Author Archives: Rob Moreno

Possible Triple Bottom On The Caterpillar Chart

Just last week it looked like Caterpillar (CAT) had broken above the rim line of a bullish cup and handle pattern. The pattern projected an upside price objective that targeted a new all-time high.

It was a very strong looking chart and all the technical indicators were tracking higher.

The MacD momentum indicator had made a bullish crossover and the accumulation/distribution line was tracking higher and above its signal average. A double bottom was in place and the stock had moved over its 50 day moving average.

But it was a false breakout.

Instead of heading to new highs, Caterpillar shares quickly reversed direction and dropped back down to their double bottom low in the $145 area.

Early in Monday’s session, CAT first tested the double bottom low and then reversed direction with the broadly stronger market. Shares finished the day up 3.25%, closing near the highs, and forming a large bullish engulfing candle. Now there is a potential triple bottom on the chart.

It will take a few days to sort this volatile price action out. First the triple bottom will have to be confirmed, and ultimately, for Caterpillar to return to trend, that zone of resistance between the $164.50 and $160 levels will have to be taken out.

Caterpillar is currently up one percent in the pre-market at $152.75

Time To Buy Home Depot – There’s a Bullish Reversal Pattern On The Daily Chart

The decline in Home Depot (HD) shares this month has been dramatic, but the sell-off may have reached an inflection point. The $175 level has been tested three times this month, the last being the central candle in a morningstar bullish reversal pattern.

A morningstar pattern is a three-period formation that consists of a large up-day candle, followed by a narrow opening and closing range “doji” candle, and completed by a large down-day candle. It reflects a transition from bearishness to bullishness.

The $175 level is of particular technical importance because it is also the 50% retracement level of last year’s important July low and this year’s high. Monday’s close was also near the high of the session and just below the 38% retracement level.

Confirmation of the pattern requires an upper candle close above the upper $182.50 retracement level. Ultimately a move back above the 50 day moving average would confirm a return to the previous uptrend.

Bitcoin’s Base Breakout Projects A Price Target In The $16,000 Area.

Bitcoin has broken above the downtrend line drawn off the lower highs that followed last year’s $20,000 high. It is currently being skewered by the 38% Fibonacci retracement level of that memorable 2017 high and this year’s reaction low.

This is a big breakout from a technical perspective but there have bee a lot of lines drawn on this chart over the last several months, and a number of false breakouts from potential basing patterns. So the question is: is this the real thing or is it just fantasy.

There are an infinite number of outcomes over time, of course, but let’s consider the shorter term higher probability moves.

The optimal price action, in my opinion, would be for the current intermediate term trend to remain in place and for Bitcoin to continue to make higher highs and higher lows above an extension of the one month uptrend line. Repetitive and constructive price action that defines a well-tested tend line gives investors confidence and attracts new money.

Another possible scenario, is that the uptrend line is broken and fails. This would probably take the price of Bitcoin back down to the $9100 level. If this happens sooner than later, it would create a channel with the 38% retracement level acting as resistance and the 24% retracement level as support.

A third guess, is that Bitcoin moves above the 11,200 level but meets resistance at the 50% retracement level and tracks along horizontally between those two levels of support and resistance. Channel price action with intermittent false breaks along the way.

The final scenario, is that Bitcoin gains even more traction over the weekend. The move picks up steam and breaks through the 50% retacement level. This is not the optimal outcome from my perspective. It would encourage profit taking and accelerate volatility.

So these are four of the more highly probable outcomes in an infinite set of outcomes. Two are positive and two less constructive. Again, anything can happen, and my simple analysis gives a 50%/50% probablity that Bitcoin will move higher or lower. Not helpful. But from a subjective perspective the chart has taken on a more bullish tone to my eye.

This is what I’m seeing.

The price action this year has formed a rudimentary inverse head and shoulders base with neckline resistance at the 38% retracement level in the 11,221 area. Recent price action could also be seen as a cup and handle formation that shares its rim line resistance level with the cup and handle neckline. Now if you measure the depth of the cup and add that amount to the rim line, the pattern projects a potential target price in the $16,569 area or just below the 79% retracement level.

