Back in April this year, we wrote an article entitled “The Technical Case for a Bottom in the US Dollar.”
The premise of the piece was that the US Dollar was been putting in a base and had recently broken above a long term resistance level. The bottom line was, “It takes a while to turn the long term trajectory of the US dollar, but it looks like the start of the process.”
Here is the link to the article.
The US Dollar Index Bullish Fund (UUP) is up about 9.7% since April this year. So, what is the current status of the buck and where might it eventually be headed?
The weekly chart of the US Dollar Index shows that the basing process in April may be the head of a large inverse head and shoulders pattern. It broke above the $95 neckline resistance level in October and has continued higher.
The inverse head and shoulders formation projects an upside price objective, measured by taking the height of the pattern and adding it to the neckline.
In this case, it targets the $101.50 area.
The S&P 500 Index was unable to penetrate the 2820 level last week, but was able to hold support at its 200 day moving average. On Friday, it managed to form a hammer candle on weak overall volume.
In early Monday morning trading the index has moved below its 200 day moving average. It is trading down 25 points near its low.
Today’s close relative to the 200 dma will be a strong indication of the short term direction of the broader market. Volume will be a key component of the closing analysis.
Over the intermediate term the 2820 level is primary resistance and the open October gap down at 2685, if it is filled, should then act as support.
In the month of October the technology space, as represented by the Technology Sector Select SPDR Fund (XLK) dropped over 10%, and moved below its 200 day moving average for the first time in more than two years.
Nearly all the major players in the sector were hit and hit hard. Over the last three weeks there has been what many have characterized as an oversold bounce. Few have been confident enough to call it a bottom.
The XLK chart shows the low made in October and the subsequent rebound. The upside move pierced through a short term downtrend line and recaptured the 200 day moving average.
These are encouraging developments for the bulls but there is one potentially overriding issue. Volume last week was anemic.
The volume bars are highlighted at the bottom of the chart. Notice there wasn’t one day last week when volume exceeded the 50 day moving average of volume.
The graph below the volume bars illustrates the percent difference between daily volume and the 50 day moving average of volume. On Monday it was more than 50% below the average and even on Wednesday when the XLK rallied nearly 3%, the volume level was 18% below the 50 day average of volume. That is unusual for a day with such bullish price action.
The contradiction between price and volume reflects a lack of investor conviction. It is the contextual back drop going into a new trading week. Obviously, moving back up above last week’s high is necessary to maintain the bull case, and breaking back down below Friday’s low and the trend line is important for the bear case.
But in order to sustain either the bullish or bearish scenario, volume will have to pick up considerably. The rule applies to any stock in any sector. Without volume and committed directional money flow markets can be easily manipulated and traders made victim of volatile whipsaw price action.
A pause in price action on Thursday was not unexpected after the strong rally on Wednesday. The pause, however, could be the second leg of a three-day bearish reversal pattern possibly under construction on the SPDR S&P 500 ETF (SPY) chart. This would be the same bearish pattern that marked the October 16 SPY high and which was followed by a 6% decline in the fund price. History may be repeating.
SPY shares rallied 2.25% on October 16 forming a large white up-day candle. This was followed the next day by a narrow opening and closing range “doji” candle. On the third day there was a drop in price that formed a large dark or down-day candle. This three day sequence many are familiar with is called an eveningstar formation.
An eveningstar is a bearish reversal pattern that suggests a transition in investor sentiment from bullishness to bearishness. It is often seen at markets tops. In the case of the October 16 eveningstar, it was a temporary top that was followed by a 6% drop in price.
This week’s Wednesday rally took SPY shares up 2.1% and high was right around the $281 level. Thursday’s narrow opening and closing range formed a doji-like candle. Nearly identical to the initial price action seen on the SPY ETF in October.
The weak futures this Friday morning indicate a lower open and if there is continued downside in the session, it would complete the third candle in the previous sequence. A second eveningstar would form on the SPY chart. That would be a bearish development that could be followed by another significant retracement.
Of course, if the SPY were to stabilize and move back up though $281 resistance it would be a very bullish development.
After Wednesday’s strong rally that left no sector behind, here are four weekly charts of interest for the rest of the week.
Check out the weekly chart of CBS Coropoation (CBS). A well-defined inverse head and shoulders pattern has formed under a declining neckline. Money flow is in positive territory and the relative strength index is bouncing off its center line.
A weekly close in upper candle range would suggest that next week there would be an attempt to break through neckline resistance.
We’ve mentioned the potential breakout on another weekly chart. KushCo Holdings (KSHB) is a cannabis packaging and marketing company. Its stock price has broken above a large triangle pattern. Now it needs to hold near its current level going into the end of the week.
In this recent period of volatility in the market, we have been using weekly charts more to put daily trades into context. Here is the Southwest Air (LUV) chart and it shows the stock price bouncing off long term support in the $49 area.
It appears that positioning to the long side with this stock has a good risk/reward ratio.
