Alcoa Breaks to New Highs

May 12, 2008: 11:53 PM CST

Alcoa (AA), a Dow Jones component that manufactures aluminum and is taking advantage of the recent materials rise, broke key resistance to make a new high in 2008 today, and could continue higher to make potential all-time highs soon.

Let’s see what’s up:

The stock broke a rectangle consolidation period from $34 to $39 per share, giving us a $5 range. If we add the $5 to the break-out zone of $39, then this gives us a classic price projection of $44, which would challenge all-time high prices.

The stock has been doing well throughout May, and volume is surging to the upside, further confirming the rectangle break. Notice how volume trailed off as the triangle consolidation pattern formed – this is in line with the classic texts of technical analysis.

Let’s pull it back to the monthly chart for a clearer perspective:

First, notice the recent volume surge in the stock (black arc).

Next, notice that the $40 per share zone has been significant resistance for quite some time. In mid-2007, price surged above this level but quickly fell the same month, which actually registered a negative month close (akin to a failed breakout which led to a price reversal).

Now, price is eeking above the $40 per share resistance zone and will mark the first monthly close above this zone if the stock can hold onto its gains for the next two or so weeks.

Also, notice price forming a clean ascending triangle – the break of which (to the upside) would potentially project prices to $60 or beyond (long-term, of course).

This stock is certainly one to keep your eye on to see if price can continue its momentum and inch its way to new highs over the next few weeks or months. Of course, it’s good for the Dow to see such a stock having excellent relative strength.

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Intraday Semi-Trend Index Action

May 12, 2008: 8:59 PM CST

Today’s US Stock Market Indexes surprised us with a semi-trend day.  The day began with a perfect gap-fade and then gave us a ‘double-distribution’ trend day.  Let’s look at it!

In the DIA 5-minute chart, we see the day start with an opening gap that was filled and then the market trended in the direction of the original gap.  Remember that gaps initially are momentum impulses, and we expect momentum to lead price action.  It’s an excellent strategy to buy pullbacks in momentum moves.

Price then rose steadily and crested into a steady pullback to the rising 50 period moving average, setting up a better buy signal which rewarded the patient with higher prices.

I also pointed out this morning the “U-Turn Buy” that was developing on the indexes and I hope you profited from its development and resolution.  Such ’steady’ moves can produce easy profits because the price action itself is so clean.

Let’s look at the 15-min SPY chart to get a better view of this pattern:

The red arrow represents the lengthy momentum divergence which preceded the U-Turn (or Saucer) set-up.

The signal to enter would have been (aggressively) when price breached the falling 20 period moving average and (conservatively) when it breached the 50 period (first purple arrow).

The confirmation zone, or strong trade idea, came as price pulled back cleanly to the rising 20 period moving average following a new momentum high.  The target would have been at least the 200 period moving average if not greater due to the structure of price.

Notice how – if you look at the daily chart – the $138.50 price area represented the daily 20 period moving average.  The balance gently shifted from sellers to buyers – such moments are amazing to watch unfold in the marketplace.

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A Little U-Turn Buy Action with Gap Fade

May 12, 2008: 12:12 PM CST

So far, the US Stock Market Index trading has been stable using simple strategies that I have discussed frequently on the blog.  Let’s examine the U-Turn Buy (or Saucer/Rounded Bottom) action along with the classic Gap-Fade trade today.

You can almost ‘feel’ the balance shifting through simple visual inspection of the price action alone to see that the strength of the selling weakened as the pace of the buying first met selling and then exceeded it.

The “U-Turn” or shift in price was complete (or confirmed) with a positive momentum divergence.

Also, on the daily chart, price sat at support where the even shift began, which further added confirmation to the potential for (short-term) higher prices.

Let’s talk about the gap-fade trade that worked out marvelously this morning:

Quickly, the ideal gap-fade technique is the following:

1.  Fade the gap down to yesterday’s close

2.  Exit the ‘fade’ at the close and then reverse your position to trade in the direction of the impulse

3.  Exit at the intraday high (or sell half the position there and perhaps play for a larger target with what’s left… if you’re aggressive).

These three parameters hit perfectly today, though it’s not always the case that they work out as ideal as today’s action has.  I always recommend printing out and annotating any ‘near perfect’ patterns or trades that develop.

Good trading!

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Market Status with Materials and Healthcare

May 11, 2008: 11:24 AM CST

Happy Mother’s Day!  Let’s take a quick view at the Dow Jones Index, along with two key sectors which I’ll put in focus today – Materials and Healthcare.

First, the Dow Jones ($INDU):

The market failed at the resistance provided by the (now) falling 200 day moving average, and from prior support at the 13,000 level (which also serves as a sort of ’round number’ psychological resistance.

There is obvious support beneath the market, via the 50 period moving average along with the rising trendline drawn since March.  Whether or not the market holds at these levels is the question, but I would guess that the support zones ‘appear’ on the surface to be stronger than the resistance levels, but the market often behaves in ways against the obvious solution.

Breaking 12,500 on the Dow could set up a retest of the lows at 11,700, but a clean break above 13,200 could set up an eventual retest of the 13,600 or perhaps 14,000 level.  Trading at these levels will generate a good deal of media coverage, because there still are plenty of expectations that the market will (or should) be headed lower.

Let’s focus on two sectors now:

The Materials Sector (XLB), which has done very well this year, but could be forming a Head and Shoulders Pattern.

Notice the key momentum divergence that has occurred as price cautiously probes new highs.  The rounded swing action has formed a potential ’slanted’ head and shoulders pattern.  A break of the neckline, via the ‘measuring rule,’ could take price down to the $40 level which would coincide with the rising 200 day moving average.

Unsurprisingly, Materials stocks have been doing well lately, including Alcoa (AA) and US Steel (X).

Let’s look at the worst performing sector of the year – the Health Care sector (XLV);

The highest price of the year was formed around January 14th with the low being in mid-March.

A rectangle consolidation (continuation) pattern formed throughout February and met its measuring objective (which I also wanted to highlight) on the chart.

It could also be considered a ‘measured move’ via a type of horizontal strange (flat) flag style pattern, where the measured move is equal to the ‘pole’ or price action preceding the consolidation.

Price is now struggling to overcome key moving average resistance, but the worst could be over for this sector (provided it does not break beneath the $30 level on to new lows).

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Dollar Bumps Weekly Resistance

May 10, 2008: 2:02 PM CST

The US Dollar Index staged an impressive rally on the daily charts, but is currently failing to surmount resistance via the strong 20 period moving average on the weekly chart.

Notice how the falling 20 period moving average (exponential) has served significantly as overhead resistance, thwarting any rallies ever since late 2006.

Price recently tested the $74 zone, and is currently failing to penetrate the average, which could set-up a retest of the $71 area before a potential base of support is built… or the index could probe new lows.

At the same time the Dollar Index is set to make new potential lows, the CRB Commodity Index made a new high this week, potentially preceding a low in the Dollar.  Oil led commodities higher, testing an all-time high of $126 per barrel.

Let’s continue to watch these markets and how they may affect the overall US Stock Market, or particular market you’re currently trading.

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