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Sell Signal in Starbucks SBUX Weekly and Daily View

Aug 24, 2010: 9:44 AM CST

Ouch – Starbucks (SBUX) shares shattered confluence support this morning, both on the weekly and daily frames. Will the sell-off materialize that this support break suggests?

Let’s take a look first at the Weekly frame:

First things first – there was a persistent negative momentum and volume divergence (lower indicators) that undercut (failed to confirm) the recent push to new recovery highs at the $28.00 per share level.

We are now seeing the expected snap-back retracement/fall that they negative divergences forecast (hinted). So far – price is behaving in line with classic principles of price movement.

Price sliced through the rising 20 week EMA (something it had not done since breaking above it in July 2009) which was an initial “take profits if long” signal on the two snap-back bars in June 2010.

From there, price tested the rising 50 week EMA at the $23 level and is now trading beneath that critical support level on this morning’s breakdown.

Price also broke the 23.6% (lesser known) Fibonacci retracement support at $23.40 – notice how it held as support on the snap-back from the highs. Not anymore.

So, the weekly chart suggests that – in the short term – shares could continue their fall to test the 200w SMA at the $21.12 price or the 38.2% large-scale Fibonacci retracement at $20.25.

Any breakdown under the $20 per share level would suggest that a larger decline was at work, which would target the $18 level over time.

Of course – this all is suggested by the chart and by no means a guaranteed move – that’s a standard disclaimer.

Let’s now drop to the daily frame to see the structure and breakdown there.

Like the S&P 500, Starbucks (SBUX) appears to be forming a head and shoulders pattern, though it’s not perfect (neither is the pattern in the S&P 500). Take that with a grain of salt.

More importantly, price has broken its uptrend (with a series of lower lows and lower highs – reversing the short-term trend) and sliced under daily EMA support on all levels.

Not only is price beneath the 20 and 50 day EMAs, it recently cracked under (shattered, is probably a better word) the important 200d SMA at the $24.00 per share level.

Yesterday saw a 50 cent decline and today it looks like share are falling about a dollar – that’s near 4% (as of mid-day Tuesday).

Not only did price break the 200 SMA, but also the $24 level price support and the $23.50 low from July.

Taken together, the chart odds favor further downside price action to come – unless we see a sudden resurgence in price that takes shares back above $24 (at which point many short-sellers would likely stop-out).

Barring that, be on the look-out for the potential for shares to decline further – and with no known support above on the daily chart, turn to the weekly frame for levels – targets – to watch.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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Lesson: The Four Early Warning Signals Given Before the Afternoon Reversal

Aug 6, 2010: 11:22 PM CST

Were there chart signals the market gave ahead of the afternoon reversal and breakout into the close after the morning Jobs Report drop?

Absolutely – it turns out there were at least four early signs that odds had shifted away from the bears and towards the bulls which was confirmed with the afternoon breakout.

I wanted to share a lesson I shared in tonight’s Idealized Trades report – the four chart signals that warned of a likely turnaround in the market. These are classic technical signs that can signal a potential change in trend and it’s important to know them.

Let’s start with the 5-min @ES (S&P 500 e-mini futures contract – similar to the SPY ETF) chart:

(click for full-size image)

What I do in the first section of each night’s report for members is teach applicable trading lessons from the current day’s activity for use when these signals/trades appear in the future.

Let’s start with the four signals I’ve identified that the market gave in advance of the afternoon breakout – which could have given you ample warning to exit your intraday short-sales and/or get long to play the breakout as it developed.

1. Failed Impulse Sell

Generally, after a market makes a new price, momentum, and TICK (market internals) low, we would expect lower prices yet to come. A good trade set-up – that I call the “Impulse Sell” – occurs when price rallies into resistance after a sharp downward thrust. We expect lower prices ahead.

However, when a high-probability trade set-up fails – as happened in this case when the market traded lower but did not retest the session low – then that is an initial sign of hidden bullish strength that the bulls ‘thwarted’ or busted a classic sell signal.

That’s not enough to expect a reversal, but it is the first clue that “Things may not be as bearish as they seem” or “Bulls may be stronger than the chart is revealing – as they just busted a sell set-up.”

2. Rounded Reversal Formation

In the reports, I define three types of intraday structures: Trend Day, Range Day, and Rounded Reversal. Rounded Reversals are the ‘enemy’ of trend days.

You can also think of it as a “Scallop” or “Arc” pattern, but when price takes on the form of a rounded arc, I call this a “Rounded Reversal” and it has bullish implications of a slow but steady/stable reversal.

I drew a green arc under price to show the curvature of the market that also showed hidden bullish strength building.

