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

Continue Reading…

Perhaps there should be a disclaimer for traders in Potash (POT) stock:  “This stock is for Risk-seekers only.”

Why’s that?  Over the course of the last three years, Potash shares skyrocketed from $40 per share to peak at $240 per share – a 600% increase – only to plunge 80% in less than half the time (6 months to be exact) back to the $50 per share level in late 2008.

Not wanting to disappoint, share prices have now tripled to the $150 level as we turn the corner into the latter half of 2010 on take-over bids.

That rocket-ride from the $80 level to the present $150 level occurred after the stock sprung one of the most violent bear traps I can remember.

Let’s see it all as it played out and note where we are now on the larger scale.

First, Potash (POT) monthly:

Without getting too detailed on the chart, we can see the typical flat-phase that gave way to the slow rise from 2004 – 2007.

Share prices entered a period of “realization” then “euphoria” from 2007 until the June 2008 peak before the plunge back to the $50 area as 2008 came to a close.

This was at the same time Crude Oil plunged from the $147 level down to $35 per barrel – with the commodity now trading back at the $75 level.

The take-over bid sent Potash shares surging, springing a bear trap that we can see on the weekly chart that trapped a lot of shorts in a painful squeeze – painful, but the stock did give plenty of warning signals ahead of the gap surge.

Here’s the weekly frame:

I’m showing the Fibonacci Retracement grid just as a reference, though with stock-specific news such as takeovers, price can easily blow through expected resistance levels.

Price also broke through the parallel trend channel as drawn at the $135 level, and share prices are now in “open air” territory with no obvious resistance anywhere.

What’s interesting to me – and what serves as a great lesson – is how the Bear Trap developed then sprung, trapping bears in losing positions and teaching a lesson on how active trade management – not bias – is critical when trading.

Take for example the trendline and 200 day SMA break in July 2010 as price sliced under support at the $100 per share level.

That’s a classic and very high-probability short-sale trade trigger that likely led many traders to short on the breakdown of $100.  They should also place stops above the EMA confluence and price resistance at $100.  Those that did were ok – they’re not still holding short at $150 per share.

Price did breakdown to test (almost) the $80 per share level before reversing higher four weeks in a row.

Here’s the key – look where I labeled the first arrow at the $105 level when price gapped strongly above the EMA convergence at the $100 per share level.

That’s “not” supposed to happen (if you’re short).

But – it happened – so bears needed to go ahead and take a stop-loss on the position (assuming they did not already exit earlier to lock in profits.

I have a saying I repeat frequently to members of the daily reports:

“If something SHOULD happen but does NOT happen, then it often leads to a LARGER than expected move in the OPPOSITE direction.”

The upside break in Potash is one of the best examples of this concept on a large scale.

With the breakdown in support under $100, price was “supposed” to continue heading lower, at least to the $80 per share level (almost touched) and lower if under $80.

However, that did NOT happen.  Price then rallied, re-tested resistance, and then shattered above it.

To bears, this was not “supposed” to happen.

But it did.

And it led to a larger than expected upside break in the opposite direction bears were anticipating.

By the way, price steadily continued higher for the next three weeks, breaking major resistance levels on the daily chart.

On August 17th, share prices gapped up $30 from $110 per share to $140 per share on sudden news of the BHP offer to buy Potash Corp.

Bears who stubbornly held short ahead of this news were warned.  Price ’should not’ have gone back above $100 per share but it did.

We can never know when a take-over deal – or a bit of unexpected good (or bad) news will be released that ’shocks’ share prices.

However, charts usually send out signals ahead of such major events.  Options experts say they can pick-up on this information in the options markets.  Chartists sometimes can as well.

Charts may not tell us exactly what we should do (buy or sell) but they often tell us when risk is high (to be short) and when we might be better on the sideline.

Use this example as a lesson in how something that wasn’t ’supposed’ to happen – did happen – which was an early “take cover!” (if short) signal weeks ahead of the huge upside gap.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Continue Reading…

I’m pleased to announce that John Forman of the Essentials of Trading recently made available the work he’s been compiling for the Trader FAQ Project.

