The stochastic oscillator has been the indicator to watch, and its movements in and out of overbought and oversold zones has been helpful in catching short term reversals on the daily S&P 500 index chart. The oscillator is currently in an oversold condition, but one of the requirements of calling a turn is that it makes a crossover and moves out of either the overbought or oversold range.
It was a strong start to the week with the major indices all forming bullish engulfing candles on their daily charts. It suggests some follow-through action and that is what the futures are indicating at this time.
There is still considerable damage, however, that needs to be repaired on the weekly chart and that will require a sustained effort on the part of the broader market.
The broad market decline today saw the S&P 500 index break below its 200 day moving average and close near a horizontal resistance area that marked the March and July lows. A move below this level should find some support between the 2020 level and the rising 50 day moving average. The stochastic oscillator is still the indicator to watch, as it has done a good job of identifying short term tops and bottoms on the index, and it is suggesting there is more downside to come.
Shares of McDonald’s (MCD) have been on a tear recently and have outperformed competitor Wendy’s (WEN) by 17% year-to-date. That statistic is somewhat misleading, however, since all of that outperformance has come in the last two months. Wendy’s actually outperformed McDonald’s by 5% from January to August of this year, and by over 35% over the last three years. At this point in time McDonald’s shares look severely overbought, while shares of Wendy’s have been building a base and look prepared to move higher, and potentially make up lost ground on the competition.
The base building has been taking place for the last several months above the 38% retracement level of the 2013 low and the 2015 high, a level that acted as resistance for most of last year. There have been bullish signal line crossovers on both the relative strength index and the volume-weighted money flow index, reflecting improving price and money flow momentum.
On the daily chart the recent consolidation process formed a triple bottom with resistance in the $9.30 area, and that level was broken this month. The stock price has pulled back to retest that resistance-turned-support, and on Tuesday formed a bullish engulfing candle. Moving average convergence/divergence is tracking higher and above its centerline, and Chaikin money flow is positive territory reflecting accumulation in the stock.
Wendy’s is a good risk/reward long candidate at its current level using a position size that accommodates a trailing percentage stop under the 50 day moving average.
(Here’s a link to the article as it appeared on The Street this morning.)
The stochastic oscillator has been particularly accurate over the last several months signaling short term shifts in the direction of the S&P 500 500. (Here and Here) These changes in direction usually follow a crossover on the oscillator and move out of either an overbought or oversold condition.
At the end of October there was a bullish crossover and a move up and out of an oversold condition. The index rallied and the oscillator quickly entered an overbought condition, remaining above the 80 level as the advance in the index continued for several weeks. The broader market pulled back last week and stochastics have made a bearish crossover and moved below the 80 level and out of an overbought condition. This action would suggest that the S&P has some more downside.
In Tuesday’s session a small hammer candle formed above the 50 day moving average and this would be a logical area for a pause. A strong bounce, however, could move the stochastic oscillator back into an overbought condition, but in either case it should continue to be an effective tool for traders with a swing time frame.
Here’s a link to my article on Agrium (AGU) posted on The Street this morning.
The August low on the iShares Emerging Markets (EEM) ETF chart tested the $30.50, which is the 50% retracement level of its 2009 low and 2011 high. It began consolidating in a cup and handle pattern under a $34.25 rim line, which is a 38% retracement level of the 2009/2011 range.
In early October it broke above rim line resistance and a downtrend line drawn off the highs of the last five months, then met a second level of horizontal resistance in the $36.50 area, or approximately the 50% retracement level of the five month May/October decline. Currently, the EEM is retesting the cup and handle resistance-turned-support level, which is now being reinforced by the 50 day moving average. Moving average convergence/divergence has made a bearish crossover and Chaikin money flow is in negative territory. These indications reflect a loss of price and money flow momentum.
In the bottom panel of the daily candle chart is a line chart of the EEM in green, overlaid on a line chart of the S&P 500 index in white. The EEM began to diverge from the S&P index in July, leading the US index to the August low, and a similar divergence is currently in place. A break below the former rim line resistance level on the EEM chart would be bearish for the ETF, and could have negative implications for the broader market.
Here is a link to my article on Bed Bath & Beyond (BBBY) published on The Street this morning.
Facebook (FB) gapped higher on the open Thursday and continued higher for the first 30 minutes of the session. Then it formed a gravestone doji star and came off its high, spending the rest of the session moving sideways. A gravestone doji is a candle that has a high upper wick and narrow opening and closing levels at the bottom of its overall range. It suggests the pressures of supply and demand are nearing a balance, and is considered a reversal pattern and often seen at market tops.
The follow through price action that followed the gap open created a doji on the daily chart. The open and close of the candle are situated above the upper Bollinger band or more than two standard deviations higher than the 21 period moving average of price. This is not to imply a top in Facebook, but it is likely at some point in the near future, that it reverts back to the either the uptrend line drawn off the October lows or the 21 period Bollinger band center average.