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The new format of weekly premium market analysis gives more emphasis to quantitative analysis and includes a market recap with commentary, ETF analysis, breadth indicators, weekly mean-reversion signals and directional probabilities based on machine learning for large cap stocks.

Weekly Market Recap (October 9 – October 13, 2017)

U.S. stocks were mixed on the week. The S&P 500 rose 0.15%, NASDAQ gained 0.24% and the Russell 2000 fell 0.50%. Consumer Goods and Utilities led advances. Healthcare and industrial goods led declines. The 10-Year Note yield fell nine basis points to 2.28%. Gold and crude oil rose. The U.S. dollar index was lower on the week.

ETF Performance (total return where applicable)

ETF Week YTD
SPY +0.2% +15.7%
SPLV +0.8% +13.9%
SPHB +0.2% +10.8%
QQQ +0.5% +26.1%
IWM -0.5% +11.8%
GLD +2.3% +13.0%
TLT +1.8% +7.6%
UUP -0.8% -8.6%
DBC  +2.3% -1.6%

Below are comments based on the above table:

  • Technology (QQQ) widened its lead with a 26.1% YTD return
  • S&P 500 (SPY) is in second place, up 15.7% YTD
  • Low volatility S&P 500 (SPLV) is in third place with 13.9% YTD return
  • Gold (GLD) regained fourth place with 13% YTD return
  • Bonds (TLT) and gold (GLD) rose on the week
  • The U.S. dollar index (UUP) was lower
  • Commodities and energy (DBC) were higher

Market Commentary

The S&P 500 is overbought for 10 trading days in a row in the sense of RSI(14) > 70 but in March of this year this index was overbought for 14 days and there was no major change in trend.

Overbought conditions occur mostly along uptrends and oversold along downtrends. Usually, overbought conditions along downtrends or oversold along uptrends mean free money for traders and rarely occur. This can be seen from the above chart: along the 2000-2003 there was only one instance of overbought conditions and along 2008 downtrends there were no such conditions. Eventually markets top and there is a major correction or even a bear market but trying to identify these major events with minor conditions such as overbought RSI is not very effective due to the short-term nature of this indicator.

As a bonus, oversold/overbought conditions often allow determining how competent some market analysts are. Specifically, analysts who anticipate major corrections based on short-term overbought conditions are usually not very experienced with the markets.

Last week there was a switch to lower risk as third quarter earnings season began. A few summary statistics are shown in the table below:

S&P 500 stock with Two weeks ago Last week
Price > SMA(20) 365 358
RSI(14) > 70 87 84
RSI(14) < 30 6 16

The number of S&P 500 stocks above their 20-day moving average fell slightly from 365 to 358, the number of stocks in overbought territory rose fell from 87 to 84 but the number of oversold stocks rose sharply from 6 to 16. This trend may continue next week as risk-off accelerates.

As a result of a switch to lower risk securities, the S&P 500 low volatility ETF (SPLV) rose 0.9% on the week but the high beta S&P 500 (SPHB) gained only 0.15%.

DJIA Average RSI(14)

The average RSI(14) of the Dow Jones Industrial Average in the daily timeframe fell slightly to 61.48. This indicator is the average of the RSI(14) values of all current constituents of the index and currently points to higher probability of a short-term reversal.

Gold and Bonds

Click on the images above to enlarge.

Gold (GLD) found support near 119 as expected in the last report and rallied above resistance at 123.  The next resistance level is at 124.75. The weekly RSI(3) rise shows increasing momentum.

Bonds (TLT) rebounded as expected in the last report. The average weekly RSI(3) shows that momentum is increasing and probability of further gains is higher.

Machine learning (P-indicator)

Notes

  • In p-indicator results, the Last Date of weekly bars is shown as the last date of the week. The Open, High, Low and Close of weekly bars are based on the actual weekly variation of prices.
  • The calculations are based on weekly adjusted data for Dow-30 stocks since 01/2000

The weekly results indicate positive short-term bias.

TS is the profit-target and stop-loss file,  P-long and P-short are the long and short probabilities for a position in the corresponding ticker, P-delta is the difference  (P-long – P-short), a measure of the directional bias and S is the significance of the result (for weekly data 0 means low or no significance.) In the results, the Last Date of weekly data is the first date of the week.

There are 22 stocks with positive directional bias and 8 stocks with negative. The ratio of positive to total is 0.73 A ratio above 0.7 indicates strong positive bias and a ratio below 0.50 indicates strong negative bias.

Overbought/Oversold conditions

The overbought/oversold counts below are for Dow 30  stocks and are based on the average of four indicators: Wilder’s RSI(3), Cutler’s RSI(3), Harris’ RSI(3) and GFI(3). Overbought conditions occur when the average is > 90 and oversold when < 10. 

Dow 30 overbought count: 6/30 versus 9/30 two weeks ago
Dow 30 oversold count: 0/30 versus 0/30 two weeks ago

Weekly mean-reversion signals

The mean-reversion signals are generated by our proprietary PSI5 algo applied to weekly data of Dow 30 stocks. These are long-only signals: the buy entry is at the open of next week and the exit is at the open of the week following the entry week.

The average gain of mean-reversion signals in last report from open to close of the week was 1.09% with 2/2 winners.

New long-only mean-reversion signals were generated for:

CSCO, DIS, GE, GS, HD, JPM, MRK, NKE, UNH

 

If you have any questions, you can email us at: premium@priceactionlab.com

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting program: Amibroker

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