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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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  • The Week Ahead: Fake Out Or Breakout?

    After a generally positive week, the stock market rally stalled Thursday and the sellers have stepped back in early Friday. The major averages are down 1-1.5% by mid-day so most of the major averages are likely to be lower for the week. In last Wednesday's session, the NYSE Composite was finally able to overcome the resistance from last July.

    The other major averages have tested their major resistance levels but have not yet been able to breakout to the upside. Even though the S&P 500 is near an all time high, the market seems nervous.

    As the WSJ noted in their pre-market commentary, "Traders and investors say they remain hesitant to continue boosting stocks ahead of additional earnings reports in the weeks ahead. Market watchers are expecting one of the most difficult earnings seasons in years for the first quarter."

    There's clearly no shortage of market bears with recent comments like "According to CIA economic expert Jim Rickards, a "25-year Great Depression is about to strike America." Others are just worried about an imminent 15-20% correction. As I discuss in the What to Watch section, the A/D line shows no signs of such a correction.

    Therefore, many are wondering if the recent market strength is just a fake out or whether the market is actually ready to breakout?

     

     

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    As I have pointed out previously, the NYSE Advance/Decline line made another new all time high on April 6. But how reliable have signals like these been in the past?

    On December 12, the NYSE A/D moved to a new high (line 1) as it surpassed the resistance from the October 2012 high. Two days later, in The Week Ahead: Stuff Those Stockings with Stocks, I recommended using any corrections to buy stocks.

    The NYSE continued higher for the next six days before it turned lower. The uncertainty over the impact of the fiscal cliff pushed the NYSE down 2.5% as it dropped to its 20-day EMA. This was a classic example of buying the dip as discussed in last week's trading lesson Four Tips for Buying the Dip. The major averages gapped higher to start 2013 and continued higher into April as the A/D line continued to make higher highs.

    Another example occurred in February 2014 as the market had just undergone a 6.4% correction, which dropped the AAII bullish sentiment from 55% at the end of 2013 to a low of 28% in early February.

    On February 13, the NYSE A/D line broke out to new highs (line 2) as the resistance at line d, was overcome. The NYSE was still well below its resistance, line c, and the previous high. These levels were not overcome on a closing basis until eleven days after the A/D line had broken out to the upside. The NYSE rallied almost 5% in the three months after the A/D line broke out.

    These are just a few of the many examples where the NYSE A/D line has been a very good leading indicator for the stock market. Therefore, despite Friday's drop, I expect last week's highs in the major averages to be surpassed in the coming weeks.

     

     

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    One of the surprising bright spots last week was the strength of some of the large financial companies like JP MorganChase (JPM) and Goldman Sachs (GS) as both moved above the late 2014 highs. In last week's column, I wondered whether the outlook for earnings was too negative.

    The weekly chart of GS shows that the relative performance has broken its downtrend from 2013, line b. This indicates that it is finally becoming a market leader. The OBV has also broken through its resistance, line c, confirming the price action.

    The weak relative performance of the DJ US Financial Index (DJUSFN) versus the S&P 500 has been holding the market back as the relative performance peaked out, line e. A break in this downtrend is needed to signal that the entire financial sector has now become a market leader.

    The Euro markets have corrected from their recent highs as the Dax index has dropped over 5% from the April 10 high. This was the trigger that started Friday's sharp decline. Concerns are building once more over the Greek debt issue as neither side seems willing to budge.

     

     

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    On the plus side, the crude oil market has been surprisingly strong as the July contract has overcome the resistance at line a, which completes its bottom formation. There were signs at the start of April-Can Crude Turn in the 2nd Quarter?-that crude oil was bottoming out. This was in contrast to the high bearish sentiment as some were recommending shorting crude oil. The major resistance level now is the 38.2% Fibonacci retracement resistance at $66.46.

    The downtrend in the OBV, line c, has been broken and the weekly (not shown) is above its WMA. The daily HPI, which measures money flow, broke its downtrend at the end of March, which was the start of a strong new uptrend. The weekly HPI (not shown) has turned positive for the first time since the middle of August 2014.

    The strength of the energy sector suggests that the worst of the selling in these stocks is likely over and this should be an overall positive for the stock market in the months ahead.

