Interesting Weekend Stock Charts

Nov 3, 2007: 1:25 PM CST

Let’s take a brief look at some charts that have interesting implications or patterns occurring right now:

Citigroup (C):

  • New Momentum Lows, indicating the potential for lower price lows
  • Bearish surge in volume
  • Bearish potential breakaway gap or measured (continuation) gap that filled
  • Bearish Breakout from consolidation range
  • Let’s hope that, in this case, this financial stock does not lead the market

Exxon-Mobil (XOM):

  • Potential Head & Shoulders Top Pattern
  • The “Measuring Rule” for the H&S pattern would take price to $85
  • Negative Momentum Divergence
  • Bearish Increase in Volume on break of neckline
  • New four month momentum lows
  • Breakout from Triangle Consolidation pattern in mid-August has completed

Baidu (BIDU):

  • Baidu.com has almost quadrupled in price since June this year
  • Price is at the upper trend channel
  • Price successfully broke out of a consolidation range (from July to September) on high volume
  • New Momentum high recently achieved
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Bear Flag forms on US Indexes

Nov 1, 2007: 10:30 PM CST

I’m sure a great many stock market traders and especially investors were dismayed and potentially shocked by the severity of today’s action in the major US Indexes.

First, we had a large volatility up-day regarding the decision by the Federal Reserve to trim the Federal Funds rate by .25 basis points. Typically, traders expect such decisions to boost the market and usher in a new round of buying. To that thought, I suspect many traders who held their breath for the cut to materialize actually bought shares/took positions following the decision and were greeted with swift profits in most if not all of their decisions.

When the dust settled and new information was digested, we saw a large volatility gap down in the Major Indexes and then experienced an even more severe trend day down, which cut through the 20 period moving average (expected support) in three of the four major US Indexes (the Nasdaq is showing relative strength thanks to Apple, Microsoft, and Google).

An ominous bear flag and impulse sell pattern has formed on the Dow and S&P 500, forecasting a larger probability of a measured move price decline than a rise in prices, from a technical analysis standpoint.

If the Dow (and S&P which shares an almost identical pattern) complete the bear flag (annotated in purple), then the ‘measured move’ action will take the Dow to 13,300, which is only 250 points away (price fell 360 points today. Don’t expect such a large volatility move to happen again so soon). Support may also come from the strong 200 period moving average, which corresponds almost exactly with the ‘measured move’ forecast by the potential bear flag.

If you look at the chart above, the candle pattern looks similar to the “Falling Three Methods” pattern detailed as an example at this post at mGlider.com. Of course, the Dow pattern is more of a “Falling Eight Methods” which doesn’t really exist, but the idea could be the same. A falling three method looks like this (courtesy mGlider):

Whether you interpret the above price action as an Impulse Sell (a pullback retracement following a large volatility or impulse move down), a bear flag, or a falling three (or eight) method pattern, it would appear the most likely short-term price direction is down.

While price could rise following today’s action, the odds as I perceive them seem stacked solidly against the bulls. Bears, it’s time to try your luck and force your hand to see what kind of technical damage you could possibly create on the price charts.

Whether you’re a bull or a bear, be safe.

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Perfect Flag Example

Oct 31, 2007: 6:37 PM CST

The Chicago Mercantile Exchange (CME) stock recently carved out a near-perfect technical analysis ‘flag’ pattern formation that can be used as an example for further study.

Remember, a flag is proceeded by a sharp price and momentum impulse, consolidates for (usually) less than two weeks, and then ejects upwards in a ‘measured move’ that allows proper (or possible) price projection.

The “pole” of the flag serves as a measuring rule when price ejects from the flag. The best flags will be contained (price will find support) at a rising 20 period moving average.

Let’s look at the perfection of the recent CME action:

The test of the rising 20 period MA served also as an “Impulse Buy” trade due to the new momentum high preceding it. This is common of observed flag formations.

The initial flag pole began around $540 and terminated around $620, carving out an $80 price move. The breakout from the flag at $620 could have allowed for a price projection $620 + $80 = $700.

Price reached its recent high around $695, but the projections were based on rough calculations and fell $5 shy of the projected target (still an amazing and impressive run).
Had you calculated the projection from the bottom of the flag – at $610 (at the moving average), then the objective was met and exceeded by $5. Either way, a $70 – $80 potential target that was achieved in 5 days is nothing less than absolutely stellar.

