Catch Major Trends with Monthly Charts

Thursday, April 05, 2012

Published: 4/5/2012
MoneyShow.com
Tickers mentioned: SPY, XLP, XLV, AAPL, NFLX
Using reference points from monthly charts, traders can identify more effective stop levels and stay with major
trend moves much longer, thus increasing their profits.
In over 30 years of looking at charts of stock and commodity market indices, I have often been struck in
hindsight by the lengthy trending periods that are evident in some markets. Over the years, I have sought to
improve not only in identifying the market turns, but also improving my ability to catch larger portions of these
trends.
From my own experience and the observations of others, there seems to be a familiar pattern. An investor or
trader will often catch the start of a good market trend and may capture most of the first major market swing.
However, once the market has a significant correction, they will often lose interest or move on to another
market. Therefore, they will often miss the next major part of the trend, which is often even larger than the
first.
I have had the most success in identifying the major market trends by using monthly charts and technical
studies. The monthly on-balance volume (OBV) for gold completed its bottom in 2002 and has stayed positive
for the past ten years. The writing of my regular monthly column on the Dow stocks has further reinforced the
importance of not only the monthly patterns, but also the monthly price ranges.
In my opinion, a poor entry price causes the most damage to an account, and that is why I strongly emphasize
calculating the risk on every position. The combination of tight monthly ranges, monthly chart formations, and
monthly OBV has helped me to identify some good recent opportunities.

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Two of these recent examples include Microsoft Corp. (MSFT) and The Coca Cola Co. (KO). I have focused only
on the monthly bars so that the tight ranges are easier to see.
MSFT traded in about a $4 range for the last five months of 2011 with the low of $23.79 coming in August. The
stock closed at $25.96 on December 31, 2011, then gapped higher to start off 2012, opening at $26.55. It
closed January at $29.53 and made a high in April of $32.95.
The Coca Cola Co. (KO) also was locked in a tight range from December 2011 through February 2012. The
December 2011 low was $65.88 and the high in January was $70.71. The range in February was even tighter
($67.42 to $69.98), but KO then surged in March to close near the highs at $74.10. For both MSFT and KO, the
initial stops were placed beneath monthly lows.
So how can monthly charts be used by both investors and traders? One approach I have been examining is to
use the prior months high or low as a stop level. Long positions would be favored based on bullish signals
from the OBV, and stops would be based on the prior months low.
Lesson Continues on Page 2

As I have said in the past, I do not recommend using a stop at the actual high or low, but instead suggest using
a level that is half of one percentage point, or 0.005%, above or below the monthly range. In these examples,
the actual low will be put in parentheses.
One of the stock markets best trending periods in the past 15 years was from late 1994 through the middle of
1998. This chart of the Spyder Trust (SPY) covers this period.

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In December 1994, SPY formed a doji (a sign of indecision), and in January 1995, SPY closed above the prior
months high and the OBV turned positive. The ETF closed the month at $46.84, and longs would have been
established on the February opening at $46.91.
For the month of February, the stop would have been at $45.23 ($45.45 was Januarys low). SPY closed higher
in February, and so for March, the stop was at $46.53 ($46.76 was Februarys low). For the purposes of this
discussion, I will consider the position stopped out, as the low during the first week of March was $46.53.
The monthly OBV was positive, so new longs would be established on a move above the prior months high.
SPY opened April 1995 at $49.83, so new longs should have been established at that time.
SPY did not make a new monthly low until January 1996, when the December stop at $59.95 ($60.26 was
Decembers high) was broken when Januarys low was $59.33. This would have amounted to a 20% gain in
eight months.
In February 1996, the January high of $63.36 was exceeded, and for the next five months, SPY edged higher. In
July 1996 (point 3), the June stop at $65.48 was hit (Junes low was $65.81) when SPY had a low that month of
$60.06.
Just two months later, in September 1996, new longs would have been established when SPY moved above
the prior months high of $67. This position would not have been stopped out until March 1997 (point 3) when
the stop at $76.73 ($77.12 was March high) would have been hit once SPY dropped as low as $75.25.
The monthly OBV was still confirming the price action and was above its weighted moving average (WMA), so
when SPY moved above the April high at $80.69 in May, it was a signal to go long. The stop should have been
at $72.94 (April low was $73.31). This would have been a risk of 9.2%.
This long position was held until October 1997 (point 4) when the September stop at $89.80 ($90.25) was
triggered. On this correction, the OBV dropped sharply but did hold above the rising weighted moving average.
Two months later, in December 1997, the November high at $99 was exceeded. This signal was reversed in
January 1998 (point 5) when the December stop at $91.90 ($92.37) was hit.
SPY opened February 1998 at $99.91, which was above the January high. On these new longs, a stop at $90.46
(0.005% under the January lows at $90.91) would have been used.
This position would have been held until August 1998, point 6, when SPY dropped below the July stop at
$110.75 ($111.31). A new buy signal was generated in October 1998 at $107 (not shown) and was not stopped
out until May 1999. SPY closed the year at $123.31.
Over the three-year period, these eight trades would have netted almost 70% of the potential gain if one
simply bought on the opening in 1995 and sold on the last day of 1998. There were eight trades and 75% of
them were profitable.
Lets now examine how this translates to other markets. Most think of the forex market as being particularly
volatile, and a high percentage of forex traders fail. One common complaint is that many have difficulty placing
their stops.
NEXT: Using Monthly Highs and Lows to Trade Forex

