May 20, 2006QQQQ BREAKS KEY SUPPORTBy Chip Anderson
Arthur Hill
QQQQ established support at 40 with three bounces over the last six months and broke this key support level with a sharp decline over the last two weeks. The break below 40 signals a major victory for the bears and the first downside target is to around 37-38. The August 2004 trendline and October low mark support in this area.
The decline was enough to push the McClellan Summation Index into oversold territory. This version of the McClellan Summation Index is based on the stocks in the Nasdaq 100 and is directly related to QQQQ. This is the fourth dip below –500 in the last two years. However, the indicator has yet to firm and rebound. As long as it remains below –500 and below its 20-day EMA, breadth is deteriorating and this oversold indicator could become even more oversold. As long as its remains oversold, I would look for further weakness towards support around 37-38 for QQQQ.
A lot of damage has been done over the last two weeks and it will take some time for the bulls to regroup. Before calling for a sustainable rebound, I would like to see the McClellan Summation Index move back above –500 and its 20-day EMA.
Posted at 04:04 PM in Arthur Hill | Permalink
May 20, 2006OVERSOLD BOUNCE IS DUE, BUT . . .By Chip Anderson
Carl Swenlin
During the last two weeks the market has experienced a much needed (and long anticipated) decline, and now it is due a bounce out of a short-term oversold condition; however, the decline could continue for a few more months.
On our first chart below we can see that the CVI (Climactic Volume Indicator) and the STVO (Short-Term Volume Oscillator) have reached deeply oversold levels and have turned up. This is a pretty good indication that a short rally could be starting.
Also, note the rising trend line I have drawn on the chart. For several months it has acted as support as the market worked its way higher. Unfortunately, that line has been decisively penetrated, and it will now function as overhead resistance. My guess is that any rally will not exceed 1300 on the S&P 500.
The next chart shows three of our primary medium-term indicators -- one each for price, breadth, and volume. The ITBM (IT Breadth Momentum) and ITVM (IT Volume Momentum) Oscillators have become modestly oversold, but the PMO (Price Momentum Oscillator) has only just passed through the zero line and is nowhere near the level where other declines have ended. Also, the violation of the short-term rising trend line suggests that the decline will continue at least to the bottom of the medium-term rising trend channel.
The best-case scenario is that the decline will end once the PMO, ITBM, and ITVM turn up from oversold levels, which might only take a few more weeks; however I want to call your attention to the March-August 2004 correction. Note that indicators (and the market) made three oversold bounces before the correction was finally over.
Bottom Line: An oversold bounce can be expected, but there is plenty of room (and need) for a continued decline longer-term. Our primary timing model for the S&P 500 switched from buy to neutral on Friday, so I am inclined to believe we are in for some rough sailing over the next several months.
Posted at 04:03 PM in Carl Swenlin | Permalink
May 20, 2006OUR FIRST EVER CONTEST -WIN A 24" LCD MONITOR!By Chip Anderson
Site News
ANNOUNCING OUR FIRST EVER CONTEST! - SharpCharts2 is so powerful, it deserves to have as much screen real estate as possible. Larger computer screens mean larger charts which means better technical analysis. To that end, we are now accepting entries in our...
"Seeing Clearly with SharpCharts2" Contest
There will be five grand prize winners who will each receive a brand new 24-inch LCD Computer Monitor (a US$978.00 value) for FREE!
Just think of how much better your charts would look if you had more room to display them!
To Enter, simply send us you "best" SharpCharts2 chart with a short explanation of how you use the chart to make better investing decisions. One week from now, we will judge all of the entries and select the 5 best. If your entry is one of the five we pick, you'll soon be charting in the lap of luxury!
Good luck. We can't wait to see what you come up with!
ATTENTION MCAFEE SOFTWARE USERS! - We've recently discovered that McAfee's Internet Firewall will sometimes (not always) prevent SharpCharts2 charts from downloading. If you use McAfee software on your computer, be sure to add "stockcharts.com" to the list of "Allowed Sites" in your software's "Options" area.
