Author Archives: Rob Moreno

Buyer Fatigue Setting In As The S&P Approaches New Highs

The elation over the major market indices approaching new highs is being replaced by market fatigue. At least that’s the way it appears on the charts. Take a look at the S&P 500 Index daily chart.

We have noted for some time here and on Twitter, that the new high level at 2873 is also an intersection of technical resistance. As the index has advanced closer to this alliance of resistance, overall daily range has diminished and more recently a series of high wick candles have formed. High wick candles reflect an inability to hold higher price levels. Their importance increases when there are several in a row and they form at important levels of resistance.

Additionally, the rate of change indicator, a reflection of pure momentum, is moving in bearish divergence to price and is crossing below its center line. Negative readings reflect price declines. Also, Chaikin money flow has moved into negative territory. This is an early suggestion of distribution not accumulation. Overall volume continues to remain a problem for the broad market, as it has for some time.

These developments suggest buyer fatigue. Likely, there are simply no new buyers left to propel the S&P higher. There could also be some early stage selling, as existing holders are losing confidence in the ability of the index to break through multiple layers of resistance and sustain a breakout.

A Good Risk Reward Trade In The Double Inverse QID

The ProShares UltraShort QQQ (QID) tracks the double inverse or -200% performance of the Nasdaq 100. It has been tracking lower as the Nasdaq has been attempting to make new highs.

While the QID has been making lower highs it has not been making lower lows. A short-term base has developed around the $37 level, and the combination has formed a descending triangle pattern on the daily chart.

The moving average convergence/divergence indicator (MacD) has been in bullish divergence to the fund price for the last two months. This is an indication of underlying upside momentum.

Money flow is still in negative territory but is tracking higher reflecting waning downside price pressure.

If the QID were to bounce off its $37 base and break above the downtrend line, the triangle pattern’s measured upside move targets the $44 area. This would also intersect with the declining 200 day moving average.

There is an inherent risk associated with trading any multiple inverse fund, but there is also the potential for added reward. So, a good risk/reward scenario represents opportunity.

The nearby levels of current resistance (entry point) and support (stop loss level) on the daily QID chart, define a low risk/reward set-up.

It should be understood that this would be a highly speculative and potentially volatile trade. It requires a clear and disciplined trading plan.

Remember that preservation of capital is job one.

This Stock Market Rally – Trust But Verify

The major stock market indices have moved back up to challenge their all-time highs. The Russell 2000 Small Cap Index broke out to new highs today, piercing through the upper end of a rising triangle pattern and closing near its highs of the session.

The S&P 500 index and the Nasdaq Composite are right at or approaching their former highs, but the Dow Jones Industrials, the early leader in this recent phase of the longer term rally, still has some work to do.

On close observation though the S&P chart is a bit concerning, at least for the short term.

The daily chart shows the index moving higher since early April, within the confines of a rising channel pattern. It successfully retested the March 2800 high level several times, and then continued on to its seemingly appointed meeting with its January 2018 high.

That January 2018 all-time high level is currently intersecting with the four month rising channel resistance line. Today it was tested and the S&P backed off, forming a gravestone-like doji candle on the chart.

A gravestone doji is a candle with a narrow opening and closing range situated at the bottom of its overall range. It reflects a failure to hold its higher level and is sometimes seen at tops.

It would be ludicrous to infer from one-day of suspect price action that a market top is in place. But it may not be as easy as some think to penetrate and, more importantly, sustain these new high levels. It could take several failed attempts.

Take another look at the block of index charts and note how close the support lines are to their current prices. If there were multiple failed attempts to breakout and one of the resulting pullbacks took the S&P or one of the other indices (including the Russell), back through its nearby support level, the technical picture would take a bearish turn.

Just a reminder that a successful breakout requires confirmation. Generally, it needs several days of upside action or a successful retest of the breakout resistance-turned-support line. Trust but verify.

Lockheed Martin Breakout Could See A 10% Upside Move

An inverse head and shoulders pattern has formed on the weekly Lockheed Martin (LMT) chart, and shares are testing neckline resistance. A breakout could power a return to the highs made earlier in the year.

In 2017 LMT saw a 60% increase in its share price, making a high in February of this year. But the highs in February were part of a large bearish eveningstar pattern on the weekly chart that initiated a reversal in the stock price.

