Where We Are

One of the best pieces of advice I ever got was this: “Don’t tell the market what it’s supposed to do, let the market tell you what you’re supposed to do.”

That is profound.  And it really makes me wish I could remember the name of the guy who said it.  Sorry dude.  Anyway, whoever and wherever you are, thank you Sir.

Think about it for a moment.  Consider all the “forecasts”, “predictions” and “guides” to “what is next for the stock market” that you have heard during the time that you’ve followed the financial markets.  Now consider how many of those actually turned out to be correct.  Chances are the percentage is fairly low.

So how do you “let the market tell you what to do?”  Well, like everything else, there are lots of different ways to do it.  Let’s consider a small sampling.

Basic Trend-Following

Figure 1 displays the Dow Industrials, the Nasdaq 100, the S&P 500 and the Russell 2000 clockwise form the upper left.  Each displays a 200-day moving average and an overhead resistance point.

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Figure 1 – Dow/NDX/SPX/RUT (Courtesy WinWayCharts TradingExpert)

The goal is to move back above the resistance points and extend the bull market.  But the real key is for them to remain in an “uptrend”, i.e.,:

*Price above 200-day MA = GOOD

*Price below 200-day MA = BAD

Here is the tricky part.  As you can see, a simple cross of the 200-day moving average for any index may or may not be a harbinger of trouble.  That is, there is nothing “magic” about any moving average.  In a perfect world we would state that: “A warning sign occurs when the majority of indexes drop below their respective 200-day moving average.”

Yet in both October 2018 and May 2019 all four indexes dropped below their MA’s and still the world did not fall apart, and we did not plunge into a major bear market.  And as we sit, all four indexes are now back above their MA’s.  So, what’s the moral of the story?  Simple – two things:

  1. The fact remains that major bear markets (i.e., the 1 to 3 year -30% or more variety) unfold with all the major averages below their 200-day moving averages.  So, it is important to continue to pay attention.
  2. Whipsaws are a fact of life when it comes to moving averages.

The problem then is that #2 causes a lot of investors to forget or simply dismiss #1.

Here is my advice: Don’t be one of those people.  While a drop below a specific moving average by most or all the indexes may not mean “SELL EVERYTHING” now, it will ultimately mean “SEEK SHELTER” eventually as the next major bear market unfolds.  That is not a “prediction”, that is simply math.

The Bellwethers

I have written in the past about several tickers that I like to track for “clues” about the overall market.  Once again, nothing “magic” about these tickers, but they do have a history of topping out before the major averages prior to bear markets.  So, what are they saying?  See Figure 2.

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Figure 2 – SMH/Dow Transports/ZIV/BID (Courtesy WinWayCharts TradingExpert)

The bellwethers don’t look great overall.

SMH (semiconductor ETF): Experienced a false breakout to new highs in April, then plunged.  Typically, not a good sign, but it has stabilized for now and is now back above its 200-day MA.

Dow Transports: On a “classic” technical analysis basis, this is an “ugly chart.” Major overhead resistance, not even an attempt to test that resistance since the top last September and price currently below the 200-day MA.

ZIV (inverse VIX ETF): Well below it’s all-time high (albeit well above its key support level), slightly above it’s 200-day MA and sort of seems to be trapped in a range.  Doesn’t necessarily scream “SELL”, but the point is it is not suggesting bullish things for the market at the moment.

BID (Sotheby’s – which holds high-end auctions): Just ugly until a buyout offer just appeared.  Looks like this bellwether will be going away.

No one should take any action based solely on the action of these bellwethers.  But the main thing to note is that these “key” (at least in my market-addled mind) things is that they are intended to be a “look behind the curtain”:

*If the bellwethers are exuding strength overall = GOOD

*If the bellwethers are not exuding strength overall = BAD (or at least not “GOOD”)

A Longer-Term Trend-Following Method

In this article I detailed a longer-term trend-following method that was inspired by an article written by famed investor and Forbes columnist Ken Fisher.  The gist is that a top is not formed until the S&P 500 Index goes three calendar months without making a new high.  It made a new high in May, so the earliest this method could trigger an “alert” would be the end of August (assuming the S&P 500 Index does NOT trade above it’s May high in the interim.

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.

Chart Patterns: Flags and Pennants

By Steve Hill

Founder, WinWayCharts

Stephen Hill is Founder of WinWayCharts. For the past 12 years he has been involved in all aspects of WinWayCharts, from support and sales to programming and education. Steve is a frequent speaker at events in the U.S. and Europe, talking on subjects as diverse as Portfolio Simulation TechniquesAdvanced Chart Pattern Analysis and Trading System Design.

