Thursday, October 22, 2015

Chartology: An Important Spot For The Market

From Barron's Getting Technical column:

Investors Have Less Cause for Worry, Say Charts
Although the S&P 500 still faces serious resistance, many areas of the stock market are perking up. 
Although it is uncomfortable for me to say, there are fewer reasons to maintain a cautious, if not bearish, outlook for stocks. Perhaps my analysis is evolving like a politician on certain issues because if I take a different angle on the analysis, things do look better. 
Traditionally, I use a “top down” style of analysis. First, I assess broad market conditions then drill down to sectors and individual stocks. That is not unique to charting as fundamental and quantitative analysis can also start with the big picture. 
That big picture still shows plenty of hurdles ahead for the bulls. For the Standard & Poor’s 500, the bull market trendline from 2011 remains broken (see Chart 1). Even after three weeks of gains, the index remains below its key 200-day moving average. And most importantly, it remains below the massive zone of resistance overhead, courtesy of the giant trading range in place before the August price plunge.
Technical theory suggests that people trapped in stocks during that steep selloff will flood the market with supply as they try to break even on their investments. And that supply can overwhelm demand currently fueled by relief that the Federal Reserve postponed its first interest rate hike. 
The good news is that a “bottom up” style of analysis shows many areas of the market either perking up or back in full rally mode. The easy example is energy, which has at least stopped falling if not set a bottom in place. We can say the same thing about other sectors such as basic materials, industrials, including the transports. On Monday, I wrote about potential upside for Delta and Southwest. 
In other words, several of the down-and-out groups are back in the hunt. They are far from leaders, but they are at least followers. 
The two consumer sectors – staples and discretionary – are leaders. Both groups bounced back quickly and are approaching their summertime highs. Consumer staples, represented by the Consumer Staples Select Sector SPDR exchange-traded fund (ticker: XLP ), in particular saw a rather sharp change in its on-balance volume study suggesting that it is in greater demand since the lows (see Chart 2).
Technology seems to be the media’s favorite right now, but as I have written here before, the broader measures do not show quite the same power. But for the purposes of this column, I will stick with the popular Technology Select Sector SPDR ETF ( XLK ). With that in mind, four of the 9 major sector ETFs – tech, staples, discretionary and utilities -- are trading above their 200-day moving averages. Eight are above their 50-day averages....MORE