Therefore, I wanted look at how using the monthly highs and lows as stops would work in the Euro FX futures.
For over 25 years, I have found that the OBV is a very useful tool for forecasting the moves in the currency
markets. In this example, I will be using the weekly OBV and its weighted moving average as a trigger.
The chart covers the period from March 2009 through March 2012. The last seven months have been
particularly interesting, as the euro came under pressure last summer when concerns grew over Greeces debt
burden.

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The OBV dropped below its weighted moving average in June, and the lower lows in July started a new
downtrend in the OBV. At the end of July, volume rallied back to its now-flat weighted moving average, which
is a classic topping formation. The first week of August, the uptrend in the OBV, line c, was broken, confirming
a new sell signal. The euro opened the following week at 1.4256, and a stop at 1.4620 (0.005% above the July
high of 1.4547) would have been used on short positions. The euro came quite close to this stop when it made
a high on August 29 at 1.4553. The weekly OBV stayed below its weighted moving average for the next seven
months, as it formed a series of lower highs and lower lows until the week ending March 23, when the weekly
OBV moved back above. FX traders should also note that the weekly OBV did a good job of catching the euros
decline from November 2009 through May 2010. Even if trading the spot FX market, keeping an eye on the
volume in the currency futures is a good idea.

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On the daily chart of the euro futures, the break of weekly OBV support and the confirmation of a new
downtrend is identified by point 1. Those who use the OBV will not be surprised to see that the euro
continued to edge higher for two weeks before dropping sharply. The weekly OBV can often be a very good
leading indicator.
For the next five months, the euro stayed well below the stop (red line), as calculated from the prior months
high, which is indicated on the chart.
Then, on February 9, 2012, the euro had a high 1.3325 (point 2) and just above the stop at 1.3301, which was
derived from Januarys monthly high of 1.3237. After a sharp setback, the euro continued to rally, eventually
reaching a high of 1.3487.
As noted in this April 4 column, the technical action now suggests that the rebound in the euro is over and
that the rally from the January lows was just a pause in the downtrend. The flag formation is consistent with a
continuation pattern.
Using the monthly stop method, those short could use a stop at 1.3457, which is calculated from the March
high of 1.3391.
For some FX traders, a stop half of one percentage point above the monthly high might be too wide, and in
this example, a stop that was one quarter of a percent above the months high would not have altered the
results. For April, that would mean a stop of 1.3424, which is 33 pips lower.
NEXT: An Alternative Way to Apply This Concept
An alternative way to apply the same concept would be to use the monthly pivot levels instead of the monthly
high or low. If the OBV or other technical measures were positive, then a stop would be used half of one
percent below the monthly pivot. Conversely, on short positions, a stop one half of one percent above the
monthly pivot would be used.
This weekly chart of Apple, Inc. (AAPL) shows the powerful recent rally, which clearly qualifies as a trending
move. The week before Christmas, AAPL closed at $403.33, which was well above the prior five-week highs.
The first week in January, AAPL closed at $422.40, which was above both the November and December 2011
highs.
 Click to Enlarge
The monthly pivot for January was $397.26, and half of one percent below that would have been $395.27.
Over the past four months, AAPL has only come close to its monthly pivot once (in early March) when it made
a low of $516.22. The monthly pivot was at $514.68, so the adjusted stop based on this pivot would be
$512.10. For April, the pivot is at $579.07, so an adjusted stop at $576.17 could be used. Apple has not made a
lower monthly low since October 2011.
For a good example of how this might be applied in a downtrending market, we can take a look at NetFlix, Inc.