    On the economic front, the Retail Sales finally picked up last month as they were up 0.9% after a drop of 0.5% the previous month. The rough weather's impact on consumer spending may finally be over, but it does make the April data even more important. The long-term chart of retail sales from last week illustrates the importance of this indicator.

     

     

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    Last Friday's mid-month reading on Consumer Sentiment from the University of Michigan came in at a strong 95.9. The internal numbers suggest strength in consumer activity and increased confidence in the jobs outlook. The chart shows that there was an upside breakout in late December as the resistance at line a, was overcome. This completed the continuation pattern, lines a and b.

    Also on Friday, we got the monthly reading on the Leading Economic Indicators (NYSEMKT:LEI), which came in at 0.2%, reflecting moderate growth for the economy. The LEI often peaks well ahead of the start of a recession and it is one of my favorite early indicators of a bear market. It shows no signs of peaking out.

    On Monday, we get the Chicago Fed Activity Index followed by Existing Home Sales on Wednesday. Then, on Thursday, we get jobless claims, the flash PMI Manufacturing Index, and New Home Sales. On Friday, we get the latest data on Durable Goods.

    What to Watch

    Earlier in April, it was the strength of the overseas markets that helped stabilize the US market and last week it was the selling overseas that punished stocks at the end of the week. The major averages closed with losses of over 1% as the Dow Industrials is now down for the year.

    This week's lower close will erase some of the recent positive signs from the weekly OBV studies. The daily OBV had improved over the past week, but the weekly studies are still badly lagging the price action. This is in contrast to the strong weekly and daily readings from the A/D lines.

    Of course, the best signals come from when both are in agreement but that is not the case right now. As I reviewed in February's Tell Tale Signs of a Correction, warnings of sharp corrections have come when the weekly NYSE A/D line drops below its WMA and then starts a new downtrend. This is clearly not the case now.

    In last Thursday's column, I pointed out one analyst's negative fundamental view of Netflix, Inc. (NFLX). The point of the article was not to point a finger at any one analyst as I have had my share of wrong calls on individual stocks. It was used as an example of why I have found technical analysis to be superior to fundamental analysis.

    Earlier in the week (Wall Street's Most Hated Stocks with the Best Charts) I had referred to research that demonstrated that those stocks that are least liked by fundamental Wall Street analysts have historically done much better than those they recommend.

    One of the advantages of rigorous technical analysis is that it will tell you when you are wrong if you accept the signals and don't become married to a position. For example, it would take probably 2-3 weeks or more of very weak A/D numbers right now to drop the NYSE A/D line below important support and to suggest a top was forming.

     

     

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    Of all the methods I follow, only the Mass Index is signaling a major trend change. To understand this fully, you should read my earlier article. The signals of a trend change from the weekly Mass Index come when the Index moves above 27 (yellow line) and then drops below the 26 level (green line).

    There is no directional component with these signals, and as you can see, there have been only six signals in the Dow Industrials since 2007. The latest signal came on April 10, and it is one I am not ignoring, as I will continue to monitor this indicator.

    Despite the severity of Friday's drop, most of the ETFs that I follow have now had a weekly close below their quarterly pivots (Quarterly Pivot Table).

    Based on the % of S&P 500 stocks above their 50-day WMA, the market is still in neutral territory and still shows a pattern of higher lows.

     

     

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    The weekly chart of the NYSE Composite shows the breakout above the resistance at line a, and the close back below it, line a. On a close above last week's highs, the weekly starc+ band is at 11,484 with the quarterly projected pivot resistance at 11,527.

    The 20-week EMA is at 10,905 with the quarterly pivot at 10,828. The monthly pivot support for April is at 10,833, so this is where the current pullback could end. There is more important support in the $10,659-19,759 area.

    Once the final numbers are in for last week, the weekly NYSE Advance/Decline will likely turn lower, but should close the week well above its uptrend, line c, and the rising WMA. The weekly OBV has also turned down but is barely above its WMA. A drop below the March and January lows would be a sign of weakness with longer-term support at line d.

