Saturday, July 11, 2009
Signals in ETFs Reveal the Stock Market
First things first: Keeping in sync with the the overall market trend is the fundamental pillar to successful stock-trading, since on average over 90% of individual stocks are
ultimately going to follow the trend. This is without regard to the company, it's earnings, or even what the technical analysis of an individual chart may be saying. It's a statistical fact. In a nutshell, "you can't fight the trend".
So how do we determine the trend? One excellent source of insight is the so-called "ETFs", which are Exchange-Traded mutual Fund designed to mimic the performance (or with some ETFs it's the inverse performance) of a designated market index, such as the Russell 3000, or of a sector such as "semiconductors".
We like to look at ETFs from a CANSLIM* cup-and-handle basing-pattern perspective, combined with our proprietary Climax High and Climax Low signals (designed to catch turning points, i.e., reversals off highs or lows, with amazing accuracy), and also with signals such as new highs, up or down on big volume, etc. Also important is the Relative Strength Rank plotted as an indicator line, and the net Acccumulation / Distribution percentage.
For example, RWM is the symbol for the ProShares Short Russell 2000 ETF. This ETF moves exactly opposite to underlying market, i.e., when the standard Russell 2000 index goes up, the Short Russell 2000 EFT goes down and visa-versa.
Note that there was a Climax Low buy signal in RWM (shown in blue a couple inches from the right edge of the chart) on June 11th, at what turned out to be virtually the exact low. A few weeks later stocks started to sell off, seemingly right on cue, as RWM started moving back up. Then finally, just a couple days ago in fact, it had a genuine upside breakout from a cup and handle bottom. You can see it on the chart. The pivot point of 59.26 was set on June 23rd, at the apex of the handle.
Additional noteworthy features with this chart are the Accumulation / Distribution percentage, which has moved into the positive zone at 56%, and the Relative Strength Rank indicator, which has been moving upward steadily as the cup-and-handle pattern formed. This all bodes well (if you can call it that) for additional declines in stocks.
Meanwhile, IWV is the symbol for the iShares Russell 3000 (long) Index. It's thrown off some Climax High sell signals lately (shown in red) that worked out pretty well. There have also been a couple of lackluster Climax Low signals, the latest of which failed almost immediately. This in itself is telling (as a contrary indicator).
As an example of a market sector ETF, SMH is the symbol for the Merril Lynch Semiconductor HOLDRS Trust. This fund represents a composite average of 20 major Semiconductor stocks. It's been doing reasonably well, forming an apparent base-on-top-of-a-base structure for the past several months after a failed breakout from a cup "without" a handle.
Specifically, the ill-fated handle-less cup in SMH began on February 10th with a Climax High signal (shown in red). The maximum correction was 18.6% at the low of the pattern. Note the Climax Low signal (in blue) which caught the exact bottom.
It rallied up off the lows to barely make another new high on March 23rd, but the breakout did not hold. More work was needed, since the cup was too deep and the requisite handle structure (with a more shallow correction) hadn't formed. It turned out to be the beginning of the extended base-on-top-of-base pattern we're seeing now.
Note the fractal-like cup and handle structure within the base-on-base that has emerged over the past several months from the more chaotic antecedent sction. Like the original cup from earlier in the year, this cup began with a climax high which occurred on May 7th (marked in red). It corrected, than ran up to make a new high out on May 7th on June 1st (marked in green). This marked the beginning of the current handle structure.
Notwithstanding ins and outs of chart-reading, the most fundamental point of all this bears repeating: The most basic prerequisite to successful stock-trading is to be in sync with the overall market trend, since over 90% of stocks will ultimately follow the market direction. Fighting the trend doesn't work!
*For those unfamiliar with the term, CANSLIM - among other things - is precise methodology for reading stock charts courtesy of William O'Neil, founder of Investor's Business Daily and author of How to Make Money in Stocks.
So how do we determine the trend? One excellent source of insight is the so-called "ETFs", which are Exchange-Traded mutual Fund designed to mimic the performance (or with some ETFs it's the inverse performance) of a designated market index, such as the Russell 3000, or of a sector such as "semiconductors".
We like to look at ETFs from a CANSLIM* cup-and-handle basing-pattern perspective, combined with our proprietary Climax High and Climax Low signals (designed to catch turning points, i.e., reversals off highs or lows, with amazing accuracy), and also with signals such as new highs, up or down on big volume, etc. Also important is the Relative Strength Rank plotted as an indicator line, and the net Acccumulation / Distribution percentage.
For example, RWM is the symbol for the ProShares Short Russell 2000 ETF. This ETF moves exactly opposite to underlying market, i.e., when the standard Russell 2000 index goes up, the Short Russell 2000 EFT goes down and visa-versa.
Note that there was a Climax Low buy signal in RWM (shown in blue a couple inches from the right edge of the chart) on June 11th, at what turned out to be virtually the exact low. A few weeks later stocks started to sell off, seemingly right on cue, as RWM started moving back up. Then finally, just a couple days ago in fact, it had a genuine upside breakout from a cup and handle bottom. You can see it on the chart. The pivot point of 59.26 was set on June 23rd, at the apex of the handle.
Additional noteworthy features with this chart are the Accumulation / Distribution percentage, which has moved into the positive zone at 56%, and the Relative Strength Rank indicator, which has been moving upward steadily as the cup-and-handle pattern formed. This all bodes well (if you can call it that) for additional declines in stocks.
Meanwhile, IWV is the symbol for the iShares Russell 3000 (long) Index. It's thrown off some Climax High sell signals lately (shown in red) that worked out pretty well. There have also been a couple of lackluster Climax Low signals, the latest of which failed almost immediately. This in itself is telling (as a contrary indicator).
As an example of a market sector ETF, SMH is the symbol for the Merril Lynch Semiconductor HOLDRS Trust. This fund represents a composite average of 20 major Semiconductor stocks. It's been doing reasonably well, forming an apparent base-on-top-of-a-base structure for the past several months after a failed breakout from a cup "without" a handle.
Specifically, the ill-fated handle-less cup in SMH began on February 10th with a Climax High signal (shown in red). The maximum correction was 18.6% at the low of the pattern. Note the Climax Low signal (in blue) which caught the exact bottom.
It rallied up off the lows to barely make another new high on March 23rd, but the breakout did not hold. More work was needed, since the cup was too deep and the requisite handle structure (with a more shallow correction) hadn't formed. It turned out to be the beginning of the extended base-on-top-of-base pattern we're seeing now.
Note the fractal-like cup and handle structure within the base-on-base that has emerged over the past several months from the more chaotic antecedent sction. Like the original cup from earlier in the year, this cup began with a climax high which occurred on May 7th (marked in red). It corrected, than ran up to make a new high out on May 7th on June 1st (marked in green). This marked the beginning of the current handle structure.
Notwithstanding ins and outs of chart-reading, the most fundamental point of all this bears repeating: The most basic prerequisite to successful stock-trading is to be in sync with the overall market trend, since over 90% of stocks will ultimately follow the market direction. Fighting the trend doesn't work!
*For those unfamiliar with the term, CANSLIM - among other things - is precise methodology for reading stock charts courtesy of William O'Neil, founder of Investor's Business Daily and author of How to Make Money in Stocks.
