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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • How Low Can Energy Stocks Go?

    The precipitous 21% plunge in crude oil prices in July has renewed the very bearish sentiment that was evident early in the year. The $6 billion loss reported by BP p.l.c. (NYSE:BP) early this morning will not help the sentiment.

    Though most of the population celebrates the low gas prices and the recent collapse in diesel prices investors who are still holding on to some of the high yielding energy giants are not happy. Many are wondering if they should sell now or just continue to hold on. Others are wondering when it will be time to buy some of these oil giants.

    For example Chevron Corp (NYSE:CVX) is down over 30% in the past year and lost 12% in 2014 and 6.8% in 2013. CVX had a high in July 2014 of $130.14 and based on its quarterly dividend of $1.07 was yielding 3.28%. It now yields 4.8% as it closed Monday at $89.14. Compared to the yield of 10 Year Treasuries this looks quite attractive.

    (click to enlarge)

    Of course in determining an outlook for the energy stocks one must carefully analyze the crude oil futures. As I noted in June the tight six week trading range in May and June was a sign that the buying power had dried up which was negative for prices.

    Now that prices are approaching the January-March lows, line b, in the $44 area the questions is whether a test of these lows will just be part of the bottoming process. The more negative scenario is that the trading range, lines a and b, is just a continuation pattern. If it were completed the 127.2% Fibonacci target is at $37.50 with chart targets below $30.

    The weekly technical studies for crude are negative but they are still well above the lows from early in the year. The daily on-balance-volume (OBV) topped out on June 1st (line 1) as it broke through support. The OBV is already back to the March lows and it is acting weaker than prices.

    The HPI, which uses volume, open interest and prices to measure money flow also turned negative with the OBV as it violated support, line d, and the zero line. The HPI formed a strong bullish divergence at the March lows which signaled that a bottom was in place. On a short term basis the HPI is still above the July lows so a short term bottom is possibly forming.

    (click to enlarge)

    The Dow Jones Oil & Gas Index (DJUSEN) is the broadest measure of the energy sector.

    • The monthly chart shows that there is next strong support in the 522 area, line b, which is approximately 8.7% below current levels.
    • The long term uptrend that goes back to the 2002-2003 lows (line c) stands at 490.
    • The relative performance has been declining since early 2008 and it broke major support in September 2014 (line 1).
    • This signaled that it was acting weaker than the Spyder Trust (NYSEARCA:SPY)
    • It will make another new monthly low this month.
    • The weekly RS analysis is also in a solid downtrend and continues to make lower lows.
    • The monthly OBV has been below its WMA for the past year and shows no signs yet of bottoming.
    • There is first resistance in the 600 area with the 20 week EMA at 638.

    The SPDR S&P Oil & Gas (NYSEARCA:XOP) dropped below monthly support, line e, in October 2014.

    • In each of the next four months XOP dropped below its starc- band before the three month spring rebound.
    • The monthly relative performance dropped below its support, line f, in September 2014.
    • The RS line shows a pattern of lower lows and lower highs.
    • The weekly RS line (not shown) is also making new lows.
    • The monthly OBV also broke its support, line g, last September.
    • The OBV has not yet made new lows so a bullish divergence could be forming.
    • The weekly OBV (not shown) did make a new low last week
    • There is first resistance at 441.60 and the March lows with the 20 week EMA at $4694.

    What to Do: If you are not a short term scalper, bottom fishing is always dangerous. Therefore most traders should wait for clear bottoming signals before concluding that a low is in place.

    For investors, scaling into a partial position in a sector is not always a bad idea. For those who feel that the economy will get considerably better before the bull market tops out some commitment to the energy sector will be warranted.

    The eventual turnaround in this sector be sharp. Therefore establishing a small position in XOP or a broadly based energy ETF or mutual fund when everyone else is selling is not a bad idea.

    Tags: XOP, CVX, SPY, BP
    Jul 28 6:42 PM | Link | Comment!
  • The Week Ahead: Can Your Portfolio Survive Earnings Season?

    The stock market's reaction to a heavy week of earnings reports was not encouraging. It reinforces the view from last week that now was not time to jump back into the stock market despite the widespread bullishness. The drop this week is likely to reduce the bullishness but a tradable low for the overall market many be a number of weeks away.

