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The Week Ahead (Lurking Quirks)

This is our free Weekly Analysis section. We present an analysis of some interesting stock indexes or ETFs, highlighting seasonal tendencies in the weeks ahead. For our focus on individual stocks, read our Stock Talk. Our subscribers have access to more than 1800 pages of seasonals, statistics, extensive analysis, trade candidates, and commentary.



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Note Date Notes for the week of September 10, 2012

There has been steady accumulation in a number of big-name stocks in a variety of sectors. The SPY reflects this:


chart courtesy of Worden − www.Worden.com

Gold is on a tear:


chart courtesy of Worden − www.Worden.com

Many of the mining stocks are showing accumulation.

EEM, the MSCI Emerging Markets Index Fund,is showing strength:


chart courtesy of Worden − www.Worden.com

EEM has a decent seasonal bias, gaining an average 3.4% over the next 9 weeks, with gains in 8 out of the past 9 years. ETFs seasonals aren't generally as strong in many individual stocks' seasonals, so 3.4% may not be impressive (4 of the 9 years did have gains greater than 7%). But it shows an upward bias that has potential for certain trades, such as covered calls.


Note Date Notes for the week of September 3, 2012

The S&P 500 remained in a tight trading range between 1395 and the previous highs of 2012.


chart courtesy of Worden − www.Worden.com

Traders will come back in force tomorrow, the first trading day after Labor day. There aren't any strong seasonals in play now. There will be in a few weeks. So for now, let's see how this week plays out.

Gold and silver, along with the mining stocks, are showing strength. Again, there aren't strong seasonals to back up any directional trades. But there are some good chart patterns suggesting big up-moves could be starting.

Note Date Notes for the week of August 27, 2012

It seemed the market would produce a solid down week, but Friday produced a modest up-close. The S&P 500 however has stalled out at the previous highs of 2012.


chart courtesy of Worden − www.Worden.com

The net result for the week is close to the definition of a spinning top candlestick pattern. A spinning top is an indication of indecision. The daily chart confirms the S&P 500 has traded within a narrow range the past two weeks.


chart courtesy of Worden − www.Worden.com

Things may be quiet until after Labor Day. The S&P 500 lacks any historical bias (seasonal) for the next few weeks. Around five weeks from now a seasonal upward bias appears.


Many key sectors show similar patterns. XLK, the Technology Select Sector SPDR ETF, shows a seasonal with an upward bias starting about six weeks from now.


But the daily chart of XLK shows an upward move may have already begun. XLK has broken above earlier 2012 highs, and volume on up-close days is well above volume on down-close days. Hedge funds and other institutions may have starting buying tech stocks in expectation of fall rallies.


chart courtesy of Worden − www.Worden.com


Note Date Notes for the week of August 20, 2012

I'll start off by saying that right now, none of the major indexes or ETFs have any decent seasonal charts to lend support to any directional trading decisions. We're on our own by relying on just price chart patterns - historical track records offer little to go by.

The Dow Jones Industrials closed Friday at a level not seen for 4-1/2 years. I wouldn't say at this point it has thrust through resistance from earlier this year, especially with volume still being weak. But it will be worth watching this week. The NASDAQ, S&P 500, and Russell 2000 are not far away from similar feats - the Dow just happens to be the first one to make the test.

DJIA
chart courtesy of Worden − www.Worden.com

Speaking of the Russell 2000, IWM, the ETF based on it, shows small stocks may be ready to break upwards. IWM may be breaking above July's high. As with the Dow though, low volume levels means this test, at least for now, could fail.

IWM
chart courtesy of Worden − www.Worden.com

The star of today's class is IWC, the ETF based on Consumer Services. The top five companies in this ETF are Wal-Mart, McDonald's, Amazon, Disney, and Home Depot. IYC has only been around for 12 years, but it closed at an new all-time on Friday.

IWC
chart courtesy of Worden − www.Worden.com

This list of star pupils continues. OEX has set a 4-year high. The Q's (QQQ) are about to set an 11-year high. RTH, the Retail ETF, just set an all-time (11-year) high. XLK, the SPDR Technology ETF, just set an 11-year high. But as often pointed out, volume has not been impressive.