(NFLX), which had an historic decline in the second half of 2011.
By the end of July 2011, the monthly pivot for July at $260.17 had been broken. On short positions, the August
pivot stood at $274.08, so a stop at $275.48 (half of one percentage point above) could have been used for a
stop.
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In September, the monthly pivot was $235.95 (adjusted to $237.12), which was just barely exceeded on the
first day of September when the high was $238.50. Of course, NFLX continued to plunge, hitting a low in early
December of $62.37.
NFLX stayed below its monthly pivot after September 1 and up to December 12, when the monthly pivot stop
at $73.95 ($73.58) was exceeded.
If instead using monthly highs for NFLX, the short position would not have been stopped out until January 4,
when the stop based on Decembers monthly high of $77.97 was exceeded.
So how can you apply this monthly analysis to your trading or investing? I hope most of you keep a written
record, or journal, of your market analysis. I think it will definitely pay off in the long run.
Each month, this record should include the months high and low for each of the markets you are following.
Every month, compare the new numbers with the prior months ranges. This should be done not only for
markets in which you are already invested, but also for those you are watching.
As an example, there are two sector ETFs, the Select Sector SPDR - Consumer Staples (XLP) and the Select
Sector SPDR - Health Care (XLV), that I think will look attractive after a decent correction.
For XLP, the March low was $32.87, and for XLV, it was $35.68. Therefore, these are the levels that I am now
watching, and if prices drop to these levels, I will be looking at these ETFs more closely to determine potential
buy opportunities.
OBV: Perfect Indicator for All Markets
Thursday, July 14, 2011
Published: 7/14/2011
MoneyShow.com
Tickers mentioned: XLE
On-balance volume (OBV) is a proven-effective leading indicator that allows traders to spot turning points and
valid signals across a wide variety of markets and time frames.
For the majority of technical analysts, volume plays an important role. Unfortunately, simply comparing one
days volume to a three-month average will not tell you much about whether money is flowing in or out of a
particular market or stock.
In the late 1970s, my father gave me a book by Joseph Granville titled Granville's New Strategy of Daily Stock
Market Timing for Maximum Profit. A few years later, I found Granvilles on-balance volume (OBV) on Compu
Trac, one of the earliest technical analysis software programs. I was quickly hooked on the OBV. From the
following examples, as well as my daily Charts in Play column, I think you will see why it is my favorite indicator
for all markets.
Joe developed the OBV as a way to determine whether the smart money was buying or selling. It is calculated
by keeping a running total of the volume figures and then adding in the volume if the close was higher than
the previous period, or subtracting the volume if the closing price was lower.
If you are doing this in a spreadsheet, such as Excel, the starting volume can be arbitrary, as it is the pattern of
the OBVnot the absolute numberthat is important. When viewed on a monthly or weekly basis, this can
be very useful in identifying major trends.
From the start, I analyzed the OBV in the same way that I would analyze a price chart. I used trend lines,
moving averages, and support/resistance analysis to determine whether the OBV was positive or negative.
Divergence analysis was always quite important, though divergences are not always observed at every
important turning point. Like my early work on Welles Wilders Relative Strength Index (RSI), it was critical to
use divergence analysis on multiple time frames in order to generate valid signals.
In May 1985, my analysis of the OBV on the major currencies was instrumental in helping me identify major
bottoms in currencies like the Deutsche mark (DMK) and Swiss franc (CHF), and therefore, the top in the US
dollar (USD). At the time, most of the leading economists were expecting the dollar to remain strong for a few
years. The dollar had bottomed in November 1980 with the election of Ronald Reagan.
Figure 1