    The sharp gains on Monday were accompanied by signs that the rally was fueled by just a few stocks as I noted in Tuesday's Narrow Advance Warrants Caution. The technical weakness did not support the new highs in the Nasdaq 100 which ended the week down over 2%.

    According to AAII 32.7% of individual investors are were bullish as of last Thursday with just 25.6% bearish. The largest group are neutral and overall there was little change in the sentiment last week. The CNN Fear & Greed Index dropped from 32 last week to just 12 this week. In August 2014 it did drop into single digit territory just a week before the market made its low.

    So what can investors do to ride out the correction during earnings season?

    The Markets

    Last week's stock trading featured a few winners but there were more losers as declining stocks swamped the advancing ones by a 4-1 margin. Some of the losers like Caterpillar (NYSE:CAT) are large multinational companies that have been hurt by the stronger dollar and the resulting weakness in their overseas business. The decline in orders from China dragged down the earnings from both industrial and tech companies.

    Even Apple Inc. (NASDAQ:AAPL) was hit last week but that was consistent with its weak volume analysis. United Technologies (NYSE:UTX) reported a 10% drop in elevator orders from China and it's stock was down 10% for the week. IBM reported that revenues from China were down 15%. The lack of demand out of China was also a problem for Microsoft (NASDAQ:MSFT) and VMware (NYSE:VMW).

    Even though biotech giant Biogen (NASDAQ:BIIB) did beat on earnings their revenues were weak and the stock was down over 22%. This week we have 163 of the S&P 500 reporting profits so it is likely to be another volatile weak.

    (click to enlarge)

    There were some winners as Amazon.com (NASDAQ:AMZN) actually had a profit and Starbucks (NASDAQ:SBUX) also moved higher late in the week while the overall market was declining. SBUX has been a market leader all year as has Netflix (NASDAQ:NFLX) which reported earnings the previous week. The % change charts clearly illustrate the winners and losers as Caterpillar has been in negative territory all year and is now down over 17%.

    In contrast Netflix was only negative for the first three weeks of 2015 but then accelerated to the upside as it is up over 119%. This dwarfs the meager gain of the Spyder Trust (NYSEARCA:SPY). It is always a good idea to concentrate in stocks or ETTs that are acting stronger than the S&P 500. This is especially true when the overall market is correcting as those stocks with strong relative performance generally hold up the best.

    (click to enlarge)

    The relative performance or the ratio of a stock or ETF to the S&P 500 is the best way to pick the winners and avoid the losers. The weekly chart of Caterpillar shows that the stock has been in a broad trading range, lines a and b, since 2012. The stock has made new lows for the year last week with next major support in the $71 area.

    In contrast the relative performance (NYSE:RS) line topped in early 2012 and has since been in a solid downtrend, line c. The lower lows in 2012 confirmed a new downtrend as the RS line has also made lower lows, line d.

    Netflix Inc. stayed in a trading range for all of 2014 but then broke through resistance at line e, in April 2015. The RS line was acting much stronger as it dropped back to its rising WMA as prices were testing the 20 week EMA and still shows a strong uptrend.

    (click to enlarge)

    The weekly chart of the NYSE Composite shows the drop below the uptrend, line b, that connected the December 2014 and the February lows just before the 4th of July long weekend. The two week rebound failed at the 20 week EMA which has now turned lower. Once below the recent low at 10,622 the next support is at the weekly starc- band at 10,509.

    The weekly NYSE A/D line dropped below its WMA on June 5th which was a reason for concern. This week the A/D line will make a new correction low and this means the correction is likely to last longer. The next support is from the highs early in the year, line c. The daily A/D line has dropped below its WMA and is already close to the lows from three weeks ago.

    The weekly on-balance-volume is still in a range, lines d and e, as it closed back below its WMA last week. The daily OBV (not shown) dropped below its WMA last Tuesday and is already close to the June lows.

    (click to enlarge)

    The Spyder Trust closed the week on its daily starc- band and just above the quarterly pivot at $207.38. A further decline to the July lows in the $204 area is looking more likely. There is additional support at $202.48 and the March lows, line a. The 20 day EMA is now at $209.74 with stronger resistance in the $211-$212 area.

