Charts For Thought

I've been doing more tinkering with stockchart.com's free P&F charts. I like Point and Figure over Candlesticks because price can be scaled to Average True Range, which helps expedient trend recognition. If you aren't familiar with ATR, look it up and read something by Van Tharp. Aside from charting, Average True Range is a statistical measure useful for quantifying positions size and trailing stop percentages. I recommend reading "Trade Your Way To Financial Freedom" for more information on ATR's applications.

Stockcharts.com also offers a variety of seemingly lesser watched index's (i.e. CNBC doesn't talk about it) such as the $BPCOMPQ, which is the Nasdaq Bullish Percent Index, and $NAA50R, which is the percentage of Nasdaq stocks above their 50dma. These are a good way of watching momentum within the markets and are perfect for point and figure because one can easily establish their current direction.

What makes stockcharts.com even more awesome (Christ this is turning into an advertisement), is the ability to create a ratio between two sets of data. For example, a comparison of US Equity and US Bonds would look like this (click to enlarge).
As you can see, the Primary Trend since mid 2007 has been towards US Bonds away from US Equity. While you don't need a chart to know that MMA's have done well vs equity in the past, it is interesting to note the recent break of a Secondary Trend downtrend, which indicates a slowing of momentum. Do my desires deceive me or is the right shoulder of a Reverse Head and Shoulders formation being built?

Time will tell, but with plenty of talk about deflation in the air, the psychology is right for a big turn. Bill Gross and Warren Buffet are moving away from Treasuries due to the low yields... are we seeing the return of inflation? The relationship between Gold Miners and Gold is saying yes for the first time since late July.This isn't to say that the Credit Crisis is over and that the rise of risky assets is afoot. There will be much more terrible news and other startling moves by governments, but fear does seem to be on the wane, "in spite of terrible job numbers." To illustrate the dissipating fear in the markets, here is the relationship between the Percentage of Bullish stocks in the Nasdaq and the Nasdaq's Volatility.
Generally speaking anything below 300 has been treacherous for investors (going back to 2000). On the other hand, traders can benefit from the sharp mean reversion tendencies of this index by trading in the direction of the ratio (X's are Bullish, O's are bearish). Intuitively, a growing number of bullish stocks and falling volatility is advantageous for buyers who don't want to deal with big daily swings on top of a falling market. Notice that the 10% pullback since the election failed to print any O's, fear is clearly retreating.

Finally, one more potentially bullish chart for this old bear. Since I don't have the tools to back test these charts as a trading indicator, I'm using intuitive assumptions to qualify their message. Admittedly, the veracity of this indicator is suspect insofar as I cannot think of a reason why it would work. The following is a ratio of Nasdaq stocks trading above their 50dma compared to ones trading above their 200dma.One of the reasons to remain vigilant in this market is the looming trend line. I'm glad to see this number hold above the 10 period moving average, but I'm wary until this downtrend is truly broken.

All in all, for the first time in months, I'm beginning to see constructive action in the Equity Markets. It could easily be snuffed out with a lower low or some other technical event, but for the time being, I believe the market has an intermediate/short term upward bias.