Chart pattern analysis, often thought of as part science part art is a key element in many traders decision process. Common patterns like double tops and bottoms are somewhat self-fulfilling, given that most of us can see these patterns occurring. Measures of what constitutes a double top or bottom in good analytical terms we’ll save for another article. In this this article we are focussing on two of my favorite chart patterns; Flags and Pennants

Flags and Pennants are Consolidation or Continuation Patterns

These patterns break out in the direction of the previous trend, confirming the existing trend, suggesting that investors are considering whether the market is overbought or oversold but ultimately deciding to confirm the existing trend. Flags and pennants are of two types, bullish or bearish

Flags and pennants are generally considered continuation patterns as they breakout in the prevailing trend direction. They represent a brief pause especially after a steep run up in an active ticker. They are a fairly common and useful for short term trading.

Bullish Flags – formation

Lower tops and lower bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bull flags (figure 1).

Figure 1Bullish flag pattern

Bearish Flags – formation

Higher tops and higher bottoms bounded by two parallel trendlines with pattern slanting against the prevailing trend are considered bear flags. (figure 2).

Figure 2Bearish flag pattern

Elements of bullish flags

  • A rapid and steep price rise of around 20% from bottom of the pole to top.
  • Decreasing volume during the formation of the flag.
  • Breakout occurs to the upside with resumption of increase volume levels
  • Flags length excluding the pole classic should be around 10 days, can be less but not more than 20 days.
Figure 3. Whole Foods Market, Inc (WFMI) bullish flag

Bulkowski noted that the high and tight flag performed best. (source Encyclodpedia of Chart Patterns by Thomas Bulkowski).
Some 25% of the patterns are horizontal notes Markos Katsanos. (source Measuring Flags & Pennants: Technical Analysis of Stocks and Commodities vol 23 no 4) bullish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.
Elements of bearish flags

  • A rapid and steep price decline of around 20% from top of the pole to bottom.
  • Decreasing volume during the formation of the flag.
  • Breakout occurs to the downside with resumption of increase volume levels.
  • Flag length excluding the pole should be around 10 days, can be less but not more than 20 days.
Figure 4 shows MNST classic bearish flag breakout on increased volume note the pole length is 20% + of the price action and the diminishing volume on the flag.

Bullish Pennants – formation

Pennants look very much like symmetrical triangles, on the end of a pole, typically they are smaller in size and duration (figure 5).

Bearish Pennants – formation

An upside down bullish pennant, the triangle is at the bottom of the pole. (figure 6).

Elements of bullish pennants

  • A rapid and steep price rise of around 20% from bottom of the pole to top.
  • Decreasing volume during the formation of the pennant.
  • Pennants look like symmetrical triangles on a pole, price action is converging.
  • Diminishing volume as pennant forms.
  • Breakout to the upside with re- sumption of volume levels.
  • Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.Figure 7 shows CDW classic bullish pennant breakout on increased volume
Figure 7CDW Computer Centers (CDW) bullish pennant

Elements of bearish pennants

  • A rapid and steep price drop of around 20% from top of the pole to bottom.
  • Decreasing volume during the formation of the pennant.
  • Pennants look like symmetrical triangles on a pole, price action is converging.
  • Diminishing volume as pennant forms.
  • Breakout to the downside with resumption of volume levels.
  • Pennant length excluding the pole should be around 10 days, can be less but not more than 20 days.

How do you trade flags and pennants?

Katsanos study of Flags and pennants revealed that the average breakout was 45% over an average period of 11 days. Bulkowski noted a 63% average gain. to trade these breakouts, set tight stops at low of day before breakout and use trailing stops once breakout occurs.

Target prices are more difficult to predict as these are continuation patterns, but after 11 days you are beyond the average move in days.

AIQ tip

Once a breakout occurs, use AIQ space on right of the chart (rtalerts only) and advance 11 days into the future. Draw a trendline parallel to the pole trend from the breakout point.

Trend-Following in One Minute a Month (A Quick Update)

This article is intended to be a quick update to this article.  The original idea is based on the theory propounded by Ken Fischer that suggests that one should not worry about a “top” in the stock market until after the market goes at least 3 months without making a new high.

Three things to note:

*Like all trend-following methods the one detailed in the linked article will experience an occasional whipsaw, i.e., a sell signal at one price followed some time later by a new buy signal with the market at a higher price.

*Like any good trend-following method the real purpose is to help you avoid some significant portion of any major longer-term bear market, i.e., 1973-74, 2000-2002, 2007-2009).

*The secondary purpose is to relieve an investor of that constant “Is this the top, wait, what about this this, this looks like the top, OK never mind, but this, this time it definitely has to be the top” syndrome.

