SPDR S&P Biotech ETF (XBI) has thwarted the best efforts of short sellers in recent weeks, holding close to the 2012 high and setting up a breakout pattern, while the broad market grinds lower in an intermediate correction. This resiliency should intensify once the major indices turn higher but why wait when you can own one of the top performing funds right now?

A harmonic convergence of good news has underpinned the instrument, with several components attracting intense buying interest. It started in April when Gilead Sciences (GILD) rallied 14% in reaction to positive data for its Hepatitis C drug, Vertex Pharmaceuticals (VRTX) followed up this week, adding over twenty points after equally positive news on its cystic fibrosis drug.

Now add in Amylin Pharmaceuticals (AMLN) which has risen over 70% since March and Human Genome Sciences (HGSI), which received an unsolicited buyout offer from GlaxoSmithKline (GSK) earlier this week. Taken together, it’s likely the fund will break out and post new highs in the second quarter, even if the rest of the market goes to hell in a handbasket.

This is a relatively new fund, coming to market near 50 in February 2006. It carved out a cup and handle pattern into September 2007 (red line) and broke out in an uptrend that peaked near 70 in August 2008, just before the market crash. That event triggered a swift decline that dropped price all the way to the post-IPO low in the low forties (blue line).

Price action since the 2009 bottom shows a volatile uptrend with three distinct selling waves.  While the fund recovered quickly after each downdraft, it shows that volatility is hardwired into this instrument and could reappear at any time. Keep that in mind when calculating position size because smaller exposure will let you sleep at night, even if it heads into another bungee-jump.

The fund broke out to an all-time high in January and surged up to 82.69, topping out just two weeks later. It’s gone nowhere since that time, other than establishing a trading range between the rally peak and support at the highs posted in 2011 (green line). Relative strength is supportive, with Stochastics engaged in its second buy cycle since the sideways pattern began.

The fund has carved out a four month rectangle pattern, with price swings crisscrossing the 50-day EMA two times so far. This looks like healthy price action that will eventually yield a strong breakout. On Balance Volume (OBV), has held intact, pointing to healthy accumulation and modest profittaking that should support higher prices in the months ahead.

It posted a third high near 83 last week and turned lower with the broad market. The decline settled on the 20-day SMA, which has converged with the 50-day EMA. This small base could mark an excellent spot to build positions, as long as stop losses are placed between 77.50 and 78 because a breakdown will favor a trip into range support near 73.

Stochastics hit the oversold level last Friday and turned higher, despite gyrations in the broad market. This crossover suggests the fund will also turn higher right here, printing a higher low within the four month trading range, This, in turn, would favor a strong breakout attempt that might yield a fresh bull advance with a measured move target right at 100.

Market players ignored the durable goods divergence straight out of the gate, lifting the stock above a four month trading range and to a new ten month high. Meanwhile, the rally printed more than twice the Dow component’s average daily volume, telling us the breakout is the real deal, even though this year’s market has generated more head fakes than a NFL running back.

The conflict between positive price action and negative news flow tells us the market’s discounting mechanism sees the company’s aircraft orders rebounding in coming months, both here and abroad. It also expects a big payoff from the 787 Dreamliner, as well as a growing military market in a time of sovereign austerity. Finally, it predicts that worldwide economic growth will surge in 2013 and 2014.

We’ve heard endless complaints from the market’s flat earth society in recent months, insisting that technical analysis doesn’t work, but here’s a perfect example of the price chart conflicting with so-called fundamentals. Honestly, I’ll take charts over P/E ratios 100% of the time when the bullish message is undeniable, as it is with Boeing right now. Saying it another way, toss your Graham and Dodd in the trash and delete your spreadsheets because it’s time to buy.

The stock sold off from 108 to 29 during the bear market, bottoming out in March 2009 and entering a strong recovery that topped out at 76 in April 2010. Price action since that time shows a broadening formation, with the May 2011 rally exceeding the prior high by five points and then turning tail in a failed breakout that undercut the prior low by three points in August.

Despite traps at the highs and lows, this big trading range fulfilled most of the characteristics of a bullish consolidation after the substantial gains posted in 2009 and early 2010. It’s also instructive that price had plenty of opportunity to sell off from the mid-seventies in the last four months but continued to hug the upper 20% of the range.

The narrow four-month sideways pattern completed during the week of April 8^th when the stock dipped down to the 50-week EMA and turned higher (red circle). This price action corresponded with a test of long term support at the 200-day EMA. The subsequent bounce rang the first set of buying signals that should multiply in a virtuous cycle for the rest of 2012.

The breakout establishes a yearlong trendline with new support just above Wednesday’s open at 75.05. The broadening formation places an initial upside target in the mid-eighties. On Balance Volume (OBV) hasn’t caught up with price because it hasn’t posted a new high yet. This predicts a period of consolidation and testing once the initial momentum rally comes to an end.

I always recommend standing aside after a big breakout and not chasing higher prices. It’s no different this time around because Boeing should deliver a second chance entry in one of two scenarios. First, the stock pulls back and tests new support. This will most likely happen during a market swoon in which the algos push down Dow components, without regard to individual strength or weakness.

Most breakout gaps don’t fill right away so new support near 75 could hold and yield a strong followthrough rally. But don’t be surprised if a pullback undercuts the trendline because that’s typical behavior in our modern electronic environment. Don’t worry about buying down there as long as the stock doesn’t gap through support or post higher than average selling volume.

In the second scenario, the stock holds high in the rally range while happy longs take profits and hopeful longs build positions. If we get this price action, stand aside a full 5-3-3 Stochastics down cycle (rollover to oversold, followed by bullish crossover) to let volatility levels ease up.  I’ll post the new buy signal to Columnist Conversation if this second scenario unfolds.

Interactive Brokers is one of the biggest culprits, with trade accounting professionals pleading with the company to issue corrected 1009-B reports that align with standard interpretation. IB is resisting and it could be months before things clear up.

IRS gets a copy of the broker’s 1099-B. If you file with conflicting losses , it will hit their exception system and you could get audited or get a heart-stopping tax bill on your 2011 trades. This doesn’t seem to be a problem if you’re a “mark-to-market” trader.

If you’re not, I’d follow what my CPA told me: file an extension and hope it gets sorted out by October 15^th.

Check out Robert Green’s site (http://www.greencompany.com/) after you read these links. It has all sorts of trader tax stuff. (Green is best known CPA in the “community”)

http://www.forbes.com/sites/greatspeculations/2012/03/14/beware-botched-1099-bs-form-8949-at-tax-time/

http://www.elitetrader.com/vb/showthread.php?s=&threadid=238471&perpage=6&pagenumber=1

Look for gold and silver to move higher in the second quarter, firming up corrective lows that were struck back in December. While these instruments may eventually find their way down to 1420 and 20, respectively, I think that decline is off the table until 2013 at the earliest. For now, it’s time to look for low-risk entry points, ahead of rally that lasts well into the fourth quarter.

Long-term relative strength cycles in both instruments posted deep lows and turned higher in the first quarter, pointing to the start of buying impulses that can last one or two years. These are slow turning indicators so it will take time for technical buy signals to catch up with the price action. That will give interested buyers the luxury of picking out the most advantageous entry points.

First, let’s highlight the most recent selloff in Market Vectors Gold Miners ETF (GDX). This fund has chronically underperformed the commodity contracts in recent years, unable to complete a major breakout over the 2008 high at 56.87. The result has been a horrific looking pattern that’s printed five lower lows in the last fourteen months.

Those selloffs have generated a long trendline that got hit once again on March 20^th. The fund has been testing that level for the last two weeks, with only minor buying interest showing up to support a sizable bounce. Even so, positive divergences are starting to set up at this level, favoring a recovery that lifts price back into the mid-fifties.

Now take a look at the trendline bounces since last June. They’ve all occurred near the end of the quarter. More importantly, these reversals align closely with swing lows posted on the gold and silver futures contracts. This timing provides additional evidence that we’ve come to the end of a precious metals sell cycle and are entering a new buying impulse.

Monthly Stochastics provides an excellent tool to read long-term relative strength cycles. You can see that gold posted cycle lows in October 2008 and again in March 2010. The 2008 crossover preceded the gold breakout over 1000 while the 2010 crossover gave an early buy signal, ahead of the biggest bull advance in history.

Gold has spent the last six weeks confirming a third crossover that took place in February. The instrument has gone practically nowhere since that time, which is good thing because it’s setting up plenty of potential entry points. I expect the bullish kicker to come when the gold miner’s fund finally turns the corner and enters a new rally phase.

Gold shows three successful tests at the 200-day EMA in the last three weeks, once again highlighting the long term forces at work right now. Further dips to 1640 or so can be bought by aggressive traders, as long as they place tight stops, while most folks should sit back and wait for a breakout over the four week trendline, which has aligned with the 50-day EMA.

How high can gold get in the next three to six months? A rally above 1800 will complete a basing pattern that goes back to the September breakdown. That will set the stage for a test at the historic high over 1900. While resistance is unlikely to break without a long fight, we could get a quick spike into the psychological 2000 level. Take profits aggressively if you see that number.

Silver hit a long-term cycle low in January but this instrument shows greater overhead supply than gold, due to last year’s parabolic rally into the 1980 Hunt Brothers’ high near 50. Realistically, I don’t expect that price level to get broken in our lifetimes.  However, if we keep expectations relatively low, silver could pay off nicely in the next three to six months.

This instrument requires greater entry precision than gold because corrections come in two or three waves after a major uptrend and the contract shows just two selloffs since the May 2011 reversal. That leaves silver exposed to a trip into the low twenties, as a final target. However, we may not know for another one or two years if this decline has already bottomed out.

In the meantime, there’s money to be made. The lower highs at 37 and 44, mark inflection points where aggressive profits need to be taken. Unlike gold, silver has been trading below the 200-day EMA in the last few weeks, with the 50-day EMA aligning tightly to that level. As a result, a breakout above 33.50 will trigger a buy signal, ahead of a recovery that should reach the February high. A final burst into the lower forties should eventually end this buy cycle.

This is big news, after months of Germany and France pushing the tax down the throats of the 27-country union. The UK’s Cameron will now look like a folk hero for standing up to Merkel and Sarkozy a few months ago, to save City of London bankers (their Wall Street). And Sarkozy will look like a dunce and job killer for passing the French FTT, which goes into effect this summer.

Herr minister said they’ll now focus on HFT regulation. Yeah, right.

Chevron (CVX) and Exxon Mobil (XOM), integrated oil giants and Dow Industrial Average components, look ready to break out of multiyear trading ranges and head  up to new highs. These long overdue rallies should give a major lift to the refining group, which has underperformed the broad energy complex since the current bull market began in early 2009.

Election year politics could drive the coming rally because rising gas prices have shined a harsh light on America’s failure to keep refined products here in the states, due to the odd disparities in pump prices around the world. US refining is a particularly cutthroat industry, with no new plants built since 1976, and sending gas to foreign markets allows companies to increase relatively low profit margins.

Increasing odds for a Republican presidency would raise hopes that delayed energy projects will come back on line, work on domestic oil production will increase and that more locally refined fuel will stay here at home, keeping a lid on artificially high pump prices. That, along with a more favorable corporate tax environment, could drive these blue chip behemoths well into triple digits by 2013.

Chevron looks like a stronger play than its rival, with a 3.00% dividend and a 20% production growth target in the next five years. It peaked at 105 in 2008, fell to 55 a few months later and entered a strong uptrend that returned to the multiyear high in early 2011. The stock nosed above that level and fell immediately into a broad trading range, with support in the mid-eighties and resistance above 110.

The weekly chart has carved out a broad cup and handle breakout pattern that shows upside potential well above 150. Price has now rallied into a key test of the breakout level. The yearlong handle pattern is sitting on top of the three year cup, adding a bullish element that could add considerable momentum when the new uptrend finally gets underway.

The daily chart focuses on price action since the original recovery rally peaked in April 2011. The series of lows since that time has marked out an inverse head and shoulders pattern that has now completed its final development phase. Accumulation has remained solid as a rock for the last year, with a steady flow of institutional buying pressure, but non-existent returns other than the dividend.

The stock tagged a new high on Tuesday, triggering a modest buy signal, but average daily volume has fallen in the last three months, suggesting there’s still plenty of time to get on board. Given the serene pattern, just wait for a rally day that prints 10 to 15 million shares and then buy the stock, rather than jumping into the top of the trading range and getting stuck in a final shakeout.

Exxon-Mobil’s (XOM) 2.20% dividend isn’t as attractive as its Dow rival but there are still plenty of reasons to consider ownership of this multinational giant. It posted an all-time high at 95.64 in June 2008 and entered a steep decline into the upper fifties. The stock bounced in a strong 2009 recovery wave but the rally failed, yielding a secondary selloff that tested the low in July 2010 (red circle).

Although it found support at the bear market low and recovered quickly, the 2010 decline puts the stock at a major technical disadvantage, compared to Chevron. The drawback shows in the February 2011 high at 88, which is nearly eight points below the multiyear high. Compare that relative performance with Chevron’s 2009 to 2011 uptrend, which ended six points above its 2008 high.

Exxon has gone nowhere in the last year, grinding sideways in a 20-point trading range. Even so, accumulation shows incredible patience in the investment community, as the stock works through major resistance put into place over four years ago. Fortunately, it looks like that digestion process is nearly completed, with price now trading less than two points below the 2011 high.

However, the disparity I pointed out on the weekly chart will come into play as soon as the stock breaks out into the lower nineties. While Chevron will post an all-time high on its next rally, a similar Exxon uptick will run into a brick wall of resistance between 90 and 95. That barrier will slow the upside for a number of months, with unsteady progress until price finally pushes into triple digits.

The Stochastics Oscillator has stood the test of time since George Lane developed the classic indicator in the 1950s. Despite its senior status, the tool does an excellent job measuring relative strength and weakness cycles in the modern electronic market. However, the majority of traders fail to take full advantage of the calculations because they misunderstand its purpose and power.

According to popular belief, we’re supposed to sell when the Stochastics fast line (%K) crosses below the slow line (%D), and to buy when it crosses above the slow line. That sounds simple enough but the technique doesn’t work because the crossovers fail to pick up strongly trending markets. Fortunately, there are two better ways to apply indicator output:

1. Use the wavy lines as a cycle tool for intraday and multi-day buying and selling decisions.
2. Read the unique patterns as they gyrate between overbought and oversold levels

The first method works because the market shows cyclical pulses of buying and selling pressure. A well-tuned indicator sitting in the lower pane of a 15-minute, 60-minute or daily chart captures the flow of these repeating impulses. This is especially effective in trading ranges, picking up when a rally or selloff hits a turning point, offering a second entry or an opportunity to cut losses.

Look at the oscillations on the SPDR Trust (SPY) 60-minute chart in the last two weeks. The cycle peaks captured nearly every high within the broad sideways pattern in place since the February 3^rd jobs report. Each oscillation down to the oversold line also corresponds with a pullback that defined a short-term low, and an opportunity to add to positions or take profits.

This type of clarity is the rule, rather than the exception, when using Stochastics as a cycle tool but markets don’t always move in perfect oscillating waves. As a filter, traders need to ignore buy and sell signals when the lines jam higher or lower, and then flatline. These patterns reveal one sided markets and the need to apply momentum tools, like MACD, instead of cycle tools.

This limitation hints at the second way that traders can use Stochastics to their advantage. The indicator prints all types of patterns as it oscillates between the upper and lower ranges. These formations converge or diverge with price patterns on the upper half on the chart. Alignment or misalignment between price and Stochastics patterns can be highly predictive.

Iron Mountain (IRM) shows an example of the lower high, one of my favorite Stochastics patterns. Look at the relationship between price and the signal lines in the last two months. Both hit new highs at about the same time during the first and second peaks. That changes on the third peak when price hits a new high but Stochastics hits a lower high, signaling a bearish divergence.

The price pattern supplies the missing information with a double top pattern that shows support near 31.25 (black line). It also fits the characteristics of a 2B Reversal, described in 1993 by Victor Sperandeo in his book Methods of a Wall Street Master The stock finally broke down on January 26^th, confirming the bearish divergence in a sizable selloff.

The midstream fakeout is another effective Stochastics pattern. The indicator drops to the oversold level while price holds above the last swing low (red lines). It turns higher but stalls in the middle of the range and starts to roll over. Many traders see the crossover and dump positions but the small platform (blue box) actually marks a continuation signal, predicting higher prices.

This pattern offers a great entry if you’re kicking yourself after missing an important reversal. Pay close attention when Stochastics rises off the low and then jump on board when you see the indicator flatline for a few bars. It doesn’t happen every time, but the pattern shows up often enough that you’ll get many second chances to get positioned at low risk prices.

What settings should you use for the Stochastics indicator? I’ve applied the 5-3-3 settings for over a decade now but these small numbers do translate into higher noise levels and more false readings. If that’s a problem, I recommend trying out the 14-7-3 and 21-14-3 settings, comparing the signals to see which offers the best fit with your specific trading style.

Volume has dropped through the floor so far in 2012, reflecting lower volatility levels and less public participation in the equity markets. This is a two edged sword because prices can be ramped up for days when institutional sellers are absent, inducing euphoria in the trading crowd and financial media, but then cut down just as quickly in vertical declines.

We’ve enjoyed one side of this equation since the start of January but, with technical indicators stretching at extremely overbought levels, quick and painful selloffs are now likely to upset the bullish tone on a regular basis. As a result, it’s a good time to protect intermediate positions with trailing stops, partial profits and/or options protection.

Limp trading levels are also making it harder to get valid breakout signals because volume-based accumulation-distribution indicators aren’t cooperating. For example, a notable breakout in 2010 or 2011 that triggered a 5 million share day on a small cap may now produce just two to three million shares traded. This is undermining On Balance Volume (OBV) readings, which generates accumulation patterns that should match or exceed price action at new support levels.

 It’s one reason why intermediate price direction on Apple (AAPL) has been so hard to predict, following its January breakout. Note the stock posted three higher highs in 2011 but OBV spiked just two times, barely registering the October high near 427. It dropped to the October 2010 low (green line) and lifted off in a shallow angle of ascent that completely missed last month’s breakout.

This lagging behavior is triggering a bearish volume divergence that predicts the breakout will struggle, yielding a series of whipsaws and a potential failure. Neither has happened in the last two weeks, with price trading higher in a series of all-time highs. It’s real hard to tell folks it’s OK to buy Apple, right here and right now, with this conflict hardwired into the technicals.

 You can see the culprit more clearly when placing a 50-day moving average of volume over the classic volume histogram. Average volume has been declining steadily since October, even though January traditionally yields strong public participation that should trigger a wave of above average volume spikes. That didn’t happen, except on the days just before and after earnings.

Now look at the horizontal black line, which notes the lowest average volume levels posted last year. Apple broke this line on the last trading day of December, with the indicator drifting lower throughout the first six trading weeks of 2012. This is crazy, given the stock’s icon status, the big breakout and a January market that should overflow with public and institutional transactions.

Please keep in mind that I’m using Apple as an example here and I’m not making a negative call, although the red flags are waving. Rather, this type of divergent behavior is flashing all across the 2012 equity markets. It’s less prevalent in the small caps than blue chips right now but the footprint of abnormally low participation is showing up just about everywhere.

This is big problem for technicians, trying to divine the market’s intentions, but it’s an even bigger problem for traders and the investment community because healthy bull markets can’t be built on apathy and robots. Of course, prices can drift higher for weeks when there are no sellers in the system but the uptrend will lack strong handed players ready to support falling prices.

This missing element sets up bad mojo when sellers finally have a reason to sell because there will be few strong bids under the market.  Of course die-hard dip buyers will still buy dips but the hideous January volume, which reflects a failure to attract public buyers, has the power to create monstrous air pockets that rival last August in their ferocity and power to destroy profits.

Perhaps investors should reconsider the equity markets, but not until the following things happen:

 1. Return the stock exchanges to non-profit status.

 2. Consolidate all stock market transactions into one central location, with a quote book that reflects actual supply and demand, i.e. no icebergs, no flash quotes, no dark pools.