Flags are often easy to perceive on a chart and are relatively easy to trade. Study them further if you aren’t quite sure what they are or how to trade them.

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Housing – Why All the Huffing and Puffing?

Oct 31, 2007: 1:20 AM CST

Analyst Sam Stovall wrote a most insightful article regarding brief historical lessons regarding past housing contraction cycles and resultant recessions. The article from Business Week is entitled, “Housing… Why All the Huffing and Puffing?”

While the entire article is certainly worth reading in detail, here are some key highlights:

“We think increased investor concerns… could be related to history lessons, which show a high correlation between declines in residential construction and recessions…. Every recession since 1960 has been accompanied by a year-over-year decline in residential construction….”

“Though all recessions have been accompanied by construction declines, not all construction declines resulted in recessions.”

“Wyss pegs the likelihood of a recession at 33%, and the reason we don’t expect this to happen is due to the breadth of the overall economy and foreign investors’ interest in a weakening dollar and the dollar’s positive impact on export demand. We also expect a proactive Fed and Treasury Department to get ahead of a recession curve.”

The author notes the positive impact that the dismal decline in the US Dollar Index will have on exports. Recall that cheaper (relative) dollars make foreign exports more attractive, meaning more sales for US companies. A falling dollar is not nearly as negative as some writers would have you believe.

Refer to the entire article for complete insights. Stovall conjectures that, although the housing decline is devastating, it will not crush the overall economy because of other forces, including a pro-active Federal Reserve and increased exports due to the falling dollar.

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Platinum and Oil Charts

Oct 30, 2007: 11:32 PM CST

Per recent reader request, here is a brief swing chart or divergence look at the Platinum and Oil charts:

(Chart: TradeStation)

Jonathan correctly identified a developing momentum divergence forming on the daily futures chart for Platinum.

The last ’swing high’ took place at $1,400 and then now we made new price highs at $1,475 and are now retracing nicely to the rising 20 period exponential moving average.

When we spot a divergence in price (with the blue momentum oscillator), then odds favor a resolution of the divergence in favor of the oscillator, using the principle “Momentum Leads Price Action.” The initial target would be a retracement to the 20 period moving average as the first line of – in this case – support. Entering a momentum divergence trade is often psychologically difficult, and you need to utilize absolute and close stops because the trade is – by nature – a counter-trend trade.

Price may be so strong in this case that it actually fails to retrace to the EMA, but more than not, momentum divergences are resolved and terminated at or through that boundary.

Divergences do NOT signal trend reversals, but only that – in this case – buyers are ‘losing steam’ as they try to push price higher. Momentum divergences are often the result of the prior swing being less forceful than previous price swings.

For those who follow concepts set forth by Linda Raschke, a “Holy Grail Buy” may be setting up in this contract because the lowest pane indicator is a standard ADX (Average Directional Index) that is set to trigger red when it crosses above the 30 threshold and trigger blue when it drops below 15. Raschke teaches that the “Holy Grail” concept occurs when the ADX increases above 30 to signal a strong trend and calls out a ‘buy’ (entry) when price retraces to its rising 20 period moving average. Technically, price has yet to do so, but traders can be on alert for it to do so should it test the moving average. Stops would go comfortably beneath the moving average.

You can recreate the ADX or moving average indicator with any popular charting software.

As a bonus, let’s look at the price of Crude Oil (futures), which has been featured frequently in the media these last few days:

I didn’t draw in the ‘divergence,’ but I think it’s actually clearer to see than Platinum or Gold (on the daily chart).

I previously mentioned the divergence setting up and we now have price correcting down off its highs in a similar manner to Platinum. Again, any pullback to the rising 20 period MA will set up the famous “Grail Buy” trade because the ADX currently stands at 35 (not shown on the chart).

Until price takes out the swing low at $85 and also makes a lower high, we still have a major uptrend in the price of oil, which can be rather bearish for the overall stock market.

Elliott Wave theorists, take note. We may have a complete three-impulse price push completing itself with Crude Oil. The chart would be a near perfect Elliott Wave pattern, except that the 1st wave was the most dynamic wave, instead of the 3rd.

Nevertheless, the chart provides evidence to the ’swing theory’ of the market – that of price moves in swings to reach balance.

We will definitely be watching other commodity prices for further signs of inflation.

With inflationary pressures sweeping most commodities, can the Federal Reserve ‘afford’ to Cut Rates this Wednesday?

 

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