An eveningstar formation is made up of a large white candle, followed by a narrow opening and closing range doji candle, and completed by a large dark candle. It represents a transition in sentiment from bullishness to bearishness and is often seen at important tops.

Following the eveningstar there was one final attempt to make a new high in April but then Lockheed shares moved back below their 40 week (~200 day) moving average. They eventually retraced 50% of their 2017 gain.

The subsequent bottoming process just above the 50% retracement level at $290 has developed into an inverse head and shoulders pattern. Neckline resistance is located at $327.50 and is being reinforced by the 40 week average.

Moving average convergence/divergence has made a bullish crossover reflecting positive short term price momentum and trend direction. Chaikin money flow has been moving higher since the inverse head low was made in July, and is attempting to enter positive territory. This suggests early buying interest in the stock.

Lockheed shares are currently retesting the neckline of the inverse head and shoulders formation. If they were to break through that resistance, the pattern’s measured move, which is calculated by taking the height of the pattern and adding it to the neckline, targets the old highs made at the beginning of the year.

This would constitute a 10% move which would return them to the $360 area.

Cummins Cup And Handle Breeakout

Cummins (CMI) rallied over 160% from early 2016 to early 2018. Then it quickly reversed course and began a seven month decline that saw it retrace 50% of its rally range.

It bounced off that 50% retracement level this month situated at the $132 level and moved back up to the 38% retracement level. On the weekly chart the MacD can be seen making a bullish crossover and Chaikin money flow is moving into positive territory. These indications reflect positive price momentum and money flow.

Cummins has been basing on the daily chart above $132 in what has developed into a cup and handle pattern, with rim line resistance in the $143.50 area. The relative strength index on this time frame is tracking higher and the Chaikin money flow indicator suggests the stock is under accumulation.

Today the stock price is breaking above the intersection of resistance defined by the cup and handle rim line and the downtrend line drawn off the highs of the year. The pattern projects an upside price objective measured by taking the depth of the cup and adding it to the rim. It target’s a return to the 200 day moving average which is currently located in the $156 area.

Copper – A Period Of Recovery And Potential Outperformance

The movement in the price of spot copper and the movement in the Dow Jones Industrial Average (DJIA) are very highly correlated. That means they generally move higher or lower in tandem.

There are, however, periods of divergence and those periods can provide a trading edge.

When a stock is moving higher but the MacD indicator, for example, on the chart starts to move lower that is a bearish divergence. The stock would be expected to follow the indicator lower. Conversely, when a stock is making lower lows but, let’s say the RSI is making higher lows, this would be an example of a bullish divergence. The stock would be expected to catch up with the indicator.

Copper has been selling off since June this year after it broke the support line of a large horizontal triangle. The stock index has been consolidating under 25500, but making higher lows above a rising 40 week (~200 day) moving average. So, copper prices have been moving sharply lower since June, while the industrial index has been making incremental higher lows. This is a divergence between a normally correlated pair.

During this time the correlation coefficient, which tracks the relationship between the metal and the industrials, has moved below its center line. This is a reflection of the disconnect between the two.

This week the DJIA broke above the 25500 level and closed on its high, forming a bullish hammer candle on the chart. Spot copper managed to move off its weekly low at $2.55, and close slightly higher.

The $2.60 area for copper is the downside measured move of the large horizontal channel pattern breakdown. It is also the 50% retracement level of the 2016 low in copper and this year’s high. It would be a logical place for a bounce in the metal and a bounce in copper would likely fuel additional upside in the industrial sector.

Continued strength in the DJIA will take it closer to new highs and that in itself could provide further upside potential. If copper starts to bounce off it recen lows, it could see even more rapid upside as the spot price reverts towards a more normalized correlation with the Dow.

Bottom line: copper should outperform in an environment of continued industrial strength.

Gaming The NVIDIA Earnings Trade – Based On This Technical Correlation

There is a close correlation between the movement in the stock price of Electronic Arts (EA) and the price action in NVIDIA (NVDA) shares.

This is not surprising, NVIDIA chips are used in gaming processors and by cloud-based gaming streaming services, and Electronic Arts is a major supplier of content and services for game consoles and streaming service providers.

But this relationship could help in gaming a trade around today’s NVIDIA earnings report.

The graph at the bottom of the chart illustrates the EA and NVDA price correlation. A reading above 50 reflects a positive correlation and a negative reading indicates a negative correlation. NVDA and EA are positively correlated a large percentage of the time.

