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Where Will Prices Go?

HAVING TROUBLE PRINTING?
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CNBC guests debate that question, and financial writers appear to do so, too. The titles of their articles appear to argue with each other. How would a trader who prefers technical analysis form an opinion?

Getting a broad overview appears to be the best place to start. Since we're talking about technical analysis, you might be surprised to find the first place I look: an economic release calendar. If I'm trying to determine where prices are likely headed on an equity's stock, I look at a schedule for earnings releases, analysts' presentations, and any other event that might impact the stock.

Technical analysis can be a great tool but don't stick your head in the sand, either. As a newbie trader, I was once surprised by an FOMC meeting that I didn't know was scheduled. That will never happen again!

Different traders use different technical analysis tools, but I begin with a look at a point-and-figure chart. That might surprise you, too, because I seldom post them. I am certainly no expert on these charts, but I can read a price objective that the charting service calculates for me. I suggest you do so, too.

I'm drawing examples from the NYSE for this article since fewer of us have preconceived notions of where the NYSE will go. Fewer of us have certain price levels embedded in our memories for the NYSE. It's easier that way to form unbiased judgments.

Point-and-figure charts can be found on Stockcharts.com. I believe QCharts may include them now, too, although I'm not certain of that because I switched charting providers some time ago.

For those of you unfamiliar with the development and uses of point-and-figure charts, StockChart.com's Chart School offers explanations. More in-depth explanations can be located in Thomas J. Dorsey's POINT & FIGURE CHARTING.

Because I haven't obtained permission from StockCharts to post their charts, I'll note some of the characteristics of the NYSE's P&F chart. Price is above what's known as the bullish support line, now at 8500. The overall tenor is bullish, then, although no trader currently holding bullish positions in NYSE stocks wants to see the NYSE decline to test that bullish support line.

In addition to being above the bullish support line, the NYSE's columns of X's have produced a bullish price objective of 11,150. Hmmm. So, the P&F evidence provides an overall bullish view of the NYSE.

If this weren't the NYSE, a broad-based index, my next steps might be to look at the P&F chart for the sector to which a stock belonged and then to compare the relative strength of this security to a broader one, including its sector and something like the SPX, Nasdaq or even NYSE. For example, if I were studying KLAC, a good idea would be to compare KLAC's strength to that of its sector, the semi-conductors, and then to a broader index such as the Nasdaq.

How is that done? Check your charting service to see whether or how the service allows that comparison. When using a chart from StockCharts.com, one would place a colon (:) between the two symbols. In the example noted above, comparing KLAC's strength relative to that of the SOX, one would use "KLAC:$SOX" in the symbol box.

Although I look at P&F charts to provide an overall outlook, I prefer candlestick charts for my own charting studies. They're as visually evocative as P&F charts. Although one might not know all the esoteric names of the most complicated of the patterns, it's easy to glance at a chart and determine whether one is seeing bullish action (predominantly tall green candles), bearish action (predominantly long red ones) or chop (either large- or small-bodied candles with red and green mixed).

When I'm studying a security for the first time, I start with a weekly chart. Because I also like nested Keltner charts, that's the setup I want on my charts.

Annotated Weekly Chart of the NYSE:

What can I tell about this chart? Several things. For periods over several years, the NYSE went into breakout mode, breaking out above the widest channel's resistance line (the purple channel). Those breakouts were so frequent and prolonged that they hauled other channel lines above what is normally the outer one.

That kind of action connotes strong momentum, but it also connotes momentum that must eventually run out of steam. It appeared to begin doing so in June and July, when price/RSI comparisons revealed bearish divergences (not shown). It was not until the week of July 23, however, that the NYSE's prices broke back inside that widest channel line again.

Notice that two of the channels--black and purple--still climb? Over the intermediate and long term, it appears that the bullish tenor hasn't yet been strongly impacted by recent market activity, despite what we all might have been feeling a few weeks ago. A slight note of warning sounds, though. The smallest channel turns down now. Bulls want to see that entire channel stay above the central basis line.

What's the central basis line? That's the aqua-colored line. It's the central basis line of the largest of the Keltner channels, a 120-ema. As long as the NYSE's weekly prices close above that basis line, it's in the bullish half of the channels.

This begins to sound reminiscent of the conclusions from studying the P&F chart, doesn't it? In both, the NYSE remains above a bullish/bearish benchmark, the bullish support line on the P&F chart and the central basis line on the weekly Keltner chart. That P&F bullish percent line had been at 8500. The weekly support shown here now lies near 8590, so they're not that far apart, given that they're derived using totally different methods. That concurrence provides a bit of extra confirmation of the importance of the 8500-8600 zone as delineating bullish versus bearish tenors.

No one holding bullish positions in equities wants to see the NYSE fall all that way, however. How vulnerable is the NYSE to doing that? Now we're getting down to what we all want to know.

