 1.17% while the tech-heavy Nasdaq Composite was up 1.41%.  Biotech, which has been moving almost straight up the past few weeks, cooled off today.  Gold and silver were crushed.

EWJ, the Japan Index ETF, gapped open hugely higher and closed with a 4.96% gain as an unexpected boost in stimulus from the Bank of Japan spurred optimism in the global economy.  JDST, the 3x leveraged junior gold miners Bear ETF, soared another 20.57%.  XSD, the semiconductor SPDR, rose 4.73%.  ZSL, the leveraged short silver ETF, was up 3.83% but closed just above its low, indicating its run may be coming to an end for now.  Please click on the symbol for details.

GLD, the gold ETF, looks to have given up the ghost.  For ten months it held above a 50% retracement of the rise from the 2005 low to the 2011 high.  There was also a double bottom around 114.50 and a long-term rising support line just above there.  All of that went the way of the nickle beer and the Burma Shave today:

GLD monthly1

At this point it looks likely that GLD will pull back to its 61.8% Fibonnaci retracement level, around 96.35.

Even though the stock market has been on a huge run I’m not seeing any technical signs calling for an imminent end to it.  The VIX (the CBOE Options Volatility Index) closed today at 14.03, well above the 12.11 it set in mid- September a day after the market topped out.  The VIX is also well above its -2 Standard Deviation Bollinger Band.  Typically there isn’t a market pullback until after the -2SD Band is reached, as happened twice in June of this year.  The market can pull back substantially without falling to this Band, of course; e.g., the VIX never touched the -2SD Band on September 19:

VIX-SPY1

Point in fact, I’m seeing technical signs that this run may be just getting started.  On the SPY the Price Zone Oscillator (PZO) and Volume Zone Oscillator (VZO), developed by my friend Walid Khalil, is nowhere near the levels where you would expect to see the market take a rest other than a few days of light profit taking:

SPY VZO

The price is above the 60-day EMA (red line) and the PZO on the left closed today at 26.47 while the VZO closed at 17.23.  While it’s preferable that the VZO have a higher value than PZO, it’s not uncommon in the early stage of an advance for Price to lead Volume.

The present price trend probably is not sustainable although I can see a few more days of today’s kind of action.  Use pullbacks to accumulate new swing trades positions, using the Larry Connors and Dave Landry techniques I’ve written about many times.  If the market action is sideways like it was last Friday/this Monday, use Dave’s Trend Knockout (TKO) technique to buy breakouts.  If you’re unfamiliar with the TKO you can use the search box at the top of the blog to find past entries where I’ve written about them.  Type “TKO” (without the quotation marks) in the search box and click on Search.

I’m taking the next two weeks off although I will update Subscribers Only! each day.  Enjoy your weekend.

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10.30.14 – On Fire

This market is on fire, even with news out the the Fed intends on ending QE soon.  Better than expected data on economic growth fueled today’s blastoff.  The Dow Industrials closed up 221 points at 17,195.42, while the S&P 500 Index gained .62%.  The Nasdaq Composite lagged, rising “only” .37%.  What I did not like despite today’s great upside action is that Treasury bond yields closed lower.

Long and strong was the watchword for today.  ERUS, a Russia Index ETF, rose 4.83% albeit on below-average volume.  EWZ, the Brazil Index ETF, gained 4.01%.  JDST, the 3x leveraged junior gold miners Bear ETF, shot up a staggering 26.23%.  ZSL, the leveraged short silver ETF, jumped 6.65%.  Please click on the symbols for details.

There is usually a strong correlation between interest rates and equities.  A rising market is usually met with rising interest rates.  On one level, it’s simple supply and demand.  When rates are too low, the historic risk-adjusted return for equities is greater than it is for bonds, so money shifts to equities.  Equities therefore rise over time as institutions allocate more money to equities compared to bonds.  When existing bond positions are sold so the proceeds may be repositioned into equities, there are more bond sellers than bond buyers.  To attract bond buyers, yields need to be higher, ergo, lower bond prices (prices and yields are inversely correlated with each other).

Usually, there is a positive correlation between stock prices and interest rate yields.  A positive correlation indicates that two assets tend to move in the same direction. A negative correlation indicates a strong tendency for two assets to move in opposite directions. A correlation value of near zero indicates there is very little correlation between the two assets.  The highest positive correlation is 1.0 and the lowest negative (inverse) correlation is -1.0.

The intermediate-term correlation between treasury bond yields and the S&P 500 Index is usually strongly positive.  But lately that correlation has weakened and today bond yields were down even though the stock index was sharply higher.  I expected yields to be higher as well but that wasn’t the case.  In the daily chart below the 30-year treasury bond yield ($TYX) is charted on top followed by SPY below that and the correlation between the two on the bottom of the chart:

TYX-SPY

In the next day or two either yields should continue higher or equities turn lower…should being the operative word.  Just because something should be doesn’t mean it will be.  I guess the answer to that is something we will know, in the fullness of time.

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10.29.14 – Blog Will Resume Tomorrow

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10.28.14 – Moving Sideways? HAH!

Showing once again the Mr. Market’s job is to make all prognosticators look like fools, good earnings reports and higher consumer confidence numbers sent the market sharply higher the day before a Federal Reserve Board policy announcement.  The Dow Industrials jumped just under 188 points to close at 17,005.75.  The S&P 500 Index gained 1.19% while the Nasdaq Composite was up 1.75%.  Treasury yields were higher.

EWZ, the Brazil Index ETF, shot up 4.98% on more than double its average daily volume.  It has been in a downtrend since early September.  XOP, the S&P oil & gas exploration ETF, rose 4.65%; it too has been in a downtrend for months.  FCG, the natural gas ETF, gained 4.24% while XME, the metals & mining ETF, was up 3.88%.  Please click on the symbols for details.

Gold is doing its darndest to hold on at its current price level.  GLD, the gold ETF, has been hanging on just above a long-term rising support line, easily see on the monthly chart.  You can make the chart full-screen by clicking on it:

GLD monthly

Drilling down to the weekly chart we can see GLD has been trading between its 50% and 61.8% Fibonacci retracement levels:

GLD weekly

I wouldn’t be in a hurry to buy here quite yet but if the lows around 114.50 – 115.00 are hit again, you could test the waters with a long trade.  Exit should it start trading much below 113, just below the 61.8% retracement level.  That’s about a 1.5% downside risk compared to a resistance level around 125 or so, a 9.6% gain, so the risk-reward ratio is pretty solid:

GLD weekly1

I’ll be out tomorrow afternoon so I’ll see you again on Thursday.

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