What is the Trader FAQ?

Over the last few months, John gathered a list of top questions he has received from new and developing traders over the years and compiled the most ‘frequently asked questions’ into a list.

I think he saw that this project was too big for one person to tackle, so he then asked fellow established traders, authors, analysts, systems developers, fund managers and other leaders in the trading community to answer the questions from their experiences.

What developed was the New Trader FAQ, which John has published as an eBook and made readily available for traders to purchase and download.

The questions are divided into Ten Segments and include topics such as:

Markets and Instruments
“The Big 10″ Questions
Market Analysis
Trading Systems
Trading Psychology

You can browse the full set of questions at the “New Trader FAQ Questions” page.

I submitted answers to three of the questions and I was honored to be asked to be a contributor to the project.

Other contributors include:

Dr. Brett Steenbarger of TraderFeed
Ray Barros of Trading Success
Rob Hanna of Quantifiable Edges
Mark Wolfinger (options) of Expiring Monthly

You can see the full list of the 12 contributors (including John Forman) via the homepage.

For a disclosure, I am a contributor and affiliate of the Trader FAQ project and John Forman’s Essentials of Trading.

Take a look at the more information page to see if you could benefit from this resource.

It’s a good place for brand new traders to start, as the contributors often answer the same question in different ways based on their market (stocks, futures, FOREX, options), style (swing, day, position traders), and experience.

Corey Rosenbloom, CMT

Continue Reading…

It wasn’t long ago -August 6th to be exact – when I highlighted the exact same concept I’m about to show in this post – in regards to the ‘warning signals’ given prior to an afternoon intraday reversal.

Be sure to read my prior lesson post:

“The Four Early Warning Signals Given Before the Intraday Reversal of August 6th”

With that in mind, let’s look at the intraday SPY (similar structure to the @ES Futures contract or other major market ETFs/Futures contracts) and see how those lessons paid off again today.

(Click for full-size image)

Remember, we started the session with a sharp down move that continued from yesterday’s activity.

What were the exact – and repeatable – signs that the market was more likely to REVERSE than to continue trading lower?

1.  Dual Positive Momentum & TICK Divergence

First, we had a dual positive divergence, coming in as shown above from the 3/10 Momentum Oscillator and NYSE TICK.

Look closely at the push to new intraday lows under $107 – while price made a new intraday low, both TICK (look closely) and momentum made HIGHER lows in a classic positive divergence (warning sign).

2.  Hidden TICK Sign of Strength

Next, we had price push up to the 20 EMA and as price pushed slightly higher – clearly NOT making a new intraday high – we had TICK form a new intraday peak high (near the 800 level).

I have little green and red dots on both my TICK chart below and SPY (price) chart above to help me see the TICK extremes better so I can spot divergences and new TICK highs/lows clearer.

Notice the two New TICK Highs – I call these “Signs of Strength” (or “Hidden Signs of Strength”) that formed at 11:30 am and 12:00pm – when price was NOT making a new high.

That’s another early warning sign of a likely trend reversal.

3.  EMA Price Breakout (Trigger)

Finally, we had the actual confirmation – via price – with a breakout above the 50 EMA (blue) and short-term horizontal resistance at the $107.30 level.

Notice the price compression that took place before the breakout as price was ‘trapped’ between the 20 and 50 EMAs – I always find that interesting when it happens – it’s the sign of a likely breakout yet to come.

From the price breakout, we had a rally – then second consolidation – into the close.

Let’s review:

1.  Positive Dual TICK and Momentum Divergence
2.  Hidden TICK Sign of Strength
3.  Price Break above 50 EMA and Resistance

Look for those three signals – technically two signals (the divergence and the Sign of Strength) to form and look for the confirmation (step 3) to come via price.

It’s another lesson of the importance of active trade management (if you were strongly short this morning) and how bias can blind you to evidence to the contrary – in this case, classic bullish early warning signals.