Finally, the price of gold has been inching up. If I was a pattern-happy chart technician, I'd point out that gold may have broken out of a triangle pattern:

The price of Gold
chart courtesy of Worden − www.Worden.com

Since 1993, XAU, the price of gold, has risen an average 2.3% over the next 5 weeks, with gains in 14 out of 19 years (74%). However, since 2000, XAU has risen an average 3.8%, with gains in 11 out of those 12 years (92%).

GLD, the SPDR Gold ETF, has only been around for 7 years. But if you are curious, GLD has risen an average 4.6% over the next 5 weeks, with gains in 6 out of the 7 years (86%).


Note Date Notes for the week of August 13, 2012

Would you say this stock is in a trading range? Of course! The stock is rising towards the top of the trading range. Also notice that volume has fallen off dramatically as this stock is nearing the top. Can you guess which stock this is, and what is the time period?

Unidentified stock in trading range
chart courtesy of Worden − www.Worden.com

Even if you know very little about the statistics and probabilities of the stock market, you are probably guessing that as this stock nears the top, it will be easier for the stock to turn downward and drop than to thrust above the top of the range (the two previous highs).

There are many professional traders who will recognize this simple pattern and will readily take profits as it nears the top. If they are wrong it will be easy to re-enter a long position after the stock breaks above the previous highs - they sacrifice a little profit. If they don't take profits, and a sudden downward turn occurs, they stand to lose a lot of profits. The safe move will be to take profits and wait and see what happens.

This stock is none other than the S&P 500 since 1995. Keep in mind over the coming months that the easiest path is down.

S&P 500 since 1995
chart courtesy of Worden − www.Worden.com

I pointed out up-trending channels in several indexes and ETFs recently. It looks like the S&P 500 and Dow Jones have broken upwards, out of their channels. However, the volume is very weak, and the daily bars are narrow, as you can see in this S&P 500 daily chart. This is not a break.

S&P 500 has broken above the recent trading range, but on low vol
chart courtesy of Worden − www.Worden.com

The NASDAQ Composite, Russell 2000, and GLD are still within their recent trading ranges. SMH, the Semiconductor HOLDRs ETF, has broken above its recent trading range. But SMH still has a sideways-to-negative seasonal pattern. Statistically, this is not a good week to enter new index/ETF positions.


Note Date Notes for the week of August 6, 2012

After the first four days last week, the S&P 500 looked as though it would pull back further towards the 50-day MA/bottom of the channel. It has been traversing the full width of the channel recently, typically producing 5% moves. Not wanting you and I to become complacent, the market jumped on the supposedly good employment news:

S&P 500 still in channel
chart courtesy of Worden − www.Worden.com

The S&P 500 is now at the top of the channel - will it break out upwards, retrace to the bottom of the channel but remain within it, or complete a bear flag pattern by thrusting below the channel?

The seasonal pattern for the S&P 500 shows virtually no net bias over the next several weeks. There is just no track record of movement one way or the other this time of year:

S&P 500 still in channel
© StockQuirks.com

The Dow Jones Industrial Average is similar. The Russell 2000 does have to slight positive seasonal. The Russell has risen an average of 2.6% over the next 6 weeks, with gains in 18 out of the 21 years (86% success rate).

The NASDAQ also has an upward bias building. Through the rest of the year it has a historical track record of increasing in price:


© StockQuirks.com

The seasonals are calculated by theoretically buying the index at the open of this week, and selling at the close from 1 through 26 weeks later. You wouldn't actually do that - you'd trade an ETF like QQQ, or you would trade some of the bigger components of the index.

But this seasonal suggests the major component stocks of the NASDAQ, such as Apple (AAPL), Microsoft (MSFT), Oracle (ORCL), Google (GOOG), and Amazon (AMZN) may be worth watching for temporary pullbacks offering lower-risk/higher-reward trade setups.


Note Date Notes for the week of July 30, 2012

I'm writing this analysis on Friday morning, and due to travel, I will not have the benefit of seeing the market close. I doubt though that anything will change drastically.

During the past few weeks, some news, analysis, and individual stock movements have suggested a recession and/or market downturn may be upon us. Many stocks have price and volume patterns indicating further downside may be in order.

On the other hand, there are some interesting strengthening patterns showing up. Energy stocks for instance are starting to work upwards on increasing volume. But the charts of many of the biggest indexes and ETFs show well-defined trading ranges. Let's look at some of them.