Posted at 04:02 PM in Site News | Permalink
May 20, 2006S&P 500 IS ENTITLED TO A BOUNCEBy Chip Anderson
John Murphy
Although the longer-range chart picture has weakened (with most weekly indicators on sell signals), the S&P 500 has lost about 5% this week and looks to be in a short-term oversold condition. Its daily chart shows the 9-day RSI line below 30 for the first time this year. In addition, the S&P has reached its 200-day moving average and potential chart support along its first quarter lows. That may be enough to cause a market rebound next week. If one does materialize, the first level of resistance would be at 1280 which would also be a one-third retracement of the recent selloff. That's also the mid-April low that was broken this week. Broken support levels often become new resistance levels. While short-term indicators are oversold, weekly indicators aren't. Since weekly indicators take precedence over daily ones, I would continue to view any short-term rally as another selling opportunity.
Posted at 04:01 PM in John Murphy | Permalink
May 20, 2006Hello Fellow ChartWatchers!By Chip Anderson
Chip Anderson
The markets moved lower last week with some disturbingly large downward movements. As you can see in the chart below, last week's losses put the Nasdaq Composite into negative territory for the year - the first of the major averages to get there.
(Did you notice the cool Performance chart that SharpCharts2 can now create? StockCharts member's can click the chart to see exactly how it was constructed.) At this point, the small caps are still leading the other averages as they have all year, but recent strength in the Dow Industrials could change that soon. BETTER, STRONGER, FASTER SHARPCHARTS2 CHARTS We're continuing to listen to everyone's feedback on SharpCharts2. Thanks again to everyone that has sent in a suggestion for improvement. Rest assured that we are always working on ways to make our site even better. The other day we got a complaint from a user about his charts being hard to read and slow to download. The solution to this particular complaint may surprise you. "Reader X" (not his real name ;-)) sent in a message saying that some of his saved charts were taking a long time to download and looked pretty bad once they arrived. Here's one of the charts he was referring to: Wow. What a mess. But it turns out there's a good, valid reason for the way this chart looks. Without realizing it, the user was asking to fit 2 years worth of 60 minute candlesticks into a chart that was only 620 pixels wide. Let's think about the math involved in that request: - There are seven 60-minute candlesticks in a normal trading day.
- There are ~250 trading days per year.
- In order to create a complete candlestick, we need a space at least 3 pixels wide (one for the left edge, one for the middle area, and one for the right edge).
So the minimum width (in pixels) that we need to create this chart is:
7 times 250 = 1750 (candlesticks per year)
1750 times 2 = 3500 (candlesticks for 2 years)
3500 times 3 = 10,500 (pixels per chart)
So, we'd need an area at least 10,500(!) pixels wide to display all of that information in a clean accurate way. (I don't know about you, but my computer screen is only 1280 pixels wide - not quite big enough!) However remember that "Reader X" told us to fit all of those candlesticks into a space only 620 pixels wide. In other words, we have to fit 3500 candles into a space that can only hold at most (620/3=) 216. Yikes!
So, how do we do that? In this case, we use a combination of two approaches: shrinking the candles and selectively omitting some candles from the chart. First off, we shrink the candles down to 1 pixel wide lines. That causes them to lose their "filled/unfilled" information, but we really don't have a choice. Even then, with 1 pixel wide candlesticks, we still need to fit 3500 candles into a 620 pixel wide chart. At that point, we get more drastic - we only plot every 6th candle (roughly). 2800 data points are thrown out in order to fit things into the 620 pixel space the user specified. With all that missing and scrunched data, it's no wonder things look so messy.
So that explains the poor visual quality of the chart, but what about the slowness?
The more data points that go into creating a chart, the longer it will take for our servers to generate that chart. So how many data points does this chart need? 3500, right? Wrong! This chart actually needs 4300 data points from our database. Can you spot the reason why?