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In a May 21, 1985 appearance on the Financial News Network, a precursor to CNBC, I discussed a chart very
similar to the one above of the Deutsche mark futures contract traded on the CME. In my early adaptation of
the OBV, I had also added a 21-period weighted moving average (WMA) of the OBV, which is plotted in green.
The weekly chart shows that the DMK was in a well-established downtrend (line a) starting in 1982, as it was
falling in value against the US dollar. In 1984, the decline accelerated, as it fell 25% to a low of 0.2881, or 3.47
DMK per USD. By comparison, in early 1984, it was 2.5 DMK per USD.
During this decline, the OBV rallied several times to its declining weighted moving average. Then in March
1985, the OBV moved above its weighted moving average and broke its downtrend, line c. The WMA flattened
out over the next six weeks before starting to rise.
On several attempts, the OBV was unable break through resistance (line d). With the OBV now above its rising
weighted moving average and with confirming bullish signals in the analysis of the CHF and British pound
(GBP), it suggested these currencies had bottomed out. The daily technical studies had been positive on the
currencies for several months, and this was another negative for the dollar.
The OBV overcame its resistance, line d, on July 5, 1985 (line a). One week later, the DMK also broke through
its corresponding resistance, line d. This is one of the reasons I find the OBV to be such a valuable indicator, as
it often leads prices by one or more periods. Obviously, this can make the risk/reward on new positions much
more favorable.
The DMK tested its downtrend (line a) in August and had a sharp, three-week pullback. During this time, the
OBV was much stronger, as it held well above its rising weighted moving average.
In late September, the G5 nations got together over a weekend at the Plaza Hotel in New York and agreed to
devalue the dollar. As you can see on the above chart, the DMK futures gapped higher and accelerated to the
upside, as there was concerted intervention to lower the dollar. By early 1988, the DMK had more than
doubled.
NEXT: Applying OBV Analysis Across Other Markets

I have found that the OBV works on any market that has good volume, and I have long advised cash forex
traders to keep an eye on the currency futures, where the volume data is very reliable.

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One of the most simplistic ways to use the OBV is to see if it makes a new high with each price high in an
uptrend, or makes a new low with prices in a downtrend. For the past five years or so, I have been reporting
on the monthly OBV analysis of the gold futures. The arrows on the above monthly chart of gold reflect the
new monthly OBV highs going back to 2003.
On the chart, you will see that each new high in the gold futures has been confirmed by a new high in the
monthly OBV. The last closing monthly high in the gold futures was in April and was supported by a convincing
new high in the OBV. It is also clear from the chart that the 21-period WMA has acted as a good level of
support, as tests of the rising WMA have often marked correction lows.
As I referred to earlier, the OBV is the only indicator that routinely will break out ahead of prices. At the end of
December 2008, the OBV closed above resistance at line c when gold closed at $884. It was not until the end
of February that the gold futures overcame trend line resistance, line a, at $928.
More serious students of the OBV can also watch for when the indicator is rising or falling more sharply than
prices. A good example occurred in the fall of 2010 when the OBV was rising much more sharply (see circle)
than gold prices. The chart indicates that gold prices did catch up over the next few months.
If you cant look at the monthly, weekly, and daily data, then at least look at the weekly and daily data. One of
my favorite patterns to watch for is the weekly bottoming formation in terms of price and the OBV.
For 18 months, the OBV for corn was in a trading range, lines e and f. While the price chart was forming lower
highs, line d, the OBV was forming higher highs (line e). This was a bullish sign.
In mid-August, corn prices closed above resistance at 412, and this was confirmed by the breakout in the OBV,
point 2. For the next eight months, both corn and the OBV were moving sharply higher. The OBV tested its
rising weighted moving average in the latter part of November, which presented a good buying opportunity.
Corn prices peaked in April and the new highs were confirmed by a new high in the OBV. But in June, when
corn made a further new high, line g, the OBV formed a lower high, line i. The next week, the OBV dropped
below its weighted moving average and corn subsequently broke support at line h.
In most cases, an eight-to ten-week divergence in the weekly OBV can lead to a multi-month correction. For
corn, it will be important to see if the uptrend in the OBV (line j) does hold.
NEXT: Sector Analysis Using On-Balance Volume (OBV)
Figure 3

