Category Archives: chart patterns

Does it all Hinge on BID?

The question posed in the title is essentially, “does the fate of the stock market hinge on the action of Sotheby’s Holdings” (ticker BID)?  Sotheby’s is the oldest stock on the NYSE and is the only publicly traded investment opportunity in the art market.  As the art market is highly sensitive to the overall economy it has been argued that BID is a potential stock market “bellwether”.
Still, the most obvious answer to the question posed above is of course “No.”  Of course the performance of the whole stock market does not come down to the performance of one stock.  That’s the obvious answer.
The more curious answer is arrived at by first looking at Figure 1.  Figure 1 displays a monthly bar chart for BID in the top clip and the S&P 500 Index in the bottom clip.  What is interesting is that historically when BID tops out, bad things tend to follow for the broader stock market.1
Figure 1 – BID tops often foreshadow SPX weakness (Courtesy AIQ TradingExpert)
Consider:
*The bear market of 2000-2002 was presaged by a dramatic top for BID in 1999, and confirmed again in late 2000.
*The great bear market of 2008 was also preceded by a top and breakdown in BID.
*The 2011 top in BID was followed by a quick but sharp -21% SPX decline.
*The 2013-2014 BID top was followed by roughly 2 years of sideways SPX price action.
*More recently the top in 2017-2018 top has been accompanied by much volatility and consternation in the broader market.
Figure 2 “zooms in” to recent years using weekly data.
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Figure 2 – BID Weekly chart (Courtesy AIQ TradingExpert)
In Figure 2 we can see how poor performance for BID presaged an extended period of sideways trading for the SPX.  At the far right we can also see that BID is at something of a critical juncture.  If it punches through to the upside and moves higher it could be something of an “All Clear” sign for the market.  On the other hand, if BID fails here and forms a clear multiple top, well, history suggests that that might be an ominous sign for the broader market.
Other Bellwethers
BID is one of four market “bellwethers” that I like to monitor.  The other 3 are SMH (semiconductor index), TRAN (Dow Transports) and ZIV (inverse VIX).  You can see the status of each in Figure 3.
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Figure 3 – Four stock market “Bellwethers” (Courtesy AIQ TradingExpert)
To sum up the current status of these bellwethers:
*All 4 (including ZIV as of the latest close) are above their respective 200-day moving average.  So technically, they are all in “up trends.”
*All 4 are also threatening to create some sort of topping formation.
In sum, as long as all four of these bellwethers continue to trend higher, “Life is Good” in the stock market.  At the same time, if some or all of these fail to break through and begin to top out, the broader market may experience more trouble.
Bottom line: Now is a good time to pay close attention to the stock market for “tells”.
Jay Kaeppel
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

Trend Following in One Minute a Month

In the article linked below, investor and Forbes columnist Kenneth Fisher writes about what to look for at a market top (How to Tell a Bull Market from a Bear Market Blip). One piece of advice that I have heard him offer before is to wait at least 3 months after a top in price to worry about whether or not we are in a bear market.  That is good advice and provided the impetus for a simple trend-following model I follow based on that “wait 3 months” idea.

First, a few key points:

*Trend-following is NOT about picking tops and bottoms or timing the market with “uncanny accuracy”.  So don’t expect any trend-following system to do so.

*The primary edge in any trend-following method is simply missing as much of the major soul – and capital – crushing bear markets as possible, with the understanding that you will miss some of the upside during bull markets.

The Good News:

*Starting in November 1970 this system has beaten a buy and hold strategy

*This system requires no math. There are no moving averages, etc.  Anyone can look at a monthly S&P 500 bar chart and generate the signals.  And it literally takes less than 1 minute per month to update.

The Bad News:

*Every trend-following method known to man experiences whipsaws, i.e., a sell signal followed by a buy signal at a higher price.  This system is no exception.

*Due to said whipsaws this system has significantly underperformed the S&P 500 buy-and-hold since the low in early 2009.

For what it’s worth, my educated guess is that following the next prolonged bear market, that will change.  But there are no guarantees.

OK, all the caveats in place, here goes.

Jay’s Monthly SPX Bar Chart Trend-Following System

*This system uses a monthly price bar chart for the S&P 500 (SPX) to generate trading signals.

*For the purposes of this method, no action is taken until the end of the month, even if a trend change is signaled earlier in the month.

*A buy signal occurs when during the current month, SPX exceeds its highest price for the previous 6 calendar months.

A sell signal occurs as follows:

a) SPX registers a month where the high for the month if above the high of the previous month. We will call this the “swing high”.

b) SPX then goes 3 consecutive monthly bars without exceeding the “swing high.” When this happens, note the lowest low price registered during those 3 months. We will call this price the “sell trigger price.”

c) An actual sell trigger occurs at the end of a month when SPX register a low that is below the “sell trigger price”, HOWEVER,

d) If SPX makes a new monthly high above the previous “swing high” BEFORE it registers a low below the “sell trigger price” the sell signal alert is aborted

Sounds complicated right?  It’s not.  Let’s illustrate on some charts.