    The daily S&P 500 A/D line rallied back it resistance at line b, last week but has now dropped well below its WMA. The lower lows in the A/D line at the July lows, line c, made me question the recent rally. The A/D line needs to overcome the downtrend and last week's highs to turn positive.

    The Economy

    Last week's data on the housing market was mixed as Existing Home Sales were strong while New Home Sales plunged 6.8% in the past month as they were much weaker than most expected. The manufacturing sector is still a concern as while the Chicago Fed National Activity Index was better than expected the Kansas City Fed Manufacturing Index was weaker. The PMI Flash Manufacturing Index held firm which was encouraging.

    (click to enlarge)

    The most positive sign was the 0.6% rise in the Leading Economic Indicators (NYSEMKT:LEI) as most economists were only looking for a 0.2% gain. This is a composite of ten economic indicators and as the chart reveals it has a good record of topping out well ahead of a recession. It is still in a sold uptrend.

    In addition to a full week of earning there will be plenty of economic data for the stock market to absorb. On Monday we get the Durable Goods Orders as well as the Dallas Fed Manufacturing Survey. On Tuesday the FOMC meeting begins and we also get the S&P Case-Shiller HPI, PMI Flash Services report and Consumer Confidence.

    Wednesday we get the latest report on Pending Home Sales followed in the afternoon by the FOMC announcement. The advance reading on 2nd quarter GDP is out on Thursday and then on Friday we have the Chicago PMI and Consumer Sentiment.

    Interest Rates & Commodities

    The yield on the 10 year T-Note declined for the second week in a row and is down significantly from the late June highs. The daily technical studies do suggest that rates will decline further over the near term but a drop back below 2.00% is needed to signal even lower yields.

    The plunge in commodity prices continued last week as the CRB index dropped 4.4% and gold dropped another $46 dollars. This was consistent with the negative weekly OBV analysis that has been pointing to lower prices since June. Traders are very bearish on gold so a short covering rally is likely in the next week

    The crude oil futures declined another $3 per barrel last week as the tight weekly ranges in June (see chart) warned of lower prices. The crude oil futures have lost over $11 per barrel since late June. Crude oil is oversold on a short term basis so a rebound is likely in the next week but there are no signs yet of a bottom.

    Market Wrap

    Since the July 4th column I have been pointing out that the small cap iShares Russell 2000 (NYSEARCA:IWM) was acting the weakest. The Russell 2000 was down 3.24% last week. This was worse than the 2.86% drop in the Dow Industrials and the S&P 500 decline of 2.21%.

    All ten S&P sectors were lower for the week as the materials were down 5.66%, oil & gas stocks dropped 4.26% and the industrials lost 3.4%. The relative performance analysis has been negative on the materials and industrial sectors in 2015 as both triggered monthly low close doji sell signals in June (see chart)

    This week Dupont (NYSE:DD), Mondelez International (NASDAQ:MDLZ) and Seagate Technology (NASDAQ:STX) all report and they receive a large share of their earnings from China. This makes them quite vulnerable to an earnings downdraft.

    For those who are looking to get involved in the stock market on this correction focusing on ETFs will help cushion you against an earnings shock from an individual stock. In terms of sectors the long term relative performance for health care and consumer discretionary continues to look the best. They will likely correct further with the overall market but should perform the best once the market bottoms out.

    If you are already invested in individual stocks or ETFs another 2-4% drop in the S&P 500 would not be surprising. Owners of stocks that have not yet reported earnings could use options to protect their positions while those in strong ETFs should ride out the correction and could consider adding to positions at stronger support.

    I feel confident that the technical studies will help correctly identify the next market low and you can follow my analysis during the week on both Twitter and StockTwits. For my regular weekly commentary see my columns at Trade Your Own Money.

    Tags: SPY, QQQ, IWM, AAPL, AMZN, CAT, NFLX
    Jul 26 9:57 AM | Link | Comment!
  • Volume Warned Of Apple's Drop

    Volume analysis has played an important role in my analysis for over 30 years. It can be traced back to my discovery in the late 1970s of the late Joe Granville's book New Strategy of Daily Stock Market Timing for Maximum Profit. In this book he wrote "stocks do not rise in price unless demand exceeds supply. Demand is measured in volume and thus volume must precede price."