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The OBV is also a valuable tool when analyzing the various market sectors. The Dow Transportation Average is
one that I monitor closely. The weekly OBV on the Transports confirmed the March 2009 lows before rising
sharply, and by that summer, it was in a clear uptrend.
The OBV peaked in August and then developed a trading range, as indicated by the resistance at line b. The
Transports had a corresponding level of resistance at 4287, line a. In late February, the OBV moved above its
weighted moving average and two weeks later overcame the resistance at line b. This breakout coincided (line
1) with the close in the Transports above the resistance at line a.
The Transports rallied almost 8% before peaking at the end of April 2010. The Dow Transports consolidated for
the next four months, but in the first week of September (line 2), the OBV moved to new highs when the
resistance at line d was overcome. The Transports did not overcome the corresponding resistance at line c
until eight weeks later, in November.
The Transports made a short-term peak in mid-February 2011 and then declined 7.9% from the highs. The OBV
held up much better than prices, and just three weeks later, it made new highs (line 3) and again lead prices
higher.
Both the Transports and the OBV made new highs in early May, but as the Transports made a new high the
week ending July 7 (line e), the OBV formed a lower high. This may be a significant divergence and does
warrant close watching. A drop below its WMA would be an additional warning sign. A violation of support at
line g would indicate that an interim top was in place.
NEXT: Trading Case Study Using Energy ETF XLE

Figure 4
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As I stressed earlier, it is important to analyze the OBV in at least two time periods. The Select Spyder SPDR -
Energy (XLE) is an ETF that I have covered regularly over the past six months.
XLE formed a series of lower lows (line 1) in the summer of 2010 and reached $48.56 in early July. In contrast,
the OBV bottomed in June and formed a series of highs lows, line 2. The bullish divergence suggested that XLE
was bottoming.
The initial downtrend in the OBV, line c, was overcome in early October, and when the intervening peak in the
OBV was overcome, it confirmed the divergence. The longer-term OBV resistance at line b was overcome in
the first week of November (line 3).
A month later, in December, XLE closed above key resistance, line a, which was a bullish sign.
The OBV surged higher for the next five months, confirming each high in XLE, and peaked in early-April 2010.
As XLE was making a new high at the end of April, the OBV started to diverge, line d. It violated its weighted
moving average in early May and formed lower highs, as noted in the May 12 article Big Oils Big Top.
The OBV is currently turning up from stronger support dating back to early 2010, but it is below its declining
weighted moving average.
So what was the daily analysis telling us during this period? The daily OBV also surged in early November and
confirmed each new price high through early March, line g. The daily OBV broke its uptrend, line f, on March 8
when XLE dropped back to first good support in the $73 area.
Because the weekly OBV was positive and had not formed any negative divergences, the action in the daily
OBV was consistent with a correction. By March 28, the daily OBV had once again moved back above its
weighted moving average. The daily OBV made a new high in April, but the weekly OBV did not confirm those
highs.
This made the short-term uptrend in the daily OBV, line h, an important level to watch. Support was violated
on May 3, and when combined with the weekly analysis, it suggested that a top was in place. The break in the
daily OBV below the March lows provided further evidence.
XLE has not yet even retraced 38.2% of its major rally, but there are some early indications that a bottom could
be formed before the end of the summer. To get the all clear signal, the weekly OBV needs to move above its
weighted moving average, and the WMA must also start to flatten out, as it is currently declining. The daily
OBV is still locked in a trading range, lines j and i, but traders should watch for a breakout.
Since there are many more market examples I would like to share with you, I may do a follow-up article if there
is interest. Unfortunately, thats all for this week. Remember, the OBV can also be useful on intraday charts if
the market you are following is quite liquid. Its essential to analyze at least two different time periods,
however, and for long-term trend analysis, the monthly OBV is best. Most of the free, online charting services
do include OBV analysis, so I encourage everyone to test it on their own.

Spot Leaders and Losers with RS Analysis

Thursday, June 16, 2011
Published: 6/16/2011
MoneyShow.com
Tickers mentioned: AAPL, GOOG, WCG, BAC, C
Using real market examples, see how relative performance, or RS analysis, can be used to pinpoint the
markets strongest (and weakest) sectors and individual stocks at any time.
Of all the technical tools that are available today, there is one that I think can help you find not only the
strongest sectors, but also the strongest stocks within those sectors or industry groups.
It is a method that I use frequently in my daily Charts in Play feature, although I dont always show it in
graphical form. It is the relative performance, or RS analysis, which compares one market to another by
plotting a ratio of the two markets.
Most analysts just use it to compare the percentage change of a market averagelike the S&P 500to a
particular sector or stock.
Since the 1980s, I have always analyzed indicators like the price charts. I often use moving averages on the
indicator, as well using trend lines to identify support and resistance levels. I have found this can be a very
useful way to identify the winning sectors and stocks, while at the same time avoiding the losers.
Relative Performance (RS Analysis)
Figure 1

