Monthly Archives: January 2018

A group of interesting candle patterns formed on the charts of four of the most interesting stocks in the the technology sector. The price action in the fabled FANG stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL), in Wednesday’s session formed candles or multiple candle patterns that reflect, at the least, investor hesitation and, at worst, reflect signs of apprehension.

First up is Facebook which has been seeing some volatility this month and has continued to produce volatility post-market today, after reporting earnings. Following Tuesday’s gap down open Facebook was able to power back up later in the session and close up on the day.

Today a spinning top formed which is a candle comprised of a centered opening and closing range “real body” and a long upper wick or shadow and long lower tail or shadow. It is a clear visual representation of investor indecision.

Next is the Amazon chart and here there has been little hesitation or volatility, just a pictograph of a stock price that has been moving higher. In today’s session, however, an ominous sounding candle formed – a “gravestone” doji.

The gravestone is a candle whose close is at or near its opening price and situated at the low of its overall range. These candles also have long upper wicks. They are called gravestone dojis because they are often seen at or near highs after long uptrends. Now it would be simply foolish to call a top in a stock with the momentum of Amazon, and this candle will need follow-through confirmation, but it is something to monitor.

Today a bearish individual candle and a bearish three-day pattern formed on the Netflix daily chart. On Monday the positive price action in the stock formed a large white candle. It was followed on Tuesday with a shooting star, a smaller version the shooting star on today’s Facebook chart. A large dark or down-day formed in today’s session.

This three-day sequence of candles is called an eveningstar formation and reflects a transition in investor sentiment from bullishness to bearishness. It is considered a fairly reliable bearish candle reversal pattern.

Wednesday’s dark candle is called a bearish engulfing candle because it encompasses the overall range of the previous day’s shooting star candle. As you might guess this engulfing candle also is one that appears at the highs of an uptrend.

Finally, a cluster of small doji candles formed on the Alphabet chart over the last five trading days. The center three candles form a tri-star pattern, one whose second doji is higher than its first and its third doji is lower than the second. Again, the doji represents indecision and the tri-star pattern represents bearish transition.

There was a doji cluster on the C.H. Robinson Worldwide (CHRW) chart just before the company reported earnings and it did not play out well. The stock has dropped 5% and looks like it is headed lower. That decline in the end is a function of the markets interpretation of the earnings report, but the doji cluster could have been a warning sign.

The takeaway from the neutral-to-bearish candles on the FANG charts is that traders holding long positions should be cautious. This is a very powerful group of stocks so getting aggressive and taking short positions would require clear pattern confirmation and still be highly speculative.

Last week we noted:

At the beginning of the year it looked like Disney (DIS) shares were advancing towards a retest of their 2017 high, but now it looks like they will come up about a buck short.

Disney’s shares had pulled back to the $110 level where they saw some consolidation. During this time the momentum indicators began moving lower in bearish divergence to the stock price. Today the $110-level was breached in early going in the session.

Here’s an update on the technical conditions. The daily moving average convergence/divergence indicator, which is overlaid with a weekly histogram of oscillator on this chart, is moving lower on both time frames. This reflects loss in in price momentum and short term trend direction.

Stochastics has made a series of quick lower highs and lower lows and now is below its center line. The accumulation/distribution line moved below its 21 period signal average in December and has continued to track below it and lower.

Last week’s post suggested:

The price action and the technical indications imply a pullback, likely triggered by a break below the $110 support level. How deep a decline is speculation but the Fibonacci retracement levels do provide some context.
A move down to the 50% level in the $104.50 area would coincide with a reversion to the 200 day moving average.

The $110 level has been broken in trading today, but it is still early in the session. Place disciplined stops if you’re short and we’ll see how this breakdown plays out.

Shares of Wynn Resorts (WYNN) fell 20% in just two days. In that time, the stock price dropped from over $200 to $161, retracing 50% of its August 2017 to January 2018 rally range.

Wynn opened lower on Tuesday and despite pressure from a deep broad market decline, it was able to stabilize and quickly reverse direction. The stock move back up through its 50 day moving average and closed near its high of day. It reversed nearly 7% from its opening low to its closing high and was up overall 4.8% on the day.

Tuesday’s positive price action formed a large candle that completely encompasses Monday’s entire price range. This is candle is called a bullish engulfing candle and is considered a potential reversal signal.

The technical price momentum and money flow indicators have been whipsawed as they factored the volatile movement of the stock over the last three sessions. Pure price action will dictate the direction of the stock for at least a short-term.

At this point in time, Wynn shares need to hold above the $162 retracement level, which was also support earlier this month. This week there could be some upside follow-through that closes the downside gap, but the most constructive thing that could happen right now would be for the stock to begin forming a base. This base could then act as a stable platform from which Wynn shares could attempt to get back to trend.

A rarely seen bearish reversal pattern formed on the daily C.H. Robinson Worldwide (CHRW) chart one day before the company reports earnings. On Monday the third in a series of three consecutive “doji” candles appeared creating an unusual “tri-star” pattern. A doji is a candle with a very narrow opening and closing range and usually a large upper wick or shadow, and it represents investor indecision.

On the C.H. Robinson chart three consecutive dojis formed with the second in the series higher than the first and the third lower than the second. This is a tri-star pattern and it is meaningful because as Investopedia says, ” Having a series of three consecutive doji candles is extremely rare, but when it is discovered, the severe market indecision generally leads to a sharp reversal of the given trend.”

