Monthly Archives: October 2018

Alibaba Chart – A Multiple Time Frame Analysis

A follower on Twitter suggested we take a look at the Alibaba Group (BABA) chart. The stock is in a severely oversold condition and diverged sharply from its Amazon (AMZN) counterpart.

The weekly chart shows just how much selling the stock has experienced after making a June high this year. Since then it has retraced 50% of its historic range.

Alibaba was trading at $210 at its high and four months later, last Thursday’s low, it traded at $135. That is a 37% decline in share value. But after opening lower on Thursday it bounced sharply higher that same day, and followed through with a further gain in Friday’s session. So, let’s take a look at the daily chart.

On the daily time frame, the rapid stair-step decline can be seen in detail. The 50 day moving average crossed below the 200 day average in August. This is called a lead or death cross, and often signals a shift in a major trend.

Last week the drop in the broad market saw BABA shares break through their 38% retracement level and continue lower before finding support at the 50% level. The Thursday reversal here was significant and formed a large white “filled” candle. It opened on its low, saw a large move to the upside, and closed near its high. It was followed up on Friday with a gap higher hammer candle.

The relative strength index is moving out of an oversold condition. It hadn’t been as oversold as it was since 2015. Downside volume at the beginning of last week was well above the 50 day moving average of volume, but upside volume on Thursday and Friday was also, above the average.

There is no guarantee that the trajectory of Alibaba shares will continue with as much velocity as it had over the last two trading sessions. The 50% retracement level may have to be retested and there is the magnetic downside pull of the open gap in the $130 area. But, in addition to the price action and the RSI reading, the Chaikin money flow indicator, while still in negative territory, is back above its 21 day moving average. This represents the first sign that the stock is seeing some buying interest.

At this point, a pullback could be a good risk/reward long entry point for a trade. But confirmation of a true trend reversal will require some basing action above the $152.50 or 38% retracement level, and ultimately, a break above the downtrend line drawn off the highs since June.

If The February Pattern Repeats – The Market Is Headed Higher Over The Next Month

The market dropped sharply in the last week of January and the first week of February this year. It experienced a similar sell-off in the first two weeks of October. But if history repeats we should see a bounce in the Dow Jones Industrial Average, the NASDAQ, and the S&P 500 next week. The math suggests that the rebounds could be substantial.

Take a look at the weekly charts of these major market indices.

The S&P 500 dropped 8.8% from its open in the last week of January to its close in the first week of February. The peak to through decline was greater but we are using opening and closing prices for this analysis.

The very next week it saw a strong reversal and a month later it had recovered 6.6% of its earlier loss. That is a relative gain of 4.4%.

The February sell-off saw the DOW decline 10% and then rebound 4.4% a month later. This is a 2.8% relative gain. These relative gains levels are important to keep in mind.

On the NAZ chart, the February decline was about 9%, but the index bounced sharply higher over the next month. In the first week of March it was up 10% from the February low close and made a new high.

All of the rebounds in these indices were followed by pullbacks of their own. In each case, they turned out to be successful retests of their February low areas and then they continued higher.

What does this tell us about the early October drop we just experienced, and a potential recovery?

First off, this analysis is based on the assumption there is some market strength next week. It is simply another way of targeting a potential upside objective area. Like all technical measured move techniques, it has no real predictive ability. It is another tool that may be helpful in constructing a trading plan.

That said, if we use the same math that we did to measure the percentage recoveries in February and apply it to the numbers for October, we can arrive at upside objectives of equal percentage ratios.

The S&P 500 index rebounded 6.6% from its closing low in February. That translates to a 4.5% rebound in the index from its current close. Again, if we see follow through next week.

The February rebound in the DOW was 4.8%. Apply the ratio of that recovery to current conditions and it implies a 2.8% move higher.

Finally, the NASDAQ recovered all and an additional percent of its February drop. If you look at how the numbers figure relative to the recent move, a future rebound would be 8.5%. A sharply higher jump, for sure, but only enough to retest its old highs, not make new ones. Traders would probably take that right about now.

This has been a very optimistic exercise. The next trading day is a Monday and that has ominous overtones of its own. But these types of sharp rebounds have been pretty common in the past, and even if they are short lived, it would be an opportunity to reevaluate positions.

The S&P 500 – This Is The Level Of Upside Resistance To Watch

What do you do when you run out of support levels? Apparently, you bounce and bounce hard.

The Dow Jones Industrial Average is set to open 368 points higher as this is being written, the NASDAQ Composite could open up156 points, and the S&P 500 Index about 41 points above its close on Thursday.

We wrote yesterday that the action on the S&P chart this week pierced through a number of support lines, and 50 day and 200 day moving average support. There was little in the way of further technical support visible on the chart. The strong move in the futures overnight could move the indices back up to where those former levels of support will come back into play, now as resistance. Former support becomes current resistance.

Taking a look at the S&P 500 daily chart, its implied 41 point higher open will take it back above its 200 day moving average. The average then becomes support.

As far as upside resistance, there is a strong band of horizontal resistance in the 2790 to 2800 area. It was resistance in March and June and support when broken in July. It could be a formidable barrier going forward.

The S&P 500 Is Running Out Of Technical Levels Of Support

On Wednesday support at 2860 level on the S&P 500 index chart gave out. The index then dropped an additional 75 points, closing on the 38% Fibonacci retracement level of its 2018 range. This was also the area of the March and June highs, former resistance which should have been support.