The Rules

For a full explanation of the rules please read the linked article.  In general, though:

*A “Sell alert” occurs when the market makes a 6-month high, then goes 3 full calendar months without piercing that high

*The “trigger” price is the lowest low for the 3 months following the previous high

*A “Sell signal” occurs at the end of the month IF the “trigger” price is pierced to the downside during the current month

*The “trigger” is no longer valid if the S&P 500 makes a high above the high for the previous 6 months prior to an actual “Sell signal”

*If a “Sell signal” occurs then a new “Buy signal” occurs when the S&P 500 makes a high above the high for the previous 6 months

Sounds complicated, but its’s not.  Figure 1 displays the signals and alerts and trigger prices since 2005.

Green Arrows = Buy Signal

Red Arrows = Sell Signal

Red horizontal lines = Sell trigger price

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Figure 1 – One Minute a Month Trend-Following Alerts, Trigger prices and Signals (Courtesy WinWayCharts TradingExpert)

Note that actual sell signals occurred in 2008, 2011 and 2015.  The signal in 2008 was a life-saver, while the signals in 2011 and 2015 resulted in small whipsaws.  Sorry folks, that’s just the nature of the beast.

Interestingly, there have been two “Sell alerts” in the last year.  The first occurred at the end of April 2018, however, that alert was invalidated at the end of August 2018 when the S&P 500 pierced the previous 6-month high.  Another alert occurred at the end of December 2018.  The “Trigger price” is the December 2018 low of 2346.58.  That trigger is still active but could be invalidated if the month of May 2019 makes a high above whatever the high for April 2019 turns out to be.

The key point here is that despite the volatility and painful sell-offs in October and December of 2018, the “system” has remained on a buy signal.

Where to from here?  We’ll just have to wait and see.

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.

Utilities at the Crossroads

A lot of eyes are firmly fixed on Utilities at the moment.  And for good reason.  As you can see in Figure 1, the Dow Jones Utilities Average is presently facing a key resistance level.  If it breaks out above the likelihood of a good seasonal rally (more in a moment) increases significantly.

 

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Figure 1 – Utilities and resistance (Courtesy WinWayCharts TradingExpert)

One concern may be the fact that a 5-wave Elliott Wave advance appears to possibly have about run its course (according to the algorithmically drawn wave count from ProfitSource by HUBB which I use).  See Figure 2.

 

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Figure 2 – Utilities and Elliott Wave (Courtesy ProfitSource by HUBB)

For what it is worth, the March through July timeframe is “typically” favorable for utilities.  Figure 3 displays the growth of $1,000 invested in the Fidelity Select Sector Utilities fund (ticker FSUTX) ONLY during the months of March through July each year starting in 1982.

 

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Figure 3 – Growth of $1,000 invested in ticker FSUTX Mar-Jul every year (1982-2018)

For the record:

*# times UP = 29 (78%)

*# times DOWN = 8 (22%)

*Average UP = +9.3%

*Average DOWN = (-5.8%)

*Largest UP = +21.1% (1989)

*Largest DOWN = (-25.8%) (2002)

*Solid performance but obviously by no means nowhere close to “a sure thing”.

*It should be noted that several of the “Down” years occurred when the S&P 500 was already in a pretty clearly established downtrend (2001, 2002 and 2008), i.e., below its 10-month moving average.  See Figure 4.

 

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Figure 4 – S&P 500 Index w/10-month moving average (Courtesy WinWayCharts TradingExpert)

Summary

Utilities are flirting with new all-time highs and March through July is a “seasonally bullish” period for utilities.  Does that mean “happy days are here again, and we should all be piling into utilities?  Yeah, isn’t that always the thing about the markets?  There is rarely a 100% clear indication for anything.

As always, my “prediction” about what will happen next in utilities is irrelevant and I am NOT pounding the table urging you to pile in.  But I can tell you what I am watching closely at the moment:

*The S&P 500 Index is flirting right around its 10-month moving average (roughly 2,752 on the S&P 500 Index).  If it starts to break down from there then perhaps 2019 may not pan out so well for utilities.

*The Dow Jones Utility Average is facing a serious test of resistance and may run out of steam (according to Elliott Wave).

*But a breakout to the upside could well clear the decks for utilities to be a market leader for the next several months

Focus people, focus.

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.

It Really Was the Most Platinum Time of the Year; What Time is it Now?

In this article I highlighted the fact that platinum tends to be a consistent performer during the months of January and February combined.  2019 held serve as platinum futures registered their 23rd Jan-Feb gain in the last 24 years.  The Platinum ETF (ticker PPLT) registered a two month gain of +9.6%.  See Figure 1.

