Rounded Reversal in RIMM with Broken Support

Feb 12, 2009: 10:25 AM CST

Research in Motion (RIMM) recently completed a Rounded Reversal pattern on the Daily Chart, though with this week’s earnings gap, the stock has broken through EMA support.  Let’s see the pattern and its resolution.

RIMM Daily:

RIMM

The Rounded Reversal is a calm, interesting pattern that expects a stable shift from sellers to buyers as price moves forward in time.  It is always accompanied with a lengthy, multi-swing momentum divergence as we see here.

Price began making new lows steadily, though each new low was made with a higher low in the Momentum Oscillator.  Eventually – although it is impossible to predict – the final low was put in place as buying pressure began to match and then exceed selling pressure, and an upswing in price began in early December.

The pattern gives a great ‘edge’ because the initial stop can be very close to your entry (though not unreasonably close) and once in the position, it is generally best to use a trailing stop or exit once key EMA support is broken – as occurred in this instance thanks to an earnings announcement.  Often, the profit (when achieved) is sometimes many multiples of the initial stop.

What’s in store for RIMM now?  It’s not comforting that price broke the upward sloping trendline that has been in place since early 2009, nor that it broke expected confluence support from the rising 20 and 50 EMA.

Use this example to get a good idea about the Rounded Reversal pattern and how it might be traded effectively.

Corey Rosenbloom
Afraid to Trade.com

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Mid-Week NewsFlashr Editor’s Picks

Feb 12, 2009: 9:57 AM CST

It’s time again for the quick mid-week update from the Editor of the NewsFlashr Business Blogs section:

Barry Ritholtz provides two quick image posts that show us the “Word Cloud Map” of Secretary Geithner’s speech and then links to an image of the Economic Stimulus Plan Mapped Out.

Mish discusses the recent government activity and provides his comments in two recent posts: Insanity Prevails (regarding the Bail-out) and Bernanke – So Far So Good (on Credit Moves).

Dr. Steenbarger shares with us his analysis and tips on how to identify and trade Range Breakouts. Breakouts from Trading Ranges

Investment Postcards shares with us a video that has Nouriel Roubini and Nassim Taleb discussing how to predict financial crises – very interesting. Dr. Doom and the Black Swan

Rob Hanna shares with us some insights from his research that describes why it’s important to consider initial positioning when considering research/analysis: The Importance of Positioning in Analysis.

Chris Perruna shares some insights and warnings about trading double-leveraged funds (and shares his recent experience): Oil Double Long ETN (DXO)

Trader Gav, who has been working on automated trading systems, shares his thoughts on what we really need to know: “Learning to adjust your mindset, to accept the change, to really understand your battle field, with these, start to enhance or alter your strategies.” What You Really Need to Learn….

The Dividend Growth Investor shares with us seven companies that have raised their dividends recently, which might be worth a second glance. Seven Notable Dividend Increases in the News

Corey Rosenbloom

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Weekly and Daily Take on Gold Prices

Feb 11, 2009: 1:56 PM CST

A few readers have asked me to take a look at Gold prices and I will do so, starting with a possible Elliott Count on the Weekly chart and then dropping down to see resistance and an interesting structure on the Daily Chart.

Gold Prices ($GOLD) Weekly:

Gold Weekly

Ok, let’s take this slowly.  I’m not saying this is the exact Elliott Wave Count, but to me it is a plausible one and I encourage other readers to comment your thoughts.

If this count is correct, it assumes that the whole structure from 2008 onwards is a massive, complex corrective phase, perhaps winding into a double Zig-Zag of sorts – or Double Flat.  The “X” Wave is a separator between ABC Corrective phases.

Gold peaked just above $1,000 an ounce in March, 2008 before heading down into a nasty, confusing pattern.  We may have had a three wave ABC into September’s lows (each wave subdivided into 3 waves) and then a connector wave (X) that then resolved into a second ABC pattern.

If this is the case, then we’re missing the final C wave down to complete the pattern, and it seems – until proven otherwise by a break above $950 – that the market wants to finish the pattern, but this is clearly not the only interpretation out there.

As I write this, Gold is up around $930 per ounce, so the entire bearish projection is invalidated with a close above $950 (which also gives you a great risk-reward).

If you’re thinking bearishly, keep in mind that we’ve officially broken and closed above a downward sloping trendline that connects the three prior price highs from early 2008.

Let’s drop down to the Daily Chart.

Gold Prices ($GOLD) Daily:

Gold Daily

Taking the larger structure into view, we see a possible ascending triangle (which perhaps has bullish implications) however, we also see some elements that give the bulls pause.

We may be completing a “Three Push” pattern (which is a bearish reversal pattern) into key resistance, as confirmed by the negative momentum divergence that’s set-in.

Also, one can draw an Elliott 5-wave impluse up, but I caution against that because each 1, 3, and 5 wave seem to be about the same length (in price) and also proposed wave 4 would enter the price territory of Wave 1 so we most likely have to rule the move from November to February as another complex Corrective Wave (meaning going against the prevailing larger correction or downtrend).

