There are a number of interesting technical developments on the McDonald’s (MCD) daily chart.
A head and shoulders bullish reversal pattern has been under construction for the last two months. Neckline resistance is situated in the $162 area. This is very bullish potential basing action. A break above the neckline projects a measured upside move which would take the stock to new highs.
As the pattern formation has been progressing, however, the accumulation/distribution line has been tracking lower. This reflects a loss of buying interest. The relative strength indicator is flat reflecting a loss in upside momentum.
In addition, the 50 day moving average is heading lower, on course for a move below the 200 day average, the infamous “death” cross.
But of particular note was the price action in Thursday’s session. A bearish engulfing candle formed and the stock closed down 2%, just off its low of the day. This was despite a 1.3% move higher in the S&P 500 index.
What kind of follow-up we see in McDonald’s, or the broader market on Monday is a guess at this point.
Shares of Red Hat (RHT) saw a 7% upside gap at the open in Tuesday’s session. The stock price price reversed direction quickly but closed up on the day, and the daily volume bar recorded upside volume that was 350% greater than the 50 day moving average of volume.
But the price action and the volume bar may not have been bullish, in fact they could be interrupted as decidedly bearish.
The volume bar is colored either green-up or red-down depending on where the stock price closes relative to the previous day’s close. If the close for the day is higher than the previous day’s close it is considered an up volume day, and if the daily close is lower than the previous close the volume bar is colored red, and is considered down volume.
On balance volume is tracked the same way, if the close for the day is higher then the previous day’s close, it is considered upside volume. The daily volume is than added to a running cumulative total of volume. If the daily close is lower than the previous day’s close it is subtracted from the total.
The accumulation/distribution line, in my opinion, is a better representation of money flow than volume bars or on balance volume.
It was developed by Marc Chaikin and is computed differently than volume bars or on balance volume. It uses a money flow multiplier in its formula. The money flow multiplier is positive when the daily close is in the upper half of the high-low range that day, and negative when the close is in the lower half of the overall range. In this way, accumulation/distribution accounts for gaps and is a more accurate measure of buying or selling pressure.
Red Hat’s daily range was extremely wide on Tuesday and overall volume was massive relative to the 50 day average of volume. But this surge in volume and the close was not bullish, in fact, the sharp opening reversal which occurred in the first ten minutes of trading, and the increased volume flow, which the accumulation/distribution line reflects as selling pressure, were a decidedly bearish combination.
So, was the action in Red Hat today a result of the market digesting the company’s earnings news, a technical phenomenon, or a result of the recent volatility in the broader technology space?
The SPDR Gold Shares ETF (GLD) dropped 45% from its 2011 high to its 2016 low. It has been basing under the 38% retracement level of that range for the last five years.
This extended period of horizontal consolidation has formed a “W”-bottom with resistance situated in the $132.50 to $132 area.
There is a technical expression that goes something like, “the wider the base, the higher the break,” or words to that effect. I simply measure the height of the pattern and add it to the breakout level.
In this case, it projects an upside move that targets the $161 area.
An old fashioned dynamic seems to be taking place in the market right now. Gold is being used as a place of refuge. It is certainly not bitcoin.
If the market continues lower and if some panic selling sets in, the yellow metal should continue to move higher. A break above technical resistance could trigger even more buying.
But if the stock market is able to stabilize and volatility dries up, the bullish gold trade will be abandoned before it starts.
It was a rough week and there will be more downside. But how much lower could the market go and how long could the decline last?
It is, of course, impossible to tell either metric with certainty. But we can make educated guesses, by using technical tools to look at past periods of volatility and pullback, and then overlaying that analysis onto the current chart.
Let’s begin this speculative adventure and take a look at the monthly time frame.
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The monthly chart highlights two important pullback periods for the S&P 500 index. The first is the decline associated with the 2008 financial crisis, and the second is the decline that began in the last half of 2015. It is overlaid with a moving average ribbon and a Raff regression study. At the bottom of the chart, is a hybrid indicator of my own construction, which is fairly accurate at identifying shifts in trend direction.
In 2007 the market was trending higher and the moving average ribbon was in a bullish configuration. The faster averages were tracking above the intermediate and long-term averages, and they were neatly aligned in parallel with no overlap. In the first quarter of 2008 they began to contract and the faster averages started to curl down like an ocean wave.
As the index continued lower the ribbon pattern expanded again, this time with the faster averages leading the others lower and arranged in a wide bearish configuration. And just before this nearly 15 month corrective period began there was a bearish center line crossover on the hybrid index.
In 2012 the market recovered and began a rally phase that lasted over three years and saw a 75% gain in the S&P 500 index.
