Today’s action was about as exciting as watching paint dry.  The day was quiet and the Dow Industrials closed down 22 points to finish at 10,835.28 while the S&P 500 Index fell .26%.  The Nasdaq Composite lost .13% – making a Narrow Range 7 day in the process – so expect increased volatility in the Naz within the next few days.

A sharp drop in inventories sent oil higher today and UCO, the levered crude oil ETF, rose 4.46%.  TAN, the solar ETF, blasted through its 200-day SMA for the first time since January, closing up 2.55%.  Except for other oil and oil-related issues, most ETFs were very quiet today.  Please click on the symbols for details.

With September ending tomorrow I took a look at a monthly chart of the SPY, the S&P 500 SPDR.  From time to time I like to look at long term charts using Gann Fan analysis, which provides insight into future resistance and support trend lines.

W.D. Gann was a finance trader who in 1935 developed the technical analysis tool known as Gann angles. Each geometrical angle (which is really a line extended into space) divides time and price into proportionate parts. The most important angle is called the 1×1 or the 45° angle, which Gann said represented one unit of price for one unit of time. If you draw a perfect square and then draw a diagonal line from one corner of the square to the other, you have illustrated the concept of the 1×1 angle, which moves up one point per price bar.

Other important angles were the 2×1 (moving up two points per bar), the 3×1, the 4×1, the 8×1, and the 16×1. When the angles are drawn in a group, they are called a Gann fan.  The Gann Fan is made up of nine angles based on this concept.  These trend lines are used to indicate support and resistance levels. When one line is broken (by the entire bar’s price range) prices should move to the next line. The drawing of these lines should start from either a top or bottom.  Please note that in the SPY chart below I chose not to show all nine angles, so it would be easier to read.

It’s worth mentioning that opinions are sharply divided on the value and relevance of Gann’s work.  Gann market forecasting methods are based on geometry, astrology, and ancient mathematics so as you would imagine, there are some technicians who consider the methodology useless.

Please review the chart below, which you can make full-screen by clicking on it:

You can see that after closing above the 2×1 line in April 2008, SPY fell back below (yellow rectangle) and the trend line acted as strong resistance until August 2009 (blue rectangle).  After closing above the 2×1 it marched steadily up to the 3×1 in December 2009 (yellow ellipse), where it stalled for another month.  In February 2010 it finally closed above the 3×1 line and in April closed above the 4×1 line, after which it fell back below the trend line.  September is the first month since April that SPY looks to close above the 4×1 line.

Assuming the SPY doesn’t close back below the 4 x 1 line, Gann Fan analysis says the next stop is the 8×1 line, currently around 132.  Will that in fact happen?  There are many technicians who scoff at Gann Fan analysis but I prefer to wait and know in the fullness of time.

The next two afternoons I have appointments so this is my final blog for the week.  See you on Monday.

“Let The Good Times Roll,” as they say in New Orleans…which is precisely what the stock market has been doing.  The Dow Industrials gained back yesterday’s losses, adding 46 points to close at 10,858.14.  Interestingly enough from a technical standpoint, today’s up volume was greater than yesterday’s down volume.  The S&P 500 Index rose .49% and the Nasdaq Composite gained .41%.

Diverging with equities were treasury bonds, which also rose today.  As a rule of thumb when stocks are up, bond prices go down and yields go up.  The past few days bond yields have gone down.  Gold and silver rose again but oil was down slightly.  The dollar continues to fall.

Semis were strong today and USD, the levered semiconductor ETF, gained 3.31%.  GXG, the Colombia ETF, has been on a tear since April and added another 3.16% today.  AGQ, the levered silver ETF, tacked on 2.75% and except for a few days in late August hasn’t looked back.  Please click on the symbols for details.

LBJ, the Latin America Bull ETF, was up 3.95% and broke through some important resistance.  The weekly chart below shows the ETF, which began trading in December 2009, broke through the resistance line of a longer-term falling trend channel (blue lines) and has now halted at the resistance line of the shorter-term rising trend channel (black lines).  Please click on the chart to make it full-screen:

This being only Tuesday there is no guarantee LBJ won’t pull back below the falling (former) resistance line but the ETF definitely bears watching.  A strong finish this week could set up a test of the April high, around 39.