The Keltner chart turns up some disturbing setups. Notice how the thin red line is now providing resistance on weekly closes? That is the basis line of the smallest channel, a 9-ema. The resistance at the declining 9-ema, the downturn that's beginning in the small channel, and the possible softening of that 45-ema support increase the likelihood that prices will descend to the bottom of the blue channel, and perhaps all the way down to the 8580-8700 support zone. They don't yet make that possibility into a probability, however.

Where are we now with our analysis? On this chart, the long-term tenor could be labeled bullish, but there's vulnerability to a retest of the summer's low. Given this information, I'm going to want to look at another weekly chart, a traditional one with a 10-ema and a 30-ema. Crossovers of the 30-ema by the 10-ema sometimes mark changes in trend. Has such a trend change begun?

Annotated Weekly Chart of the NYSE with 10- and 30-ema's:

As the notations point out, no bearish 10-ema/30-sma crossover has yet occurred. Yet, the 10-sma has dipped close to the 30-sma. We should be alerted to watch this chart for a crossover, remaining aware that such crossovers sometimes occur rather late in a movement. I use the -ema's because they tend to be a little more responsive on long-term charts than the -sma versions, but the payment for that responsiveness is more false signals. Use 10-sma and 30-sma crossovers as confirmation of an existing move or warning of an impending one but don't act solely on such a crossover.

On this traditional chart, I've also drawn a long-term rising trendline. This is not the trendline off the 2003 low, which would cross a little higher. Rather it's a trendline that began forming in 2004 as the NYSE broke above prior resistance, came back to see if it would hold as support, and then began trending higher. Notice that trendline's proximity to the support zone that's already been determined through other means.

What are the conclusions drawn from this chart? The NYSE maintains long-term support and wouldn't violate it until a weekly close beneath about 8650-8700. Some signs of potential weakness do show up, however, and should be watched.

So far, both weekly charts--Keltner and more traditional trendline/MA charts--concur rather well.

What does a daily chart suggest?

Annotated Daily Chart of the NYSE:

Friday, the NYSE retested Keltner and historical horizontal resistance, closing at or near both. This chart doesn't provide as much information as I would like, with the close not convincing me that the NYSE can pull free of that resistance. The NYSE's ability to sustain values above the central basis line hasn't been established, especially since the rally up to that resistance on a Friday before a Labor Day weekend must be somewhat suspect. About all I can conclude from this is that the NYSE appears to be undergoing an important test. How it will turn out is not apparent yet.

What is visible on this chart is the turning down of the black channel as well as of the central basis line on the widest channel. Unless the NYSE can sustain values above that basis line, the widest channel may turn down, too, heightening the possibility that prices will retest that support zone that's a benchmark for bullish and bearish activity on these various charts.

What can I conclude after studying all these charts? Both the P&F chart and the weekly Keltner chart would characterize the NYSE as still maintaining a bullish tenor but one that would be maintained all the way down to 8500-8580. Retesting that level would not be tops on a "to do" list for bulls, to say the least. A few signs on the weekly charts do demonstrate the NYSE's vulnerability to a retest of that zone while not yet calling for that test to be a probability rather than a possibility.

One of the reasons that I like the nested Keltner charts is that they allow me to form a scenario and determine levels that would either disprove it or prove it true. What would it take for the NYSE to lessen its vulnerability to a retest of the summer lows? The weekly nested Keltner chart suggests that it needs to produce consistent weekly closes above the weekly 45-ema. That's what's needed at a minimum to stabilize the channels. Then the NYSE needs to begin producing daily closes above the 9-ema again rather than finding resistance on that moving average as it's been doing for a number of weeks. The daily chart suggests that prices need to move into and stay in the bullish half of the chart. If these things don't happen, descending moving averages may pressure prices right back down to retest that support zone that delineates bullish versus bearish long-term action.

These studies didn't tell us where prices were going, but they did show us what vulnerabilities exist, where prices could go, and how to determine if they're likely to go there. For those of you who wondered why I didn't discuss upside targets, it was because of the resistance that's been holding, resistance pointed out on the Keltner weekly and daily charts. That resistance must be cleared on a consistent basis before new upside targets are set on these charts. The P&F chart has, of course, already set one.

A thorough study of where markets might go would also require a study of indicators of market breadth, too, such as bullish percent levels and those sorts of measures, as well as studies of how volume acts at certain price points. There isn't room enough to include all information in a single article, but I wanted you to see the general process I undergo.

The process seems onerous, doesn't it? This article's text, excluding charts, is five manuscript pages long and much longer with charts. This is truly one of those times when a picture is worth a thousand words, however. Calling up those charts and examining them requires only a few moments.

For those who would like to set up Keltner charts, I'll include my settings. Blue channel: based on a 9-ema, with a multiplier of 1.4. Black channel: based on a 45-ema with a 3.0 multiplier. Purple channel: based on a 120-ema with a 7.2 multiplier. Of course, feel free to color your channels however you wish. I know that QuoteTracker and QCharts both allow the nesting of these channels. I'm not sure about other charting services.
 

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