The S&P 500, despite the gyrations in the market (and the news) in recent weeks, has actually been trading within a civilized, up-trending channel:

S&P 500 still in possible bear flag
chart courtesy of Worden − www.Worden.com

The S&P will eventually break out of the channel, my guess is it will be on the downside. A strong breakout on the downside will prove the current channel to be a bear flag pattern, with significant downside to follow. However, if it breaks below, but relatively weakly, it may just retrace a bit to rebuild strength for another upward move.

The NASDAQ looks similar:

NASDAQ still in possible bear flag
chart courtesy of Worden − www.Worden.com

The Russell 2000 isn't in as clear a pattern, but it has been ratcheting upwards since early June.

The Dow is nearing the top of its channel. It will be interesting to see Monday's open.

DJ-30 nearing top of channel
chart courtesy of Worden − www.Worden.com

XLK (Technology Select Sector SPDR), XLY (Consumer Discretionary SPDR), and XLF (Financial Select Sector SPDR) have formed sideways trading ranges.

GLD has reached the top of its sideways trading range. Is a breakout coming?

GLD at top of range
chart courtesy of Worden − www.Worden.com

And finally, semiconductors are still within a horizontal trading range, but I like how the volume is starting to increase:

Semi's are picking up
chart courtesy of Worden − www.Worden.com

Now if you are a regular visitor to this site you are wondering about seasonals, as I sooner or later tie them in. The NASDAQ has an upward bias, historically, as we enter into the fall:

NASDAQ seasonal shows upward bias
© StockQuirks.com

The semiconductor ETF has a downward bias for several weeks:

SMH seasonal shows downward bias
© StockQuirks.com

HUI, the Amex Gold Bugs Index, has an interesting seasonal for the next 6 weeks - 15 out of the 16 years HUI has risen an average 7.6% a year over that time period:

HUI has upward bias
© StockQuirks.com

All of the other major indexes and ETFs show sideways seasonals - no net gain/loss over the next several weeks.


Note Date Notes for the week of July 23, 2012

The market pulled back Friday, making its intentions quite clear. The S&P 500 couldn't set a higher July high on Thursday, then produced a solid red candle on Friday (meaning the S&P 500 opened at its high for the day and closed just above its low for the day). Emphasizing the point, the S&P 500 logged above-average volume. It was July option expiration Friday, but is still worthy to make note of.

S&P 500 still in bear flag pattern
chart courtesy of Worden − www.Worden.com

Overall though, the S&P 500 remains within the up-trending channel visible since early June. This may turn into a Bear Flag pattern, with the S&P 500 breaking strongly through the downside starting another down-leg. But until it does so, a short-term trader should assume that it is more likely the index will stop and rebound, or at least pause, at the lower channel trendline.

The NASDAQ Composite has a very similar pattern, as well as the Russell 2000. The Dow Jones 30 haven't been as strong, forming more of a sideways trading range instead of an up-trending channel.

For index/ETF traders looking to increase their odds, waiting for the S&P 500 to pull back to the lower trendline (around 1350) and playing a rebound with a stop-loss point just below the 7/12 close (which also corresponds to the current 50-day moving average) will produce a good reward-to-risk trade. However, it would all depend on the volume of the pullback to 1350, the volume on the rebound if it occurs, and the usual host of other factors (such as the overall picture of the earnings announcements that will be coming out and news in general).

As far as seasonals, the NASDAQ Composite is coming into a positive seasonal pattern. For example, backtesting the NASDAQ shows that if a theoretical long position was taken this Monday, and held for 20 weeks, over the past 21 years there would have been 17 years with gains (81%), with gains averaging 6% a year.

However, the other indexes do not yet show positive seasonals. There is time to wait on the NASDAQ. If a weak pullback does happen in the NASDAQ and it starts to rebound strongly, a bullish, longer-term trade in something like QQQ may be worth considering (at least until the NASDAQ makes it to the top of its up-trending channel).

GLD, the SPDR Gold Shares ETF, has only been around for 7 years. But it too has an upwardly-biased seasonal. Over the next 16 weeks for instance, it has gained an average 7.6% with gains in 6 out of the 7 years (2008 being the only losing year).