And speaking of international ETFs, EEM, the emerging markets index, is worthy of discussion.  The weekly chart below clearly shows EEM had been trending higher from late 2008 through April 2010 and has since moved sideways:

Last week it ran up to the resistance line that began July – August 2008.  This week so far, it’s pushed above.  My AAPTA colleague Dave Landry draws a Big Blue Arrow to visualize the trend direction and you can see the direction had been higher.

EEM has formed a deep rising right triangle, approximately 25 – 26 points high.  A close this week above the resistance line could set the stage for a move to the 70 range.  Not uninterrupted I’m sure but like LBJ, worth watching.  Having said that, Thom Bulkowski, author of Encyclopedia of Chart Patterns, comments that the pattern is a mediocre performer.

At some point the time the market will decide to engage in profit taking and give back some of its recent gains.  But until then, “Laissez Les Bon Temps Roulez.”

Well, it looks like Dell finally fixed my new computer.  Huzzah!  I picked a heck of a week to be off-line, too.

Stocks traded in a narrow range today until the final half-hour, with the Dow Jones Industrials closing down 48 points at 10,812.04.  The S&P 500 Index dropped .57% and the Nasdaq Composite gave back .48%.  The U.S. Dollar was up a little but Treasury Bonds soared today, after giving back recent gains last Thursday and Friday. Gold was flat.

The news about Southwest Airlines buying AirTran sent FAA, the airline ETF, up 3.32%.  This ETF trades very thinly, with average daily volume under 35,000 shares.  Financial stocks lost some ground and FAZ, the 3x levered Financial bear ETF, rose 2.64%.  Real estate slipped; SRS, the levered short real estate ETF, rose 2.06%.  Please click on the symbols for more details.

Despite the gains today in TLT, the 20+ year Treasury Bond ETF that was up 1.74%, I’m not convinced that bond yields will continue to fall.  Although the price was up (remember, bond prices move inversely with yields so if the price is up, yields are down), it rose on slowing volume.

I’ve blogged a number of time times about Dave Landry’s Bow-Tie crossover technique.  Back in late April it fired off a buy signal.  The bow-tie is a very simple technique that uses three moving averages: the 10-day SMA, the 20-day EMA, and the 30-day EMA. The moving averages should converge and spread out again, transitioning from a proper downtrend order (10-SMA < 20-EMA < 30-EMA) to a proper uptrend order (10-SMA > 20-EMA > 30-EMA).  According to Landry, ideally this should happen over a period of three to four days.  The creates the appearance of a bow-tie in the averages.

Here are the entry rules:

1. The moving averages transition from proper downtrend order to proper uptrend order.

2. The ETF must make a lower low and a lower high.

3. Once #2 has happened, go long above the high of #2 until filled.  If the ETF starts trading below its 20- or 30-day EMA before you’re filled, reevaluate the trade and consider standing aside.

Please review today’s bow-tie chart on TLT.  You can make the image full-screen by clicking on it:

TLT fell below all the MAs on September 3, followed by a two-day recovery and then falling back below the MAs on September 15.  It’s began rallying two days later, however, and today’s close was well above all the moving averages.

Landry suggests holding the trade until the ETF starts trading back to or below its 20- or 30-day EMA.  That doesn’t mean you should automatically sell there, although taking partial profits is never a bad idea.  Use other technical indicators to confirm the trend is changing.  If you’re still in the ETF and the moving averages reverse to a proper downtrend order, however, exit the trade.

Last week the 10-day SMA crossed below both EMAs but the 20-day EMA did not cross/close below the 30-day EMA.  My personal preference is to hold the trade as long as the moving averages don’t reverse into the proper downtrend order.  It’s okay to continue holding the trade if the 10-SMA falls below the 20-EMA, as long as the 10 and/or 20 are still above the 30-day SMA.

But look at the volume…steadily decreasing since September 21, the day TLT closed back above the moving averages.  The Price Zone Oscillator and Volume Zone Oscillator (developed by Walid Khalil) are also showing a non-confirmation of price and volume.  One of the basic tenets of Dow Theory is that  volume goes with the trend.  There are exceptions to this rules but it’s a pretty reliable one.