    Over the years, I have explored the OBV in more detail and written extensively about multiple time frame analysis of the OBV in the past few years. In identifying both bottoming and topping formations in stocks or ETFs the relationship of the OBV to its 21-period weighted moving average plays an important roles.

    This because you will not always see positive or negative divergences at a major turning point. At a market bottom divergences can be explained by a transition where the demand starts to gradually exceed supply as prices reach a low point. Negative divergences at a top are a result of the fact that fewer buyers (lower volume) are pushing prices higher.

    Of course the OBV does not always warn you of tops or bottoms but with so many instruments to trade or invest in the OBV can often lead prices up or down which can help give you an edge. The recent decline in Apple, Inc. (NASDAQ:AAPL) in reaction to its earnings was preceded by strong warnings from both the weekly an daily OBV.

    (click to enlarge)

    The weekly chart covers both the sharp rally in 2014 as well as the trading in 2015. On March 21, 2014 (line 1), the weekly OBV broke through resistance at line b as it started to lead prices higher. The OBV had been above its 21 week WMA since early February. The stock price did not breakout to the upside until five weeks later so the improving OBV was revealing accumulation of the stock.

    Using the 2014 lows, the OBV was in a clear uptrend, line c, that stayed intact until the first week of May. The OBV also made a series of higher high, line d, as it was confirming the price action. This changed on May 5th as the new weekly high was not confirmed by the OBV. The negative divergence, line e, should have put investors as well as traders on notice that the trend could be changing.

    The decline the next week dropped the OBV below the prior low creating a new downtrend in the OBV. This confirmed the divergence and the following week the OBV just rallied back to its now flat WMA (line 2). This I have found to be a quite reliable topping formation. The decline in the OBV below the prior lows established the downtrend, line e, as key resistance.

    (click to enlarge)

    The daily OBV moved back above its WMA in October 2014 as APPL rallied from the $101 level to a high near $119 just before Thanksgiving. The OBV formed a slight negative divergence, based on the daily closing price, at these highs, line c. This was now the key level of resistance to watch.

    The chart of $APPL shows that it formed a flag formation (lines a and b) over the next seven weeks. This formation was completed on January 22nd and the following day the OBV (line 1) had clearly overcome the bearish divergence resistance at line c. This created a buying opportunity as the company was scheduled to report earnings after the close on January 27th.

    Before the opening on January 27th I reviewed the monthly, weekly, daily and 240 minute charts of $AAPL and recommended buying $AAPL on a pullback even if it came on an earnings miss. Instead the stock declined ahead of the earnings and reached the initial buy level. The earnings were strong and $AAPL gapped sharply higher the next day.

    The daily OBV stayed strong until early March as it then developed a trading range that ended on April 27th when it made a marginal new highs. The OBV support that developed in March and April, line e, was broken in early May. As $AAPL rallied to a new daily closing high on May 22nd, point 3, the OBV stayed below its declining WMA (line 2) which was a sign of weakness.

    On June 9th the daily OBV support, line d, that went back to the January lows was broken. The lower lows in the OBV were consistent with a new downtrend that was negative. The rally from the July 9th lows was accompanied by well below the average volume as the OBV just rallied briefly above its WMA but that did not change its trend, line f. $AAPL needs to rally above the recent peak and the late June highs to suggest the worst of the selling is over.

    This type of OBV analysis can be used on stock, futures and ETFs. The weekly chart of gold I featured last Friday revealed the OBV had dropped to new lows several weeks ago well ahead of prices. The analysis can be done on a number platforms and here are my suggestions.

    1. Monitor the weekly and daily OBV trend lines
    2. Watch the relationship of the OBV to its WMA on multiple time frames.
    3. Determine whether the WMA is rising or falling.

    I will be adding additional examples of the OBV analysis in the coming months and will continue to post OBV charts on both Twitter and StockTwits.

    Tags: AAPL
    Jul 24 12:34 PM | Link | 1 Comment
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