Before this week’s commentary, an update on the upgrades being done toStockscores.com. The main thing we are working to finish now is the installation of the new charting features. I expect that this will be complete this week, giving Stockscores users the ability to add indicators, change timeframes and time intervals. Once that is done, we will clean up any bugs and fine tune the look of the site. Thanks for your patience.

Second, I will be speaking at the Money Talks Insiders Conference in Vancouver on November 19th. For information on this conference, click here. If you wish to buy tickets to attend the conference, use the promotion code SOBC2011 and receive $25 off plus $50 of your ticket price will be donated to the Special Olympics. Even if you can’t make it to Vancouver, it is possible to watch the conference on video, the information page has more details.

Investors have many choices on how to analyze the stock market. Most use some form of fundamental analysis, looking at company information to determine whether the stock’s price is more likely to go higher or lower in the future. This approach makes the most intuitive sense and appeals to our need to make an educated decision. However, it is seriously flawed for most investors.

When considering information about companies, it is not enough to know the news. It is also essential to understand whether that information has already been priced in to the stock. Ultimately, using information is only valuable if the rest of the market is not yet aware of it.

Small investors doing fundamental research are competing against large, institutional investors who have considerable resources, industry knowledge and relationships to uncover hidden value. This is sort of like bringing a knife to a gun fight, although it is probably more accurate to say that you are bringing a stir stick to a nuclear war.

Rather than study fundamentals, I prefer to analyze what the market thinks of the fundamentals. Using price and volume activity, it is possible to understand what investors think about the fundamentals. Since the markets are extremely efficient, they tend to price in information long before it is part of the public base of knowledge. Most importantly, studying a stock’s trading history looks at what all investors are doing with their money, not just what some are saying.

When doing analysis, I begin by collecting information. For me, this means looking at all of the relevant charts and assessing what the message of the market is. In this process, it is important that you avoid biasing the research.

It is a common for people to only look for what they want to see. An investor who is long a number of oil stocks will seek out information that confirms the oil market is going higher. You can be a great reader of charts, but if you don’t look at the right charts, you will get a tainted impression of where a market is headed.

Let’s do this process for analyzing the overall market right now. Here is a list of the ETF charts I focus on:

UUP – US Dollar Index
FXE – Euro Trust
TLT – 20 Year Treasury Bond
GLD – Gold Trust
VXX – Volatility Index Futures
SPY – S&P 500
T.XIU – TSX 60

In each of these charts, I look for a few simple characteristics:

Rising bottoms – the buyers are in control
Falling tops – the sellers are in control
Price volatility – if there is a lot of price volatility, investors are uncertain. If the stock is trading in a narrow range, investors are confident
Price relative to a trend line – price far above an upward trend line indicates buyers are emotional. Closer to the trend line shows investors are rational
Price relative past price ceilings and floors – recent breaks through important areas of support and resistance show a change in the perception of fundamental value

We need to look for these things in the charts and the piece together the puzzle of how different factors work together. Let’s go through the list of ETFs and highlight the characteristics:

UUP – the US Dollar is in the control of the sellers over the past month but the buyers showed strength last week. There is a lot of volatility, so investors are uncertain. UUP is at some short term resistance now so more likely to fall toward support.

FXE – virtually the opposite of the US Dollar, the Euro lost value last week but is up over the past month.

TLT – the long term upward trend was broken early in October but it came back up last week. This is likely an upward bounce in the early stage of a long term downward trend.

GLD – is in a long term upward trend so the buyers are in control.

VXX – going down over the last month but there is a lot of volatility in volatility.

SPY – has moved sideways over the past year but with a lot of volatility. Short term optimism but going through a period of profit taking.

T.XIU – building rising bottoms in the short term but long term pessimism that has not yet been broken.

Based on these quick assessments of these charts, I can start to piece together the puzzle. I consider Gold to be a hedge to currency devaluation, the fact that it is going up indicates the market expects governments to print more money. The US Dollar and the Euro tell me that Europe is getting closer to a solution to their debt problems but there remains a lot of uncertainty. The VXX shows fear is coming down but it still in the minds of investors. The charts of the SPY, TSX and TLT demonstrate that money is coming back to stocks, and coming out of safer government bonds. However, the stock markets are working to overcome a lot of pessimism and we are far from an optimistic market.

For a similar analysis, give my Market Minutes video a look by clicking here.

Stocks continue to slowly strengthen, there remains a lot of uncertainty but I am seeing a small number of stocks start to show optimism. Here are a few charts of stocks that I think are worth checking out:

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1. LLNW
LLNW is breaking through some short term resistance and has had rising bottoms long enough for the Sentiment Stockscore to move above 60, a positive sign. Support at $2.60.

2. GNW
GNW made an abnormal price jump on Friday with good volume support, the stock is not above resistance that has held up for three months. Support at $5.80.

3. AFOP
The Sentiment Stockscore is coming up for AFOP because the chart is moving from falling tops to rising bottoms. The stock had a good day on Friday with stronger volume. It may see some short term profit taking but the momentum is switching for the longer term. Support at $7.50.