Watching for new investment opportunities.

We’re coming into a whole lotta technical resistance points on many major NA indices right now. That, in conjunction with the seasonal tendencies for lower returns after May might suggest either a flat – or worse -summer ahead. But that doesn’t mean there’s no money to be made in the markets. You just need to look a little harder than in the past!

Before I start – I hope you guys all subscribe to the ValueTrend Update newsletter. Its sent out about once a month, the latest of which was emailed yesterday. You can subscribe to it (and the blog, if you don’t already) here. This months newsletter looked at the basing phase that the market is entrenched in right now, along with a few sectors that we have been legging into at ValueTrend. Hope you read it.

A handy trend indicator

Lets look at some simple market charts for signs of overhead resistance, and the likeliness of breaking, or failing, at those points. I’m going to introduce an indicator that might be useful for this discussion – one that I didn’t cover in my Online Trading Course – nor have I covered in this blog or my videos. That’s because I keep my system simple, using indicators that I have a long history of confidence in. However, I have studied Aroon enough to understand where it might help in determining trend potential. As an aside: my thanks to Kevin Prins, who is with the ETF side of BMO, for introducing me to this indicator many years ago. Kevin is an enthusiastic student of Technical Analysis and an all-round good guy.

A brief on Aroon: the indicator was developed by Tushar Chand. The default setting is 25 bars. On a weekly chart like those below, a 25-week Aroon-Up measures the number of weeks since a 25-week high. A 25-week Aroon-Down measures the number of weeks since a 25-week low.  Stockcharts.com observes that Aroon differs from typical momentum indicators which focus on price relative to time. Aroon is unique because it focuses on time relative to price.

Aroon is interpreted as bullish – aka the trend is improving or good- when the Aroon-up (green) line is above 50, and the Aroon-down (red) line is below 50. And visa versa for bearish trend. There’s more to it than that, but lets use this bit of background knowledge when we look at the indices below

S&P 500

Clearly in a sideways consolidation pattern with a ceiling in the 4100-4200 zone. Aroon indicates a weak move so far, despite the “Up” indicator being above 50 and the “Down” one below 50. I view the decline in the “Up” side of late a sign of weakness… Aka, no clear signs of building strength that might successfully challenge that resistance.

 

S&P TSX 300

Clearly in a sideways consolidation pattern with a lid near 20,800. Same weakening Aroon signal as the SPX.

 

NASDAQ

Looks to me like the news is getting worse for the NASDAQ – despite its recent move to the technical lid near current levels (about 12,300). Aroon suggests weakening highs with strengthening lows.

 

Japan – potentially bullish

Now lets look at a market that is challenging a resistance point that shows POSITIVE Arron price action indication. The EWJ (SPDR Japan ETF) is hitting its overhead resistance. At the same time, we have rising 25-week highs, and falling 25-week lows. This is a bullish indicator for the ETF. I am not in the trade, but am certainly watching it for the neckline to break out positively.

Conclusion

Hopefully these charts tell you the same story they are telling me. That is, the current rally in NA stocks may just be another disappointment in a long string of failed rallies. Meanwhile, there are other markets worth looking at. The future probably ain’t what it used to be…but that doesn’t mean there aren’t opportunities!

 

4 Comments

  • You mentioned in your update a contrarian play you invested in. What is your definition of contrarian. I perceive it as counter to current sentiment of the stock, sector or market. I ask because it seems that technical analysis would steer you away from this play. Can you use T/A to identify contrarian opportunities?

    Reply
    • A lot of my work is contrarian. Basically, we look for signs of over-pessimistic situations (in this case, lots of short positions that could be covered soon) that are beginning to bounce off of support with hooks on momentum indicators – and if the fundamentals (aka Craig’s work) suggest this rally is real–despite the crowd. Good analytics need to look beyond the crowd at times.

      Reply
  • I started legging into the oil producers when oil dropped down to $62 or so. I think it’s heading higher given OPEC’s recent decision to cut production. What do you think?

    Reply

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