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Most investors would likely pick Apple (AAPL) as the top stock of the past few years. Therefore, I thought it
would be interesting to see how the RS analysis performed on this key tech stock.
This daily chart goes back to late 2007. On the bottom is the relative performance, or RS analysis. In the latter
part of 2008, the RS was in a downtrend (line d), as major resistance at the 2008 highs (line c) was evident.
This downtrend was broken in late-January 2009 after the RS had formed higher lows.
On January 22, 2009, I noted the basing action in AAPL and felt that a breakout above $97-$100 on heavy
volume should complete the bottom formation.
Apple made higher lows (line b) in March with the RS in a well-defined uptrend at that time. On March 18,
AAPL closed above $100, and on April 6, the major bear market resistance in the RS, line c, was finally
overcome. The OBV also completed its bottom formation.
For the rest of 2009, the RS was in a solid uptrend, line e. While the overall market was topping in April and
May, the RS continued to move higher. The first sign of weakness was in March 2011, when the uptrend (line
e) was broken. A drop in the RS below the April lows will start a pattern of lower highs and lower lows.
NEXT: How to Find Which Stocks Are Leading the Market

Identify When Small, Mid, and Large Caps Are Leading

Figure 2
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Before selecting a stock in a particular sector, I generally have to decide what size company in a sector is likely
to do the best. Therefore, I keep a close eye on how the small- and mid-cap stocks are doing relative to the
S&P 500 (large caps).
The trend line analysis on the RS can often give some early insight as to whether the small- or mid-cap stocks
are acting stronger or weaker than large caps. I often use the S&P 400 (mid caps) and S&P 600 (small caps)
indices, but also analyze the iShares Russell 2000 Index (IWM), which tracks the small-cap stocks and is a very
liquid ETF.
By May 2009, the relative performance, or RS line, for IWM was in a solid uptrend (line e) that stayed intact
until it was broken on October 17 (line 1). This break coincided with the high made in IWM.
The small caps underperformed for the next nine weeks before the downtrend in the RS, line d, was broken
the week of December 19 (line 2)
The RS was able to stay in its uptrend (line c) until June 12 before being broken (line 3). During the summers
choppy market action, the RS formed a clear downtrend, line d, which was finally overcome in September (line
4). This was discussed on September 29 (see Can Small Caps Break Out?).
The small caps acted well until May 7, 2011 (line 5) when the uptrend in the RS, line e, was broken. The RS is
now testing its longer-term uptrend, line e.
The A/D line on the Russell 2000 also failed to confirm the early-May highs. Taken together, this was a stronger
warning signal than I recognized at the time.
Using RS Analysis to Pick Winners
As part of my regular sector analysis, I use not only the RS analysis, but also the actual performance numbers
to find which of the sectors looks best. Though I have been favoring the health care sector since early this year,
it came to the forefront in April, when I discussed the bullish RS analysis for both the Select Sector SPDR -
Health Care (XLV) and the Select Sector SPDR - Consumer Staples (XLP). To see those charts, click here.
Once you have identified the strongest sectors, you can take it a step further by looking for the strongest
industry groups within that sector.
Figure 3
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When you look at the industry groups that make up health care, one sub-group that stands out are the health
care providers, which through June 13 were up 19.6% for the year versus 10.4% for the health care sector and
just a 1.1% gain for the S&P 500.
The Health Care Providers have rallied sharply from the September 2010 lows, as there have only been shallow
pullbacks. The RS analysis versus the S&P broke out to the upside on January 10 (point 1), as it overcame the
resistance and prior highs at line c.
Ideally, you would like to pick stocks that are in the strongest industry groups in the strongest sectors. On the
bottom of the chart, I have also plotted (in green) a comparison of the health care providers to the overall
health care sector. In October, the health care providers broke through RS resistance (line f), indicating that
this group was starting to outperform the broader sector.
By March, the providers were clearly outperforming the S&P 500, as the RS had formed a solid uptrend, line e.
The RS consolidated during March and April before breaking through the resistance at line d (point 2). The RS
has since surged to the upside.
One stock in the health care provider group is WellCare Health Care Plans (WCG), and the daily chart shows a
nine-month trading range (line h) that was resolved to the upside in early January 2011. WCG then rallied from
a low of $27.64 to a high of $32.75 before pulling back at the end of January. The correction retraced 57% of
the prior rally, holding above the 61.8% retracement support.
By February 11, the RS had surpassed major resistance at line i and the OBV had also broken through the
resistance at line j. These were very positive signs, and the weekly analysis confirmed the breakout.
The daily chart show a powerful rally over the past few months, as WCG is up by more than 60% in 2011, over
three times greater than the health care providers Group (up 19.6%), and 59% better than the S&P 500.
NEXT: Using RS Analysis to Avoid Losers

