Potential stopping point?

As everyone has seen over the past several months, the stock market simply goes up.  Sometimes it seems borderline comical. No matter what the news, no matter how sluggish the economy, no matter what the start of the day looks like nor what the technicals look like, up we go.

So, weeks ago I began telling the students that I coach that I had given up on the idea that a resistance for the market exists since the market never seems to resistance anything. As the saying goes, “Resistance is futile”.  Instead, let’s just let the market play out and eventually it will tell us when it’s going lower. After all, let’s not loose sight of that fact: The market will pullback, it will correct, and it will eventually enter a bear market again. These are the facts of the stock market. What isn’t a fact is when any or all of these things will happen?

Last week, I noticed a trend line moving into range that I had not looked at for years.  I don’t look back more than a year or so very often, but with the market going up, up, up, an important potential resistance came into play. So, please take a look at the long-term, quarterly chart of the Dow I have shown below:

This channel has been forming for decades, so it’s importance is paramount.  As I tell my students, any (2) points can start a trend line, but a 3rd or more confirms it. If you notice my notations, you will see how often the channel resistance (red) and support (green) have been tested.  Remember, after the 2nd test of these levels, the market decided they were important levels, not me. You will also notice how often the 50% mark (blue) between these levels has acted as either support or resistance, such as with the 2009 low.

As the market has rallied over the last 6 months, you can now see why the upper trend line resistance came into my view.  However, here’s the problem: It is very difficult to pin an exact number on where that resistance lies. I’d look at it as more of a range, somewhere in the general 12,500 area. Again, depending on how/where the individual draws this channel, that target price can have a several 100-point variance above or below.

The Tale of the Tape: A very important channel resistance has come into range on the Dow.  In the long run, if you believe the market is still in a secular bear market that will return, this range around 12,500 could be a potential turn around point. This level is of more importance to you if you are the long-term trader or investor. For you, make sure protective stops are in place, or feel free to lock in some great gains at your discretion. For short-term traders, the trend is still up, but be on the look at for a reversal. If the trend were to change from up to down, you would obviously want to adjust your trading strategy.

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.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Don’t sleep on the dollar!

I just wanted to do a follow up on the US dollar. In the past, I have analyzed the dollar to gauge the possible movement in various markets. Not only can the movement of the dollar warn us of potential moves in commodities, stocks and bonds, but also trading the dollar itself can be an option.

So, let’s review an updated, long-term chart of the DXY dollar index.

As you can see, the DXY has created a long-term support line that accurately gave the dollar a bounce back in November. Here recently, the dollar approached that same trend line. Although the dollar may have already tested this trend line and begun a move higher, watch to see if it is tested again soon. If so, I would obviously expect the bounce higher for the dollar at that time. This could be a negative for commodities such as gold and other currencies such as the euro. A bounce in the dollar might be problematic for stocks as well.

Lastly, don’t assume the DXY will hold that support line. What if it breaks rather than provides a bounce? That could be a positive for gold, the euro and stocks.

The Tale of the Tape: The DXY may have tested its long-term support and started to move higher. On a move higher, expect the exchange trade fund (ETF) UUP to rise as well, while the ETF FXE would move lower. Protect any positions in gold if you haven’t already. On a DXY break of support, look to go long on commodities like gold, currencies like the euro, and possibly stocks as well.

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.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Dow Theory 101

Well, the Dow seems to be moving above the 11,750 area that I referenced a couple of weeks ago. It’s been a struggle, but the Dow has slowly inched higher. However, I do think there are some major red flags starting to pop up.

First, it is very concerning that while the Dow has been moving higher, the secondary indices have been struggling. For example, after reading this article, take a minute and review the charts of the Russell 2000 and the Nasdaq. Even though the Dow held it’s ground, and actually grinded higher last week, those two indices have moved lower. In a healthy market, we’d like to see everyone moving higher together. With the “risk-on” stocks like those contained in the Russell and Nasdaq selling off, it wouldn’t appear that the markets are NOT healthy. Rather, they seem to be falling apart a bit.