3. “Kick-off” Sign of Strength

We monitor TICK in relation to price highs and lows for confirmation/non-confirmation. TICK should roughly mirror what’s happening in price. Anything unusual – like a divergence – sends a signal.

A “Kick-off” occurs when the TICK makes a new intraday high while price is NOT making an intraday high – and the further price is away from making a new intraday high, the more powerful the Kick-off Signal is.

Look at #3 at 1:30 CST (13:30). I created an indicator to overlay TICK highs on the price chart, as revealed by little green dots. It helps me see the signal better to spot divergences and Kick-off signals – like this.

If you look only at price, you would say “Oh – price is making a new swing high” but if you compare to TICK, you see yet another “Hidden Sign of Strength” as TICK pushed up to a new high on the session.

That is a very blatant sign of strength that many traders miss – and it is a very powerful signal that odds strongly favor higher prices yet to come.

4. Bollinger Band and 50 period EMA Breakout

I’m not sure this gave you much of a ‘warning’ but it was the final signal needed – the final nail in the bearish coffin for the day – that odds strongly favored a reversal. This was your execution signal to get long – or take your stop-losses if you remained in an intraday short-sale position.

In a very strong candle, price sliced through the upper Bollinger Band and 50 period EMA (blue line) at 1:50 CST. You can get long on the break to new swing price highs to play for a bullish breakout to materialize – I call this a Positive Feedback Loop because short-sellers are rushing to the exits to stop-out and buyers are now trading long for the breakout.

We would thus expect price to rally higher as long as the positive feedback loop was in effect – and when they form, they can often go longer than expected – and in this case boosting the market almost all the way to break-even on the session.

Again, these are the kind of lessons and examples I consistently teach/describe each day in the daily subscriber reports.

Lessons like this can mean the difference in holding stubbornly short after price broke-out into the afternoon session, or playing long to profit from the breakout.

The market gave signals and created a narrative of hidden bullish strength… that culminated with a powerful breakout in the close.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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Market Internals Matter! A Closer Look at the Three June Market Reversals

Jul 9, 2010: 12:15 PM CST

I frequently post updates on NYSE Market Internals positions when looking at the S&P 500 because knowing what’s “Under the market’s hood” is extremely important just just for day traders, but also for swing traders.

This post takes a look at the three market turns in June 2010 and specifically highlights the market internal divergences that forecast these turns.

Let’s first start with the June 8th bottom:

Rather than make this a text-filled post, I am going to let the charts speak for themselves.

All charts will show the S&P 500 15-min chart (candles) and then the ADD (Breadth) along with VOLD (Volume difference of Breadth).

While you may not be able to view VOLD in your charting platform, you can certainly view Breadth, which is the difference in NYSE Advancing Stocks minus Declining Stocks – it’s $NYAD in StockCharts.com.

Divergences occur when price goes one way and internals goes the other – and divergences are warning signs of a likely reversal.

They don’t guarantee a reversal, and it’s often best to wait for a break in an established trendline before shifting your trading strategy, but if you do not incorporate market internals into your short-term trading strategy, you are missing valuable clues that you can’t get anywhere else.

Both Breadth and VOLD bottomed on June 4th, though the S&P 500 formed its final swing low at 1,045 on June 8th, which marked a short-term swing low and tradeable long (buy) opportunity that produced a strong upside move.

However, that upside move itself ended in a massive negative divergence in internals as seen in the major market turn on June 21.

If you look extremely closely, market internals actually peaked on June 10th – a technicality – but one worth noting.

We had a second, lower peak in internals at the close of June 15th, where I began the arrow.

Notice the crystal clear drop-off in internals – actually turning negative on June 16th’s up day – that is a MAJOR warning sign of caution.

However, the SPX did not reverse as was forecast by the market internals divergence – internals are not magic indicators that work 100% of the time – nothing does.

So the market rallied higher and higher, to peak on a “Finger” or “Exhaustion” gap at 1,130 on June 21st.

Look closely to see that Breadth and especially VOLD formed crystal clear negative divergences – traders caught long – or who bought on this peak – did so on extremely thin ice… and when the ice broke, the avalanche began.

Market Internals Matter! The longer a market is stretched thinly higher on declining market internals, the higher the probability for a major downward resolution of the divergences – we’re talking mini-crash/reversal as opposed to a typical retracement. And that’s exactly what happened.

However, even that multi-down day series ended on its own crystal clear positive internals divergence on July 1:

Looking closely at the chart, we see the massive down-day on June 29th resulted in new lows for Breadth and VOLD – lows that held despite the market falling to the 1,010 level.

When the market hit 1,010 – a confluence support area – Breadth and VOLD both showed higher lows in a classic positive internals divergence.

And the market rallied exactly as expected from this divergence in internals.