Electronic Arts usually files their own earnings report just days before NVDIA. The blue lines on the chart are prior reporting days for EA and the red lines the following NVDA reporting days. In its most recent July 27 report, EA beat estimates but lowered forward guidance. The stock price was punished severely, down double digits in the days immediately after, and it has yet to recover.

NVIDIA shares dropped below their 50 day moving average in sympathy but held a long standing uptrend line. They bounced off the trendline, recovered the average, and have tracked higher going into today’s report. The correlation coefficient indicator has moved into negative territory reflecting the diversion between the two stock prices.

A reversion towards a closer correlation would seem likely. The price action in Electronics Arts shares has been the leading indicator. The implication then is NVIDIA shares should move lower following their Thursday earnings report.

One caveat, note the reaction in NVDIA shares after the late October 2017 Electronic Arts report. EA shares moved lower after the company reported and continued lower into the end of November. NVIDIA dropped the day after it reported in early November but bounced higher the following day. Shares continued higher for the next two weeks before they reversed and headed sharply lower into early December. In December both stocks had returned to their normal positive price correlation.

What Is Going On With This Market?

In yesterday’s session the major market indices closed near their lows and the day before they closed near their highs. Today they dropped hard at the open retesting minor support levels. By mid-session they were on the mend and ultimately closed well off their lows forming hammer-like candles on the charts. Tomorrow they will likely open stronger, but ultimately the ability to hold higher levels into the weekly close will be key to determining their intermediate term direction.

What’s going on? Let’s take look at the charts.

The S&P 500 Index touched an intersection of resistance last week. At the time, we tweeted out about the event. This 2870 area of resistance is defined by the channel uptrend line the index has been trading in for the last four months, and the January high.

This test was followed by several days of decline and then the trap door open today. The DJIA was down over 320 points at one point in the morning before the indices began a mid-session recovery that eliminated nearly half their losses.

On the S&P chart, the retest of minor support at the 2800 level initiated its bounce, and a well-defined hammer candle formed at the close. The hammer is a bullish indication.

The NASDAQ Composite has been moving within the confines of a large rising triangle pattern. Today’s low retested the triangle support line and the 50 day moving average. As it approaches the apex of the triangle, it becomes increasingly likely that a decision will be made as to the future direction of the index. A strong move could could follow.

A break above the rising resistance line could trigger a move higher. We have seem hyperbolic moves after similar trading patterns. On the other hand, a break below pattern support and an intermediate to long term pullback could follow. There are several levels of horizontal support indicated on the daily chart.

The Dow also tested its 50 day average and ultimately formed a hammer candle on its chart. Things are looking a little more bearish on the Russell 2000 Small Cap Index.

It bounced off the support line of a rising triangle but remained below its 50 day average. The bounce was weak and the day’s price action formed a bearish engulfing candle on the daily chart. An engulfing candle did not form on the iShares Russell 2000 ETF chart.

So, while the day-to-day price action has been erratic, it has been playing out between well-defined levels of support and resistance on these index charts. If that is any comfort to whip-sawed traders.

The Reason I Shorted The Tech Sector On Monday

I bought some ProShares UltraShort QQQ (QID) at the close on Monday. At this early point in the Turesday trading session, it looks like I should have waited to make the buy. Stops are in place and I’ll evaluate the traded as it progresses. The thinking behind the trade is still intact and it centers around the FANG stock charts.

Facebook (FB) shares are still reeling from the hit they took last month. They had managed to get back above their 200 day moving average early last week. but faded on Friday. Facebook closed under the average on Monday and at the lower end of its trading range. This price action formed a high-wick doji, or narrow opening and closing range, candle.

Amazon (AMZN) is the only one of the FANG group to make a new high this month, but an ominous “gravestone” doji formed on its chart on Monday. This candle has a narrow opening and closing range that is positioned at the bottom of the overall candle range. Its implication is obvious: price could not hold its highs of the day and retreated back to where its started.

It seems unusual to say but Netflix (NFLX) shares have been trending lower. A bearish shooting star candle formed on its chart on Monday. One formed on the Alphabet (GOOGL) chart. This candle has the same negative connotation as the shooting star or the gravestone doji.

A single day’s candle does not a trend make and I may have been early on this trade. But I’m in the position and now all efforts are on monitoring the position, making adjustments to the stop if necessary, and basically managing any potential loss.

If it turns out to be profitable, that’s good, too.