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Figure 1 – Ticker PPLT (Courtesy WinWayCharts)

Figure 2 displays the updated hypothetical growth of equity achieved by holding long 1 platinum futures contract during January and February every year starting in 1979.

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Figure 2 – Platinum futures $ +(-) during Jan-Feb; 1979-2019

Since most investors will never trade platinum futures, Figure 3 displays the growth of $1,000 invested in ticker PPLT only during Jan and Feb since 2011.

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Figure 3 – Cumulative % growth of $1,000 invested in ticker PPLT ONLY during Jan. and Feb.; 2011-2019

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Figure 4 – Yearly % +(-) for PPLT during Jan-Feb

Going Forward

So platinum was great, but what have you done for me lately?  For what it is worth, historically two sectors that “should” be doing well in the March-April period are energies and grains (please remember that seasonal trends DO NOT always work every year).   As you can see in Figure 5, energies have been rallying since late December (though lots of consternation regarding crude oil remains a constant).

Figure 5 – Ticker DBE (Energies) – so far so good; (Courtesy WinWayCharts)

Grains have been a bust so far (their “favorable seasonal period” typically begins in late January-early February – no dice this time around).  Where too from here?  One of two scenarios: either this is just going to be an off year for grains, or right now will be looked back upon as a buying opportunity.  Only time will tell.

Figure 6 – Ticker DBA (Agricultural) – so far NOT so good; (Courtesy WinWayCharts)

And of course, don’t forget that the stock market tends to do pretty well March through May….

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.

Bean There, Done That

In this piece I wrote about a strong seasonal tendency in corn based on the planting cycle.  Turns out soybeans are in the same boat.  This can be a good thing for traders who are, a) willing to speculate, b) not dumb enough to the bet the ranch.

 

The Trend

 

Figure 1 displays the annual seasonal trend for soybeans (from www.sentimentrader.com).  Just as with corn, the months of February through April tend to see positive results.  Please note the use of the word “tend” and the lack of the words “sure” or “thing”.

 

 

bean seasonality

 

Figure 1- Soybean Annual Seasonal Trend (Courtesy Sentimentrader.com)

 

The History

 

Figure 2 displays a monthly chart for soybeans going back 4 decades.

 

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Figure 2 – Monthly chart for Soybeans (Courtesy ProfitSource by HUBB)

 

Here are the two things to note (using some pretty technical terms):

 

*Soybeans (like most commodities)  spend a lot of time “churning”, “grinding”, “consolidating” and generally going “nowhere”

 

*HOWEVER, “when beans go they really go!” (hopefully that wasn’t “too technical”)

 

*The primary thing to remember is that when soybeans get going to the upside, typically the best thing to do is to banish the word from “overbought” from your trading lexicon.  See Figure 3.

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Figure 3 – Big moves in Beans (Courtesy ProfitSource by HUBB)

 

Now let’s focus on the months of February, March and April.  Figure 4 displays the hypothetical $ growth (no slippage or commissions) from holding long a 1-lot of soybean futures during February, March and April every year starting in 1976.

 

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Figure 4 – Long 1 soybean futures contract during Feb-Mar-Apr every year since 1976

 

The Results

 

Some things to note regarding Feb-Apr in soybeans:

 

*# of times UP = 33

*# of times DOWN = 10

*Average $ gain = +$3,808

*Average $ loss = (-$1,788)

*Largest gain = +$15,025

*Largest loss = (-$3,775)

 

In sum, a winners to losers ratio of 3.3 (or 76% winners), an average win to average loss ratio of 2.13-to-1

 

Bottom line: these are great numbers for traders BUT they entail the assumption of significant risk (2017 saw a loss of over -$3,400)

 

An Alternative Way to Play

 

Ticker SOYB is the Teucrium ETF designed to track the price of soybeans.  SOYB allows traders to buy soybeans just as they would buy shares of stock.  Just remember that you don’t get the same leverage buying SOYB as you would buying a futures contract.

 

Figure 5 displays a monthly chart for SOYB and Figure 6 displays a daily chart.  Note the significant resistance level at around $16.96 a share.  If SOYB takes out that level sooner than later it might be a bullish sign.

 

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Figure 5 – SOYB Monthly (Courtesy TradingExpert)

 

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Figure 6 – SOYB Daily (Courtesy TradingExpert)

 

Summary

 

Soybeans have been beaten down a bit over the last several years.  If (and “yes”, that is a big “If”) beans are going to make a move higher, history suggests that the Feb through April period is a likely time for that to happen.

 

Am I “recommending” or even “merely suggesting” that you should buy soybean futures or ticker SOYB?  Not at all.  I adhere to that old media adage of “We (I) report, you decide.”

 

Which is better I think than the current motto of major media which appears to be “We decide, then we report our decision.”

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.