NutriSystem (NTRI) shares have been pressing up against a long term downtrend line. The stochastics oscillator is bouncing off its oversold level suggesting a potential breakout move.
More importantly, the Chaikin money flow reading indicates the stock has been seeing buying interest down below the $37.50 area. An upper candle close that pierces the trend line is bullish.
Trading weekly charts requires deeper stops and consequently smaller position size to limit losses. While this strategy also limits profits, it helps prevent whipsaws in volatile markets and allows your trading thesis time to play out.
Last week we wrote here that a head and shoulders pattern had formed on the daily Apple (APPL) chart. At the time, it appeared that Apple shares were breaking down through neckline support.
The daily chart shows Apple shares trading sideways in October, while the Technology Select Sector SPDR saw a sharp decline in its share price. But now what looked like positive horizontal consolidation looks ominously like a potential head and shoulders top, with a complex right shoulder. The neckline of the formation would be situated in the $215 area…
A H&S formation projects a measured downside move by taking the height of the pattern and subtracting it from the neckline. In this case it targeted the $200 dollar area or about $5.00 lower.
Apple saw an intraday low on Friday of $197 forming a hammer candle and closed today at $203.77. It has fulfilled the pattern objective and made a small bounce.
Now some consolidation around its current level would be a healthy process to build a platform for a move higher.
Monday night on CNBC’s Fast Money, the Chartmaster Carter Worth outlined his technical analysis of the crude oil market. In the video below he says that he expects crude oil to bounce off its current test of support on the chart, and move higher.
Chartmaster says these are the bet names to buy on an energy bounce from CNBC.
On Mad Money, which follows “Fast” on CNBC, Jim Cramer presented his thesis on the energy space. Jim said “I think demand for oil is slowing, perhaps slowing enough to cause a major breakdown in price.” He thinks that the strong quarters oil companies have recently reported does not reflect economic reality. You can read his complete analysis here.
My view, while based on the technicals like Carter’s, is more aligned with Jim’s outlook.
Support on the WTIC Light Crude Oil Continuous Contract chart has already been breached. The uptrend line drawn off the lows of the last six months was taken out decisively last week. Moving average convergence/divergence is tracking lower and Chaikin money flow is in negative territory. The RSI reflects a loss in upside price momentum and the money flow level indicates distribution.
The relative strength index is in an overbought condition and the reading suggests there could be a brief bounce in price. But that previously solid six month support level is now formidable resistance, and a quick move back up to $66 is likely to fail.
The path of least resistance for oil is lower.
The iShares Emerging Markets ETF (EEM) has been in a downtrend all year. Two weeks ago it closed just below the 50% Fibonacci retracement level of its 2016 low and 2018 high. It looked like the fund price might accelerate even lower.
But in a sudden reversal last week, the EEM was up about 5.5% and a bullish hammer candle formed on the weekly chart. The question now is will there be follow-through price action this week, that retests the long term downtrend line?
Moving in on a more the more detailed daily time frame shows that the EEM fund is currently testing another important level of formidable resistance. The 50 day moving average has rebuffed numerous attempts by the fund to break higher, as the average has trended lower.
On a few occasions during the decline the EEM has held above the average for several days, but then dropped back below it. In every case it made a new lower low.
This time the EEM may pierce through the 50 day moving average which is currently in the $41.34 level. But the weekly downtrend line, which has never been broken, is just over head, situated at $41.85. It is going to be difficult for the EEM to close above this level.
Trends do change. The weekly candle is bullish and the 50% retracement level is a good psychological platform for a reversal move. But transitioning from this long term down trend will require several days or more of trading above the weekly downtrend line.
The Apple (AAPL) earnings report after the close on Thursday took the company’s share price down modestly. It was the call that followed which dealt a heavier blow. The after-hours close saw the stock price down $14.41, a drop of nearly 6.5% from its regular session close.
Well into the call, CFO Luca Maestri mentioned that effective immediately, Apple would end its policy of breaking out iPhone, iPad and Mac unit volumes in their earnings reporting. In the company’s opinion unit sales figures are getting in the way of where the real focus should be, which is the growth in services revenue.
Unit sale volumes of the iPhone is the primary metric of most analysts. This change to the company’s reporting is being viewed by the market as an attempt to hide slowing iPhone demand.
Apple’s has been the one big technology name bucking the downdraft in the sector. But now Apple is likely to be a catalyst that puts further pressure on the space.
The weakness which has continued in pre-market trading this morning indicates a regular session open that will take out an important support level.
The daily chart shows Apple shares trading sideways in October, while the Technology Select Sector SPDR ETF saw a sharp decline in its share price. But now what looked like positive horizontal consolidation looks ominously like a potential head and shoulders top, with a complex right shoulder. The neckline of the formation would be situated in the $215 area and will be broken by the lower open today, at this moment around the $209 level.
The head and shoulders pattern projects a measured move that takes Apple’s share price back down to the $200 area, which is about 10% below Thursday’s closing price.