Nasdaq Elliott Wave Count

This blog has been dedicated mostly to following the S&P500 index however while this index is composed of 500 companies noted as large cap “blue chip” the Nasdaq Composite includes over 5000 companies. The Nasdaq does reflect what is commonly refered to as the “market” and in that regard the economy.

I am posting two charts showing the Elliott Wave count as I see it for the Nasdaq. I would say we are in a Daily 4th wave which means we most likely will see a retest of the 3rd wave lows with a 5th wave. Click on charts to enlarge.
The next chart shows a 5 wave pattern on the weekly chart. What then, according to Elliott wave theory, can we look forward to next? As I understand it the next wave pattern to follow is either an ABC correction or a new 5 wave count. With the passage of legislative bill H.R. 3221, the homeowner rescue bill now in congress, some of the drag of real estate on the economy may soften and we could see a rally to the upside. We will just have to wait and see.

Financial Sector Buy Signal ?

We all know that real estate has taken a beating with falling home prices and an increase in forclosures. This resulted in the financial sector having big write offs and being the leader to the downside in the market. The financial sector peak in the market was over a year ago and it has been going down ever since. But has it hit a bottom?

A 20-day 4 hour chart with RSI(14) of the XLF shows the market has made a change in trend, even if only for the short term. The question is: Is this a corrective bounce or a true change in trend for the long term trend? Click on charts to enlarge.

A look at the 6 month weekly chart with RSI(3) of the XLF shows that the RSI is above the 50% mark however the fast band of moving averages are below the slow band and price pressure is to the downside.
If we are to make decisions based on the long term direction of the market to avoid losses and minimize risk we need to move up to the level of the long term time frame. For this I follow Martin Pring who uses a 12 moving average on the monthly chart. A 3 year monthly chart shows we are a long way from an end to this downturn. The XLF would have to rise over 22% to even touch the 12 moving average.
In conclusion, while we have a short and intermediate term buy signal the long term trend is down in the financial sector and unless there is a change in the housing market and a sustained move to the upside it is best to avoid this sector. Bottom fishing is risky in the markets.

Relative Strength Part 2

The other type of Relative Strength is a strength relative to the stock or index itself. As a metaphor lets use a weight lifter. A weight lifter can be compared in his/her strength to the strength of all the other weight lifters as well as his/her own performance. On a good day you may be able to lift more than on some other day. So too with stocks relative to their own price performance.

The Relative Strength Index (RSI) is just such a measure and it calculates a ratio of the recent upward price movements to the absolute price movement of the stock being measured. The RSI ranges from 0 to 100. It can be put on any time frame from minute to daily to monthly and indeed will have different values based on these different time frames.

The Relative Strength Index (RSI) was developed by J. Welles Wilder and was first introduced in 1978. It is commonly used to measure if a stock is overbought or oversold and in market timing. There are many good resources on the Internet for further information about the RSI indicator. What is of note is that it is a value that can be placed inside of a spreadsheet and sorted according to its numerical value, i.e., from lower to higher or vice-versa. This type of sorting and using different time frames together with the Relative Strength comparative mentioned in the prior post is an excellent way to find stocks headed higher in price.

As an example I am including a 6 month weekly chart of Agilent Tech Inc (the first stock in the $SPX, alphabetically speaking) ticker symbol “A” and the $SPX index on a weekly chart to show buy and sell signals. I am using the RSI(3) technical indicator and strength is indicated as a value above 50% (buy signal) and weakness as a value below 50% (sell signal). These values can be published numerically in a spreadsheet and I will show this in future post. Click on charts to enlarge.

Agilent Tech Inc


S&P500

Relative Strength Part 1

Relative Strength is defined as by investopedia as: A measure of price trend that indicates how a stock is performing relative to other stocks in its industry. It goes on to say: It is calculated dividing the price performance of a stock by the price performance of an appropriate index for the same time period.

There are actually two kinds of Relative Strength as far as my mind understands the concept. In the context of price performance we can have Relative Strength as a measure of price performance relative to some other index.

For example, lets take a look at Agilent Tech Inc. The symbol for Agilent Tech Inc is “A” and it is the first member, alphabetically speaking, of the S&P500 Index. Mathematically, we could write its Relative Strength as follows:

RS = (price change for A over N # of days) / (price change for SPX over N # of days)

This is the definition given by investopedia above and is graphically represented by a performance chart. Here I used SPX as the symbol for the S&P500 index.

Lets take a look at this graphically. The first chart show the 3 month price of Agilent Tech Inc. This stock has gone from approximately 30 to 35 over the last 3 months which is an increase of approximately 5/30 or 16%. Click on charts to enlarge.

Next, lets look at the SPX. It has gone from approximately 1330 to 1240 which is a decrease of 90/1330 or 6.7%.

Finally, look at the comparison chart for Agilent Tech Inc and the SPX. It shows the Relative Strength of Agilent Tech Inc compared to the SPX. This is a price comparison chart over time showing Agilent Tech Inc “Beating the Street”.

The other type of Relative strength is price performance of a stock relative to itself. I will discuss this in greater detail in my next post.

Sector Rotation and the Economy

There is an excellant article in the ChartWatchers newsletter by John Murphy entitled Sector Rotation Says Bearish. John Murphy is well known to students of market techical analysis. His book Technical Analysis of the Financial Markets is one of the best on the subject. The diagram below shows how the stock market, depicted by the red line in the diagram, preceeds the cycle of the economy which is represented by the green line. Stocks lead the economy. At this point in time the energy sector is at a high and the financials are at a low indicating we could be in that early recession phase of the economy. For a 65 day performance chart of the sectors see here.
Click on diagram to enlarge.

Beating the Street

Peter Lynch started management of the Megellan Fund with Fidelity Investments in 1977 with $18 million in assets and by 1990 the fund had grown to more than $14 billion in assets. He has also written three texts on investing: One Up on Wall Street (ISBN 0671661035), Beating the Street (ISBN 0671759159), and Learn to Earn.

Using the idea that the performance of the S&P500 is the “street” lets take a look at some of the ETF’s that “beat the street”. From my last post I gave a link to the Yahoo ETF Center. From there is a link to Performance which lists the ETFs which can be sorted by YTD column. Excluding the ultra short ETFs, to get an idea of what is really going up, the top performers are GAZ, UNG, JJC, and JJM.

GAZ is the iPath DJ AIG Natural Gas TR Sub-Idx ETN. This fund is designed to reflect the performance of natural gas. UNG is the United States Natural Gas ETF. This fund also is designed to reflect the performance of natural gas. JJC is the iPath DJ AIG Copper TR Sub-Idx ETN. This fund is designed to reflect the performance on copper contracts. Finally, JJM is the iPath DJ AIG Ind Metals TR Sub-Idx ETN. This fund is designed to reflect the performance of industrial metals.The index is composed of four futures contracts, aluminium, nickel, zinc, and copper.

The table below shows the performance of these top performing funds sorted by the YTD column. With the "Street" down 12.85% as reflected by the SPY index, GAZ looks pretty good up 66.73%. Click on table to enlarge.

Exchange-Traded Funds

Sector rotation is defined as a trading pattern in which money is shifted from one sector of the economy to another. The so called “Smart Money” moves to sectors and asset classes that are appreciating in value. But how is this done? Not all sectors of the economy perform well at the same time. Sector rotation is a portfolio managers attempt to profit through timing a particular economic cycle. Yahoo finance has a list of some 739 ETFs in its Exchange-Traded Funds (ETF) Center which can be found here . Take a look. I will be writting more about these ETFs in coming days.