Shares of C.H. Robinson have advanced higher since their August 2017 low in two distinct stages and are up 50% in that time. The stochastic oscillator reading reflects the overbought condition of the stock and it is turning lower. Positive money flow is waning and the accumulation/distribution line has crossed below its 21 period signal average.

It is impossible to say if a top is in place on the C.H. Robinson chart or how the stock will react to the earnings report when it is released after the close on Tuesday. It is possible to say that a very rare bearish reversal candle pattern has formed on a stock chart that is severely overbought and under short-term selling pressure.

Shake Shack (SHAK) shares have had an incredible run since making a low in September last year. They were up as much as 56% earlier this month, but after making a high in the $47.00 area, they pulled back and have been trading above support at the $42.50 level.

The price action in Shake Shack over the last two months has formed a rudimentary head and shoulders top. Neckline resistance is at $42.50 and that level forms the base of a triangular area of support. The top of the triangle is the trend line on the daily chart that delineates the four month rally, which is currently being reinforced by the rising 50 day moving average.

The relative strength index is positioned on its center line, reflecting a loss in upside price momentum. While the accumulation/distribution line has crossed under its 21 period signal average, and Chaikin money flow has moved into negative territory. These money flow indications are signs of selling pressure.

Shake Shack has been pulling back off its right shoulder in the last three sessions. If the stock were to break the $42.50 neckline level, the head and shoulders pattern measured move suggests a 10% downside target around the $38.00 level.

At the beginning of the year it looked like Disney (DIS) shares were advancing towards a retest of their 2017 high, but now it looks like they will come up about a buck short.

The stock price had been making a steady series of higher highs and higher lows over the last three months. A well-defined uptrend line defines the move. This month, however, the upside momentum has waned with the $113 level now acting as resistance. This week the uptrend line was broken.

Disney has now pulled back off the $113 level and has been trading in a narrow range above the $110 level. Moving average convergence/divergence made a bearish crossover in December and has since been tracking lower. This is an indication of the short-term decline in positive momentum and trend direction.

The accumulation/distribution line crossed below it 21 period signal average and Chaikin money flow is in negative territory. These readings suggest the stock is seeing selling pressure and is under distribution.

The price action and the technical indications imply a pullback, likely triggered by a break below the $110 support level. How deep a decline is speculation but the Fibonacci retracement levels do provide some context.

A move down to the 50% level in the $104.50 area, would coincide with a reversion to the 200 day moving average.

We have been highlighting the candle action on the Apple (AAPL) chart over the previous four days. An unusual series of doji candles formed on the daily chart which suggested a potential reversal, and there was a move to the downside in Wednesday’s session.

Apple shares were down nearly 1.6% on Wednesday returning to their 50 day moving average and an uptrend line drawn off the lows of the last four months. The integrity of this intersection of support at the $173 level could determine the intermediate term direction of the stock price.

As we noted in the previous article ” Apple Stock Positioned For A Potentially Deep Pullback,” the overbought condition illustrated by the diversion and then reversion of the blended 10 week and 40 week moving averages, has preceded deep corrective pullbacks in the stock price. Any further downside will turn the blended average below its signal line. This is the precondition to the dire pullback scenario.

The depth or duration of a pullback, if one does occur, is speculation at this point, but a break below the 50 day moving average is something Apple longs should watch very carefully.

A rarely seen “tri-star”candle pattern formed on the daily Apple (AAPL) chart on Monday. It may suggest a reversal in the upward trajectory of the stock and a potentially deep pullback in price.

Recently, Apple shares have seen a short-term disconnect with other stocks in the technology sector, and this infrequent tri-star candle pattern, coupled with a deeply over-bought condition, could be signalling the start of the pullback.

A look at the weekly chart puts the daily price action in context. It shows the six year Apple rally has been punctuated with two deep percentage corrections. These have occurred when the 10 week moving average has diverged sharply from the 40 week moving average.

The graph at the bottom of the chart shows the relationship between the two averages and is overlaid with a 40 week moving “signal” average. Crossovers have signaled changes in the intermediate term direction of price. The average line is currently making a lower high in negative divergence to the rising stock price, and looks like it is preparing for another bearish crossover below the signal line.

The overbought condition reflected in the divergence between the moving averages is punctuated by the price action over the last nine months. During this time, a nearly vertical triangle has pierced a long term resistance line drawn off the highs of the charted period. Price has reached the apex on the triangle pattern, a move looks imminent.

On the daily timeframe, the recent break above a short-term horizontal resistance line was quickly followed by a series of three doji candles. A doji is a candle with a narrow opening and closing “real” range, and reflects investor indecision. When three consecutive dojis are formed the sequence is called a “tri-star” pattern.

The tri-star is a rarely seen reversal pattern. A perfect bearish tri-star consists of a second doji that is higher than the first and a third that is lower than the second. In this case, each star is lower than the previous one, but this is still an infrequent occurrence and the indecisiveness of the rudimentary pattern is equally as clear.

Daily moving average convergence/divergence is in bearish divergence to price and the stochastic oscillator is making a negative crossover in its overbought range.

Price action and several technical indications on multiple timeframes suggest a pullback is underway which has the potential to be deep. But this pullback, if it does occur, is not likely to be as great a percentage move as the previous two highlighted,because of countervening fundamental and technical conditions, but traders should be alert to the possibility.

Addendum today 01/23/18 –