Maximizing Moving Averages and The Final Bar Mailbag (01.14) | David Keller, CMT | The Final Bar


Hello everyone welcome to today’s
edition of The Final Bar we’re doing this remotely once again due to the snow
in Seattle we’re going to have a great show we’re gonna open the font of our
mailbag answer your questions about the bearish engulfing pattern on the S&P
also some other questions you sent in recently also do a LevelUp segment we’re
going to talk about moving averages how you should think of them as an investor
also preview my my upcoming video discussion with Ralph Acampora.
ladies and gentlemen this is The Final Bar * music * Hey everyone welcome to today’s showThe Final Bar
I’m your host Dave Keller. I’m the chief market strategist here at
stockcharts.com once again we’re doing this remotely
we’ve got some pretty severe winter weather here in Redmond Washington so a
lot of the StockChartsTV team, if not all of us, are working remotely trying to
keep things going from outside the office. So thanks for hanging with us as
we get things up and running for you. On today’s show we’re gonna have a great
great segment, we’re recording this a little earlier in the afternoon but the market
selling off here with the news on the US China and tariffs maybe extending a
little bit further than people expected the markets are all about expectations
and what’s priced in and what isn’t so we’re getting a bit of distribution
here going into the afternoon so will be interesting to see how the market closes
going into the end of trading today we’re gonna talk about the bearish
engulfing pattern I mentioned that with the S&P 500
earlier this week starting last Friday I had some questions on that’s when we
open The Final Bar mailbag I’m gonna answer some questions on that as well as another
couple things that are really interesting to to share with all of you
before we get to the show I did want to point out the upcoming schedule we have
some really cool guests for you in special events we have next week Katie
Stockton on the 15th, Doug Busch on the 16th, both fantastic technical analysts.
The week after on January 21st we have Greg Schnell is familiar to many of you,
also Greg Harmon who is a fellow a Clevelander a very capable technical
analyst is a great great take on the markets the January 22nd that we also
will be unveiling our 2020 market outlook this is featuring interviews and
segments from all of the StockCharts contributors sort of sharing the charts
that they think are most important going into the into the new year here and
through the first quarter and beyond so you’re not gonna miss that on January
22nd. Let’s get right to a market recap I’m gonna share my screen here now when
I’m thinking about the market obviously we’ve had a bit of a change of character
and it’s funny I think the world knew the world knew that I was going to be
recording this in the afternoon and usually there’s some big change in the
picture before we broadcast live at the close and and here we’re actually doing
at midday so you just can’t get away from this the volatility but you know
serious so this is the the Dow here’s the S&P we have this nice rally
actually started in the red but you know recovered and the S&P was you know
trading up pretty nicely to 3293.94 all of a sudden we distribute right into this
this is based on you know pretty much a headline on U.S.-China relationships and
how that might evolve so clearly that’s a lot of fluidity there’s a lot of
movement that could happen because of that and as I mentioned in the
introduction remember the the markets are all about expectations it’s not
about what happened necessarily it’s not about what’s going to happen it’s about
what people think is going to happen and their emotional tie to those narratives
those future outcomes when that narrative appears to change people will
react and fear will drive things higher drive things lower and that’s what we’ve
seen this distribution going into the closer I will tell you going into the
close today going into the 4:00 p.m. close I’ve paid a lot of attention as to
how the market digests this sell-off and and and where we end up do we continue
distribution is there more profit taking more negativity more fear driving things
or is it more constructive that’s just a an initial reaction we start to digest
it I don’t think we’re gonna know that for sure for a couple days you sort of
see how the market I just the sort of news but overall pretty interesting also
we have to balance that with the fact that we have a lot of earnings coming
out right so this week is beginning of a heavy earnings stretch so down here at
the SCOOTER reports you have Delta Airlines stock reporting you also have
you know Citigroup, JP Morgan off the top of my head number banks are reporting um
so that certainly has the chance to drive prices up or down very quickly as
the market digests reaction to those to those earnings releases looking at
sector returns you know obviously you have health care now industrials
financials they’ve all come off a little bit in the last half hour but overall
