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Your Stocks v Review Of World Major Stock Indices: SPY, QQQ, DAX, FTSE, CAC, HSI

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Sunday  9 November 2014

There can be one reason only for putting your money into the stock market and that is to
earn a return on capital.   Back in 2008-2009, many were faced with what would be their
return OF capital once the market decline came to an end.  Many never recovered their
losses.  For what lies ahead, from our perspective, a similar choice, but worse is in store
for market participants.

As context, it is worth remembering that no country can keep printing [actually now
digitally creating] money-to-infinity, creating more debt than has ever existed, and with
interest rates at near zero, without disastrous consequences.  It defies common sense, and
it defies prudent investing.  Now there is a term we have not heard in quite some time.

Our approach to markets is reading developing market activity in the form of price and
volume without resorting to conventional technical analysis tools like moving averages,
relative strength, MACD, Elliott Wave, whatever.  The very best and most accurate source
of information comes from the market itself, and it is available to everyone at the same
time, as price and volume develop each minute, hour, day, week, month, etc, for whatever
time frame one chooses.

The chart indices that follow are a composition of the stocks in each market, from the best
performers to the worst and everything in between.  If your objective is to make money,
then it stands to reason that each and every stock you own should be performing better
than the indices.  If your objective is not to make money, then your portfolio likely has
many stocks that are not making money, the justification for which is beyond any sound
reason for investing in the first place.  Maintaining lower financial standards seems to
have a higher degree of following for many in the stock market.

Is it so unreasonable to ask the question, if any stock purchased is not outperforming the
averages, why commit money to it?  If the rationalization is that it may catch up to the
rest of the market, then wait for it to demonstrate that it can catch up and then buy it.  It
is like watching a horse race, out of 10 horses for example, you decide to place a bet on
one that is running in the middle of the pack, or near the end, hoping it will somehow
change its demonstrated ability to fail to meet just average standards and all of a sudden
outrun the leaders to the finish line.

When we look at charts, we are looking at present tense performance results that are facts
in terms of where price is in relation to where you want/expect it to be.  If the facts are not
proving the standards you expect, move on to another possibility that is.   As you view
each of the stock indices below, compare your own stocks against the performance of the
averages.  It does not require a degree in finance to understand a simple comparison.  If in
doubt, ask a 5th grader to make the comparison.  He or she is not burdened with outside
complications that can cloud one’s viewing perspective.

It is your money, therefore your responsibility, even if you turn over that responsibility to
another to invest for you, you still should hold that party to the same standard and not
accept rationalized excuses.

Money printing by the US central bank keeps this market going, and anyone who has been
betting that a bear market is just around the umpteenth corner simply does not know what
a basic trend is.  It is an established fact that more money is lost trying to pick bottoms and
tops.  As of Friday, the number of profitable short sellers in this market is not very big.

The lesson to be learned here is two-fold:  1. Never bet against the trend, and 2. if your
stock holdings are not at least as good in performance as the chart below, it is time to take
a comparative inventory and make some responsible decisions to preserve capital from
further risk.

The September swing high is an example of how market tops form: a failed high and
immediate downside follow-through.  The “V”=type bottom is not a typical recovery,
but nothing in the US markets over the past few years has been typical.  If any of your
holdings have not recovered in a similar fashion from the October low, the odds are
against them recovering.  Smart stock selectors are picking those which are outperforming
the SPY index.  If stocks are not at least matching the performance, then they are simply
eliminated to reduce risk exposure.  Nothing hurts performance more than holding on to
losing stocks.

Stock selection is a business, not a popularity contest or one based on sentiment.

Many of the best performers have been NASDAQ stocks, and even they must still meet
the standards of performance or else elimination.  The small range for last week is
typically a red flag, and a closer look at the weekly for a clearer explanation is in order.

 

The box captures the activity over the last 6 TDs, [Trading Days].  Is this a pause before
resuming the trend, or a pause before reversing?   Deference has to be given to the trend.
The closes are mostly upper range, indicative of buyers being in control, and there is no
evidence of supply, so higher prices should prevail.  This also applies to individual stocks
that should be doing at least as well as the index.

We cannot repeat enough times the importance of maintaining performance for your
holdings to at least match its index performance, for once these markets turn, stocks
which have underperformed will often fare worse to the downside, and that can mean
unwarranted risk exposure.  Next to the importance of stock selection to make money
is consideration for preserving capital from adverse moves lower.  The two go hand-in-
hand.

Dax performance has put that trend sideways, for now.  [LH = Lower High, LL= Lower
Low,  S/D = Supply overcoming Demand].  The 9,800 area high established at the
beginning of the year appears to be more meaningful because it is where the last swing
high failed in September.   The EDM [Ease of Downward Movement], after September
indicated sellers entered in a big way, and it would make any recovery rally more difficult.

The recovery rally from the October low has not been as strong as SPY or QQQ.  It makes
a difference when there is not as much central bank fiat being pumped into the market.  If
the current rally fails to go above the September swing high, it will turn the trend from
sideways to down, as we measure trends.

To turn a trend down, there has to be a sequence of two LLs and two LHs.  It is a simple
way to measure a trend change.  There are many other ways, but whatever the chosen
measure it must be applied consistently.

