Trend Check with Tushar Chande

There must be 50 Ways to Leave a Trade (Or, The Two Ratios You Need to Evaluate Your Trading)

"The problem is all inside your head/ she said to me" is how Paul Simon starts his 1975 hit, for there must be fifty ways to leave your lover, he speculates.  He was not crooning about trading, but he might well have been.  Unless you are a systematic and highly disciplined trader, you have probably discovered fifty ways to exit a trade. Well if not fifty, surely more than ten.  The actual effect is to shorten the length of your average trade and thus possibly degrade your ratio of average winning trade to average losing trade. But why is this significant?  Let me offer a simplified explanation.

 

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S&P 500 Tops Index Trend Strength: Now will it Follow Through on the Latest Breakout?

A shift in dynamics in the nation's capital has pushed the S&P 500 index to new highs.  But, can the market follow through on its breakout?   Also, many thanks to all who wrote in with a solution to my last week's puzzle (more on that below).

Chart 1: The S&P 500 Index and the Dow 30 topped my trend strength rankings after many months, as the market signals a willingness to go higher.

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A Quiz for Chart Watchers: Can you Identify This Indicator (Or These Indicators)?

If you are back from vacation but not quite ready to get back to work, here is a gentle diversion: can you identify the mystery indicator or indicators on the attached chart?  I have deliberately obscured names and axis labels to make things a bit more interesting. Is this the same indicator (with different values for its variables), or are these three separate indicators? I hope you will pardon the white-out effects in the charts below as I tried to obscure details that might give the game away immediately.

 

Chart 1:  Are these three different indicators, or the same indicator with different values for key variables?

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August 2017 Review, Plus: Metals Melt Up, Smart Money Rotates Into Growth, But Price:Breadth Divergence Continues

Markets were resilient, defying skeptics (yes, including me), as a surge at month end erased most of the month's losses.  Metals of all types: rare, precious, base and industrials melted up, suggesting that the economy is getting stronger, confirmed by a stronger GDP reading (and hence, the smart money rotated into growth).   However, breadth continues to lag across time frames, and that divergence will have to be resolved at some time in the future.

Chart 1: Markets rebounded into the neutral region in the short- and intermediate-term, and remained firmly long over the long-term. At the intermediate-term (100-day length) the financials-laden Russell 2000 now is trending lower, diverging with the other indexes. Index breadth increases from left to right, from 30 to over 2000 stocks.  The time frame doubles at each step from to top to bottom from 25 to 200 days. (Details of the trend-following models are here.)

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Will Rising Utilities Eclipse the Mega Cap Rally? (With Scan Code For the Top Trending Utilities)

2017 has been the year of the Mega Cap rally, as Mega Cap stocks have handily outperformed other capitalization sectors (see Chart 1).  However, a majority of Mega Cap stocks have just turned lower on a medium-term basis. Is this the start of a correction in the market's leading cap-weighted sector?  In the meantime, utilities are trending higher as a group, when measured with the Chande Trend Meter.  Will Utilities eclipse Mega Caps? (I also include a scan code to find the strongest utilities, which you can edit to find the strongest sector or socks of your choice.)

 

Will the strengthening Utilities sector eclipse the strongest cap weighted sector of 2017: the Mega Caps?

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Has The Curse of Year 7 Finally Caught up with the Market?

Bad things have happened in the stock market during years ending in 7.  However, 2017 has been remarkably calm, and our year-to-date draw-down is the smallest since at least 1947 (see Chart 1). Will the market now play catch-up (or is catch-down?) to its Year 7 history over the next few months?  Inevitably, the sample size is small, but you can read about the quirks in Year 7 returns from LPLresearchDana Lyons, and Safehaven.

Chart 1: The worst yearly draw-down for years ending in 7 since 1947 shows that the 2017 year-to-date month-end draw-down is much smaller than its other counterparts.  Will the market catch-down to its historical returns over the next few months?

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Small Cap Stocks Show Significant Weakness

Small cap stocks have broken down in a noteworthy way, as the down-move I anticipated roils the market. Typically, weakness in small cap stocks is an early warning of weakness in their larger cousins.  First, a majority of stocks in the S&P 600 Small Cap Index have turned lower in all four of my trend following models (see Chart 1).  Second, $SML, the Small Cap index has broken below its 200-day simple moving average (see Chart 2).  Third, the broader Russell 2000 Index has also reached its 200-day simple moving average (see Chart 3).  All three, taken together, point to significant weakness in the small cap area.  Now, the question is whether the weakness will spread elsewhere.

Chart 1: All four of my trend-following models show a majority of stocks in the small cap index trending lower, which means the underlying small cap universe is turning lower.  These calculations are supported by charts 2 and 3 below.

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Do Large Down-side Gaps In Leadership Stocks Point to Start of Mini Correction?

A change in sentiment is now evident, as profit-taking has opened up down-side gaps greater than 10-day average true range in the charts of key leadership stocks (such as Amazon and Coherent) starting a mini correction as measured by the Guggenheim Equal Weight ETFs: in the short-term only 4 of 9 equal weight ETFs are long, two are flat and two are trending lower.  The data are summarized in Chart 1.  Two sectors, Industrials (RGI) and Health Care (RTH) are in short-term down-ternds.  Two, Materials (RTM) and Technology (RYT) are flat.  Energy (RYE), Consumer staples (RHS), consumer discretionary (RCD),  financials (RYF) and utilities (RYU) are long.  Thus, a mini-correction has emerged.

Chart 1: A change in sentiment is visible over the short-term in the Guggenheim Equal Weight ETFs. Two are flat, two are short, and only five are long. (For details of the trend-following models, see here.)

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July 2017 Review: All Green, With a Small Divergence

My trend-following models are all green, across all four time frames and market breadth at month-end.  However, even as the Dow 30 made new highs over the past few days, other key indexes declined, and one has to watch if this divergence persists, because looking at all the positive July returns in the SPX since 1950, there is only a 24% chance that both August and September will be positive.

Chart 1: The trend-following models are bullish, across multiple time frames and market width varying from 30- to over 2000 stocks.

 

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Is Volume Expansion Necessary for a Successful Breakout?

Conventional wisdom has it that volume expansion must accompany price expansion in order for the price expansion to succeed, i.e., for the breakout to mature into a trend.  But is volume necessary for a successful price breakout? Does price follow volume?

A fish out of water illustrates the necessity of water for fish to live. If there is no water then, then there is no fish (Is water? = False results in Is fish? = False).  For us, does Is Volume? = False always mean Is Trend? = False?  (Photo courtesy www.goodfreephotos.com).

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