The chart below shows that PZO has been leading VZO, which is bearish because in a bullish trend it usually works the other way around:

Note how last week, PZO almost rose to +40 (blue ellipse; it was 39.24) while VZO didn’t rise nearly as high (yellow ellipse).  VZO closed today at 20.63 while PZO made a much “stronger” close at 31.42.  Price leading volume tends to result in price failing to moving higher.

Given the tendency for bonds and stocks to move inversely to each other, the oscillator non-confirmation may be signaling today’s pullback in equities is temporary and stocks will continue higher after undergoing a round of profit-taking.  That’s what happened last week.  Will it happen again this week?  The answer to that question is something we will know in the fullness of time.

Folks, I continue to have problems with my computer, to the point where Dell is sending out a technician to replace the motherboard and fans.  The durn thing keeps “crash dumping” every 15 – 20 minutes, making it impossible for me to to create the charts and post the blog.  I hope to up and running again by the end of the week.

Sorry about this.

Enjoy your weekend.

Equities closed mixed today, with the Dow Industrials up 22 points to close at 10,594.83; the Nasdaq Composite up .08%; but the S&P 500 Index down .04%.  Gold continues to rally but oil and treasuries were down.

ETFs were quiet but SCO, the levered inverse crude oil ETF, gained 2.88%.  USD, the levered semiconductor ETF, gained 2.04%.  Yesterday I discussed a short entry in SMH using Larry Connors and Cesar Alvrez’ RSI 75 and %b strategies – the latter shorted additional shares today.  Silver continues to climb and AGQ, the levered silver ETF, rose 1.87%.  Please click on the symbols for details.

TLT, the 20+ Treasury Bond ETF, is at an important inflection point, seen on the weekly chart, below.  You can click on the chart to make it full-screen:

From December 2008 through April 2010 high, interest rates declined.  When rates go down bond prices (TLT) go up, and vice versa.  This means TLT peaked in December 2009 and bottomed in April 2010.

TLT came within a few cents of retracing 61.8% of the of this decline, but couldn’t push through (blue Fibonacci retracement lines).  Starting in April TLT began rising, which meant rates began to decline again.   Since late August, TLT has declined which means rates began rising anew.

As a general rule, Fibonacci analysts believe that retracements of up to 50% mean the preceding trend is still in force.   Retracements of 61.8% or more are interpreted as meaning the preceding move has come to an end.  TLT had been rising (rates falling) since April 2010 (falling rates) and the expectation was that decline in rates would continue, since it had retraced 61.8% of of the decline.

Usually, but not always.

TLT has since fallen well below the 50% retracement line and this week’s low is holding on the 38.2% retracement line.  Now look at the shorter term Fibonacci retracement series, in gray, which uses the April low and August high as end points.  Note how the 38.2% retracement level of the shorter series is almost identical in price to the 38.2% level of the longer series: 100.99 versus 100.92.  When two levels from different time series coincide, this is called a Fibonacci price inflection point, and it acts as a powerful support or resistance level.

Normally these are two different retracement levels, e.g., 38.2% on the longer series and 61.8% on the shorter series.  The reason that’s not the case here is because the longer series was measuring the retracement higher while the shorter series is measuring the retracement lower.  The effect is the same, however – just below 101 is where the battle line has been drawn between Bond Bulls and Bond Bears.

The fact that bond yields have risen sharply while equities haven’t risen nearly as much (in percentage terms) may be foreshadowing a growing belief among institutional asset allocators that the economy has bottomed and things are starting to look better.  If that’s the case then the equity indexes like the SPY (S&P 500 SPDRS), QQQQ (Nadsaq-100 Index), and DIA (Dow Diamonds) should be moving higher than their August highs.  QQQQ has but the other two have not.  That the equity indexes are extended is something few would argue against but how much of a pullback if any is in store, remains subject to debate.

If the economy is improving then we should see oil prices start moving higher again.  But crude oil prices aren’t reflecting this; I mentioned earlier that SCO was up almost 3% today.  It’s also back above its 50- and 200-day SMAs.  Overall, SCO has been trading sideways since February 2010.  That may be coming to an end, however.  Please review the weekly chart of SCO, below:

SCO has formed an inverse head-and-shoulder pattern (IH&S), also known as a head-and-shoulder bottom pattern.  Thom Bulkowski, author of the book Encyclopedia of Chart Patterns, refers to the IH&S as having a 3-valley pattern with the middle valley below the others.  I like to think of it as someone standing on their head!  The valleys are labeled LS (left shoulder), Head, and RS (right shoulder).  Volume tends to decrease as the right shoulder forms, which is also the case here.