those are the three still in the green here at at midday down on the negative
side you have real estate energy technology one of the questions we have
coming up with the mailbag is about leadership and if the bearish engulfing
pattern does play out what does that mean for the leadership themes I think
if you start to see technology at the bottom of the list that tells you a
little bit about a row of a potential leadership rotation up again one day
does not make that sort of leadership rotation it’s a series of days it’s a
successive series of that creates a trend it’s not one day
necessarily that we do it but worth paying attention and so energy
consistently has been toward the bottom of the list if not at the bottom that
tells you the out of favor that is and why that is a as a sector leader
certainly not on the on the table let’s look at the daily chart of the S&P 500
and again we’re recording this in the in the afternoon before we’re before where
as we’re still sort of digesting this but the trend that we’ve been talking
about is really important we’ve had this successive uptrend this consistent
uptrend of higher highs higher lows the most recent swing low around 32.10 and
if and when we’d get any distribution that’s the line in the sand I would be
looking at to see if we can remain above that at this point as long as we remain
above that the trend by definition is up because we have higher lows that have
that have continued to be in place where just most recently made a higher high
what concerns me though and what we’ve talked about is this potential
non-confirmation that’s bearish divergence so as the price goes to
higher highs you have lower peaks in the RSI that bearish divergence some so
every time market pushes higher there’s less momentum behind it that’s a bit of
a concern now again that signal is sort of what puts it on your radar that
should be a red flag that on its own in my opinion doesn’t mean you sell it’s
not telling you that it’s it’s to be to be horrendously bearish it’s all about
what the price does do we validate that divergence by following through you know
this is the momentum picture but this the price is people voting with their
feet that’s what the price of the index is doing it’s we break down through the
most recent swing low again by definition the trend has been positive
let’s look at the mindful investor chart list one of the charts we’ve looked at
recently as this chart of breath and this is looking at the accumulated
advance decline line for the S&P500 from the New York Stock Exchange for the mid-cap index
for the small-cap index I think it’s noteworthy but we’ve had this
divergence in our three and three yesterday was really focused on you know
that cap tier sort of theme large versus small and a couple different ways to
slice it just an uptick in all these breadth lines yesterday with a nice
strong up move we’ll have to see as the as the market locks in the closing price
today what this happens to the what happens to the breadth but again this
trend is a bit of a concern with large caps going higher
small and mid caps actually continuing to syllable lower what’s interesting
here this is the chart of the new highs and new lows on the New York Stock
Exchange then the S&P 500 at the bottom is just
telling you the number of companies making a new 52 week high or low on the
S&P500 yesterday you saw 65 stocks out of 500 ish making a new 52 week high only
one company making in the new 52 week low look at how long it’s been it’s a
since you have a meaningful number of S&P names making new 52 week close but
it’s been quite a while however look at the New York Stock Exchange right so
this is getting a little more into the small and mid-cap part of the exchange
you can see that there actually have been an increasing number of stocks
making the 52-week low this is still very early days again I’m looking for
anything that would tell me to resist the pull of this consistent uptrend
that’s one of the things I’m looking at you still have plenty of new highs we’re
just starting to see some new lows creep in so this chart is an interesting one
to pay attention to because you want to see if you see an increasing number of
new lows a decrease in new highs we’ve started to potentially see that on the
American soccer chains and not as much on the S&P 500 that’s one of the things
that I would be paying paying attention to here that’s it for a market recap and
again I pay attention going into the close how things sort of
evolving to get a lot of earnings coming out free market today but also after the
close watch for a lot of jumps a lot of gaps that will potentially need to be
thinking about through the course of the of the week here we however need to go
on to our next segment which is The Final Bar mailbag.This is one of the
segments I love because it gives us a chance to answer questions, answer
questions from all of you in terms of what you’re seeing what you’re hearing
and again I love the interactive nature of The Final Bar more than anything so
please keep your questions and your feedback coming you can get them to us