In Thursday’s session the S&P saw several attempts at stabilization. As late as the final hour it made a valiant 30 point try at recapturing its 200 day moving average. That effort failed and the index faded back down to close 57 points lower, and below the 50% Fibonacci retracement level.

The 68% retracement level is situated at the 2687 level and that coincides with the June low, which was support in the past. The stochastic oscillator is at a level that, also in the past, has been followed by bounces in the index.

As the week has unfolded to this point, the fundamentals have lost their relevancy, and if the market weakness continues, the S&P 500 index running out of relevant technical levels.

SPY – The Last Time Downside Volume Was This High, It Marked A Bottom

The SPDR S&P 500 ETF (SPY) was down over 3% on Wednesday. The sell-off was powered by a 200% increase in the 50 day moving average of volume.

The last time the fund saw that level of downside volume was on a Monday, in February this year. That particular day was followed by a rebound of similar range and volume. By the end of the week a bottom had be made.

Take a look at the highlighted section on the chart at the beginning of the year. The fund had been fading since late January but accelerated lower in February.

On Monday, February 5th, the SPY dropped $11.37. Volume that day was greater than 200% of the 50 day moving average of volume. The next day it rebounded and was up $5.14 on strong volume. Two follow-up down days and Friday’s rebound marked a short term low.

It may be that the past repeats and by Friday things are looking more positive. The SPY could be higher into the end of the month. Most traders would take that outcome at this point in time.

But even if that turns out to be the case, it is still going to be a tough climb back up to the highs of the year. There was a sense of fear in market on Wednesday, particularly going into the close. In the future traders will be more likely to sell into rallies, rather than buy into dips.

Adobe Systems – Potential Triple Top

The performance of Adobe (ADBE) over the last two years has been nothing short of spectacular. It was trading around $100 at the end of 2016 and it traded above $275 last month.

But after touching the $270 to $275 level three times last month, Adobe shares began to show signs of weakness. This month they have gone straight down, piercing through the 50 day moving average, and three levels of trend line support.

It may not look like it on the chart but this decline is the lowest the stock price has gone under its 50 day average in over a year. The breakdown sets up a retest of the 200 day moving average. Adobe has not even touched its 200 day average since late 2016.

The relative strength index is tracking well below its center line, reflecting the loss of positive price momentum, and Chaikin money flow is in negative territory on heavier than usual volume.

This is not the kind of price action that investors in Adobe have seen in quite some time. The highs last month clearly look like a triple top.

But even if the stock continues to pullback, long term holders will likely wait to see the action around a retest of the 200 day moving average before making any decisions. Short sellers, on the other hand, have a speculative trading opportunity.

RightTrading Featured On Mad Money With Jim Cramer

RightView Trading was featured on the “Off the Charts” segment of last night’s Mad Money show with Jim Cramer. The piece looks at stocks that could profit in three possible future interest rate environments. Thanks, once again, to Jim and his fantastic team for the opportunity.

Click this link to see a synopsis of the segment by Tom Bemis, that was published on TheStreet.com this morning, or go to the video.

Cramer’s charts offer 3 strategies for investing around long-term interest rate moves from CNBC.

3D Systems Bearish 2-Dimensional Chart

Shares of 3D Systems (DDD) gapped sharply higher early last month, after the company reported better than expected second-quarter earnings.

They continued on an upward trajectory into the end of the month, topping out at around $21.50. At that point, the stock began making lower highs above a wide zone of support in the $17.25 area. The price action formed a triangle pattern on the daily chart.

This month DDD shares moved below their rising 50 day moving average and more recently have been forming bearish long wick candles, just above support.

The relative strength index has moved below its center line, reflecting the declining price momentum. Chaikin money flow entered negative territory approximately a month ago, suggesting distribution as the triangle pattern formed.

A break below triangle support brings into play the unfilled August gap and the potential for another sharp move in 3D shares. But this time, to the downside.

Verizon’s Powerful Breakout Projects Potentially Powerful Upside

Verizon (VZ) shares made a powerful move in Tuesday’s session. It was only a fraction over one percent but it broke through two months of base resistance and made a new all-time high.

A number of the bond-proxy stocks and those in the utility sector saw positive moves today. Verizon does have a 4.3% dividend yield. But there are technical factors that support the move.

The breakout was from a familiar “W” basing pattern which, in this case, is a continuation pattern. A strong looking hammer candle took out horizontal resistance situated in the $54.50 area. The breakout suggests resumption of the rally in Verizon shares that began in June.

The September bounce off support at the 50 day moving average is significant. The relative strength index is back above its 21 day moving average and center line. This reflects this month’s upside price momentum. Overall volume has started to track above the 50 day moving average of volume, and Chaikin money flow is turning positive. These readings suggest early but renewed buying interest.

There are several ways to measure Verizon’s potential upside from the continuation pattern breakout. One is to take the length of the prior June to August rally, and add it to the breakout level of the consolidation phase. The run from the June $46.50 low to the August $54.50 high is $8.00 and this methodology adds that length to the $54.50 breakout level. It projects up to the to the $62.50 area.

A shorter term price projection uses the height of the channel added to the break out level to project a more conservative price objective. This $2.00 move targets the $56.50 level.

In either case, the current technical condition of the Verizon chart offers a good risk/reward long entry point. The upside projections are simply technical potentialities and traders are always required to monitor and carefully manage the trade as it progresses. Capital preservation is job one.