A neckline is drawn by connecting the two “armpits,” shown here with by a horizontal black line.  A price objective is calculated by taking the distance between the Head low to the neckline directly above the Head.  With SCO, the Head is the week-ending August 6th low of 12.43; the neckline directly above that is around 16.85 – 16.90.  Subtract the head from the neckline and you get a distance of 4.42 – 4.47.  Add this to the neckline for a breakout objective (should it occur) of 21.27 – 21.32.

Bulkowski takes the calculation one step further.  His research showed that the IH&S met its price objective 74% of the time.  He therefore takes the difference between the neckline and Head (4.42 – 4.47), multiplies it by the percentage that met the price objective (.74), and adds that to the breakout price.  Using his methodology the price objective is:

(4.42  x .74) + 16.85 = 20.13.

A close above the neckline could be either a signal or confirmation that the market is looking for lower prices.  On the other hand, SCO could run up to the neckline and fail to move through, like it has several times in the past few months.  As always, what it’s going to do is something we will know in the fullness of time.

After an opening hour that pushed the market into the red, speculation that more companies will be bought or return cash to shareholders pulled the market back into the black for the remainder of the day.  Commodities and treasuries fell while the Dow Industrials tacked on another 46 points to close at 10,572.73.  The S&P 500 Index gained .35% while the Nasdaq Composite rose .50%.

The Yen slid as Japan sold the currency for the first time in six years to bring it down from a 15-year high against the dollar.  YCS, the levered short Yen ETF, jumped 5.73%.  Other ETFs were more sedate today.  TBT, the levered short 20+ year Treasury Bond ETF, gained 2.83%.  XBI, the Biotech SPDR, rose 1.97% and closed at a 60-day high.  Please click on the symbols for details.

The indexes have run smack-dab back into the range where they stalled in early August, followed by a 7% – 8% pullback.  Volume on the Nasdaq is stronger now than it was in early August, however, so it remains to be seen from what price level the Naz will start to slip, if at all.

SMH, the semiconductor HLDR, fired off a short signal on yesterday’s close in the RSI 75 strategy.  Today’s close fired off a short signal in the %b strategy.  Both strategies are discussed in Larry Connors’ and Cesar Alvarez’ book, “High Probability ETF Trading.”

RSI 75 is a simple strategy that waits for the 4-period RSI to rise above 75 for a short entry.  The trading rules are as follows:

1) The ETF is trading below its 200-day simple moving average.

2) The 4-period RSI closes above 75.  If it looks like that will happen, sell short on the close.

3) Short a second unit if at any time while you’re in the position the 4-period RSI closes above 80.

4) Exit when the 4-period RSI closes below 45.

Here is a chart showing the short entry on SMH.  The horizontal blue line is the 200-day SMA.  Yesterday’s 4-day RSI closed at 75.18.  The chart can be made full-screen by clicking on it:

The short trade will cover when the 4-day RSI closes under 45.

The %b is one of the components of the Bollinger Bands, developed by Mr. John Bollinger.  It measures how overbought or oversold a security is.  The higher the %b reading, the more likely the asset has moved higher.  The lower the %b reading, the more likely the asset’s trend has been lower.   Ideally, traders want to buy low %b readings and sell high %b readings.

The system is straight-forward.  For short trades:

1) The ETF must be below its 200-day SMA;

2) The %b must close above 0.80 for 3 days in a row.  If this occurs, short the ETF on the close;

3) Aggressive traders – Any additional day while you’re in the trade, if the %b of the ETF closes again above .80, short a second unit on the close;

4) Exit when %b closes under .20.

In a test of 20 ETFs  from their inception date to 12/31/08, the basic (no scale-in) version on short trades had average %P/L of .95%; the average trading days held was 4.5 days; and the average % Winners was 70.1%.  The aggressive (scale-in) version had an average %P/L of 1.34% and a % Winners of 75.4%.  With SMH, from inception through today the scale-in version had a % Winners of 75.26% (before trading costs).

Rather than short SMH you can go long SSG, the levered short semiconductor ETF.  Use the exit signals for covering SMH to time your exit on SSG.