In the charts that follow:

*An Up green arrow marks a buy signal

*A Down red arrow marks a sell signal

*A horizontal red line marks a “sell trigger price”.

Sometimes a sell trigger price is hit and is marked by a down red arrow as a sell signal.  Other times a sell trigger price is aborted by SPX making a new high and negating the potential sell signal.

spx trendf 1

Figure 1 – SPX signals 1970-1979 (Courtesy AIQ TradingExpert)

SPX trendf 2

Figure 2 – SPX signals 1980-1989 (Courtesy AIQ TradingExpert)

SPX trendf 3

Figure 3 – SPX signals 1990-1999 (Courtesy AIQ TradingExpert)

SPX trendf 4

Figure 4 – SPX signals 2000-2009 (Courtesy AIQ TradingExpert)

SPX trendf 5

Figure 5 – SPX signals 2010-present (Courtesy AIQ TradingExpert)

To demonstrate results we will use monthly close price data for SPX.  If the system is bullish then the system will hold SPX for that month.  If the system is bearish we will assume interest is earned at an annual rate of 1% per year.

Figure 6 displays the results of the System versus Buy and Hold starting with $1,000 starting November 1970 through 1994 (roughly 24 years).

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Figure 6 – Growth of $1,000 invested using System versus Buy-and-Hold; Nov-1970 through Dec-1994

Figure 7 displays the results of the System versus Buy and Hold starting with $1,000 starting at the end of 1994 through the most recent close.

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Figure 7 – Growth of $1,000 invested using System versus Buy-and-Hold; Dec-1994 through Feb-2018

Figure 8 displays the growth of $1,000 generated by holding the S&P 500 Index ONLY when the trend-following system is bearish.  In Figure 8 you will see exactly what I mentioned at the outset – that the key is simply to miss some of the more severe effects of bear markets along the way.

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Figure 8 – Growth of $1,000 invested ONLY when trend-following model is Bearish; 1970-2018

Finally, Figure 9 displays trade-by-trade results (using month-end price data).

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Figure 9 – Trade-by-trade results; Month end price data

Summary

So is this “The World Beater, Best Thing Since Sliced Bread” system?  Not at all.  If you had started using this system in real time in March of 2009 chances are by now you would have abandoned it and moved on to something else, as the whip saw signals in 2011-2012 and 2016 has the System performing worse than buy and hold over a 9 year period.

But here is the thing to remember.  Chances are prolonged bear markets have not been eradicated, never to occur again.  100+ years of market history demonstrates that bear markets of 12 to 36 months in duration are simply “part of the game”.  And it is riding these bear markets to the depths that try investors souls – and wipe out a lot of their net worth in the process.

Chances are when the next 12 to 36 month bear market rolls around – and it will – a trend-following method similar to the one detailed here may help you to “save your sorry assets” (so to speak).

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

World Met Resistance

In this article titled “World, Meet Resistance” – dated 12/21/2017 – I noted the fact that many single country ETFs and regional indexes were closing in on a serious level of potential resistance.  I also laid out three potential scenarios.  So what happened?  A fourth scenario not among the three I wrote about (Which really pisses me off.  But never mind about that right now).

As we will see in a moment what happened was:

*(Pretty much) Everything broke out above significant resistance

*Everything then reversed back below significant resistance.

World Markets in Motion

Figure 1 displays the index I follow which includes 33 single-country ETFs. As you can see, in January it broke out sharply above multi-year resistance. Just when it looked like the index was going to challenge the all-time high the markets reversed and then plunged back below the recently pierced resistance level.

(click to enlarge)1

Figure 1 – Jay’s World Index broke out in January, fell back  below resistance in February (Courtesy AIQ TradingExpert)

The same scenario holds true for the four regional indexes I follow – The Americas, Europe, Asia/Pacific and the Middle East – as seen in Figure 2.

(click to enlarge)2

Figure 2 – Jay’s Regional Index all broke above resistance, then failed (Courtesy  AIQ TradingExpert)

So where to from here?  Well I could lay out a list of potential scenarios. Of course if history is a guide what will follow will be a scenario I did not include (Which really pisses me off.  But never mind about that right now).

So I will simply make a subjective observation based on many years of observation.  The world markets may turn the tide again and propel themselves back to the upside.  But historically, when a stock, commodity or index tries to pierce a significant resistance level and then fails to follow through, it typically takes some time to rebuild a base before another retest of that resistance level unfolds.