    S&P 500
    The Spyder Trust (SPY) tested the key resistance, line a, on last Wednesday and Thursday but then gapped lower Friday. It may close below its 20-day EMA ay $208.35 and is not far above its daily starc- band. The daily uptrend is now just under $206, line b, with the quarterly pivot at $204.90. The monthly projected pivot support is at $204.16.

     

     

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    The S&P 500 A/D line made a slightly higher high on April 10 and retested this level last week before turning lower. It is still above its WMA. The next important level of support is at the twin lows from March.

    The daily OBV has turned lower after recently moving back above its WMA. It is still well below its long-term downtrend, line e.

    Dow Industrials
    The SPDR Dow Industrials (DIA) was also hit hard Friday as it is now getting close to the quarterly pivot at $176.58. The daily starc- band is at $176.26 with the monthly pivot support at $174.57.

    The resistance in the $180-181 area was tested last week as the high was $181.51. A strong close above this level would be an upside breakout with the daily starc+ band at $183.56.

    The daily Dow Industrials A/D line has been able to move through its downtrend from late 2014 (line g) and its WMA is still rising. It could be tested this week if the selling continues on Monday.

    The daily OBV was finally able to move through its downtrend, line h, last week and its WMA is also now rising.

    Nasdaq 100
    The PowerShares QQQ Trust (QQQ) has lagged the other averages on the recent rally as it failed well below the March highs. It is now getting close to the quarterly pivot $104.63 which was tested early in the month. The monthly projected pivot support is at $103.50, which also corresponds to good chart support.

     

     

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    The key resistance is still at $109.20, line a, with the daily starc+ band now at $109.49. The quarterly projected pivot resistance is at $114.67.

    The daily Nasdaq 100 A/D may drop back below its WMA with Friday's close. It is still well above the longer-term support, line c, and the late March lows.

    The OBV has dropped back below its WMA with next good support at the March lows.

    The 20-day EMA at $106.73 now represents very short-term resistance.

    Russell 2000
    The weekly chart of the iShares Russell 2000 (IWM) shows the spike to new highs last week and the lower close. There is first good support at $121.54 and the breakout level, line a, with the quarterly pivot at $121.39.

    As was the case for the SPY, QQQ, and DIA, the IWM also triggered a low close doji sell signal on Friday. There is initial resistance now at $125.30 and then at $127.13 with the daily starc+ band at $128.37.

    The weekly Russell 2000 A/D is still in a clear uptrend with support at line f. It is also well above its WMA which is still clearly rising.

    The weekly OBV has turned lower but it did break through long-term resistance, line g, in March.

    NEXT PAGE: Sector Focus, Commodities, and Tom's Outlook

    Tags: SPY, QQQ, IWM, DIA, XLE, IYT, GDX
    Apr 17 7:44 PM | Link | Comment!
  • Netflix: The Dangers Of Fundamental Investing

    The much dreaded earnings season is getting off to a better start than most were expecting. Of course, there have been some stocks that have disappointed as the Bank of America (BAC) missed on revenues and the stock dropped over 1%.

    The rally Wednesday was broadly based as the NYSE Composite broke out above last July's highs. So far, this has gotten little attention from the financial press. As I commented yesterday, this is consistent with the number of new highs in the NYSE A/D line and the S&P 500 is likely to follow suit in the near future.

    A full fledged breakout will further validate the value of technical over fundamental analysis. One apparent star in this earnings season is Netflix, Inc. (NFLX) as they reported a sharp increase in international subscribers after the close yesterday.

    The stock jumped 13% in after hours trading even though earnings were cut in half because of the stronger dollar. It is too early to tell if NFLX will be able to hold its gains in Thursday's trading but it did in January.

    One well known analyst from Wedbush Securities has been warning about their poor cash flow since last summer as they had a price target of $215. To his credit, the initial warning came just a few weeks before the summer high of $489.29. The stock subsequently dropped to a low of $315.54 at the end of 2014.

    His long-term concerns did not change after the stock surged on earnings last January. In late trading Wednesday, NFLX was trading at $537.50, and before this surge, the stock was already up over 39% YTD.

    Given the volatility of NFLX stock, it is always possible that his target will be met in the future, but technical analysts will argue that fundamentals almost always lag the price action. As I pointed out in Monday's Wall Street's Most Hated Stocks with the Best Charts, several studies have shown that stocks least liked by Wall Street's fundamental analysts do better than those stocks they like.

