Herbalife Nutrition’s (HLF) stock price dropped sharply in late May after news that Carl Ichan had sold 10.5 million of his shares in the company. Since the announcement, the stock has traded back up before consolidating between contracting Bollinger bands.
This price compression has reached an extreme level, and a narrow horizontal channel has formed between the $55 level and the $53 level on the daily chart.
Periods of very low volatility like this one are often followed by a high volatility resolution. The “pressure” builds as the stock price is squeezed and then there is a “blow-off” break from the tight range. The move can be either up or down but it is usually a big one.
Herbalife’s former CEO Michael Johnson and current Executive Officer sold just under 850,000 shares of the stock on June 6, at $52.13 a share. The sale was valued at $44 million, well below the $552 million Ichan sale, but still significant.
The usual technical momentum and money flow indicators on the Herbalife chart are relatively neutral. But the graph at the bottom of the chart does suggest that this contraction phase may be resolved by a sharp downside move.
The graph shows the percent difference between the 50 day moving average and the 200 day moving average. The 50 day average has been somewhere between 15% to 20% above the 200 day average for the last month.
This is the largest diversion between the two averages since Herbalife has been trading, and everyone knows about reversion to the mean.
It’s all about timing. There is, very likely, a volatile move coming in the stock price and two of the major averages have diverted from each other by an historic margin. The technical inference is that Herbalife is headed lower and the move should be swift.
Bitcoin has broken out of an inverse head and shoulders base and is tracking higher. The move is similar to the bullish action that began at the end of April this year and continued into early May.
It looks like Bitcoin will make an attempt at breaking through the longer term downtrend line that the May high helped define. If it were to penetrate that barrier, it could spark a second phase of cryptocurrency mania.
One way to trade any renewed interest in things crypto and block-chain related is through a proxy play. Overstock.com (OSTK) is one of these proxy stocks and it is breaking out of a bullish basing pattern of its own.
Overstock.com is an e-commerce company that is also developing cryptocurrency and blockchain projects. It’s stock price has been correlated with the movement in bitcoin shares.
Shares dropped sharply in the first quarter of this year. Then they began a four month period of consolidation under horizontal resistance in the $41 area. Overstock jumped over 10% in Tuesday’s session and penetrated the consolidation resistance line.
Bitcoin continued higher overnight and Overstock is trading modestly higher in pre-market trading.
Bob Lang, the founder of ExplosiveOptions.net and part of TheStreet.com’s Trifecta Stocks newsletter team gave his technical take on three stocks in the biotechnology sector, on the “Off the Charts” segment of Mad Money tonight.
Cramer’s charts suggest big-name biotech stocks Gilead and Celgene have more room to run from CNBC.
Gilead Sciences (GILD), Celegene (CELG), and Illumina (ILMN) have been laggards in the biotech space but Bob believes and Jim agrees, they are prepared to head higher.
The Financial Select Sector SPDR Fund (XLF) is nearing a technical inflection point on its daily chart.
This year the fund has been making a series of lower highs above horizontal support in the $26.50 area. This price action has formed a large triangle pattern on the daily chart. Earlier this month the support area was successfully retested and now the triangle resistance or downtrend line is being retested.
But this time the downtrend line is intersecting with the 50 day and the 200 day moving averages, adding additional levels of reinforced resistance.
The significance of a breakout is increased by this trifecta of resistance. The XLF and the financial space in general would be expected to rally big if it were broken. A measured upside move from the triangle pattern projects to new highs for the fund. A failure at this point and subsequent break below triangle support, however, implies a potential retracement back down to the XLF’s 2017 lows.
The price action in Electronic Arts (EA) is closely correlated to the price action in Activision Blizzard (ATVI), as would be expected with the two biggest names in the gaming industry.
In trading on Monday shares of both companies were down and this large dark down-day candle completed the formation of a eveningstar pattern on their daily charts. This bearish pattern, as many know, is a three day reversal formation that consists of a large up-day candle, followed by a narrow opening and closing range “dpji” candle, and completed by a large down-day candle. It represents a transition in investor sentiment from bullish to bearishness, and often marks the completion of an uptrend.
Activision and Electronic Arts both moved lower in early trading this morning but have since returned to roughly unchanged. The eveningstar pattern is invalidated after a close above the middle doji candle. There is no measured move downside price target associated with an eveningstar pattern. There are only conventional percentage retracement levels or areas of previous resistance-turned support.
NVIDIA (NVDA) the big name in gaming chips has been losing momentum after previously testing an upside trend line.
At the beginning of the month, shares bounced off the support line of a large rising triangle pattern as the stochastic oscillator moved out of an oversold condition. The stock has been unable to recapture its 50 day moving average and complete the second half of the return to triangle resistance. This is very similar to the price action after the April retest of the support line.
Price action in NVIDIA and Electronic Arts is closely correlated so if the bearish scenario of the eveningstar pattern plays out in the gaming stocks, it would imply weakness in NVIDIA. Likewise, if NVIDIA shares are able to recapture their 50 day moving average and continue higher, the gaming stocks would be expected to return to their primary uptrend.