Using RS Analysis to Avoid Losers

After a rally in early 2011, the financial stocks have been much weaker than the S&P 500, and the relative
performance analysis identified this weakness. The RS analysis can do a very good job of highlighting those
stocks that you should avoidor those you should consider for bearish strategies.
Figure 4
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For most, it will be another filter that can eliminate stocks from a buy list, no matter how compelling the
fundamentals may seem. On May 13, I highlighted The 4 Worst Bank Stocks, as I had been sharing my
negative outlooks for Bank of America (BAC) and Citigroup (C) for several months prior.
JPMorgan Chase (JPM) had violated RS support, line c, on April 15 when the stock closed at $43.90. The RS has
continued to decline since, with JPM reaching a recent low of $40.10.
During this time period, JPM has declined almost twice as much as the S&P 500. The well-defined downtrend
in the RS and the weak OBV gives no indication that JPM is ready to turn around.
Goldman Sachs (GS) was also featured in that May article, and the RS analysis showed that it had broken the
RS support, line f, on January 23 when the stock closed at $166.30.
The uptrend on the price chart, line e, was not broken until almost two months later, on March 16. I have
frequently seen similar signals where a breakdown in the RS will precede a breakdown in price by several
weeks, if not longer. So far, the June low for GS is $130.50, as it has dropped 21.5% since the RS broke support.
Figure 5

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This type of analysis will work on any sector or stock. On April 13, just before Google (GOOG) was set to
release earnings, I pointed out the potential head-and-shoulders (H&S) top formation. I then noted that the RS
had already broken support on February 22 (point 1) with the close at $610.21, and the RS had since formed a
series of lower lows, line c.
The break of RS support and its clear downtrend made it more likely that an H&S top would be completed and
that the reaction to Googles earnings would be negative. Two days later, the earnings were released and
GOOG gapped through the neckline (line b) on heavy volume (point 2), completing the H&S top formation.
To calculate the measured target from the H&S top formation, you take the high price when the head was
being formed ($642.96) and calculate the difference between it and the neckline ($553.31). This gives you
(646.96 - 553.31) 93.65. This number is then subtracted from the neckline to give the downside target at
(553.31- 93.65) $459.66.
With GOOG now trading around $500, it has the potential to decline another $40 from here. Though the daily
RS analysis has moved sideways for several weeks, the weekly and daily on-balance volume (OBV) readings
remain negative, suggesting that the stock has not yet bottomed.
Figure 6

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With the overall stock market correcting and despite the increasing bearish sentiment, now is the time to be
looking for those stocks that are doing better than the S&P 500. One of the stocks I talked about early this
week is an excellent example of what I am looking foreven though it is a utility stock.
Southern Company (SO) overcame seven-month resistance in April, line a, which was confirmed by the
volume analysis. It is now retesting the breakout levels and the uptrend.
Even more important is the RS analysis: The downtrend from September (line c) indicated that SO was
underperforming the S&P 500. The break of this downtrend in March was the first sign of a change. The move
through resistance at line d completed the bottom formation (lines d and e) and signaled a new uptrend in the
RS.
This was a sign that SO should outperform the S&P 500, which it has done. Therefore, the current pullback
should be a good buying opportunity.
Investors can do similar analysis to what I have discussed for free online, as most Web sites that provide stock
charting will also allow you to compare a stocks performance to a major average like the S&P 500 or an
appropriate sector or industry group.
To draw the trend lines, you may have to do it on a printed copy, but I think your efforts will be rewarded.