What’s next?

As you may have noticed, the past few days seem to have increased in volatility. With that, a lot of the students that I coach have wondered what the near-term direction of the market is. It seems that we either go up nicely only to have the gains erased, or we go down hard only to fight our way back into the green. So, which is it: up or down? How might one gauge the short-term direction of the market?

As you may have noticed in my other Chart School articles, as often as possible I like to keep things simple.  Below is my very simple, straightforward answer to the above question:

As you can see, I have added the 200-day simple moving average (SMA) to the S&P 500, as well as its current trend line support (blue).  As commonly happens, the S&P is reacting to its 200-day SMA as a resistance area on each rally we’ve had over the last few months. In the meantime, the S&P has created the up-trending support, which we have tested a couple times as of late. At some point one of these levels will have to give.

The Tale of the Tape: The S&P is stuck between its up-trending support and its 200-day SMA, which is currently at 1114. A break of either of these levels should dictate the near term direction of the market. A break above the 200-day SMA would be a great point at which to enter new long positions or add to current ones. On the other hand, if the support we’re to break, short positions might be entered.

Waiting for the most opportune trading times, like I have outlined above, could provide you with the higher probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

As rates go, the rally goes

There are plenty of correlations between the various markets. Sometimes these correlations are direct, and sometimes they are inverse relationships. Believe it or not, sometimes correlations can switch from direct to inverse. There are correlations between interests rates and the dollar, the dollar and the euro, bonds and stocks, commodities and rates, etc. etc. etc. Sometimes these correlations are always in effect, sometimes they are in effect off and on, and sometimes they are only in effect from time to time. Obviously, it can be helpful to recognize when important correlations are in force that may give you a  “heads up” to a trend change or continuation. So, let’s look at one correlation in particular: stocks vs. interest rates.

For this exercise I have chosen to use the S&P 500 to represent the markets and the 10 Yr. T-note for interest rates. Please analyze the 1-year chart of these below:

With the S&P above and the 10 Yr. below, you will notice that I have highlighted in blue some of the noticeable peaks in rates.  You will notice that whenever rates turned down the S&P followed. More often then not rates led the market, with the market only leading once. So, why might this happen? Well, the simplest reason might be due to investors becoming fearful in their outlook on the economy. When this happens they tend to jump out of stocks in a “flight to safety, thus buying bonds. When the demand for bonds rises, so do bond price, which in turn pushes rates lower. In short, it could be useful to keep an eye on rates.

Below is a chart of the 10 Yr. T-note by itself with some key notations:

The red line denotes the down trending resistance for the 10 Yr Note. The green represents the key 3.10 level that is currently a resistance after being a long-term support. The blue support line at 2.90 is also a key level for the 10 Yr.

As of the time of this writing, with the markets moving slightly higher, the 10 Yr. has made its way through the down trending resistance. Since we have seen that there is a correlation between rates and the market, this resistance break would appear to make sense considering the market has also moved higher. Now the focus will be on 3.10 and 2.90. Remember, more often than not, rates on the 10 Yr. led the market. Regardless of which leads, paying attention to the 10 Yr. could help to confirm a higher or lower move in the market.

The Tale of the Tape: After breaking through its down trending resistance, the 10 Yr. T-Note is between its 3.10 resistance and 2.90 support. Watching these two levels to see which way rates break could help to confirm the future direction of the market. This in turn will help you know which side of the trade to be on and when to make those trades.

Waiting for the most opportune trading times, like I have outlined above, could provide you with the higher probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

Gold go bye-bye?

A few weeks ago I published a Chart School newsletter in which I discussed the prospects for gold. At that time, I recalled hearing about what a great buy gold was seemingly every time I turned on the TV or even went to a mall. “Buy gold”, or “We buy gold”, it was always one or the other. Well, should I?

So, I decided to take a look at gold myself to see what I could see. To do that, I decided to look at the GLD, which is the ETF that tracks gold and allows you to profit from gold without having to physically go out and buy a bar! Below is a similar chart to the one I presented in my previous newsletter:

At that time, you can see that the GLD was trending higher, while volume was contracting. This is what’s known as a divergence. Think of it as less and less interest as the price goes higher and higher. It’s as if there is nothing holding the ETF up and it could fall on it’s own weight. Although this divergence is not an immediate “sell” signal, it did tend to make me skeptical of gold’s recent rise. Well, it was not a surprise to see what happened next:

Not only did the GLD break it’s up trending support line, but when it broke, it did so on a pretty nice increase in volume. In other words, we didn’t just casually break that support. There was a heavy interest in getting out and the “big” money was making a move out of gold/GLD. Although we don’t necessarily need a pop in volume to go lower, it does add validity to the breakdown. Afterwards, the price of the GLD did exactly as expected after a break of support, it went lower. Recognizing that support break and increase in volume would have been a great short opportunity, yes? Well, please look at my updated chart:

You will see that the GLD had created another strong support, but this time at the $115 level. Again, the GLD breaks support and yet again on a heavy increase in volume. Based on what you know about support breaks, volume and the charts above, what might the GLD do next? More importantly, what might YOU do next?

