Video and Report Headlines
- Bull Market Environment
- SPY Surges above Upper Bollinger Band
- Short-term Overbought and Staying Overbought
- XME Forms Bullish Continuation Pattern
- Video Game eSports ETF Flies the Flag
- Autonomous EV ETF Reverses its Down Swing
- Amazon Consolidates Near Highs
- Big and Little Wedge Breakouts for Live Nation
- Cisco Breaks out with a Gap
- Textron Gets Breakout within Bigger Pattern
- Lilly Zigzags after Massive Advance
The next Chart Trader will be posted on Thursday morning, December 14th.
The weight of the evidence is bullish for stocks. It all started with a Zweig Breadth Thrust on November 3rd and the broad advance extended into early December. The 5-day SMA for the Composite Breadth Model (CBM) hit +1 on December 7th. The CBM is a trend-following model that turned bullish as the percentage of stocks above the 200-day SMA started exceeding 60%. Trend-following signals always lag so a later signal is normal. The Zweig Breadth Thrust, in contrast, is not a trend-following type signal. Instead, it is an early bird alert that signals a strong buying thrust off a low.
SPY Surges above Upper Bollinger Band
I posted an article at StockCharts this weekend that showed SPY surging above the upper Bollinger Band (125,1). This is also a bullish trend signal. The indicator window shows %B based on the Bollinger Band settings. %B (125,1) measures the level of the close relative to the upper and lower Bollinger Bands. The close is above the upper band when %B is greater than 1 and below the lower band when %B is below 0. In an effort to reduce whipsaws and still capture trends, I would suggest setting the bullish and bearish thresholds just above 1 and below 0. A cross above 1.05 is bullish and a %B cross below -.05 is bearish.
The table below shows backtest results for Bollinger Band crosses and %B crosses. This long-only backtest extends to 1993 and covers 30 years. There were 29 trades with the basic Bollinger Band cross. Adding a signal buffer via %B reduced the number of trades to 25 (blue shading). Overall performance also improved. The Compound Annual Return improved from 6.69% to 7.29% (green shading), the Average Drawdown was lower and the win rate was higher. Keep this concept in mind for trend-following signals. Add a little smoothing or widen the signal thresholds a bit to reduce whipsaws and improve performance.
The weight of the evidence is bullish for stocks and the onus is on the bears to prove this otherwise. Such evidence might include the Composite Breadth Model turning negative and the 5-day SMA of the CBM moving below 1. For SPY, a %B move below -.05 would be negative. Also watch for the 5-day SMA to cross below the lower line of the Keltner Channel (see the ZBT1500 chart).
Short-term Overbought and Staying Overbought
SPY remains short-term overbought after a 12.5% surge since late October. Overall, the ETF surged to a new high in July, corrected with a falling channel into October and broke out with the November surge. Short-term, we have a classic case of becoming overbought and remaining overbought as buying pressure continues. I suspect that underweight portfolio managers may be scrambling to put more stocks on the books for their yearend reports (window dressing). Whatever the case, the short-term trend is up … and steep.
QQQ started to lag with a three-day pullback that broke short-term support, but quickly recovered and surged to a new high. Overall, the active signal remains the falling channel breakout in early November (just as with SPY). The short-term support break was a red herring and this is something we should ignore. Admittedly, it is sometimes difficult with overbought conditions that favor a pullback. QQQ remains short-term overbought, but the short-term trend is clearly up and buyers are in control.
Chart Analysis, Setups and Trading Ideas
Metals & Mining SPDR Forms Bullish Continuation Pattern
The Metals & Mining SPDR (XME) produced two breakouts with the November surge. First, the ETF broke falling channel resistance with a surge above 51 in mid November. Second, XME broke horizontal resistance in late November. The ETF fell back the last six days and this decline looks like a correction within a bigger uptrend. A falling wedge formed as XME retraced around 50% of the prior surge. Both the pattern and the retracement amount are typical for corrections within bigger uptrends. A break above Friday’s high (red line) would signal an end to this correction and a resumption higher.