The hybrid index moved into negative territory again in July 2015 signaling potential trouble ahead. This warning was followed by a period of price volatility that lasted about seven months. In the summer 2016 the rally resumed and in less than two years the S&P was up another 43%.
With that background let’s take a look at the indicators on the chart.
On this chart the center line of the three rising parallel trend lines is the Raff regression line. It is the best-fit straight line of price over the period from 2009 to present. The parallel lines above and below it measure the largest percent move above or below the regression line. It is interesting to note that the rally above the regression line to the January 2018 high, is of the same degree as the decline below the regression line in early 2016.
The slope of the long term rally on the monthly chart is positive, but it has reached an extreme level. This means that there should be some reversion to the mean, and that’s what we’re seeing now. Note the current reading on the hybrid indicator.
The long term picture on the S&P 500 chart, however, remains bullish. The index had diverted by a large percentage above the regression line and at the current time is looking somewhat unstable. It is in a reversion phase now and while ultimately that could be healthy for the index, for investors it is a matter of how deep and how protracted the pullback could be.
Let’s move to the weekly chart for a little more detail on that.
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It is highly unlikely that we’re going to see another decline like the one in 2008. At that time the banking system was under tremendous pressure and major financial institutions were in danger of failing.
The fundamental case today for banks and economy in general is positive.
The volatility we’re seeing in the market right now is the unwinding of an overbought condition, and it doesn’t take much of a reason (there seems to be a new one every day in the financial news) for the process to unfold.
So I think it is more relevant to review the 2015/2016 pullback period, as it pertains to the current one, rather than the 2008 decline.
The reversion process that began in late 2015 lasted six months. It started with an initial drop of 12%, followed quickly by a rebound of 13%, and completed by the index making a new low in early 2016. The overall decline was about 15% from peak to trough.
The recent volatility began only three months ago. It started with a drop of about 12% in January, followed by a 10% rebound in February, and then a second pullback phase this month. The action by the index over these two periods is strikingly similar, and if our current decline ultimately pulls back 15%, like the 2015 overall decline, it would mean that we have about 6% more downside.
The market could handle that kind of a reversion, but I don’t think it would like it if it took another three months to play out. In any case, whatever amount of time it takes, if history rhymes, it should only be corrective and not a full blown bear market.
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The first daily chart is of the SPDR S&P 500 ETF (SPY) and includes Fibonacci retracement levels measured off the 2016 low and this year’s January high. If there is a 15% decline off the recent high, similar to the 2015/2016 decline, it would take the SPY back down to the $243 area. This is also the 38% retracement level of the 2016 and 2017 range.
The second daily chart is another ribbon chart with the hybrid indicator. Looking back at the sharp drop in February the bearish ribbon curl can be seen clearly. Is not so obvious right now but another bearish curl is currently underway.
The hybrid indicator moved into negative territory last week, as it did in January prior to the February decline, and in late March. One of the things that I like about this particular indicator is that it seems to work well in volatile periods, unlike many other indicators that get whipsawed.
This last daily chart includes the support and resistance lines that I have been using to denote a triangle pattern that has formed on this time frame. The pattern price objective of the triangle is measured by taking the height of the triangle and subtracting it from the break down point. It projects a downside target in the $242 area, which would be a 15% move off the January high, equivalent to the 2015/2016 overall decline. This corroborates the technical indications on the prior charts.
The best case scenario over the short term would be for a hammer-like or long tail “doji” candle to form after testing the 200 day moving average, just a few points away. If a hammer were to form at the average and was followed by a strong rebound in price, the three-period candle action would form a morningstar pattern, a reliable bullish reversal pattern. The inference would of a V-shaped reflexive bounce and then all would be right with the market. But that is the best-case scenario.
At this point in time, stochastic oscillator is entering an oversold condition like it did in early February. Overall volume picked up over the last two trading sessions but is only about 63% the greater than the 50 day moving average of volume. In February it spiked over 200% above the 50 day average. Chaikin money flow has moved into negative territory and the 21 period moving average dropped below the center line this month. That was not the case with the signal average back in February and is a concern, but the indicator does not reflect panic selling.
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You can’t close out a bad week or a down Friday without references to the 1987 Black Monday that followed the Black Friday. The internet is peppered with this video of the great Martin Zweig making his famous “crash” call on the old Wall Street Week program. For those old enough to remember Louis Rukeyser and his corny humor, the video is a trip down memory lane. Marty Zweig comes in with his call around 6:50.
But to recap our analysis:
— The long-term trend as seen on the monthly chart is intact;
— the weekly chart retracements suggest potentially 6% more downside, firmly in correction territory, but not a bear market;
— and finally, the triangle measured move targets the consensus 15% overall downside price projection or another 6% lower.