The stock market had a bad week but Bitcoin had a good week. I would have expected Bitcoin to drop as investors liquidated speculative positions in Bitcoin to cover margin calls in the stock market. That did not happen, in fact Bitcoin may have replaced gold as a safe haven play, because the SPDR Gold Shares ETF (GLD) was down 0.59% last week, while Bitcoin was up 15%.

Bitcoin is a speculative play and erratic price action can take trend lines and price patterns and turn them to rubble. But the obvious noted, the recent price action on the chart is constructive and encouraging. The next big milestone will be recapturing and holding the 50% retracment level in the $12,883 area.

That level of recovery will get the market’s attention.

S&P 500 Index – What Would It Take To Turn The Weekly Candle Positive?

There is a particular importance to the appearance of the weekly candle.

It is “blended” candle or an amalgam of price action over the week, and as such, it contains more information.

A candle reversal pattern on the weekly chart is more significant than a similar pattern on the daily chart because it implies a change in the intermediate term trend, as opposed to a short term change.

The current weekly candle will not be fully matured until the close of trading today. If the S&P index were to close at the same level it closed at on Thursday, it would form a large dark bearish engulfing marubozu candle.

A marubozu candle is a large dark candle which opens opened near its high and closes near its low. In this hypothetical example, its range would encompass the entire range of the previous week’s candle. This would qualify it as bearish engulfing candle which could a signal an end to the bounce off the February low and a reversal of the intermediate term trend.

So what would be required for this week’s S&P 500 index candle to turn technically positive?

One option would be for a weekly hammer candle to form. The hammer candle has an opening and closing range in the top half of its overall range, and a long tail or lower shadow. It is considered a bullish reversal candle and sometimes marks a “hammer bottom.”

In order to form a rudimentary hammer candle at this point in the week the S&P 500 index would have to return to its weekly mid-range, which is back near 2725.

This would require a 46.73 point gain in the Friday session or about a 1.6% move above the Thursday close. It would tighten the range between this week’s open and this week’s close, above the candle center line, and form a rudimentary weekly hammer candle.

If the index could accomplish this amazing feat of strength, it would change the complexion of the weekly chart and suggest that the bounce off the February low (also a hammer candle) has more room to run.

Apple Chart – Watch For Another Doji Cluster

Tweeted this out earlier today:

On January-23, just before Apple shares began their 12% decline, we saw this pattern on the daily chart and warned of the potential for a deep pullback.

Apple is back in the $180 area, watch out for dojis.

So, the sell-off on Wednesday contributed to the formation of another high wick candle on the daily chart. The gap down near $168 may have to be filled before Facebook shares make a new all-time high, particularly if another doji cluster forms.

The Pattern On Yesterday’s Facebook Chart Suggested Today’s Decline

The Facebook (FB) chart was trying to tell us something on Tuesday. An eveningstar formed on the daily timeframe.

An eveningstar is a three-period reversal candle pattern that is often seen at important tops. It consists of a large up-day candle, followed by a small opening and closing range “doji” candle, and completed by a large down-day candle. It represents a transition from bullishness-to-bearishness.

The moving average convergence/divergence indicator at the top of the chart has been tweaked to reflect the weekly MacD oscillator reading. It made a bearish crossover months ago and has been tracking lower, suggesting an internal loss of positive price momentum.

The Chaikin money flow indicator at the bottom of the chart has also been heading lower.

This lethal combination of price action and money flow caught up with Facebook earlier this month, and it continues to be a drag on the stock.

Bitcoin – Watch These Key Fibonacci Levels

Bitcoin retraced back up to the 38% Fibonacci retracement level of its all-time high and February low. This Fibonacci level intersected with the downtrend line drawn off the December 2017 and January 2018 highs, presenting reinforced resistance.