These are the type of lessons and examples I show to members each day in the Idealized Trades Reports.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Continue Reading…

Rather than getting down in the nitty gritty and doing a detailed Elliott Wave Count on gold – or any market for that matter – I often find Elliott Wave concepts best suited for showing me whether a market is in a “Corrective” or “Impulsive” phase, and knowing that gives me insights into what the higher timeframe expectation is and where the market is likely heading.

I correctly used/showed this concept in a blog post entitled:

“Signs of a Distribution Top?  A Look at S&P 500 Intraday Elliott Wave Insights.”

Review that post for a detailed explanation of what I was seeing at the time (in terms of the market shifting intraday to CORRECTIVE waves to the upside and IMPULSIVE waves to the downside) and how the market now has indeed confirmed the downward turn that I showed early on the Elliott insight post.

Here’s the current intraday chart (120-min) of Gold Futures (@GC) – let’s see if we can make sense of it in the same way.

(click for full-size image)

A quick review of the difference between impulsive and corrective waves (or swings):

Impulsive Waves show motion/movement, and generally do not overlap each other.  These show the direction of the higher timeframe and likely direction of price continuation.

Corrective Waves show stalemate/pause/sideways action and almost always overlap each other.  They show correction or “reaction” against the “action” of the higher timeframe.

You can have a lot of fun counting waves and some people are really good at it, but for most people, it’s enough to pinpoint the difference between a corrective or impulsive movement in the market.

Case in point – the ‘impulse’ from April to the May 2010 peak of $1,250 per ounce is a good example of a series of impulsive waves (swings) in gold.

Though the whole move was an upward impulse, you can see little/smaller upward impulses that I’ve highlighted that continued to suggest higher prices were likely as the uptrend continued.

The little down or sideways phases – not highlighted – were the smaller corrections as price “waved” its way higher.

We had a swift downside move and then a steady rise in price from $1,180 back to a new contract high of almost $1,270 on June 21.

This is a more advanced concept, but price “impulsed” upward waves in what was actually a rising larger-scale corrective phase – as evidenced both by the overlapping larger waves (look closely) and the price collapse (impulsive move) that occurred when price broke down from the bigger corrective rising pattern.

It’s one of the most confusing aspects for new traders learning Elliott Wave to discover that corrective “B” waves that occur after a 5-wave sequence to new highs CAN and sometimes DO make new absolute price highs… just before a violent downward impulsive Wave C.

It looks like that’s what happened here with the initial Wave A occurring from $1,250 to $1,170 then the larger “Corrective” Wave B pushing up to new price highs to peak on June 21, which then gave way for a big Wave C (at least on this timeframe).

But look very, very closely at what happened in terms of the “corrective” and “impulsive” wave structure that began after that peak and after the breakdown from the “rounded reversal” pattern.

We began “IMPULSING” to the downside and “CORRECTING” to the upside… or in other words, we began making really big swings down and smaller, overlapping swings on the way up.

I highlighted the downswings accordingly during this time.

Price continued in this fashion all the way down to a new swing low at $1,160.

The important question now is:

“Are we Impulsing higher or Correcting Higher?”

I think it’s clear – right now at least – that we’re impulsing higher, at least that’s what the 60-min chart shows:

Again, click for a larger image.

I’ve highlighted what appear to be the “impulsive” (non-overlapping, actionary) waves and drew trendlines around most of the corrective or “re-actionary” overlapping waves.

As long as we keep seeing this pattern, it implies that we can expect higher prices in gold, but watch the pattern closely to see if there’s any change in structure.

From a pure price standpoint, it’s also bullish as long as gold continues to make higher swing highs and higher swing lows – that’s the definition of an up-trend.

Unless we see any sort of sign of weakness – via a trendline break or a shift in corrective/impulsive short-term wave structure – we could easily retest the $1,260 level again, but be sure to watch closely at all the overhead price resistance there.

Try not to get too caught up in the intricate details – always maintain perspective on the larger picture.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Continue Reading…