at the final bar charts calm police and then anytime anytime you can and we’ll
get to them on a future broadcast when we can. Also put in putting comments
during the Q&A segment of a live show we can capture them there as well. We’re
going to start with the question on the S&P500 and this was I’ll read the
question very quickly here, “if that bearish engulfing confirms” the bearish
engulfing pattern we saw in the S&P 500 and sorry I’m not doing a great job
keeping my mouse visible hopefully you can see it here but
we this is the bearish engulfing pattern we saw on Fridays we had this big update
on Thursday a larger down day on Friday and this is Monday Tuesday and it’s this
bearish engulfing pattern right here is what we were highlighting, “if that
bearish engulfing confirms and the broad market takes a breather would it mean
that the current leaders would also follow suit and the laggards begin a
tactical ascension?” that is the S&P and NASDAQ pulled back to the 20-day moving
average 20-day exponential moving average where we see the technology
healthcare communications services likely begin a pullback so and again not
not saying it’s a certainty but is that what we would see so the question was
how can we connect this potential bearish engulfing pattern a potential
sell-off in stocks with the leadership themes right and and and there’s a is a
is a tough question to answer I’ll try to give you some some character I think
what you’re the way you’re thinking is absolutely right right thinking number
one about the broad market index but then thinking what it means for some of
these sector themes that we’ve been we’ve been talking about maybe the
sector page is a better place to to look at this so you have things like
technology here in the lower left you have things like healthcare in the upper
right industrials these have been leadership
sectors in strong consistent uptrend communication services as well they’ve
done a very good on a price basis many of them them very well on a relative
basis what does that mean if we get some sort of pullback and I think that’s a
very important question if and when we do get a sell-off in stocks we have not
had it yet obviously we’re trading up a little bit today again and so that the
the sell-off in the afternoon here um you know what happens there the the the
broad market pattern is one thing the sector themes around there are then the
secondary question and I think whether you have things like tech and consumers
communication services which have been consistent out performers if you start
to get those rolling over you would also want to look for some emerging
leadership from things like real estate things like utilities these have been
sectors that have been very much out of favour real estate is a great example
that this is a sector that had been on a tear on a relative basis on a relative
basis for the last couple years look at this relative line that’s come
consistently up into the right until the fourth quarter of last year that’s when
we really started to get an underperformance from from real estate
if you would start to see real estate Utes those sorts of things more
additional defensive sector starts to emerge and things like technology which
have been on a consistent uptrend if you see the XLK start to roll over a little
bit see this relative strength linemen start to come off a little bit that
would confer I think that would be maybe one additional piece of the puzzle so
the question was can you expect that you would have a sell-off in tech and
healthcare and others if you get a sell-off in the markets and I would I
would unfortunately tell you, you can’t assume that and the example I often
point back to it’s hard to bring up a chart quickly this but 2014 was in the
middle of this huge uptrend I might be able to show it right here right so 2014
is overview there’s a weekly chart of the S&P this is one of the great strong
uptrend during this you know consistent cyclical uptrend for ten years now plus
we’ve been overall in any consistent uptrend 2014 was just a great solid year
for stocks but the number one sector during that year was utilities so even
though the market was up a sector you would never expect to leave utilities
was the number one sector so you can never assume because the market does one
thing that the broad sectors are going to follow a traditional sector playbook
that’s why I think you have to pay special attention to the sector charts
themselves so I look at the at the CandleGlance pages all the time to see when
we’re seeing some rotation also the relative rotation graphs I think are
gonna be really really important so the daily RRG would be a really good one to
watch to see if we do get that rotation but I would be looking at the chart of
tech I wouldn’t be looking at the broad S&P and using that as a way to determine
whether technology is gonna show up again if you’re not to know with RRG
Julius de Kempenaer does such a great job on his show check out the YouTube
channel for for his Sector show because he shows you real time how to use use
those those charts the second question thank for that first question by the way.