Over the next 3 weeks, OIH (Oil Services ETF) has fallen an average 4.5% with losses in 8 out of the 11 years (72%), but I'd be careful as some of the major oil stocks have been picking up strength. The Semiconductor indexes/ETFs still have negative seasonals.

That's it for this week. I'll focus on another possible earnings play in Stock Talk again.


Note Date Notes for the week of July 16 2012

On Friday, the S&P 500 rebounded to stay within the up-trending channel. The volume wasn't impressive, but not unusual for mid-summer.

S&P 500 rebounded to stay within up-channel
chart courtesy of Worden − www.Worden.com

However, the S&P 500 in one day has already traversed half the way to the upper part of the channel. This channel should be widely recognized by traders, and this rebound may quickly fade as the index nears the upper trendline.

There are no strong seasonal charts right now, again not surprising since it is mid-summer.

Q2 earnings announcements will start picking up this week. This is also July option expiration week. Earnings estimates have been falling and any positive surprised may spark a brief pop in certain stocks. Look for major stocks due to announce before Friday, that have a track record of moving on earnings announcements, that still have Historical Volatility levels near the bottom of the past year's range, and investigate straddles on them. There may be some good reward-to-risk trades to be found.

Be sure to check out this week's Stock Talk!


Note Date Notes for the week of July 9, 2012 (update July 11, before market open)

I want to point out that the major indexes have been forming possible bear flag patterns. The S&P 500 briefly fell below the 200-day moving average, but since then has been ratcheting upwards. It's primary task now is to stay above the 50-day moving average:

S&P 500 may be forming a bear flag pattern
chart courtesy of Worden − www.Worden.com

But if you connect the recent lows and the highs, you see it may be forming a bear flag (see Continuation Chart Patterns - Bear Flag).

The key here is to watch what happens in the next few trading days. If the S&P 500 starts rebounding strongly, it may spend several days working its way back to the top of the up-trending channel. But if it breaks below, especially if it closes well below the bottom trendline on strong volume, then the bear flag pattern will be confirmed, and a strong, longer-term down-move may be in order. The target for a confirmed bear flag pattern will be a drop equal to the April 2nd high of 1422.38 to the June 4th low of 1266.74, or 155.64 points. From a breakdown below the bear flag (and 50-day moving average), currently around 1336, a drop of 155 points produces a target of 1181 for the S&P 500.

The NASDAQ Composite is in a similar situation:

NASDAQ Composite may be forming a bear flag
chart courtesy of Worden − www.Worden.com

A rebound or a strong down-move. We should have the answer within the next few days.


Note Date Notes for the week of July 9, 2012

The market set a short-term high this past week. The pullback since then in the S&P 500 has been restrained. The NASDAQ Composite and the Russell 2000 have barely been affected. Many of the financial websites are starting to suggest this may be the best time in years to buy stock.

Friday's jobs report was negative, until you think about the actual difference between the hoped-for numbers and the reported ones compared to the overall job market. The conspiracy theorists in the audience may think powers within the government (and the Fed) will do whatever they can to encourage a rising stock market leading up to the election.

Flipping the page on my notebook, I begin to list some possible negative influences that may be a factor:

  • IBD stated on 7/6/12 that 70% of retailers have missed expectations.
  • Q2 earnings season officially kicks off tonight (July 9th) with Alcoa's earnings. I will follow the reports from basic industries and services. WD-40, YUM, maybe FAST's reports will interest me this week.
  • McClellan oscillator reached an even more overbought level this week (see my comments from two weeks ago here in The Week Ahead).
  • With the capital gains tax currently scheduled to increase 33% on January 1st, tax selling may pressure some stocks.
  • Most major indexes and ETFs have flat seasonals for the next few months. Semiconductors, usually a leader in rallies, actually have a negative seasonal - a historical pattern of declining over the next couple of months.
  • Businesses don't seem to have the confidence to add to their payrolls. The stock market won't go far if the economy doesn't grow faster, the economy won't grow if employment doesn't grow, and employment won't grow if businesses aren't comfortable growing it. (Economics in one sentence)
  • Europe (I don't need to say any more).