However you interpret it, Gold is at an extremely critical level right here.  Just a little strength to the upside and we will have momentum to make a run back to $1,000 per ounce if we break out of these levels here… but on the same ticket, we could fail miserably at the current price levels and head back down to test the $700 level which would likely end the corrective phase and launch us back to new highs after that swing completed.

Dig deeper and do your own analysis here – the resolution will be interesting.

For a different take, watch Adam Hewison’s recent video “Fibonacci Analysis in the Gold Market“.

Corey Rosenbloom
Afraid to Trade.com

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Extreme Divergence and Rounded Reversal in USO US Oil

Feb 11, 2009: 9:48 AM CST

I wanted to highlight the possibility for a trend reversal or at least low-risk opportunity in the US Oil Fund (USO), or at a minimum, show a large-scale structure potentially playing itself out.

USO Daily:

USO

Before reading, keep in mind that there’s no guarantee this pattern will produce the expected result, but it’s worth a casual glance at a minimum.

First, notice the price forming a Rounded Arc (I call it “Rounded Reversal”) from the September swing down to current prices.  Keep in mind that we made a new low (actually an all-time low) on Tuesday, so by no means is there no risk in this position.

Second, notice how the 3/10 momentum oscillator has formed seven positive divergences as price continued to make new lows – that’s extreme.

I see one of two possibilities:

1.  We are indeed forming a true “Rounded Reversal” and the oscillator is hinting at growing positive momentum and we’ll see a reversal to the upside very soon

2.  The momentum oscillator is giving a false signal, similar to that on extreme trend days and so the indicator/signal must be ignored (like I always say, “Turn Off Indicators on Trend Days” or on major moves”)

It will be very interesting to see which scenario plays out and how to adjust expectations if needed.  This is a huge structural development and it can have a major impact on the chart and of course how oil affects other markets IF we do get a reversal.

Finally, whether or not Oil reverses, it is a good idea to take into account this structure (so you can trade it when it sets up on other stocks/markets) because it is a very low-risk opportunity.

Why is it low risk?

If you enter long right here, you would be able to place a stop very close to price (perhaps two or so percent beneath your entry) but would be able to play for a very large target if you’re able to capture in close to the bottom IF a reversal takes place.  Depending on your stop-loss (and if price reverses), you might have a large multiple reward to your initial risk (perhaps 10 to 1 or greater).  This is more of a swing or position trade than a scalp trade.

Do your own analysis and make your own decision, but over time, you’ll do well to find trading opportunities that offer low risk but high reward… even if you’re ‘right’ on 50% of your trades.

Corey Rosenbloom
Afraid to Trade.com

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5 and 15 Minutes of Downside Doom in the DIA

Feb 10, 2009: 7:55 PM CST

Let’s look inside the price action of the 5 and 15 minute chart of the DIA to see the clues preceding the reversal down and also an example of an extremely powerful trend day.

Let’s start with the 15-min structure that I almost highlighted to you last night:

DIA 15 min

I almost pointed out the “Rounded Reversal” and multi-swing Negative Momentum Divergence on the open blog but decided against it because I believed I’d look foolish doing so as I thought Geithner would reassure Wall Street with his plans and the market would race higher.  Well, that didn’t happen, and the market ‘fell off a cliff’ before he was finished speaking today and never really looked back.  I’ll keep my political thoughts to myself.

From an educational standpoint, take a good look at the large-scale “Rounded Reversal” and how price followed the script off the reversal and breakdown through the 20 and 50 EMAs – complete with a “Cradle” or Confluence EMA resistance trade at 11:00 EST (how convenient!).

Dropping down to the 5-minute structure gives us the entries and risk points to trade the powerful Trend Day Down:

DIA 5 min

Well, it sure didn’t feel like we’d have a trend day down when the markets opened and filled their opening gap (giving a profitable trade for those nimble among us).

One has to let technicals take a back seat to the major news or announcements – such as a Fed Decision or major policy speech like Geithner gave – but then again, sometimes it’s amazing how accurate they (technicals) can be even in the midst of such rampant volatility.

As Geithner began speaking, we had a bear flag/EMA confluence resistance trade that signaled a short-entry which wound up hitting and exceeding the target literally in 10 minutes.  Price formed a two-bar flag (it really wasn’t enough to signal entry) before plunging back down to new lows and forming a second new momentum low.

At this point you should have suspected that we had a Trend Day on our hands and switched off your indicators (you did that, didn’t you?).  The only indicator that I’ve found to be useful on trend days is the 20 and 50 EMAs (or your preferred moving average combination).  Sell any pullback to the key EMAs.

Seriously – Turn Off Indicators on Trend Days.  You’ll save yourself thousands of dollars.  Do not read any positive divergences into the latter part of the day.  Do not find any buy signals in the stochastic or RSI.  Get short and stay short (or get long and stay long on an up-trend day).  You’ll thank me later.

Continue studying Tuesday’s Trend Day action for additional clues so you can be ahead of the game when the next trend day occurs.

Corey Rosenbloom
Afraid to Trade.com

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