The second question again came to us via email said, “the XLI Industrials have
been a perfect technical chart for a breakout as it is kept closing above 82
but is not able to jump even though volume is good, any idea what’s going on?”
it’s another good question so sort of tease us to the question we had
previously right which is the the sector appears to be doing well I don’t
have the volume on air I don’t take pay a ton of attention to volume mention the
volumes the little late okay um then you know what’s going on with this
lack of industrials breaking out it looks like it’s it’s setting up for a
perfect breakout what’s the story and I would I would share your concern with
industrials ability to breakout meaningfully it looks a lot like the
chart of the XLF actually we have this nice two-year base you then have this
range bound segment in 2019 then the fourth quarter comes industrials gap
higher they push higher it seems like it’s a guaranteed win you’ve got a layup
of a chart to be owning if you own Excel I in an uptrend gapping high or breaking
above resistance above to upward sloping moving averages it checks all the boxes
but the problem is at the bottom of the page which is the relative strength one
of the challenges especially when you’re looking at at sector ETFs when you’re
looking at industries but even when you’re looking at individual names you
can get the absolute price right right the price went up from 78 up to 83
that’s not bad right that’s pretty good that’s a nice move in a stock or diamond
in an ETF however the relative strength is what killed you so what this tells
you is that other places in the market are stronger so even though you might
have the right call on price you’re not getting paid for it on a relative basis
meaning there are other places that are just better so the reason why relative
strength diving is so important with the XLI is until you get an improvement in
relative strength it tells you that industrials really aren’t the place to
be because other places are stronger and if you think about what charts are
stronger it’s it’s kind of what we’ve talked about it’s something like
technology chart looks a little bit similar although much you know a much
more of an established uptrend totally granted but look at the difference in
the relative strength line look at how tech consistent outperform in 2019
that’s continued in the first couple weeks of the new year compare that to
the chart of the XLI where you have a a continued uptrend but the relative
strength is sloping downwards talking with Tom Bowley made months months if
not a year ago I remember going on MarketWatchers Live with with him and
Erin and and he we were talking about you know relative strength and the
importance of it and we talked about how you know if you want to if you want to
outperform the S&P 500 you need to own things that are outperforming the S&P by
definition so if you own stocks or if you own ETFs where the relative strength
line is going down you cannot out perform
the S&P500 but you can out perform a passive product the broad
market environment you need to own things where the relative line is going
up and so I would encourage you can see most of the charts I show you have the
relative strength line at the bottom and that’s what I think is important so with
the XLI, I agree with you it’s broken out very nicely the primary trend
appears to be positive but the relative strength is why I wouldn’t be in a place
like that right now I’d be looking for groups and sectors that are that are
emerging and look for the relative strength to improve them one final
question was about thirteen week highs, “I’ve used the scanning engine, I’ve
looked for stocks that make thirteen week highs and lows.” I’m looking at my
member dashboard here going down to the scans is one of my favorite scans to use
S&P 13 week highs excuse me this is a list of stocks just intraday here that
are making a new 52 week high we can see this is alphabetical order let’s do it
by sector so we can see Akamai charter Electronic Arts so these are all stocks
that have made a new 13 week high and the question was what do you do with
that right I mean is is the you know how do you actually trade around that how
would you invest with that so I would tell you that listen there’s a reason
why I don’t use the 13 week high list has an automatic violence just appearing
on that list of 13 week highs does not mean I want to own that chart what it
means is it puts it on the radar ei is one in the communication services at the
top of the list Electronic Arts is one that made that cut new 13 week high so
and again it’s the closing price you can see how the closing price higher than
the previous closes making a new you know high for the last quarter so what
do you do with that so I would find what I do is I take that list I put it in a
chart list and I go through the charts manually I look through those charts to
find ones that are at interesting junctures for me making a new 13 week
high is what puts it on the radar it’s not necessarily a trigger right that’s
what should put it on your watchlist the way you actually get into it for me I
tend to look for things where you have the best of both worlds you have a
strong primary uptrend and I think when a stock hits that new 13 we kind list it