The Tale of the Tape: The GLD has broken down again. Regardless of what all the talking heads may say, the GLD is telling me that it is going lower. This would appear to be a great time to:

  1. Short the GLD
  2. Buy the ETF – GLL, which goes up when gold goes down
  3. Short gold related stocks that also break support. Stocks to watch may be ABX, AEM, GOLD, RTP, FCX, AU, GG, etc

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT

K.I.S.S.

Ironically enough, I’ve always been a huge fan of keeping trading as simple as possible. Many of the people I coach are somewhat stunned that I think that way considering I am such a big student of technical analysis. My experience has been that the more I learn about the complex, the more I am attracted to the simple.

Have you ever heard of Occam’s razor? It is the principle that “entities must not be multiplied beyond necessity”. The mainstream interpretation of this principle is that the simplest explanation is generally the correct one. That is essentially my belief in trading: Keep it simple.

Unfortunately, simplicity is just not how we are conditioned nor marketed to these days. We are flooded with indicators, signals and software programs in every way possible: TV, Internet, newsletters, etc. Let’s be honest, it’s what sells!

Well, I was coaching a student earlier this week that was struggling to put the trading pieces together. When I asked this student to show me one of their trades, and tell me why they made that trade, their reasoning had so many parts to it that it actually left me stumped. Since I always focus on a very straightforward approach, I asked the student to tell me what they were looking at on their screen. I found out that they were looking at something similar to what you see below:

Looks like a couple of elementary kids colored on it, doesn’t it? Now, don’t get me wrong; I will never claim that some of the more advanced technical tools available couldn’t add some “icing on the cake”. But, should it be the cake? My understanding of the markets has always been, “Price is King”, and “Price discounts everything”. So, shouldn’t price be the central focus, or the cake?

I asked the student to clear off all the squiggly lines and just simply look at the price. When everything was removed, this is what was left:

I’ve obviously added my own comments, but notice how easy this particular stock has been to trade over the last year. First, by simply identifying the $45 support level you could have made a nice trade in November. If not, a support buy could’ve been executed at $50 in January or February. Let’s say you are more of a break-out trader. Wouldn’t the break to a new 52-week high, through the $55 resistance, have been a great break-out trade? And finally, $60 has demonstrated its importance as both resistance in March and then support thereafter. Wouldn’t a buy at the $60 support near the end of June have made sense? By simply focusing on the price, would you have needed any of the indicators shown on the first chart? No.

The Tale of the Tape:  There’s a lot of great information and trading tools available to you that can certainly help you in your trading.  You just want to remember the pecking order: Price first. Price never goes out of style, and at the end of the day, it may be the only “indicator” you truly need.

Waiting for the most opportune times, such as I have outlined above, could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

Good Apple earnings bad for market?

Tuesday after the bell Apple Inc. (AAPL) topped analysts’ estimates yet again with the release of its latest quarterly earnings report. AAPL also raised revenue guidance above what Wall Street was expecting. Shares shot higher in after-hours trading.

AAPL said net income rose 78% to $3.25 billion, or $3.51 per share, from $1.8 billion, or $2.01 per share a year ago. In addition, revenue for the April-to-June period rose 61% from last year to $15.7 billion, making it the company’s highest quarterly revenue ever. Analysts surveyed by Thomson Reuters had forecast net income of $3.11 per share on $14.7 billion in revenue.
So, with AAPL’s earnings exceeding expectations, and the stock apparently ready to soar, will that be a good thing for the overall stock market?

While analyzing AAPL’s chart, and then switching to a chart of the S&P, I noticed and interesting correlation between the two charts over the past year. Could it be possible that what’s good for AAPL tends to foreshadow a sell-off in the market?

Please review the chart below with my notations added:

AAPL – 1 YR w/ S&P comparison

As you can see, I have noted each of AAPL’s last 3 earnings releases (blue). The top chart is that of AAPL and the bottom is a comparison chart of the S&P 500. Notice that in the case of all (3) earnings releases the overall market sold off to one extent or another shortly after AAPL’s earnings release. Generally, the sell-off began within a day or two of the release. As a technical analyst I am not as concerned with why this happens, rather just that it apparently does. However, AAPL is obviously a bellwether for tech, so might it simply be a case of “buy on the rumor, sell on the news”?

It appears that the S&P tends to rally for a day or two after the release of AAPL’s earnings. So, where might the S&P be if it rallied today?

Please review the chart below. The chart is from a previous newsletter of mine:

S&P – 1 YR

I have added the recent down trending resistance line in blue and the 50-day Simple Moving Average (SMA) in red, which has also been acting as resistance. After yesterday’s somewhat surprising market rally, the S&P stands just 5 points away from its 50 SMA, which is just slightly below the down trending resistance. Is it possible that after AAPL’s release the market is setting up for yet another sell-off?

Not so fast though! There is one slight difference between the (3) previous AAPL earnings releases and the latest one: The market was in a rally mode during the previously released AAPL earnings reports, but in the midst of a 3-4 month sell-off currently. Could that make the difference and break the trend of positive AAPL earnings = market sell-off?

The Tale of the Tape: There has been a recent trend of market sell-offs after AAPL earnings releases. However, this sell-off tends to start a day or two after the release. If that trend were to continue and the market were to have a slight rally after AAPL’s latest earnings release, the S&P would approach (2) very important resistance levels. At that point, one might want to raise protective stops on long positions in preparation for a potential sell-off or look to enter new short positions.

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT