From the desk of Tom Bruni @BruniCharting

New Mystery Chart!

For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it's a custom index or inverted, who knows!

We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.

You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?

From the desk of Tom Bruni @BruniCharting

This week's talk of the town is how Financials, particularly Regional Banks, are rolling over relative to the rest of the market at a faster rate than the Yield Curve is rolling over.

While that's certainly something worth noting, Financials as a group don't really become that interesting until they break out to new all-time highs.

The XLF is close, but not there yet.

Instead, I think the focus should be on the Broker-Dealers & Exchanges ETF (IAI) as it presses up against all-time highs of its own.

Let's take a look at what's happening.

Here's the Broker-Dealers & Exchanges ETF (IAI) holding well above its 2007 highs after a successful breakout retest in January 2019. Today, prices are pushing back up against their 2018 highs as momentum approaches overbought territory on the weekly chart, confirming the strength of buyers. From a structural perspective, there's not a lot to dislike here.

Click on chart to...

In an environment where we want to be buying stocks, we primarily want to focus on areas of relative strength. With that being said, we also want to be aware of those areas showing relative weakness so that we can avoid them on the long side and short them when the environment is more conducive to shorts.

One clear area of weakness remains Nifty PSU Banks, so let's take a closer look at what's going on.

From the desk of Tom Bruni @BruniCharting

The dash to trash is a big theme in the first two weeks of 2020, with names like Beyond Meat (BYND) and other beaten-down IPOs from the last year catching a bid and working their way higher.

We've been focusing a lot on the Marijuana sector over the last month because the ETF and many individual names are at levels where it would be logical for a reversal higher to begin.

Today we want to reiterate that potential and highlight two of the largest stocks in the space that are both liquid and offering a skewed reward/risk at current levels.

There's a household name setting up for a bullish breakout to all-time highs sporting the lowest implied volatility in options prices in nearly three years! How do I not play this one?

These are my favorite types of setups and I get to play them simple.

The Large-Cap indices continue to churn near the highs as Mid and Small-Cap stocks play catchup. Sector leadership remains clear, but we're now beginning to see signs that a former leader turned laggards may start heating up again.

Let's take a look.

Here's the Nifty Fast Moving Consumer Goods Index attempting to break back above 31,000 resistance as prices reverse from their lows and momentum diverges positively. If prices can break back above that resistance then this long-term uptrend could accelerate and target 39,000 over the course of 2020.

Click on chart to enlarge view.

Here's the Equally-Weighted Fast Moving Consumer Goods Index also reversing higher as momentum diverges. If the sector is going to accelerate higher, this would be a logical level for it to happen at.

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Sometimes the greatest things in the world are right there in front of you.

Of all the charts I look at and indicators that we include in our process, Consumer Staples relative to the S&P500 has to be one of the most valuable. And for that matter, one of the more simpler tools to use.

Consumer Staples are the things we're theoretically going to buy even if there's a recession or the economy is doing poorly. No matter how bad things get, we're still going to drink beer, smoke cigarettes, brush our teeth, wash our dishes and so forth. Those stocks tend to outperform when the rest of the stock market is falling. Some of the top holdings of the S&P Consumer Staples Index include Colgate-Palmolive, Philip Morris, Procter & Gamble, Coca-Cola and Pepsi.

These stocks represent consumer staples and tend to pay higher dividends and are less volatile than the overall market. We call that "lower beta", because it makes us sound smarter.

Anyway, you can see in this chart how helpful the relative strength in staples has been in identifying trends and turning points:

There are a lot of people out there who would rather fight trends than take advantage of the ones that are already in place. The idea is they are always looking for the reversion to the mean. And while some think prices always come back to the mean, it's often forgotten that the mean can also catch up (or down) to price. I learned this lesson the hard way in 2013 and it has served me well ever since. This episode is short and sweet but I think adds a tremendous amount of value.

When I asked Phil to comment on the subject, he said, "Give me someone who can adapt, someone who is flexible over someone who is a rocket scientist any day because I can teach him to ignore that voice inside his head telling him that breakouts must revert.

The mean reversion heuristic is just one more example of how conventional thinking styles, that come hard wired in most of us and which serve us just fine in most environments, require suspension in the trading turret."

Here is the podcast episode in full:

Until further notice -- given to us by price action -- there is no reason to be on the hunt for bearish setups. There's no award handed out for being the first to catch the turn. More than likely, you'll needlessly exhaust a ton of capital -- both money and emotional -- taking hit after hit.

Let somebody else take the body blows.

One of the bullish setups JC and I discussed in the latest All Star Options monthly conference call is setting up and I feel like it's getting ready to spring into action.

I'm really fortunate that I get to interact with traders and investors from all over the world on a regular basis. I receive emails with great questions all the time. And while I'm happy to share my thoughts, it's these questions that really help force me into thinking about a lot of different things. So I'm learning every single day from this simple exercise. Please keep them coming!

Here is a good example of some of the questions I get. This one comes along quite often, in fact. So I wanted to share it with you and include my response.

From the desk of Tom Bruni @BruniCharting

Thank you to everyone who responded to this week's mystery chart.

Most people were sellers of this one, while some were staying away fearing a whipsaw.

With that as our backdrop, let's take a look at this dumpster fire.

Humans are incredible storytellers. We've convinced ourselves of all kinds of things that biologically don't exist, like state borders and even money. States aren't like mountains or rivers that we can see and touch. They're just stories that we all agree are true, which is why it works. Money is really just a worthless piece of green paper. But we all agree that a $10 bill gets you 1000 sheets of paper to print your charts out on. While it helps society function, these things we're referring to are just stories. They are really nice stories, but they're just stories. They exist only in our minds rather than biologically.

The reason homo-sapiens have conquered the world is because of our ability to believe stories. If there were 7.5 Billion chimpanzees in the world today instead of 7.5 Billion humans, it would be complete chaos. Other animals don't have the ability to use their imagination to deal with many others of the same species. That's why other strong and smart animals are locked up in cages at zoos and laboratories, while humans rule the world.

This natural ability of ours to believe stories, however, doesn't help us when it comes to analyzing the market...