Here’s hoping I’m wrong

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

One More Cry of ‘Wolf’

If I were the type to make bold proclamations I would probably consider “taking my shot” right here and shout “This is the Top” and/or “The Market May Crash.”  Unfortunately, on those occasions (well) in the past when I would make bold public predictions of what was about to happen in the financial markets I would almost invariably end up looking pretty stupid. So even if I did make a “bold proclamation” it wouldn’t necessarily mean that anyone should pay any attention.
Besides all that the last thing I want is for “the party to end”.  Even if you do think the market is about to tank it’s a pretty crummy thing to have to root for.  Even if you did manage to “call the top”, the ripple effect of the ramifications associated with a serious stock market decline can have pretty negative effect on just about everyone’s life.
So let’s put it this way: I am concerned – and prepared to act defensively if necessary – but still have money in the market and am still hoping for the best.
Reasons for Caution (Indexes)
Figure 1 displays four major indexes. The Dow keeps hitting new highs day after day while the others – at the moment – are failing to confirm.  That doesn’t mean that they won’t in the days ahead.  But the longer this trend persists the more negative the potential implications.
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Figure 1 – Dow at new highs, small-caps, Nasdaq and S&P 500 not quite (Courtesy AIQ TradingExpert)
Reasons for Caution (Bellwethers)
Figure 2 displays 4 “bellwethers” that I follow which may give some early warning signs.
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Figure 2 – Market Bellwethers possibly flashing some warning signs (Courtesy AIQ TradingExpert)
*SMH soared to a high in early June and has been floundering a bit since.
*Dow Transports tried to break out to the upside in July but failed miserably.
*XIV is comfortably in new high territory.
*BID tried to break out in July and then collapsed.  It is presently about 12% off of its high.
In a nutshell – 3 of the 4 are presently flashing warning signs.
Reasons for Caution (Market Churn)
In this article I wrote about an indicator that I follow that can be useful in identify market “churn” – which can often be a precursor to market declines.  Spikes above 100 by the blue line often signify impending market trouble
It should be noted that the indicators signals are often early and occasionally flat out wrong.  Still, a churning market with the Dow making new highs has often served as a “classic” warning sign.
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Figure 3 – JK HiLo Index (blue) versus Nasdaq Compsite / 20 (red); 12/31/2006-present
Summary
Again, and for the record, I do not possess the ability to “predict” the markets.  But I have seen a few “warning signs” flash bright red at times in the past.  As a general rule, it is best to at least pay attention – and maybe make a few “contingency plans” – you know,  just in case.
Here’s hoping my gut is wrong – again.
Jay Kaeppel Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client. 
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

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Inverse Head and Shoulders on the market?

There was an interesting Inverse Head and Shoulders pattern completed last night on SPY. As SPY is the proxy ETF for the S&P500 index, it caught my attention. A closer look at the Chart attached shows this pattern usually breaks out to the upside.
Analysis of the supplementary information clearly shows that the uniformity of this inverse head and shoulders is good, however the overall quality of the pattern is only average. The biggest issue is the lack of volume and lack of power of the breakout. The volume is particularly low. More volume is needed before this pattern is confirmed, particularly on a strong up day.

Learn more about Chart Pattern Recognition for TradingExpert Pro  http://aiqsystems.com/chartpatterns.htm

Classic Flag Breakouts on CVX, NFG, TOT

Our Chart pattern Recognition tool had a wealth of gasoline related stocks have breakouts yesterday. The classic flag breakout on good volume could be seen on CVX, NFG and TOT.

Quick reminder on what a flag pattern is.

The flag pattern is considered a continuation pattern after a consolidation period. The flag is a rectangular shape, similar to  the pennant, but the pennant looks more like a triangle.

Usually there’s a strong price movement followed by sideways price movement which is the flag. The pattern is complete when prices breakout in the same direction as the initial price movement. The following move will be in the same direction as the prior sharp move. The move prior to the flag is called the pole.

The flag pattern forms a rectangle with two parallel trendlines that act as support and resistance for the price until the price breaks out. Usually the flag will slope in the opposite direction to the trend.

The buy or sell signal occurs when the price breaks through the support or resistance level, with the trend continuing in the same direction as the pole. The breakthrough should occur on heavier volume.

I’ve put all three charts together and you can clearly see the pole, flag and breakout. As noted above the volume on the breakout on TOT was reasonable. The Quality of the pattern was also considered high.

Incidentally the volume on NFG and CVX was not as significant.

The entire list of stocks that generated completed flags in our nightly report on 5/25/16 is below.

and check out this new video that shows how we automate this reporting every night using the Chart Pattern recognition plug-in for TradingExpert.

Tired of staring at charts time and time again? We have an app for that

Tired of staring at charts time and time again, not certain what is setting up?
Check out this chart of FITB, Fifth Third Bancorp, How would you have traded this over the last 6 months?
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Check out this completed falling wedge pattern from 02/12/16. You would have been alerted to this breakout on 2/12/16, the direction indicator suggested that prices will rise and they did.
Check out this completed falling wedge pattern from 02/12/16. You would have been alerted to this breakout on 2/12/16, the direction indicator suggested that prices will rise and they did.
 
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Or this inverse head and shoulders on 3/1/16, the direction indicator suggested prices would rise and they did.
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and check out this new video that shows the most recent price pattern we were alerted to on FITB on 5/13/16 AND how we automate this reporting every night.