These are educated guesses based on technical patterns that have played out in the past. This analysis is an intellectual exercise and if the S&P does move another 6% lower, it does not guarantee the decline is over.
A V- shaped reflex bottom would require multiple days of confirmation and might not even occur this time, even though many market participants have become accustomed to this type of rebound in price.
Recovering from this decline however deep, may necessitate a prolonged period of horizontal basing. Remember the process took six months in 2015/2016 and we are less than three months into the current one.
We have a shortened trading week coming up and volume will be light. Volatility should remain. Be cautious and be patient.
The SPDR Gold Shares ETF (GLD) has been moving in a triangle formation for the last two months above horizontal support in the $124 area.
On Wednesday it broke above the triangle downtrend line and its 50 day moving average. Overall volume jumped higher and the Chaikin money flow index is firmly in positive territory. This suggests renewed investor interest in the precious metal.
As the construction of the triangle pattern progressed the Bollinger bands have narrowed. Bollinger bandwidth is now at a level indicating very compressed band width.
The last time there was a similar reading was in December before the rally into this year. Prior to December it has been several years since the Bollinger bands were equally compressed.
Periods of tight range compression are often followed by a volatile resolution. This suggests that yesterday’s move is not over and the price of gold could be headed considerably higher.
The triangle projects a target price objective that would see the GLD make new highs for the year, and could take out the 2016 high.
On Wednesday the broader market averages opened flat and rallied through the morning. Then at about 2:00 PM a double top formed on the ten minute chart and the indices gave up all their gains, closing back down near the lows of the day.
The late day drop to opening levels formed long wick candles on the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite daily charts. These candles resemble shooting stars or gravestone dojis, with the long upper shadow, and the real body, or opening and closing range, situated at the bottom of the overall range.
These types of candles are often seen at market tops, but if you look carefully at the three daily index charts you can see gravestone dojis and shooting stars that formed in the past, and were followed by moves higher.
What makes these current long wick candles a little different is that they have formed after trend line breakdowns or, in the case of the S&P 500 and the DJIA, after having broken below the 50 day moving average.
They become more suspect and another piece in the construction of the bear case for the broader market.
THURSDAY NIGHT UPDATE—
The gravestone-like doji candles that formed on the daily index charts on Wednesday were ominous looking. They turned out to be habingers of a brutal Thursday for the entire market.
So, what type of candles were left in the wake of Thursday’s broad market devastation, and what do they purport for the final trading day of the week?
Bearish marubozu candles formed on the S&P 500 Index, the Dow Jones Industrial Average, and the NASDAQ Composite charts in the Thursday session. These candles have only a “real” body, that is, they opened near their low and closed near their high, and have no upper wicks or lower tails. The reverse formation is true in the case of a bullish marubozo.
Thursday’s bearish or dark marubozo reflects selling pressure from the start of the session to the close. The obvious inference is that there will be follow-through selling on Friday. That seems likely, the DOW futures are down about 135 points as of 8:30 PM on Thursday night.
The close on Friday will make an important contribution to the construction of the weekly candle. And the formation of the weekly candle could be a key factor in determining the near term direction of the indices.
As we said, there are bearish marubozo candles on the daily index charts and, currently, there are also bearish marubozo candles on the weekly index charts. I say currently, because the weekly charts are not fully matured, Friday’s contribution is not yet factored into their formations.
What would it take to shift the appearance of the weekly candles from their current bearish look to a more bullish profile?
Using the DOW chart for illustration, a close above the 24,250 level on Friday would be constructive. It would help to transform the decidedly bearish weekly marubozo into a rudimentary hammer candle. This could be interrupted as a bullish reversal candle, but it would require a nearly 300 point one-day rally in the industrial average.
The weekly candle is always an important piece of the price action puzzle. It will be particularly significant at the conclusion of trading this week.
FRIDAY MORNING UPDTAE —
If the market isn’t prepared to recover enough to form a strong weekly candle, as outlined last night, all is not lost. There is a daily outcome that could be constructive.
The best-case daily scenario – a Friday open at previous close, followed by a move lower in the morning, and then rally back up and over the open in afternoon. This would form a bullish hammer-like doji candle. The second step in a morningstar reversal formation.
A morningstar pattern is a three-period bullish reversal candle pattern often seen at market bottoms. It consists of a large down-day candle (Thursday), followed a narrow opening and closing range doji candle (potential Friday candle), and completed by a large up-day candle, (potential Monday candle).
This a lot of speculation, but if the weekly close does not form a hammer, the morningstar is another possible bullish outcome.