Now, we’re facing declining market internals as the market continues its rally, which signals caution for the bulls and potential upcoming opportunity for the bears.

Save this post and reference it often – Market Internals Matter!

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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The Final Support Shelf in Goldman Sachs GS

Jun 24, 2010: 12:03 PM CST

Those who follow Goldman Sachs (GS) chart moves are undoubtedly aware of the importance of the “Support Shelf” at $130.00.

Let’s take a look at why $130 is critical support to watch for this leading financial stock – and what it might mean for the market if support holds… or breaks.

First, a price purism look at the weekly chart to see the importance of $130:

The $130 per share level reflects the prior swing low from June and May 2009 – that doesn’t make it magical, it only gives us a prior price swing low to reference.

Once price broke under the February 2010 low at $150, we then looked to target the prior swing low at $130 for a downswing which has now occurred – now we rest at that target level.

From a pure price perspective, a break under $130 sends the next price support target to the March swing low at the $70 per share level, as the move up was a singular swing without reference lows like those which formed in June.

That’s why I’m calling this a “Support Shelf” – or Edge of the Cliff or whatever colorful name you want to use. The main idea is that buyers have to hold above $130… or we could see a positive feedback loop send price much lower over time.

The daily chart offers a glimpse into a possible support bounce ahead for the stock…

We see the potential for a short-term triple bottom price pattern at the $135 level as shown. Price has formed a lengthy positive momentum divergence in the 3/10 Oscillator as well – that’s bullish.

So we could very easily see a bounce higher in the stock, but we need to see a break and close above $140 then $145 to expect a move back to $150 or $160.

That’s why the $130 to $135 level will be so important. If bulls cannot support off the weekly level and parlay a triple bottom pattern with a lengthy positive momentum divergence into a bullish price swing up… then we most likely will see a further sharp deterioration in price.

What is the alternate short-term technical pattern? Instead of a triple-bottom as shown, one could label a short-term descending triangle pattern with upper trendline at the $137 level. That will be something to watch as well.

It doesn’t really matter what the pattern is if we start to see a price break under $130 – so for investors and traders in GS, watch this level extremely closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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What Happened to Monsanto MON? Lessons from the Fall

Jun 23, 2010: 2:21 PM CST

Last night I was doing relative strength analysis on stocks to the S&P 500 year to date and found out that Monsanto (MON) was the second-worst performing stock – relative strength wise – in the entire SP500 year to date.

It wasn’t that long ago that Monsanto and Potash (POT) were high-flying stocks that swing traders loved to trade while their prices were soaring into the stratosphere. That was 2008 – this is now.

Let’s take a look at the rise and fall of Monsanto and see where we are today.

From 2003 to 2008, Monsanto (and Potash – a similar company) was one of the best performing stocks out there, rising from the $10 level to peak in mid-2008 at $140… before a devastating collapse took the price now to $50.00 per share.

There’s a good lesson I wanted to highlight with this stock.

First, notice the “arc” pattern. This is an important point that most new traders aren’t aware of – that when price rises in an exponential arc, the price rise is unsustainable and WILL likely collapse. Not just fall, but will probably collapse.

Look for a ‘take profits’ or ‘exit signal’ when price breaks the rising exponential arc trendline. It’s like playing musical chairs – it’s a dangerous race for safety when the music stops… and some traders never hear the music stop.

Second, notice the obvious shooting star/reversal doji candle – with the long upper shadow – for the month of June 2008. Look closely to see that the 3/10 Momentum Oscillator formed a crystal clear negative monthly divergence (lower peak) at that time.

These are signals you should NOT ignore.

Rise above your emotions (such as “This stock will rise forever!”) and look at the signals from the chart – and from history.

After a lengthy rise, there is often a consolidation or deep correction – such is occurring now. I’m labeling the “A” and “B” waves, placing us currently in a large scale “C” wave down in Elliott Wave terms.

Let’s now turn from the past to the present to see where the recent short-term levels to watch in the stock exist.

Similar to the June 2008 peak, we had another short-term price peak at $85.00 that formed on a negative momentum (3/10 Oscillator) and volume divergence.

The key line in the sand – prior support at $67.50 from November 2009’s swing low and $70.00 from four ‘tests’ in 2010- was broken officially in April with a gap down and surge in downside volume (a rise in volume as price headed lower).

This was a confirmed breakout that suggested lower prices were likely – and they certainly came. Price broke the support line and carried down without stopping until the recent bounce at the $50.00 per share level.

Now we are seeing a very small positive momentum divergence, though price has since resisted against its falling 20 day EMA which lies just above $50.00 right now.

Watch the $52.00 area and the 20 day EMA for any sign of life… and unless that happens… a break under the June low at the $49.00 level signals the potential for even lower prices yet to come.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

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