started to look at least something like this where it’s higher than it’s been
the last three months that tells you that the price is emerging to the upside
tells you overall it’s pretty strong but it might be way to extend right am I
just be breaking out it might be right at the top of that resistance pushing to
new highs that might be kind of an interesting time to do it but if it’s to
extend it I look for some sort of pull back some sort of indication that
there’s profit taking some sort of you know short-term pullback in the chart
and that’s what we tell you to potentially get into it so again the 13
week high our thirteen week lowest doesn’t mean you automatically buy or
sell it for me that’s what puts it on the radar that’s what puts the tough
puts it on the list and then you’re gonna review those charts and look for
things that are maybe at more viable levels either just at the point where
it’s breaking out or ideally pulling back a little bit and if you don’t know
what I’m talking about there go back to some of the conversations I’ve had about
mean reversion in the short term versus trend following in the long term should
answer some questions there so what I wanted to do now thinks our effort for
all of those questions keep them coming you know [email protected]
is the way to do it what I wanted to do now is share with you a preview of
the interview that I did with Ralph Acampora at his barn outside of
Minneapolis we’re going to unleash this on you coming up very very soon and
wanted to give you a quick preview so here’s a short preview of my
conversation with Ralph Acampora. * music * I was staring at the north wall of my barn. It’s
it’s plain, boring. It’s this whitish color it’s 70 feet long about 18 feet
high and just blank. and I said to myself you know 2017 I’m gonna be 50 years in
the business, wouldn’t it be cool if I could just put the history of the stock market * music * that’s where the idea came from I wanted
to capture my 50 years Hey guys welcome back to the show The
Final Bar thanks so much for joining us every weekday here I hope you enjoyed
that quick preview of my conversation with Ralph Acampora it’s gonna be so
exciting to share that whole interview with you it was a really fantastic day
that we spent with him showing really highlighting his 50 years on Wall Street
through this amazing life size chart of the Dow that he painted on the side of
his barn outside of Minneapolis oh you’re not going to wanna miss that coming up
very soon our next segment is called Level Up this is where we love to share
with you some of the ways to upgrade your use of technical analysis of StockCharts and try to become a better better investor in some small way hopefully
through the natural course of The Final Bar we give you some ways to do that but
in particular I wanted to make sure that that you get some ideas here so in
particular we’re going to talk about moving averages. Moving averages are one
of the common things I have on my charts, on all the charts that I show you for
the most part, on a daily chart I have the 50-day and the 200-day simple moving
averages if you look at the work of some of the other StockCharts contributors
you can find we all have many of us have our own combinations and number the
StockCharts guys use exponential moving averages which there’s total validity to
that there are plenty of good reasons to use some of those I do use them in some
of my some of my longer-term trend following models but on the daily chart
I use the 50 and the 200-day moving averages the reason why I use those is
is as such my goal with looking at charts is I when I realized that there
is a technical toolkit a toolkit that is designed to help you get inside the head
of all the other investors out there I was hooked I love that idea I love
trying to understand what was motivating people to make buy and sell decisions
and that’s what I think charts do in particular I think moving averages are a
great way of doing that because what they do is they strip off the noise of
the day to day price activity and they show you the long-term trend of what’s
happening and the reason why I use these particularly moving averages the 50 and
200-day I spent years meeting up with institutional investors, portfolio
managers, analysts, salespeople, traders, brokers, hedge fund traders, etc and and
and work with them on how to use charts as part of their process and I will tell
you probably 90% of them that are looking at a daily chart that have
moving averages it’s the 50 and 200-day moving average so what
I’m trying to come up with ways to get inside other investors heads looking at
what they’re looking at seems to be a really good starting point to that
process and that’s why I look at the 50-day and 200-day and anecdotally
having lots of conversations with investors over the years you tend to be
aware where the price is relative to the 50-day where the price is relative to
the 200 and a lot of methodologies like the William O’Neal methodology has a lot
of discussion about the 50 day or the ten week moving average and and so I
know a lot of individual investors that are going to be keying off of those
levels so how do I use moving averages well number one it is a trend following
tool it tells you what the trend is so in general you want to be owning stocks
for the prices above – upward sloping moving averages that’s what I would love