 3. End the carried interest loophole.

 4. Regulate HFTs, forcing them to provide liquidity and depth through all market conditions.

 5. Require opening liquidity quotes, with mandatory maximum spreads.

 6. Charge HFTs for quote cancellations.

 7. End sub penny pricing.

 8. Abolish leveraged ETFs.

 9. Enforce naked short selling rules.

 10. Regulate fund performance reporting to eliminate end of month and year mark-up.

Money center banks met low expectations in the fourth quarter, with critical issues here and abroad keeping a lid on profitability and their 2012 projections. JP Morgan Chase (JPM) and Wells-Fargo (WFC) investors shook off the modest numbers, lifting to multimonth highs. Citigroup (C) shareholders weren’t as forgiving, knocking the debt-laden institution to a two week low.

Given the buy-on-bad news impulse, is it time to shout an all-clear signal for the banking sector and throw more money at the rally wave that started in November? Well, not so fast because the group faces two major obstacles heading into the end of January, one technical and one logistical, before the institutional crowd finally gives their thumbs up or down to the group.

First, although we’ve heard from nearly all the big banks, the vast majority of mid-sized and small cap sector components will report earnings in the next seven sessions. That data flood will reveal the state of the industry away from Wall Street and in Middle America, which is highly dependent on more traditional commercial and residential loans.

 Second, the KBW Banking Index (BKX) just completed the second leg of a mean reversion swing off the 2011 low and into the 200-day EMA. The rise into this critical level tells us that extreme selling pressure has washed out of the system, allowing price to float back to a central fulcrum. Saying it another way, the index is no longer oversold on a longer-term basis.

What is doesn’t tell us is more important. Simply stated, the bounce doesn’t reflect a healthy buying phenomenon typically seen in a bull market advance. Using a simple analogy, hold a rubber ducky under the bathwater and let it go. It will catapult into the air and then settle back on the surface. If you want it to stay in the air, a real live human needs to intervene and pick it up.

We can see this flatline behavior in the last seven sessions, which correspond with the first earnings release by JP Morgan Chase on January 13^th. The index hasn’t budged since that time, remaining stuck like glue to a trading range between 42.50 and 44. This isn’t a necessarily a bad thing because a sideways pattern will support higher prices, as long as it finds real live buyers.

 But it could just as easily mark a topping pattern, ahead of a steep decline into the upper thirties. Secondary technicals are raising a red flag in this regard because the numbers don’t support the positive price action. For starters, accumulation as measured by On Balance Volume (OBV) looks bleak, with a long series of lower highs and a pathetically slow rise off the October low.

The indicator is reacting to the limp volume that’s characterized this January market so far. The lack of investor interest is troubling because the banking sector is trying to climb out of a deep hole and needs enthusiastic shareholders to accomplish that task. Maybe that will happen after this week’s results, but typical mutual fund inflows should have hit the ticker tape by now.

Now look at the Fibonacci retracements off the 2011 high. The index has remounted about 50% of the February to October selloff and 62% of the July to October selloff. These are typical bounce percentages within a bear market environment. Sector bulls can still prevail but they’ll need to push the index up and over major clusters of resistance between 43 and 46.

 Finally let’s see what the weekly chart is telling us. It’s troubling the index topped out in the first quarters of 2010 and 2011 (blue circles) because this fractal behavior will invite selling pressure. Those highs formed a broad double top that broke to the downside in August. Pattern resistance lies between 42.50 and 44.50, which makes sense given the index’s recent loss of momentum.

Meanwhile, weekly 5-3-3 Stochastics has now lifted into the overbought level, which isn’t earth shattering for bulls because it can support another few weeks of buying pressure. However, a selloff lasting more than two or three sessions is likely to trigger a rollover, shifting the balance of power back to bears and favoring a decline cycle that lasts one to two months.

Summing things up, sector price action has reverted to the mean after a tough slog through the second half of 2011. There’s been little reaction so far to fourth quarter earnings but that’s likely to change when the reporting cycle finishes up next week. Without strong results from mid and small cap players, banks could easily head for their 3^rd straight year of inferior performance.