    In my experience, basing investing or trading decisions on what the market will pay for a stock is much more likely to keep you in the right stocks at the right time. Besides, since stops should always be used, the market will tell you when you are wrong. Let's look at the charts to see if there was advance warning of the recent price surge.

     

     

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    Chart Analysis: The monthly chart of Netflix, Inc. (NFLX) shows that it formed a doji in December.

    • The strong close in January triggered a HCD buy signal and returned the focus on the upside.
    • The monthly trading range is $174 wide so a confirmed breakout of the trading range has targets in the $660-$680 area.
    • The monthly relative performance moved back above its WMA in January signaling it was a market leader.
    • The monthly OBV looks less positive as it dropped below its WMA last October.
    • The OBV has stayed below its WMA which is now declining.
    • There is monthly support at $410 which was the March low.

    The weekly chart of Netflix, Inc. (NFLX) shows that it had a weekly close above the quarterly pivot on January 23.

    • NFLX tested the weekly starc+ band in February before it corrected back to its 20-week EMA in late March and early April.
    • The 2nd quarter pivot at $406.88 was tested before last week's strong close.
    • The weekly RS line rallied back above its WMA last week.
    • It looks ready to break its downtrend, line d, this week.
    • The weekly OBV made a new high in January as it was stronger than prices.
    • The pattern of higher lows, line e, is bullish with the OBV moving back above its WMA last week.
    • The monthly pivot is at $435.65 with the 20-week EMA at $426.93.

     

     

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    The daily chart of Netflix, Inc. (NFLX) shows that it also skyrocketed on January 20 in reaction to its 4th quarter earnings as it closed up 17%.

    • For five days after the earnings NFLX traded above its starc+ band before it finally consolidated.
    • The daily technical studies confirm the price action in January as they turned positive the week before earnings (see arrows).
    • The daily chart gave similar signals last week as the daily RS line moved above its downtrend, line c, on April 8 (line 1).
    • The daily OBV also overcame its resistance at line e, two days before the up gap opening on Monday, April 13.
    • NFLX is traded above its WMA in Wednesday's session.
    • It now has very minor support at $469.40 with the 20-day EMA at $443.60.
    • The monthly pivot is at $435.65, which makes the risk on any new long positions very high.

    What it Means: The monthly analysis does not yet support a breakout from a fourteen month trading range but this could change in the next month, or so, if the volume increases. The weekly studies were positive prior to the latest surge as they did suggest the recent pullback was a buying opportunity.

    The daily technical studies should have given traders advance warning of the recent move and would have justified buying ahead of earnings.

    For those of you who are still undecided about whether you should be using fundamental or technical analysis, I hope this look at Netflix, Inc. (NFLX) may help you decide.

    My goal has always been to teach technical analysis, which I think anyone can learn if they are willing to do the work. It is based on the hard market data while fundamental analysis depends on analyzing a company's data, which is always subject to revision, unlike the price history.

    How to Profit: No new recommendation.

    Tags: NFLX
    Apr 16 3:33 PM | Link | Comment!
  • Will The Semi Stocks Survive Intel's Earnings?

    It was a sluggish day for stocks Monday as even though the Nasdaq Composite was able to move above 5000 during the day, it closed lower. The small-caps and banks were a bit higher while the oil & gas stocks were hit with profit taking as they had become overextended last week.

    Another day or so on the downside would not be surprising but it is the weekly close that will be more important. The new highs in the NYSE Advance/Decline line continues to favor an upside breakout from the recent trading range.

    The market now faces the early earnings test with JP MorganChase (JPM), Wells Fargo & Co. (WFC), and Johnson & Johnson (JNJ) all reporting before the opening. In early trading, both JPM and WFC are higher while the futures are a bit lower.

    More important for the technology sector could be the earnings report after the close for Intel Corp. (INTC) as the stock has had a rough year losing 11.90% YTD. The Market Vectors Semiconductor (SMH) has just kept pace with the Spyder Trust (SPY) as it is up 2.23% YTD.