The weekly chart of World Wrestling Entertainment (WWE) has gone hyperbolic.
The stock price has diverted widely from its 40 week moving average. On the daily chart the 50 day average is over 40% higher than the 200 day average. These diversions are the most in the history of the stock price.
It’s impossible to say when a reversion to these means will occur but when it does it could be swift and volatile. It is important for those long WWE or those looking to enter from the short side to be vigilant for early warnings signs.
One such warning sign may have appeared on the charts this week. A large doji candle formed on both the daily and weekly time frames. These particular candles are called long legged dojis because their narrow opening and closing range is situated near the middle of a wide overall range.
Doji candles suggest investor indecision because the stock saw a lot of movement both higher and lower after the open, but it finished the session by closing exactly where it started.
These dojis often mark the tops of sharp rallies and are very often associated with blow-off tops.
Initial confirmation would require a break below the two month uptrend line on the World Wrestling Entertainment daily chart. Shorts should use tight disciplined stops because a stock with this type of upside momentum won’t go down without a fight.
The S&P 500 Index has been making a well-defined series of higher highs and higher lows, since it bottomed in early April. A very bullish looking rising channel pattern has formed on the daily chart.
Friday’s close took out the February high, the relative strength index is tracking higher, volume is light but the direction of money flow is positive. It appears to be all good and perhaps it is.
There is one troubling aspect, however, not so much of the chart but of the index itself.
It is hard to believe but just three stocks, Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT) account for 70% of this year’s gains. Here is a link and a video:
These three companies are responsible for 70% of S&P gains from CNBC.
The influence of several big technology names is, to a large degree, determining the direction of the broader market.
Now take a look at the number of stocks in the S&P 500 that are above their 50 day moving average.
When the S&P made its June high about 75% of the stocks in the index were above their 50 day average. But when the index made a higher high last week, only 67% of the stocks in the index were above their 50 day average. This is a 10% divergence.
The takeaway is that several big tech names have hijacked the broader market.
All will be well as long as they can handle the load. The converse is also true. If one of these names should falter, the entire market is vulnerable.
There is a 20% outstanding short interest in shares of Party City Holdco, a speciality retailer that provides party supplies. This is usually not a good fundamental sign. Short sellers are very often right about a stock.
But when the stock has been under consolidation for a while and looks like it is poised to break out of a technical pattern, then a large short interest can be a good thing for traders. It can power the classic short covering rally, when weak holders rush to cover their short positions and consequently the stock rallies.
On the Party City weekly chart the stock can be seen breaking above a long term downtrend line that marked the 2017 and 2018 highs. Shares then began trading in a horizontal channel pattern delineated by resistance in the $16.25 area and support at $14.00, just above the 40 week moving average.
The stochastic oscillator is moving higher reflecting an increase in positive momentum, but more importantly are the money flow readings. These indicate an increase in investor interest in the stock this year and accumulation.
On the daily chart it is clear that Party City is in the process of breaking out. The long short-squeeze trade is a speculative one designed for a quick profit or a quick loss. Protecting capital is the prime directive.
(Note to readers: please notice that no cheesy “party” references were used in this copy. It wasn’t easy.)
Docusign (DOCU) became a publicly traded company 53 trading days ago. The e-signature software provider made its May debut at $38 and then rallied sharply, to a $64 closing high the following month. After making its June high, however, shares quickly reversed direction and in just the next two weeks, retraced 50% of the initial 68% gain.
This took the stock price back down to the $52 area which is also the current location of the newly tracked 50 day moving average. At this nexus of 50 period technical point in both time and price, a bullish candle pattern has formed called a morningstar pattern.
A morningstar is a three period pattern consisting of a large down-day candle, followed by a narrow opening and closing range “doji” candle, and completed by a large up-day candle. It reflects a transition in investor sentiment from bearishness-to-bullishness, and often marks important lows in price.
In addition, there was strong positive volume and money flow in Thursday’s session and the stochastics oscillator has moved out of an oversold condition.
Docusign is a good risk/reward long trade at its current price using an initial percentage stop under the 50 day moving average.
The retail sector has been hot. Shares of the SPDR Retail ETF (XRT) are up over 16% from their April lows this year, but the chart suggests the rally may be nearing an end.
There is an interesting distribution of a candle formations on the XRT daily chart, which have identified short and intermediate term tops. The final piece of one of these eveningstar patterns formed in Monday’s session.
An eveningstar pattern is a three period bearish reversal formation. It consists of a large upside day, followed by a narrow opening and closing range day, and completed by a large down day. It represents a transition from bullishness-to-bearishness.
The eveningstar patterns on this chart have marked intermediate or shorter term trading highs. The one that was completed in the last session is a particularly ominous pattern, because it also looks like the right shoulder of a head and shoulders top.
Head and shoulder neckline support is situated in the $48.50 area which is also intersecting with the uptrend line drawn off the lows of the three month rally.
Moving average convergence/divergence has made a bearish crossover and Chaikin money flow is tracking lower. These indicators are signalling a loss of positive price momentum and positive money flow.
If support on the XRT chart fails the head and shoulders pattern projects a downside price target in the $46.50 area.