At this point, just as it did in January, a bearish eveningstar reversal pattern formed on the daily chart marking a top in the short term uptrend.

An eveningstar is a three-period candle pattern that consists of a large up-day candle, followed by a narrow opening and closing range doji candle, and completed by a large down-day candle. It represents a transition from bullishness to bearishness.

Monday’s bullish large body candle held above the 23.6% retracement level and is retesting the downtrend line. In order for the eveningstar pattern to be negated, the 50% retracement level needs to be recaptured and price advance from there.

The Retail Investor Left Out – While XIV Trade Was Done In Secret Behind Closed Doors…At Night.

First, let’s understand what did not happen. The now infamous, VelocityShares Inverse VIX Short Term ETN (XIV) did not malfunction; it did exactly what it was supposed to do. It dropped 90% when the Volatility Index (VIX) dropped 45%.

The problem that many people have been highlighting about the XIV is that individual retail investors should not be using this particular product as a trading vehicle. That is absolutely true but retail traders did not start the cascade of selling in the VIX. In fact, they were deliberately kept out of it.

The VIX is a tool primarily used by hedge funds and institutions, and these “market participants” don’t like to make their trades public. They find liquidity in “dark pools” which are private and unseen markets of liquidity. And they often trade after-hours or in the pre-market.

That is what happened on Monday and before the market opened on Tuesday. Undetected pre-market and post-market trading, disclosed at the open on Tuesday.

So, in my opinion it wasn’t the product that hurt the retail investor. It was the fact that a majority of the trading that took the XIV lower was done at night…behind closed doors.

The retail trader was left out of the trade until it was too late. What would Michael Lewis say?

Short-Volatility ETF Plunges Over 60% In After-Hours Trade

Today from MarketWatch:

Shares of a popular exchange-traded fund designed to bet against volatility plunged in after-hours trading on Monday. The VelocityShares Daily Inverse VIX Short Term ETN XIV, -14.32% lost 62%, after getting crushed 14% in the regular session. Meanwhile, an exchange-traded fund designed to bet on volatility surged after-hours, as the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN VXX, +33.48% leapt 32%.

…and from CNBC:

Volatility ETN crashes from CNBC.

and, from the Financial Review:

The rapid unwinding of complacent markets may have claimed its first victim after a Wall St exchange-traded fund which gains from falling volatility crashed in after hours trade, triggering the closure of a related Tokyo-listed product.

The $US2 billion VelocityShares Daily Inverse VIX short-term exchange-traded note, trading in New York under the ticker XIV, was hammered 14 per cent overnight as the volatility index, or VIX, spiked amid the worst fall for US stocks since August 2011.

But in after hours trading the fund’s price crashed from $US99 at the close to $US20, or by just shy of 80 per cent, Simon Ho of Triple3 Partners told The Australian Financial Review.

That had analysts wondering whether investors had grown nervous the fund would trigger a clause in which the fund would wind up in the event of losses in excess of 80 per cent.

The inverse volatility listed indexed fund dropped over the regular New York session on Monday night only to crash in …
The inverse volatility listed indexed fund dropped over the regular New York session on Monday night only to crash in after-hours trade.
“It’s hard to say whether [traders] at the end of the day knew that it was going to be in breach of that rule,” Simon Ho of Triple 3 Partners said. Mr Ho is an expert in volatility and manages the Volatility Advantage Fund.

In a strong sign of things to come, this morning Nomura Europe Finance announced that its Tokyo-listed exchange-traded inverse VIX product “will be redeemed early, after a condition for early redemption was triggered due to movements in the underlying index”.

The XIV fund has proved extremely popular among investors who have bet on the extended period of calm on markets would lead to continuing low and falling volatility.

Last year the fund made a 180 per cent return. But many experts, including Mr Ho, have been warning of the risks of a sudden and devastating effect a return to more normal levels of volatility would have on some of these products.

“To date it’s only been a three-day sell off but it’s been powerful enough trigger this kind of response.”