Video Game & eSports ETF Flies the Flag
The Video Game & eSports ETF (HERO) surged with the rest of the risk-on trade in November and then consolidated since mid November. Overall, the pattern at work looks like a flag, which is a continuation pattern. Flags represents a consolidation after a big move and take their bias from the direction of the prior move. The prior move was up so this flag is a bullish continuation pattern. A breakout at 20.2 would signal an end to this consolidation and a resumption of the November surge. I would then target a test of the summer highs. Upon a breakout, the early December low would mark first support (call it 19.6).
Autonomous EV ETF Reverses its Down Swing
It is year of the big swing for the Autonomous EV ETF (DRIV). There are five double-digit swings and three of these were 25 percent or more. DRIV reversed the summer-fall downswing with a surge in mid November. DRIV broke short-term resistance with a 13% advance and then consolidated with a flat flag. The ETF broke the upper line on Monday and this signals a continuation higher. I would now use the flag lows to mark first support. A close below these lows would argue for a re-evaluation.
Amazon Consolidates Near Highs
Amazon (AMZN) is in a leading uptrend with a wedge breakout in November and new highs. After a 26% surge, the stock consolidated with a pennant (small triangle). A pennant breakout would signal a continuation higher. As with the rest of the market, AMZN is short-term overbought. Will it remain overbought and continue higher or will it correct? I will watch the pennant for clues. An upside break would suggest remaining overbought and a downside break would argue for a correction.
Big and Little Wedge Breakouts for Live Nation
Live Nation (LYV) sports two breakouts: a big wedge breakout in late November and a small wedge breakout on Monday. First, LYV surged some 55% and then retraced 50-67 percent with a falling wedge. This decline was a massive correction and the November breakout puts the bigger uptrend back in play. LYV advanced around 19% in November and then corrected with falling wedge that retrace 67%. Again, the pattern and the retracement amount are normal for corrections within bigger uptrends. LYV broke out with a surge the last four days. Thus, the short-term trend is now aligned with the long-term uptrend.
The red hash at 81.19 is the ATR Trailing Stop (22,3). This is 3 ATR(22) values below the highest close since the breakout (11-Dec close). I chose 3 for the ATR multiplier to place it just below the wedge low, which is the natural support level. A multiplier of 2 puts the stop too high (83.15), while a multiplier of 4 puts it too low (79.22). This stop will trial higher should LYV continue higher. A close below the ATR Trailing Stop would call for re-evaluation. The ATR Trailing Stop is covered in more detail in today’s video and this indicator is part of the TIP Indicator Edge Plugin for StockCharts ACP.
Cisco Breaks out with a Gap
I featured Cisco (CSCO) last week as it firmed in a support-reversal zone. The lows extending back to December 2022 marked support and the decline into November retraced 50-67 percent of the 50% advance. CSCO broke out with a gap and 2.1% surge on Monday. This is bullish and I would mark first support at the early December low (47.59). Chartists can also consider an ATR Trailing Stop that starts just below this low. The red hash shows the ATR(22, 2.5) stop at 47.36 for starters.
Textron Gets Short-term Breakout within Bigger Pattern
Textron (TXT) is consolidating after a big advance and I am seeing a wedge breakout within this pattern. This is an example of using the pattern within the pattern to get the jump on a bigger breakout. First, TXT surged 30% to a 52-week high in August. It then moved into a consolidation and this is considered a bullish continuation pattern. A breakout at 80 would end this consolidation and signal a continuation higher. Within this consolidation, TXT surged on 30-Nov and 1-Dec, and then fell back with a falling wedge last week. We can also guestimate that the wedge retraced around half of the prior two day surge. TXT broke out of this wedge with a 1.6% gain on Monday. This breakout argues for a challenge to resistance at 80. A close below 74 would argue for a re-evaluation.
Lilly Zigzags after Massive Advance
Eli Lilly (LLY) surged some 92% from March to mid September and then began to zigzag higher. First, there is a wedge into early October and a breakout. Second, there is another wedge into early November and a breakout. There was not much follow through after this breakout at LLV corrected into December with another wedge. The stock failed at 602 twice in the last two weeks and this is the level to beat. A breakout at 602 would be bullish and open the door to new highs.