More importantly, let’s stick with the Dow. More specifically, Dow Theory. Investopedia probably sums it up best: “A theory which says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high, it is accompanied or followed by a similar advance in the other. The theory also says that when both averages dip below previous important lows, it’s regarded as an indicator of a downward trend.” Those that follow Dow Theory will look to the Dow Jones Industrials (DJI) and Dow Jones Transports (DJT) to gauge the “health” of the trend in force, based on the criteria set out above.

So, take a look at the following charts of the DJI and DJT (closing prices):

As you can see in the first chart, the DJI has in fact continued higher. Unfortunately, the transports have turned lower. This appears to be one of the first steps in the unfolding of a move lower, to one extent or another. Of course, if the DJT reverses and confirms the DJI’s high, then all will be well again, for now.

The Tale of the Tape: Although the DJI has continued higher, and may be on it’s way to 12K, the DJT has failed to take part. In addition, other secondary indices such as the Russell 2000 and Nasdaq have also “peeled away”. While the DJI seems dead set on marching higher, the overall market does not seem to agree. Keep an eye on the DJT and the other secondary indices.  The DJI cannot go it alone. Be prepared to adjust your trading and/or investing strategy if the markets finally turn lower. OR, look to see if the DJT, Russell and Nasdaq eventually confirm the recent DJI’s move.

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.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Silver update II?

I just wanted to do another quick follow-up on silver. I have been following the movement of silver, and gold, for the past few months in expectation of a downside reversal. The metals have continued higher, but has the party finally ended?

Please review the following chart of silver with my added notations:

Over the past several months, silver has been bouncing along the up-trending support line I have drawn. Silver has approached this up-trending support line again, so might that be a point of entry for a long position? What if that trend line were to break?

I have an opinion: I think silver is going to break lower. Why? Please review the silver ETF SLV that I have shown below:

First, the SLV has already broken its support level. Next, you will notice that both volume and momentum (MACD) have been negatively diverging from the rising price of the SLV. So, it looks to me like silver is preparing for a move lower, but you be the judge.

The Tale of the Tape: Silver has pulled back to its support line again. If you are bullish on silver, you could enter a long position on silver or the SLV. However, the SLV seems to be flashing signals of trouble on the horizon. So, if you are bearish on silver, you could enter a short position on silver, the SLV or go long the ZSL for a short-term trade. Similar trades on gold could also be made.

Waiting for the most opportune times that I have outlined above could provide you with higher probability entry 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

11,750 isn’t important, is it?

Identifying important levels on the markets can be quite a tricky task. First of all, which index do you look at? Next, what time frame is analyzed? Etc. Since technical analysis is somewhat objective, I really don’t think there is necessarily a right or wrong answer to these questions. However, from time to time some key levels are quite clear, at least to me.

A lot of people have a tendency to hone in on round numbers such as 11,000 or 1200. For example, I’ve heard 12,000 on the Dow being referenced quite often lately. I would certainly agree that these price points are usually important, but there are definitely other prices that can be important. Please review the chart of the Dow below:

You will notice the level I’ve highlighted around 11,750. The all time high at the forefront of the Dot.com bust was 11,750. This same level was resisted the next time up in 2006. That same 11,750 became support briefly on the way down in 2008. So, is it really a coincidence that that Dow stalled just over 11,700 yesterday? Add this to the Nasdaq hitting 2700 and Russell stalling at 800 and you have yourself an interesting potential stopping point for the markets.

The Tale of the Tape: 12,000 on the Dow may not be a foregone conclusion. 11,750 has proven itself to be important throughout the last decade. Combine this level (which is close to where the Dow stalled yesterday) with a market that is definitely “due” for a pullback and the stage could be set for some trouble. Use your stops and protect yourself from a potential reversal. Be on the lookout for short trade setups if they present themselves.

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.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT