No More Foreplay

[youtube:http://www.youtube.com/watch?v=og-f7G4FFYE&feature=related 550 412] ____________

My once-reliable Freeport-McMoRan broad market “tell” has been running a few misdirection plays at me of late. While the broad market has been printing fresh 52 week highs on a daily basis, Freeport has been churning below its 20 and 50 day moving averages, with a close below the 100 day moving average to finish out last week to boot. Beyond that, the large cap copper and gold miner appears to be nearing the apex of a descending triangle, which often resolves lower. Thus, I am inclined to believe that this week will resolve this glaring divergence, one way or the other.

You may recall a few weeks ago that the transportation stocks were diverging from the broad market as well, only to quickly recover and help to propel the S&P even higher. Just as with the trannies, Freeport has been an historically sound broad market leading indicator. Accordingly, I do not expect the divergences to remain in place for much longer.

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For many traders, one of the most confusing chart patterns is the bearish rising wedge. After all, how can a pattern possibly be bearish if we are seeing a series of higher highs and higher lows? Before we delve into an answer, let’s briefly recap what comprises the rising wedge.

First, rising wedges are seen as continuation patterns in downtrends (similar to the “bear flag”), or reversal patterns in uptrends. You are looking for the initial wide range of higher highs and higher lows to narrow as price converges at the apex. You also want to see at least two reaction highs (touching the upper trendline), and at least two reaction lows (touching the lower trendline). At that point, the presumption is that once the rising wedge breaks down, it will do so very quickly and retrace, or give back, all of the gains from the entire pattern. Unlike single candlestick reversal patterns, such as the bullish hammer, it is not nearly as important to wait for confirmation of a rising wedge breakdown, since once the lower trendline is broken the rate of downside acceleration tends to violently increase.

Beyond price, a lack of strong buying volume as a stock works through a rising wedge supports the bearish thesis. In confirmed downtrends, bears are looking for an overall lack of volume in the wedge to give them additional confidence that it is merely a continuation pattern before heading lower. In an uptrend, though, you are looking for signs of distribution. In other words, you want to be on watch for a situation where heavy institutional players are selling their shares to exuberant retail buyers.

As an example, let’s take the current daily chart of AAPL. Clearly, Apple has been in an overall uptrend on multiple timeframes since March of 2009. However, over the past month there can be no doubt that sellers have been dumping shares in size, as denoted by the large red volume bars. At the same time, price has been making fresh 52 week highs, despite the distribution. Further, drawing simple support and resistance trendlines over the past month yields our bearish rising wedge pattern, from which price broke down on heavy selling volume last week. A downside price objective of $326 would retrace the entire move.

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Inside The PPT, the seasonality statistics for JMBA are quite impressive, indeed. As you can see below, returns during March and April over the past five/six years have been staggering, especially when compared to other months of the year. What accounts for this? Well, the easy answer is that the JMBA business model is going to thrive in most parts of the country during the late spring and summer months. So, hedge funds are probably accumulating in March and April to get out in front of the expected uptick in earnings.

Seasonality

Month Avg % Return Total # Months # Months UP # Months DOWN January -0.458 6 2 (33.33%) 4 (66.67%) February -2.579 6 4 (66.67%) 2 (33.33%) March 21.524 5 4 (80%) 1 (20%) April 18.093 5 3 (60%) 2 (40%) May -0.783 5 2 (40%) 3 (60%) June -4.646 5 1 (20%) 4 (80%) July -15.503 5 0 (0%) 5 (100%) August 1.03 6 2 (33.33%) 4 (66.67%) September 10.529 6 4 (66.67%) 2 (33.33%) October -9.214 6 2 (33.33%) 4 (66.67%) November -1.546 6 3 (50%) 3 (50%) December -4.797 6 3 (50%) 3 (50%)

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Beyond the statistics, a look at a zoomed out daily chart supports the idea that JMBA is ready to move up and out of a nine month base.

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DISCLOSURE: I have no position in JMBA…yet.

The recent spike in many commodities has led to countless sensational headlines, including the fact that cotton has seen its highest nominal prices since The Civil War. Indeed, trying to precisely time tops in strong bull markets is as tough as it gets. However, there are certainly times along the way when it is correct to back off the action and wait for better entry points, since even bull market corrections can be fierce and unforgiving to complacent longs.

Over the past two months, equity and commodity bulls have aggressively fought off any semblance of a modest pullback. With that said, cotton finished this week with extreme volatility and volume, with a huge gap up on Thursday, followed by an even higher volume selling affair today. The net result is a weekly candle that is often referred to as a bearish shooting star reversal candlestick, where price spikes up only to be aggressively faded to close the given time period of the candle near or at the lows (In this case, a week on the weekly chart). A few weeks ago, I noted that cotton printed a similar candle, albeit not quite the monstrosity of this week’s. However, the bears proved clawless, and cotton promptly ripped higher to negate the candle. As always, the absolute key to acting aggressively on a reversal candlestick is CONFIRMATION–In this case downside follow-through to the bearish shooting star.

In other words, if commodity bears are going to make their move–If only for a few weeks–then they had better make progress next week. If not, then we will know that the commodity inflation genie is so far out of the bottle that he’s already traded it in for a nickel.

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With every sloppy chart in sight breaking out, it is understandable to see traders shunning all forms of discipline. After all, if only price pays, then what good are a bunch of stupid trading rules by which to abide? So, the chase is on, and it is without shame. Indeed, there is nothing wrong with playing along in a market that is hell-bent on perpetually dripping higher. The key is to do so within the context of setups that are “clean.” As an example, let’s take a look at a stock that I am currently long: NCT.

This is the type of chart that I am comfortable holding in a market filled with setups that I would usually consider to be less than attractive, in terms of the risk/reward profile. Here, however, we see a tight base that broke to the upside on volume, and is now flagging high and tight. I am keeping a tight leash on all positions here, and will let 12631 members know in real-time when I sell, but consider this chart of an example of the kind of setups that I believe are only worth playing when the broad market is stretched, but even more stretched by the day.

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I suppose I could post a slew of daily charts of the major indices, but they would all show essentially the same thing: A slow drip higher that is becoming laughably predictable.

Heading into an OPEX Friday and a long weekend (market closed on Monday for Presidents’ Day), I am curious to know where you think we are going from here. Topping out? Melting up? Blowing off?

Chime in. Vent. Mock…