“This…is not meth.” -Walter White
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[youtube:http://www.youtube.com/watch?v=sGN3SBVIjjA&feature=related 550 412] Comments »The 30 x 20 Tell
As the session moves into the New York lunch hour and beyond, keep an eye on the 20 period moving average on the 30 Minute Chart of both the SPY and S&P 500. If the bulls are going to put in any kind of serious bounce, then you are looking for them to get above–and hold–that reference point. Alternatively, if the bears are going to deliver another blow with their newfound momentum, then they should be able to take advantage of a rejection from the 20 period on the 30 minute chart.
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Mr. Market Addresses Buyers Last Friday
That’s what happens when you’re late to the bull party…
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[youtube:http://www.youtube.com/watch?v=YYfC5e9Kn-E 550 412] Comments »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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Apple Turnover for Breakfast
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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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Another Con(firmation) Job
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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