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Dave & Donald Moenning

Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Officer for his Chicago-based Registered Investment Advisory firm, Heritage Capital Management (...

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What Are The Charts Telling Us Now?

It is said that a picture is worth a thousand words.

As such, there are times when investors can learn an awful lot about the state of the market environment simply by scanning the charts of major stock market indices. And cutting to the chase, this is definitely one of those times.

Some will argue that Friday's weakness was related to concern about the debt ceiling debate taking place in Washington. The fact that the Republicans in the House pushed through a measure that "defunded" (is that even a word?) Obamacare as part of a continuing resolution to fund the government until December 15 certainly adds to this argument.

Since everybody on the planet knows that the bill has no chance in the Senate, the move can be viewed as just another effort to up the level of gamesmanship (which is likely to lead to brinkmanship) between the two parties. Therefore, some traders fear that the debate will once again threaten the fragile economic recovery.

Another argument regarding Friday's sudden swoon was that all the good news is now out. The Fed didn't taper. Larry Summers withdrew his name from consideration. And Syria is out of the headlines. So after a surprising run to the upside, some backing and filling would be a logical next step for the indices.

Then there were the issues of an expiration Friday and the Dow's rebalancing, as three old-school names were booted from the venerable index. Some argued that this combination allowed the algorithms to play even more games with the market than usual.

In any event, it appears that some sort of a pullback is under way. The question, of course, is if the pullback that got rolling on Friday will be a one-day wonder or something more serious.

As the technicians like to say, "The tape tells all." So, in an effort to find some clues as to what might transpire next, let's take a look at some charts.

Let's first take a look at the daily chart of the S&P 500. This is the index that most technicians follow and therefore can be viewed as a picture of the overall "market."

S&P 500 Index Daily

Sometimes it is best to use a K.I.S.S. (keep is super simple) approach when reviewing charts. While Friday's decline wasn't a happy event for the bulls, the S&P remains above the August high, which is an important technical line in the sand, as well as is shorter-term moving averages. And all three of those moving averages are moving higher. In addition, there is an uptrend line that can be drawn from the November and June lows. Thus, the bottom line is the trend remains bullish - at least at this stage.

The next step is to look for confirmation among other indices. So, take a moment to scan the following charts using the criteria that was applied to the S&P 500.

NASDAQ Composite Index Daily

For the NASDAQ, the same situation can be seen. This chart is actually in better shape than the S&P's as Friday's pullback was less severe. The bottom line here is the index remains in an uptrend, is well above the August high, and is nowhere near its short-term moving averages or trend-line. In short, it's all good.

Russell 2000 (Small Cap) Index Daily

Ditto for the Russell 2000, as the market-leading small cap index remains in pretty darn good shape.

However, the "picture" painted by the Dow Jones Industrial Average and the Midcaps is very different. Take a look.

Dow Jones Industrial Average Daily

Uh oh. This daily chart does not look nearly as good as the S&P, NASDAQ, and Russell. No, chart-watchers will argue that the DJIA failed to hold its breakout, broke important support, and appears to be tracing out a double-top formation. In addition, the short-term moving average has been violated. Therefore, the bears will suggest that the most likely next step is a trip down through the trading range to test support in the 14,800 area.

S&P 400 Midcap Index Daily

A similar picture is painted by the midcaps. This chart clearly shows a potential double-top and although the index remains above the short-term moving average, those seeing the glass as half-empty are likely looking for those gaps on the chart to be filled in the near term.

A Tale of Two Tapes

The problem is it appears that the charts are telling conflicting stories at this point. The charts of the S&P, NASDAQ, and Russell seem to suggest that the trend is up and the pullback should be bought. Yet, the action in the DJIA and Midcaps argues that defensive measures should be taken - and soon.

Generally speaking, it is usually a good idea to go with the message from the "league leaders," which in this case would be the NASDAQ and Russell since they are up the most on the year. In addition, the bulls contend that the action in the Dow should be discounted due to the rebalancing of the index that took place on Friday. The thinking here is that some of the move may have been artificial in nature.

So, those looking to place a bet on the near-term direction may want to continue to lean long. However, experience suggests that this may be a time to put away the crystal ball and simply try to stay in tune with what the market is doing for a while. In English, this means that it is time to let price be your guide.

Click Here For More "Daily State of the Markets" Commentary

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Fed Policy

      2. Fun and Games in Washington (I.E. the Debt Ceiling)

      3. The Outlook for the U.S./Global Economy

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Near-Term Support Zone(s) for S&P 500: 1710

  • Near-Term Resistance Zone(s): 1730

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator: Positive

  • Price Thrust Indicator: Positive

  • Volume Thrust Indicator: Positive

  • Breadth Thrust Indicator: Positive

  • Bull/Bear Volume Relationship: Moderately Positive

  • Technical Health of 100 Industry Groups: Moderately Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • Overbought/Oversold Condition: The S&P 500 is very overbought from a short-term perspective and is neutral from an intermediate-term point of view.


  • Market Sentiment: Our primary sentiment model is negative .

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.

Weekly State of the Market Model Reading: moderately positive - This tells us to give the bulls the benefit of the doubt at this time.

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

Turning To This Morning...

With another potential big, bad event (Germany's elections) out of the way, traders will now turn their attention entirely to the state of the debt ceiling debate. The German elections did not provide any major surprise and preliminary PMI's out of Europe remained in expansion mode. Farther east, China's HSBC PMI rose to a six-month high. However, with the potential for an economy-damaging government shutdown now just a week away, all eyes will likely be on Washington in between this week's important PMI numbers. Finally, U.S. futures point to a modestly lower open at this time.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

- Japan: Closed

- Hong Kong: -0.56%

- Shanghai: +1.33%

- London: -0.40%

- Germany: -0.22%

- France: -0.06%

- Italy: +0.10%

- Spain: -0.28%


Crude Oil Futures:
-$0.12 to $104.63

Gold: -$9.60 to $1322.90

Dollar: higher against the yen and euro, lower vs pound.

10-Year Bond Yield: Currently trading at 2.742%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: -3.69

- Dow Jones Industrial Average: +21

- NASDAQ Composite: -3.18

Thought For The Day...

“It is not only what we do, but also what we do not do, for which we are accountable.” -Moliere

Looking for Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Got Research?

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

  • State's Chart of the Day - Each day we highlight a top rated stock with a positive technical setup

  • The Risk Manager Report - Stay in tune with the market's risk/reward environment

  • The “10.0” Report - These are the REAL best-of-breed companies

  • The Insiders Report - See what the people who know their company's best are buying

  • ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.

  • The SOTM 100 Portfolio - The top rated stocks in each market sector

  • State's Market Models - Each week we quantify the "state of the market" with a series of models

  • The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day
  • Mission Statement

    At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

    Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

    Wishing you green screens and all the best for a great day,

    David D. Moenning

    Founder and Chief Investment Strategist

    StateoftheMarkets.com

    For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

    Positions in stocks mentioned: none


    The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in our websites and publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

    Tags: obamacare

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