The culprit is that 200-period EMA. In order to plot the EMA correctly on the left side of the chart, we need to pull additional data from our database that doesn't even appear on the chart. The amount of additional data depends on the type of indicators on the chart and their durations.
Now, if this chart contained just a 200-period Simple Moving Average, we'd only need to pull 200 additional data points. Unfortunately, Exponential Moving Averages are calculated in a very different way (which I've written about in previous newsletters). EMAs require much more data than SMAs do - it turns out that to accurately calculate a 200-period EMA, you need at least 800-periods of data. Thus we pull over 4300 data points from our database when creating this chart.
In addition, the "crunched" look of the candlesticks reduce the efficiency of the compression routine that we use to shrink down the chart - thus making the chart's file size larger and, as you probably know, the larger the file size, the longer the download.
SOLUTIONS
There are several things that "Reader X" could do to this chart to improve it.
- He could change the range from "2 Years" to "Fill the Chart". "Fill the Chart" will ensure that all of his candlesticks aren't scrunched. It is perfect for people that are mostly interested in the most recent information on the right side of the chart.
- He could change the duration of the chart from "2 Years" to something shorter. Anything more than about 30 trading days will result in some "scrunched" candles, but anything less than 2 years will be an improvement.
- He could increase the width of his chart. The more space we have, the less "scrunching" we have to do. Keep in mind however that wider charts mean larger file sizes and thus slower download times.
- He could change the period from 60-minute bars to daily bars. Then we'd only need to plot 500 candles in the 620 pixels available. There'd still be some scrunching, but not nearly as much. The only "gotcha" with this approach is that he'd also have to reduce the period of his EMA by a factor of seven (since there are seven 60-minute bars in one day). Thus, he'd need to change it from a 200-period EMA to a 28-period EMA.
- He could change from a "Candlestick" chart to a "Line (thin)" chart. A line chart only needs one pixel per data point and thus can fit more data into the same amount of space without scrunching. In this case there would still be lots of omitted data points, however this suggestion can be combined with some of the above suggestions to improve the final result.
- Finally, if "Reader X" is using a slow internet connection, he may want to disable the "Line Smoothing" option on the chart to further decrease it's size.
When contacted about this chart and its settings, "Reader X" replied "Wow, I didn't even think about that. I never really paid much attention to the settings and things look much better now that I've adjusted things based on your suggestions."
Here's a example of a chart that incorporates many of the above suggestions:
So remember, use discretion when creating your charts. Think about the amount of data involved and the screen real estate required. Hopefully, "Reader X's" lessons will help you improve your charting experience also.
- Chip Anderson
Posted at 04:00 PM in Chip Anderson | Permalink
May 06, 2006ANOTHER BREAKOUT FOR THE RUSSELL 2000By Chip Anderson
Arthur Hill
The Russell 2000 has not been the strongest broad index over the last few weeks, but it is still by far the strongest index in 2006 and shows no signs of stopping after another falling flag breakout on Thursday. This is the third such breakout since December and the death of small-caps has been greatly exaggerated. Longer term, the index remains in a rising price channel with lower trendline support at 755 and upper trendline resistance around 820.
I also use RSI to gauge the strength and direction of the long-term trend. This key momentum indicator moved above 50 in early November and then held above 45 in December, February, March and April. There is clearly lots of support at 45. As long as RSI holds 45 and the index holds the lower channel trendline, the flag breakout is bullish and we should expect further gains.
In addition to using RSI for the long-term trend, it can be used to identify playable pullbacks within the trend. Notice that RSI bounced after each pullback below 50 (gray ovals) and these dips represented excellent opportunities to partake in the bigger uptrend. RSI held above 50 on the most recent pullback (falling flag). The shallowness of the pullback shows underlying strength and I expect further gains.