my entire portfolio to always look like because that means the stocks I own are
in a primary uptrend the only way that happens is if the price is going higher
the short term is stronger than the long term and that’s what’s causing these
moving averages to slope higher and again the reason is because again this
is the the average of the last 50 closing prices if that line is going up
then that window of the last 50 days is increasing which means the last 50 days
continues to improve relative to the previous you know slice of 50 days and
as a result that means the trend is going positive in a in an uptrend and a
primary uptrend will switch tickers here go to Apple maybe in a longer term
uptrend you will often find that the price will pull back to the 50-day
moving average here we saw this last August where Apple breaks out comes back
pulls down to the 50-day a number of times and tends to rebound off of it
this has become in such a strong uptrend it’s actually elevated so far from its
50-day moving average which is another issue to talk about but overall in an
uptrend you’ll find that the 50-day moving average is an interesting
pullback point so we’re a lot of short-term trends stocks will pull back
– in a short-term trend if and when it violates the 50-day and follows through
that’s when it might be a chance to jump on your radar if it breaks down through
the 200-day moving average that means the trend characteristics have
completely changed that’s when you really want to start to revisit do I
still want to be owning the stock or ETF does this make sense to continue to to
invest in it because the trend has reversed lower so I like looking for
things where the price is in an uptrend I like to scream for things where the
price has pulled, it is in an uptrend and has pulled back to an upward sloping
moving average actually it’s one of the scans I use and I want to say last week
last Thursday or Friday to go back to YouTube you’ll see that that was one of
the the things that I that I that I shared that is it for Level Up folks
that is how I use moving average we need to finish the show and move to the 3-in-3 So three charts in three minutes if they are not on your radar
yet they should be now let’s get to it our first chart on the 3-in-3 is
looking at moving average breath and this Level Up segment just now I share
with you how I use moving averages but I also think they’re really interesting as
a breath measure and here we’re looking at the percent of S&P names above their
200-day and the percent of S&P names above their 50-day moving average this
is the one that’s interesting to me at the top this is the percent of S&P names
above their 200-day moving average we’re at 84% which is the highest it has been
over the last five plus years actually don’t know I haven’t gone further back
to see how long it’s been since we’ve been this high but we are certainly
elevated if not at the highest point we’ve been you know in in short term
recorded history here so my concern is we have so many stocks above their
200-day and and when the market becomes so polarized and so many stocks are up
at that one point it tends to coincide with market offset so we saw at the
beginning of 2018 so what we saw in March of 2017 again it doesn’t mean the
markets going to zero by any means it just means that we need a bit of a rest
and again there’s so many reasons why I think anecdotally the market could use
for a pause to digest its previous games this is one breath indicator telling you
we’re kind of at that point our second chart on the 3-in-3 is the biotechnology
Index dollar sign BTK what’s interesting here is we had a bit of a sell-off here
who’s testing new highs a couple days ago this is on Friday yesterday you had
a big distribution and that is completely reversed and you see biotech
stripping to the upside I think the direction of the biotech index might be
a really good tell on the overall market environment is something like biotech
can hold up very nicely can push the XLV higher can push
healthcare higher I think we’re in pretty good shape I think we’re okay
if this continues to break down if this is a dead cat bounce before the next leg
lower I think we have to be a little more
are concerned about further weakness in stocks it’s a really interesting chart
to look at right now the third chart of the 3-in-3 is the XLF this
is the financial sector and we have a lot of earnings in the financial sector
this week we have Bank of America after the close today I want to say a JP
Morgan sitting here these are all names to be to be paying attention to
and I think the earnings how those play out how those companies do how the
stocks react to those earnings could tell you about the overall strength of
financials which could tell me about you know sort of a bellwether for a market
environment we’ve had a downtrend in relative strength even though the XLF
has held off so our financial stocks able to rally and it’s a relative
strength able to improve I think that’s one of the important things to pay
attention to here but folks we have to end our show thanks so much for joining
me on The Final Bar. Join me every weekday 4 p.m. here on StockCharts TV. For
StockCharts and in snowy Redmond Washington, this is Dave Keller. Have a
great afternoon. * music *

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