The stock market closed mixed today, with the Dow Industrials losing 17 points to close at 10,526.49, while the S&P 500 Index fell .07% and the Nasdaq Composite Index gained .18%.  Worries reappeared over Europe’s economy, after German investor confidence fell sharply and industrial production stagnated in the countries that use the euro.  Treasuries and gold rose sharply while the U.S. Dollar fell hard.

The second biggest mover today was AGQ, the levered silver ETF, which soared 5.21% and is closing in on its all-time high made last December.  Not far behind was UGL, the levered gold ETF, up 3.98%.  Semis made a solid move today, reflected in USD, the semiconductor ETF, gaining 2.79% on strong volume; it is still trading below both its 50- and 200-day SMAs, however.  Please click on the symbols for details.

It’s all-too easy to concentrate on the exotic or complex TA indicators and strategies.  They’re interesting, they’re sexy, and you sound like you really know what you’re talking about when you discuss them with other technicians.  But sometimes, the old stand-bys work just as good if not better.  For example, take a look at this daily chart of UUP, the U.S. Dollar Bull ETF.  You can make the chart full-screen by clicking on it:

Look at how something as simple as a 50-day SMA held back UUP from rising any higher than it did in late August.  If later in the month or early September it had broken through, that would have been a powerful signal.  The 200-day SMA demonstrated on September 3 it wouldn’t hold as support and that fact smacked longs in the face yesterday.

TLT, the 20+ Year Treasury Bond ETF, is trying to recover the ground it lost the past two weeks.  Back in late April it fired off a Bow-Tie buy signal.  Developed by my AAPTA colleague Dave Landry, the bow-tie is a very simple technique that uses three moving averages: the 10-day SMA, the 20-day EMA, and the 30-day EMA. The moving averages should converge and spread out again, transitioning from a proper downtrend order (10-SMA < 20-EMA < 30-EMA) to a proper uptrend order (10-SMA > 20-EMA > 30-EMA).  According to Landry, ideally this should happen over a period of three to four days.  The creates the appearance of a bow-tie in the averages.

Here are the entry rules (short sales are reversed):

1. The moving averages transition from proper downtrend order to proper uptrend order.

2. The ETF must make a lower low and a lower high.

3. Once #2 has happened, go long above the high of #2 until filled.  If the ETF starts trading below its 20- or 30-day EMA before you’re filled, reevaluate the trade and consider standing aside.

TLT fell below all the MAs on September 3, followed by a two-day recovery and then falling back below the MAs last week.  Today’s close was right on the 30-day EMA.

Landry suggests holding the trade until the ETF starts trading back to or below its 20- or 30-day EMA.  That doesn’t mean you should automatically sell there, although taking partial profits is never a bad idea.  Use other technical indicators to confirm the trend is changing.  If you’re still in the ETF and the moving averages reverse to a proper downtrend order, however, exit the trade. As of today’s close the MAs have not yet crossed over.

My personal preference is to hold the trade as long as the moving averages don’t reverse into the proper downtrend order.  It’s okay to continue holding the trade if the 10-SMA falls below the 20-EMA, as long as the 10 and/or 20 are still above the 30-day SMA.

So does this mean the long TLT trade should continue being held at this point?  Go back two paragraphs ago for your answer: Use other technical indicators to confirm the trend is changing.

Note that TLT is rising on decreasing volume.  Price rises on decreasing volume tend to fail.  The 30-day EMA also acted as resistance on September 9th (yellow rectangle).  Now take a look at the Volume Zone Oscillator (VZO) and Price Zone Oscillator (PZO) chart of TLT:

These oscillators, developed by Waled Khalil and discussed in yesterday’s blog entry, show that the PZO (left) is well ahead of the VZO (right).  It is well-accepted among technicians that price usually follows volume.  Either volume needs to increase, at which time VZO will gather speed, or price will likely flounder in its attempt to advance.