Posted at 04:05 PM in Arthur Hill | Permalink
May 06, 2006GOOD AND BAD NEWS ABOUT THE DOLLARBy Chip Anderson
Carl Swenlin
On March 17 our trend model turned from bullish to neutral on the US dollar, and since then the technical picture has continued to deteriorate. Prices have dropped precipitously from near 90 to near 85, and the weekly 17-EMA has crossed down through the 43-EMA, a long-term sell signal. (The weekly moving average crossover is not "official" until the end of the week, so the sell signal could be erased if there is a sharp rally on Friday.) The weekly moving average crossover is a big deal, because, as you can see on the chart below, it doesn't happen very often.
While price action and internals are negative, there is the possibility that a bullish reverse head and shoulders is forming. There is a clear left shoulder and head, and the support line at 85 could facilitate the formation of a right shoulder. If the dollar can rally off the support at 85, we would want it to rally up through the neckline drawn at 93 in order to execute the pattern. There is no guarantee that this will happen, but it is a possibility.
The next chart is a long-term view of the dollar using a monthly chart (each bar equals one month), and it shows another set of positives and negatives. Starting with the negatives, the monthly PMO has topped, and the 6-EMA has crossed down through the 10-EMA. Both are long-term sell signals.
On the positive side, we can see that there is very strong long-term support between 78 and 80. If the reverse head and shoulders pattern fails to execute, it could be that the current decline will lead to a double bottom on the support around 80 in preparation for a strong upside trend reversal.
Bottom Line: We are currently neutral on the dollar, and the technical condition of the index is negative; however, support zones at 85 and 80 could provide a solid basis for a long-term bottom. Sentiment shows the lowest percentage of bulls since late-2004, so a short-term bounce is likely very soon.
Posted at 04:04 PM in Carl Swenlin | Permalink
May 06, 2006SC2 OFFICIALLY RELEASEDBy Chip Anderson
Site News
SHARPCHARTS2 OFFICIALLY RELEASED - Late last week we officially released SharpCharts2. This is a huge step forward for StockCharts.com and we couldn't have done it without the help and support of our users. Thanks again to everyone that provided feedback to us during the Beta process. We are still interested in hearing from anyone that has suggestions for improving things - use the "Report Problems" link below the chart to send us your ideas.
Attention New SC2 Users! Be sure to read our SharpCharts2 FAQ page for help with transitioning from SharpCharts1 to SharpCharts2.
NEW LOOK FOR OUR SUPPORT AREA - We also release an updated version of our Support area last week. The new area is cleaner looking and easier to navigate. More importantly, it uses "Wiki" technology similar to that found in sites like "Wikipedia.org". That will allow us to keep our support information up-to-date much more easily than before. Watch for us to update our ChartSchool area with this same technology soon.
HARDWARE IMPROVEMENTS CONTINUE - Something that may not be as apparent is the amount of additional hardware that we've added to the website recently. In the past two weeks, we have brought 10 new servers on-line and upgraded our 4 oldest machine to new hardware. There are now over 50 top-of-the-line servers driving our website. We also placed an order for an additional super-high-speed internet connection that will boost our bandwidth by 33% when it arrives later this spring.
CONTEST ALERT! - We are putting the finishing touches on the rules for a contest that we want to announce in 2 weeks (in the next newsletter). We want to help our users improve their computer equipment by giving away new computers and new computer monitors via an online contest. When the contest starts, we'll be asking for people to send us stories, pictures and examples of how they are using StockCharts.com to make better investing decisions. There will be several categories for awards, from the "best use of SharpCharts2's new features" to fun things like "oldest computer" and "messiest office." Start thinking about the unique things you do with StockCharts and get ready to share them with us in the coming weeks!
