While technical analysis shouldn’t be the sole factor in determining investment decisions in my view, it does provide clues as to how healthy the bull/bear market is. Here are some charts that I’ve been watching recently. (All charts courtesy of freestockcharts.com)
1. Below are charts for the Dow Jones Industrial Average as well as the Transports. According to these charts, the bull market has more room to run. Both averages just broke through their bull market highs today and signal continued out-performance in stocks in the weeks to come, unless it’s a false breakout. We need to see follow through on Monday to validate this bullish development.
2. Not everything is fine and dandy though. The next two charts show some unhealthy signs. The XLF (Spdr Financial ETF) and XHB (Spdr Homebuilder ETF) haven’t made new highs since mid-April of last year. Also, the homebuilder ETF seems to have topped out at a lower level than its previous high. This is a bearish omen. Remember that the whole financial crisis was precipitated by weakness in the housing sector and then financials soon there after. If housing and financials are not participating in the bull market rally, it is cause for concern imho.
3. On the bullish end, we see that the XLY (Spdr Consumer Discretionary ETF) has indeed been participating in latest multi-month rally. This shows that prospects for retailers are improving as jobs are being created. It is close to breaking its highs set in late February. The outlook for consumer spending is improving according to this chart.
4. This last chart tracks the price of copper (the commodity with a PhD in economics). As of now, it is mildly bearish as it has not accompanied the bounce-back in the markets in recent weeks. This is a chart to keep an eye on as it has recently been a leading indicator of the stock market. Do a comparison of copper and the SPY from Apr ’10 to Sept ’10 and see for yourself. It’s impressive. One might be (I am) tempted to look at this chart as a proxy for demand from China given its voracious appetite for the metal. This chart may be reflecting the recent rate hikes and tightening in that country.