Volume can pick up – it happened yesterday in SPY, the S&P 500 SPDR – but unless it quickly picks up and preferably VZO overtakes PZO, a price pullback increases in probability.  Yesterday’s SPY VZO-PZO charts looked like this:

Both oscillators closed greater than +40 but PZO is ahead of VZO.  Most of the time PZO and VZO are in synch with each other.  But since price usually follows volume, when price is lagging behind volume (PZO lags behind VZO), price usually catches up.  And when price runs ahead of volume (i.e., VZO lags behind PZO), price usually pulls back.  When VZO is ahead of PZO, this is a bullish divergence between the two oscillators.  When PZO is ahead of VZO, this is a bearish divergence.  Yesterday was a bearish divergence between the two oscillators.  And in today’s chart below you can see that while SPY closed slightly higher, both oscillators pulled back below +40, with VZO “ahead” of (lower than) PZO:

So let’s cut to the chase – what does this all mean?

SPY has now stalled in the range it stalled at back in early August: 111 – 113.  Although not shown in the charts above, it’s holding above both its 50- and 200-day SMAs.  As long as this remains the case, use pullbacks as an opportunity to trade the long side of equities.  If it falls below the 200-day but stays above the 50-day, be cognizant of increased volatility.  If it also closes below the 50-day SMA, start playing the short side again.

TLT may keep rising but if volume doesn’t pick up and VZO start gaining on PZO, the gains this week may be short-lived.  Watch and see if TLT can start closing back above the three MAs in the bow-tie.

I’m sure I’m not the first person who needed a vacation after their vacation.  The market did fine in my absence, continuing the climb it began on September 1 with the Dow Industrials adding another 81 points today to close at 10,544.13.  The S&P 500 Index rose 1.11% and the Nasdaq Composite soared 1.93%, thanks to new banking regulations, takeovers, and positive news from China.

Overseas ETFs did well today with CZM, the 3x levered China Bull adding 7.56% and LBJ, the 3x levered Latin America Bull rising 7.29%.  USD, the levered semiconductor ETF, gained 6.48%.  UWM, the levered Russell 2000 Index ETF, rose 4.77% and is closing in on its 200-day SMA.  Please click on the symbols for details.

QQQQ, the Nasdaq-100 Index ETF, has broken out above the highs of the early August congestion zone highlighted by the light blue ellipse.  Please click on the chart to make it full-screen:

Various technical indicators are extended at this point so a pullback is likely but from what price it begins remains a question – markets that are overbought can become even more overbought before correcting.

There is a bearish divergence underway between the Volume Zone Oscillator (VZO) and the Price Zone Oscillator (PZO) on SPY, the S&P 500 SPDR ETF.  Developed by Waleed Khalil, the VZO and PZO illustrate overbought and oversold conditions, which warns that the price trend is overextended (in either direction) and vulnerable to a retracement.  I discussed the oscillators in detail in the June 29, June 30, and July 16 blog entries, which you can find by clicking on the calendar on right-hand side of this page.

Most of the time the PZO and VZO are in synch with each other.  But since price usually follows volume, when price is lagging behind volume (PZO lags behind VZO) price usually catches up.  And when price runs ahead of volume (i.e., VZO lags behind PZO) price usually pulls back.  When VZO is ahead of PZO, this is a bullish divergence between the two oscillators.  When PZO is ahead of VZO, this is a bearish divergence.  Please review the chart below of the SPY, looking at both PZO and VZO:

The PZO chart is on the left and the VZO chart is on the right.  Note that PZO is ahead of VZO: 45.05 versus 40.51.  VZO can catch up, of course, but watch if it continues to lag or both reverse and fall below +40.  That’s a sell signal.

Last week TLT, the 20+ year Treasury Bond ETF, fired off buy signals on several of the Connors/Alvarez short-term trading strategies discussed in their book, “High Probability ETF Trading.”  On Friday TLT pulled back to its 50-day SMA and moved strongly higher today on an engulfing bar (yellow rectangle).  A similar pattern occurred in late July-early August (blue rectangle):

Note how today’s high and close was above the former resistance line that held as support when tested on September 3 and September 9 (blue arrows), and as resistance on September 13 (red arrow).

I also find it interesting that both equities and bond prices were higher today.  As a general rule, the two move inversely with each other.  If we look at the action in the SPY on Friday and today versus July 27-28 (both were engulfing bar patterns), in July the S&P dropped the day TLT made the engulfing bar, while today it rose.  After a pullback retest of the 50-day SMA a few days later, TLT took off to the races on August 6 and a few days after that the SPY began its 7.8% fall that ended on August 31.

So will equities continue to rise or do they top out here and bonds prices begin rising again (falling yields)?  That is something we will know in the fullness of time.