As for trading possibilities, in the indexes and ETFs this column focuses on, only the IYF (iShares Dow Jones US Financial Sector) caught my attention. IYF has fallen to the lower part of an up-trending channel. Short-term traders may consider this an opportunity to enter a long position, and if a tight stop is used, a good reward-to-risk trade may be possible:

IYF at bottom of channel
chart courtesy of Worden − www.Worden.com

The XLF (Financial Select Sector SPDR) looks similar. I personally won't consider trading IYF (or any other financial sector ETF) right now because there is no net seasonal bias (track record) for entering IYF trades right now, and I always look for 'tailwinds':

IYF has flat seasonal for the near future
© StockQuirks.com

One other reason is since 2008, I've lost any interest in trading financial stocks. I just don't trust their business models anymore.


Note Date Notes for the week of July 2, 2012

We have what may be the start of another uptrend developing. There are some good looking chart setups. Friday's gap-up in the technology-laden NASDAQ Composite makes for interesting analysis:

NASDAQ Composite has gapped-up to 2-week ago highs
chart courtesy of Worden − www.Worden.com

The Composite spent two months retreating to the 200-day moving average, with strong volume on numerous down-close days overwhelming the volume on up-close days. But the pullback stopped at the 200-day MA, starting a consolidation that has lasted for two months now.

The index managed to stay above the 200-day, up-close days are outnumbering down-close days, and the volume is picking up on up-close days. The Composite is trying to make the 50-day moving average the new support level. Over this weekend, Investor's Business Daily has changed the Composite's Accumulation/Distribution rating from C- to B- and changed the Market Outlook from 'Market in Correction' to 'Confirmed Uptrend'.

Businesses no longer need to have any trepidation about ObamaCare, and Europe working things out last Friday means we may have some smooth sailing for a while.

I will not be one to join the chorus. Being an owner of several businesses over the years, having many small business-owning friends, and being an avid student of Economic History, my outlook isn't as rosy. I was especially interested in comments by George Soros last week. He essentially said that Europe has perhaps only 3 days to resolve various disagreements on handling the banking crisis over there.

That is an interesting comment. Soros has a track record of making startling comments only in areas he has interest in. If he had faith in the Euro zone and the Euro, he would have a long position in the Euro. The comments sound like he has an interest in seeing it all work out. But that isn't Soros. Those comments, especially from one of the top currency traders in the world, are likely to make people nervous, and nervous traders sell on the first hint of problems.

Soros likely has a large bet against the Euro. Any negative news from Europe could turn sentiment sharply negative instantly, and U.S. markets aren't likely to brush it off. Here in the U.S., with the ObamaCare decision out of the way, the electoral race likely uneventful until the conventions, earnings season winding down, and vacation season starting, external influences on the stock market may be minimal for a while.

Let's go back to the U.S. indexes and think about how the odds stand for trades in the near future.

The NASDAQ Composite on Friday came back to the short-term high set the previous week. However, it did not break above. The Dow and S&P 500 charts are similar. If these indexes break above the previous highs, especially on higher volume, then this rally could turn into a longer-term move. It's worth noting that the Russell 2000's chart looks better, as it already has broken above the previous high.

However, if within the next couple of days, the indexes don't break above the 2-week ago highs, then the odds of any significant advance quickly diminish.

The seasonals for nearly all the indexes and major ETFs are pretty much the same - flat. There are no historical track records of net gains or losses for the next several weeks. The NASDAQ Composite's seasonal is a good example:

NASDAQ Composite seasonal is flat

Notice that the Composite's seasonal shows no net gain from this coming week through about 15 weeks, but then starts to climb, and picks up from 18 weeks onward. 15 weeks corresponds to the first week in October, 18 weeks is the last week in October. Regular readers of this site know there are strong seasonals that show up in late October, for nearly all the major indexes, ETFs and many individual stocks.

If good chart setups occur in mid to late October, the seasonals (historical track records) of many stocks will combine to provide higher probability trade possibilities. You can make much of your trading profit for the year in situations like that.

Right now no such higher probability setups exist. Look for stocks that have been trading in ranges and either play small moves from one end of the range to another, or consider credit spreads outside of the ranges. Covered calls on higher quality stocks, when they are near the bottom of recent ranges, also can work well in environments like we have now.



The Week Ahead Archive

The older commentaries from our The Week Ahead column are archived here.

June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010



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