Here again, if individual stocks are underperforming the DAX index, the probability of
outperforming it is very slim, and that means increased risk exposure.

 

The daily gives an amplified picture of what was discussed on the weekly.  From that
little retest rally in July, we drew a dashed horizontal line to the right to indicate potential
future resistance.  The September retest rally failed  right there.  The line did not mean
that price would automatically fail that level.   Instead, it is an alert to watch developing
market activity  for possible weakness that a rally could fail there.  Everything must be
confirmed before taking action.

The rectangular box in the middle of the chart shows the importance of how strong
directional moves can dominate.   Price never did recover from that May sell-off, and
the market was sending a clear message via the labored recovery over the next 18
months.  Another clear message is that the strongest directional moves have been to
the downside, both marked S/D [Supply overcoming Demand].

The speed of the recovery rally underway over the past 3 weeks has been somewhat
strong, but the marginal net gain from last week’s close over the previous week has not
been strong, and that could be a red flag.   A red flag is a sign of caution that market
activity may be giving a reason to expect change.  Often, a look at the next lower time
frame, the daily here, can provide more detail.

At the end of September, there was a series of overlapping bars that led to a breakdown in
lower prices.  The current rally has stalled where that breakdown occurred.  We purposely
did not draw in a dashed horizontal line to indicate a potential resistance area because
some may think a line was drawn in hindsight.  Having now qualified the end of market
activity in September, you can now se why certain areas are used to drawing potential
future support/resistance areas, and being aware of price failures like that is an alert for
future activity.

A look at just the last 3 bars in November shows a wide range strong close rally, 3rd bar
from the right.  The rally looks promising, at that point.  Next day, the net gain is not much
more than the strong rally bar, and the close is off the high and where price closed at the
end of October.  It is also where price closed on the 3rd TD of October.  Friday’s smaller
range bar and close below the half-way point is an indication that sellers were able to
prevent buyers from making a better result that day, and it is at the resistance mentioned.
The accumulated information over the 3 days was the market sending a message.

If you were to now draw in a dashed horizontal line across 6,600, starting from the end of
September you can see how market activity related to past performance, and HOW price
behaved when it reached that level last week confirms 6,600 as resistance.  You can even
go back to August and see the one day probe under 6,600 that quickly recovered, showing
that level as support, back then.  Support, once broken, becomes future resistance.

We direct you back to our third paragraph at the beginning of this article.  The market is
the best and most reliable source of information, and it is available for everyone to see at
the same time.  Compare your individual stock performance with this chart.  If it is faring
worse, it is unlikely to get better, so the market and results say.

The performance of the CAC is weaker than the FTSE noted by the clearer October swing
high compared to the September high.  Last week’s close was under both the opening of
the week and the previous week’s close, increasing the odds of another lower high and a
change in trend from currently sideways to down.  A look at the daily for more detail.

 

Last Thursday’s bar, wide range higher than the rally 4 bars earlier but failing to hold
the rally and closing mid-range, tells us sellers were stronger than buyers.  Friday’s
lower day confirms that observable Thursday fact.

To further illustrate a greater weakness in CAC, notice how last week’s rally failed to reach
the September breakdown discussed in detail on the FTSE daily chart.  This is how to
determine when one index or stock is weaker than another.  Assume for a moment that the
CAC daily is an individual stock and a part of the FTSE.  It is not performing as well as the
index itself, and as an individual stock, CAC is not a candidate for staying long.  This is
how you measure relative strength of one your stock holdings v its index to determine if it
should be retained.

The weekly resistance line at 24,000 is similar to the 9,800 are line drawn on the DAX.  A
chart is a chart is a chart.  The underlying price structure does not matter if it is an index,
an individual stock, or a futures market.  They all resonate to ultimate supply and demand
factors that are pictured in price and volume behavior.  Just as a retest rally stopped at a
prior high in the DAX, you see the same market behavior in a totally different stock index.

The large rally bar and strong close two weeks ago was promising for HSI.  However, once
price opened last week, it reversed to the downside, confirming resistance at 24,000.  You
must wait for confirmation of one form of market activity relative to a previous area.  The
daily chart should give greater clarity on the failure of last week’s bar.

Monday’s price performance was a red flag that turned out to be an apt warning when
price closed lower after making a higher high over the previous Friday.  If this swing
high failure holds, it will set up what is called Bearish Spacing.  It occurs when the last
swing high, [Monday], fails to reach the low of he last swing low, formed on the second
TD of September, [see dashed line].  It is bearish because sellers are confident enough
to sell before the market retests the prior low.

This is just a potential scenario.  We leave open the possibility that low of the week of
September 15th could qualify as a more subtle swing low, and last Monday’s high closed
any space between those two levels, thus eliminating any bearish spacing.

Monday’s rally also stopped at a 50% retracement of the low to high, indicated by the two
heavy lined horizontal line.  A half-way retracement is a general measure of how strong or
weak a rally may be,  If price cannot rally past the half-way point, it is a sign of a tiring
market.

Individual stocks with HSI should be compared to the index to determine strength or
weakness relative to the market  order to evaluate individual performance and decide
what risk exposure there is in one’s portfolio.

As evidenced over the various markets, this is a wash, rinse, and repeat process which, if
followed, will lead to more profitable results.  Any questions can be sent to:
[email protected].

 

 

 

 

 



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