Wow, what a month! March put in the best monthly gain since October 2002 and it even managed to score a monthly selling climax. Regular readers are familiar with our work on weekly selling climaxes as a sign of capitulation, but their bigger brother is even more potent. We have not witnessed one of these on the major index since the last bear market bottom, also in October 2002.
In this issue we start by highlighting a powerful and successful industry indicator compiled by us at Investors Intelligence - the “Industry Bell Curve”. We then go on to discuss direction of the USD, Oil and the broadest equity index in the world. And lastly, we run through yet another fast and simple stock picking method.
My pick of the charts over the last month has to be the Investors Intelligence “Industry Bell Curve” on the 5th of March. It provided a fantastic warning sign that the end was near as selling neared exhaustion. We printed the industry bell curve in the ETF Review on the 6th of March as the “Chart of the week”. The chart and accompanying text below are reprinted from the front page of that report.
“The US Industry bell-curve below shows the distribution of industries based on their bullish % charts. The bullish % charts represent the percentage of stocks in a given sector with P&F bull trends. Industry breadth is close to deeply oversold. If selling persists over the next couple of days, all of these groups are expected to drop into the super-oversold camp of 10% and lower. If history repeats, that would be a great market buy signal. Following trading on the October the 9th last year, ALL industry groups were grouped in the super oversold ’10%’ group and it remained there for just one day, the 10th October. On the 11th of October the S&P gained just over 10% in just one session. Very similar behavior occurred at the November lows, with the market almost reversing instantly, just as the Bell curve hit super-oversold. Equity trading risk is now to the upside. New short trades are too risky and stops should certainly be tightened.” ETF Review 6th March 2009
Capital markets, US sectors, International, Bond, Commodity and Currency ETFs are analyzed every Friday in the ETF Review.
Indices – S&P sidesteps catastrophe
“Price action on the quarterly bar chart is literally on a cliff edge, as a potential mountainous double-top looms. The pattern portends carnage, with a fall down to 375 for the S&P, slashing another 50% off current trading. However, we are not yet forecasting this gloomy scenario, as the pattern is yet to be confirmed. Confirmation will come with the index ending this quarter beneath the patterns neckline.”
The extract above is from last month’s report and we are happy to say, the index managed to end Q1 2009 back above the neckline. This feat is quite an achievement bearing in mind that jaws were dropping on the 6th of March as the S&P slipped down to a low of 666.79.
As touched on at the start of this report, the trading behavior of March has left a rare monthly selling climax. The last time we saw a monthly selling climax was almost seven years ago at the October 2002 bottom and that marked the start of a new bull market. That bull market gained almost 100% over five years.
Come the end of April, we want to see the index maintain trading above 768, and certainly above the 2009 low of 666.79. Should that happen, we are confident of a summer rally - a revival that could launch a new bull market. How high could that bull charge? Well, looking at the chart objectively, given the now confirmed bear-trap at the 2002 low, a move would be expected to the top of the twelve year trading range - the October 2007 high!
NYMEX Crude Oil (CL1) has broken out of its three month price range and in doing so has confirmed that range as a triple-bottom pattern. We first identified a potential bottom in the February issue of this report, though it did take a few weeks longer to complete than we originally anticipated.
A target to $66 is forecast, by adding the depth of the bottom to the neckline at $48. That’s a logical target given the presence of the 200-day exponential moving average close by at $65.
The current pull-back to the neckline is typical technical action following a breakout. However, three consecutive closes beneath $47 would invalidate the pattern and point to a return of the range drifting action between $33 and $50.
We speculated last month that the US Dollar Index (DXY) was unlikely to make further gains, given the presence of significant resistance and the fact that other safe havens had sold off.
The USD relative to a basket of weighted major currencies (Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and the Swiss Franc) did manage the briefest of breaks through 87.5, but that proved to be a classic bull-trap.
Rising trendline support on the P&F chart has undergone a recent test and we don’t expect that to be the last. The next attempt will weaken support and confidence further and we reiterate our advice to sell short down to 77.5. If that level fails, do not expect support until the early 2008 lows.
We analyze the major currency spreads in theFX Hotline published on each trading day.
Another fast and simple stock picking strategy
Last month we considered using the daily “MA Crossover” report from the Investors Intelligence website as a method for generating stock ideas. The system we walked through threw up McDonalds (MCD) as a sell, then trading at $54.57. Although the stock is flat (bizarrely closing at exactly $54.57 on 31-March) since that analysis, the stock has underperformed bearing in mind that major indices are up since that analysis period. So overall, the strategy proved worth while.
This month, we layout another time limited strategy. Now, in the fourth week of March, the S&P was showing a rally of 20% off the lows and by traditional measures that constitutes a bull market. With this in mind, we will seek buying opportunities by looking at weekly selling climaxes. Again the system we outline aims to be short and simple, making use of the features on the Investors Intelligence website.
Select the “USA” region from the top of the Investors Intelligence home page. Then select the “Signals” tab and run the mouse down to the “Weekly Climaxes” tab and select.
The weekly climaxes report lists the buying and selling climaxes from the prior week. A weekly selling climax occurs when a stock makes a new 52-week low but closes higher on the week, and vice-versa for buying climaxes.
The screen shot above captures the top of the report, showing four selling climaxes. Kansas City Southern (KSU) was a negligible signal, as the trading range was narrow; the same applies to Palomar Medical Technologies (PMTI). The strongest signals come from climaxes that have a long tail (wide trading range). Although Hub Group (HUBG) has a tail, Meridian Biosciences (VIVO) shows a stronger signal, having both a long tail and a close above the open for the week. The chart for Meridian Biosciences also shows that the selling climax occurred on high volume. High volume is a critical ingredient, as it confirms the signal.
So overall we are looking for weekly selling climaxes that exhibit:
- a long tail
- a weekly close that is above the open for that week
- and above average volume
With VIVO fulfilling all of the above criteria, this month’s strategy exercise has highlighted this health diagnostic stock as a buy. Any strategy has to have a stop and this signal will be negated on a weekly close below last weeks low at $16.50 (the low point of the tail). Next month we will review how this strategy has performed.
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The Chart Seminar
Our sister company, Fullermoney (www.fullermoney,com), will hold The Chart Seminar on 21 and 22 May at the Radisson Edwardian Hampshire Hotel, Leicester Square, London, England.
Eoin Treacy presents this two-day workshop on trading, tactics and forecasting. It is designed to sharpen delegates' technical insights and disciplines necessary for successful investment and combines theories of crowd psychology with factual charting disciplines, generating a set of investment principles that work in all market conditions – surely a must in this challenging environment?
The Chart Seminar is designed for all investors and traders who wish to hone their analysis and market timing skills. Tuition focuses on markets of interest to delegates, for relevance and so they can also act on their conclusions on return to the office. Regular attendees include fund managers, investment advisors, investment bankers, forex dealers, currency traders and hedgers, brokers, analysts and internationally-oriented private investors and traders.
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