Posted at 04:02 PM in Site News | Permalink
May 06, 2006WHY JAPAN IS STILL A GLOBAL VALUEBy Chip Anderson
John Murphy
The first chart below shows why I believe Japan to be one of the best global values. While most other global markets are at or near record highs, the Nikkei 225 has recovered barely a third of its losses from 1990 to 2003. The Nikkei is still down 55% from its 1990 peak at 39,000. During that same time span, the S&P 500 has risen over 300%. What I also like about Japan is that it's been poorly correlated with other global markets over the last fifteen years. That makes it an excellent global diversification vehicle. This isn't a new view. Those of you who have followed by writing know that I was saying the same thing last summer when the Nikkei was just breaking out of a base at 12K. There is a short-term warning, however, that you should know about. The chart of the Nikkei shows the next upside resistance barrier at its early 2000 peak just over 20K. That's still 18% away from current prices. Chart 2, however, shows that resistance level to be 16.03 in the the Japan iShares (EWJ). Today's trade at 15.39 puts the EWJ within 4% of that resistance barrier. While I remain bullish on Japan, you should know that the EWJ may run into some interim resistance around that 16.00 level.
Posted at 04:01 PM in John Murphy | Permalink
May 06, 2006Hello Fellow ChartWatchers!By Chip Anderson
Chip Anderson
SIGNAL LINES GALORE
One of the huge new features of SharpCharts2 is its ability to plot "indicators of indicators." In other words, SharpCharts2 can chart indicators based on the value of another indicator which, in turn, is based on the value of the chart's main stock, index or fund. In our last newsletter, I included an example of how you could use the Slope indicator to see the changes in the MACD more clearly. This time around I want to show you how the same technique can be used to add signal lines to just about anything.
A signal line is a moving average of an indicator that is typically plotted on top of the indicator so that cross-overs are easy to spot. Many indicators such as the MACD and Stochastics indicators are typically plotted with signal lines already. However there are still a large number of indicators that aren't typically plotted with signal lines. Fortunately, with SharpCharts2, StockCharts.com members can easily add signal lines to any indicator they want.
Earlier this week, subscribers to John Murphy's Market Message got a taste of just how powerful this capability can be when guest columnist Jeanette Young used a 5-period EMA signal line on the 20-period CCI indicator.
"The study on the bottom is one which I use, the Commodity Channel Index with a 5- period exponential moving average on top. The reason that this 5- period exponential moving average is placed on the CCI is to obtain better triggers than would be offered by the CCI alone. Were I to use the CCI alone, I would miss about 75% of the trade. By using the 5- period Exponential Moving average, I have created a trigger for both a buy and a sell." - Jeanette Young
Here's an example of Jeanette's technique in action:
(Click on the chart to see the parameter settings.)
To create this chart, first log into your account, then plot a daily chart of the Qs with the Blue-Grey color scheme. Hit the "Clear All" button in the "Indicators" section to remove any other indicators, then add the "CCI" Indicator to the chart and click "Update." Click on the green "Advanced Options" triangle to pull-out those choices (sorry, you have to be a member to use the advanced options), then change the "Color" to red. The "Overlay" dropdown is the key to charting indicators of indicators. Select "Exp. Mov. Avg" from the "Overlay" dropdown, then enter "5" in the "Parameters" box.
That's it! Just click "Update" to see the final result. The 5-period EMA (in blue) crossed the red CCI line two days ago giving a sell signal. Note that these are pretty short-term buy/sell signals - you might want to use longer periods if you are a longer-term investor.
Here's another example using one of my favorite indicators, the Chaiken Money Flow. Long-term ChartWatchers know that I like the CMF because it combines price action with volume action to create one indicator. While longer-term CMF lines aren't super-jittery, adding a signal line to the mix can help you be sure you are seeing the indicator's message clearly.
(Click on the chart to see the parameter settings.)
In this case, I'm using a 40-day CMF combined with a 10-day EMA signal line. Despite the big declines of the last two weeks, this chart suggests things are looking up in the near term for GOOG as the CMF is just about to cross back above the blue signal line.
Signal line work well with indicators that are not too smooth and not too "angley." Signal lines on smoothed oscillators (like the ultimate oscillator) tend to give very few signals and most of those are late. Signal lines on "angley" indicators (like the Aroon) are unable to react quickly enough to the quick direction changes.
Other than those cases, signal lines work great. I encourage you to experiment with them on your charts and see how they can help you make better investing decisions.
- Chip Anderson |
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