    Intel dropped sharply in March as they revised their outlook for the 1st quarter based on weak demand for business desktop PCs. They are expected to issue revised guidance with today's 1st quarter earnings. Many of the other semiconductors also dropped with Intel, but has this changed the weekly outlook for this important industry group?

     

     

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    Chart Analysis: The Market Vectors Semiconductor ETF (SMH) closed above weekly resistance in the middle of February and continued higher for the next three weeks.

    SMH hit a high of $58.47 before it stalled and then dropped sharply with Intel, which is an 18.8% holding in SMH.

    • The sharp low at $52.62 was below the pre-breakout low from February at $52.93.
    • There is further support at $52.20, line a.
    • SMH closed back above its 20-week EMA last week with next resistance at $57.88.
    • The weekly starc+ band is now at $60.69 with monthly pivot resistance at $61.81.
    • The relative performance broke its uptrend, line b, on the recent correction.
    • The RS has turned up but is still below its WMA.
    • The weekly OBV also violated its support, line c, and is now below its declining WMA.
    • The daily studies are just slightly positive heading into earnings.

    Intel Corp. (INTC) broke the uptrend from the early 2014 lows, line d, on the March drop.

    • The March low at $29.31 was just above the 50% retracement support at $29.15.
    • The weekly starc+ band is at $27.89 with the 61.8% support at $27.17.
    • The weekly RS line dropped below its WMA at the end of January.
    • The longer-term uptrend, line e, was broken well before their surprising announcement.
    • The OBV held its support, line f, on the correction and closed last week barely above its WMA.
    • A drop below this support would be an intermediate-term negative.
    • The daily studies suggest that the recent rally is just a bounce in the downtrend.
    • The quarterly pivot is at $32.60 .The 20-day EMA is at $31.40 and is now trying to turn higher.

     

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    Analog Devices, Inc. (ADI) was a recommendation from January 22 as the buy levels were hit on the early February drop to $50.95. It is up 15.54% YTD.

    • The weekly starc+ band was hit two weeks ago.
    • Once above the high at $64.94, the weekly starc+ band is at $67.34.
    • The quarterly pivot resistance is at $73.62.
    • The weekly relative performance resistance at line b, was overcome one week after the February lows.
    • The RS line is still rising sharply as it continues to be a market leader.
    • The breakout in the weekly OBV has been less impressive as it has just barely made it above resistance at line c.
    • The OBV is well above its slightly rising WMA.
    • There is initial support at $61.70 and the rising 20-day EMA.
    • The 20-week EMA is rising strongly and now sits at $57.68.

    Texas Instruments Inc. (TXN) peaked in early March at $59.99 but has drifted lower over the past five weeks.

    • So far, the quarterly pivot at $56.19 has held on a weekly closing basis.
    • The 20-week EMA was tested a few weeks ago and is now at $55.49.
    • The RS line broke through resistance, line e, in early February.
    • The relative performance is now testing its still rising WMA.
    • The weekly OBV is now slightly below its WMA but it did confirm the recent highs.
    • The daily studies are mixed with just the OBV now positive.
    • There is minor resistance now at $58.60 but TXN closed below its 20-day EMA on Monday.

    What it Means: Overall, the rally in the semiconductor sector has been disappointing though there have been some bright spots like Analog Devices, Inc. (ADI). The technical outlook for Intel Corp. (INTC) does not favor new buying though it could still have a positive surprise.

    The decline in Market Vectors Semiconductor ETF (SMH) just barely hit the stop that had been raised as the rally was not strong enough to hit my initial profit taking zone. The positive longer-term outlook for the industry group does keep the semi stocks on my prospective buy list.

    How to Profit: No new recommendation.

    Portfolio Update: For the Market Vectors Semiconductor (SMH), the 100% long from $53.79 was stopped out at $52.85.

    For Analog Devices (ADI) was 100% long at $52.49 and sold 1/3 at $62.58 or better. Use a stop now at $59.33.

    For Texas Instruments Inc. (TXN) should be 100% long at an average price of $55.12. Sell ½ at $57.10 or better and use a stop at $55.26 on the remaining position.

     

    Tags: SMH, INTC, ADI, TXN
    Apr 15 6:49 AM | Link | Comment!
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