Last week SunPower Corporation (SPWR) filed a petition to be excluded from tariffs on solar-cells and panels developed in the US. If the company were granted an exemption, it would allow the savings to be spent on domestic manufacturing, which would ultimately be beneficial to the company’s bottom line.
The stock has been making a series of lower highs for the last nine months above horizontal support in the $6.50 area, forming a large triangle pattern. After the recent February retest of that support SunPower shares have been further consolidating in a small symmetrical triangle or wedge.
The sharp 7.6% move higher in Tuesday’s session pierced through the wedge downtrend line, and the stock closed near its high of the day.
Both the relative strength index and the accumulation/distribution line moved up and through their 21 period signal averages. The Bollinger bandwidth indicator reading reflects extremely tight band compression. In the past, this level of compression has been followed by several days of volatile price action. This suggests the possibility for more upside in the stock price.
The small wedge projects to a price objective measured by taking the height of the pattern and adding it to the breakout level. It targets a break above the larger triangle pattern. A measured move off that larger pattern would take SunPower shares considerably higher.
Shares of Starbucks (SBUX) have moved sharply higher off their February lows and managed to close a large downside gap. The gap was formed by a drop in the stock price in January, after the company reported disappointing same store sales.
Price action over the last week formed a series of high wick candles. High wick or upper shadow candles are a condition of shooting star or some doji candles, and these candles are often bearish reversal warning signs.
They are formed after upside action in a stock is rejected and it closes lower, leaving the high upper wick. A cluster forms when there is a grouping of these candles. The number of candles in the group reflects multiple rejections and is that more bearish.
Bearish reversal candles often form after price has attained a particular technical level, like filling a gap or returning to a previous support-turned-resistance level. The suggestion is that the stock has completed the job it set out to do and now it is time for a pause or a pullback.
The recent high wick/low close price action is not yet reflected in the direction of the moving average convergence/divergence oscillator, but Chaikin money flow has moved into negative territory.
It would be guesswork to try and determine the degree of a potential pullback, but there are nearby levels of support at $58.60 and $58.00. The worst case scenario, however, would be a return to the uptrend line drawn off the 2016, 2017, and 2018 lows, currently in the $54 area.
This support line and the downtrend resistance line drawn off the 2017 and 2018 highs, define a large multi-year symmetrical triangle that has been forming on this chart.
The Intel (INTC) chart looks like it is rolling over.
A high wick shooting star candle formed last Tuesday which was followed on Thursday by a large bearish dark candle. The stochastic oscillator has made a bearish crossover and has moved below its overbought border, and the accumulation/distribution line is pointed lower.
Intel has been making a series of higher highs for the last four months. That is a good thing but the previous three highs have all been followed by lows that retest the $42 level. That is not a good thing. The pattern looks like some kind of modified megaphone top.
The depth of the pullbacks that have followed the highs has been widening. If there were to be another similar pullback from Intel’s current level it would constitute a 16% decline from where the stock closed last Friday. The $42 level is the upper end of a gap that formed in late October last year. Gaps have magnetic properties.
From time to time, I want to include in these postings, some explanation about the technical indicators I use. Specifically, how they are constructed and what they are telling us. Too often, I see people using charts that contain indicators that use basically the same information to support their technical view on the direction of a stock. This is called multicollinearity or using redundant data as confirmation. It is not confirmation at all and needs to be avoided.
The stochastic oscillator is telling us the position of the price of a stock relative to its overall range over a certain period. The default period is 14 days. I’ve highlighted a 14 day period on the chart in late January and noted the mid-range with a dashed line. If you compare the price of Intel to the reading on the stochastic oscillator, you can see the relationship very clearly.
So, the stochastics oscillator is rolling over or headed from a position near its recent high range to a lower position in that range.
The on balance volume indicator had been moving higher, but the accumulation/distribution line has been flat to, more recently, lower. They both measure the direction in the flow of money, either to the buy or sell side, but the difference in the readings is again, how they are constructed.
The on balance volume indicator simply takes a cumulative running total of volume, and adds the current days volume to it, if the stock closed up that day, or subtracts it from the running total, if the stock closed down that day.
Accumulation/distribution is a little more sophisticated. It measures an up volume day by where the stock price closed relative to its overall range. In other words, if the stock closed in the upper half of its overall range it calculates that as buying volume, and if it closed in its lower range that is considered to be selling pressure.
On balance volume and accumulation/distribution generally trend in the same direction, but divergences between the two can signal a change in the trend.
The price action and the technical indicators, as I interrupt them are suggesting that Intel is due for a pullback. The depth of the potential retracement is unclear but it has the potential to be considerable.
Long holders of Intel should be cautious and tighten stop loss levels.
The broader market indices finished the week looking weak.
The bounce off the February low has been impressive, but it’s been a process and part of that process requires pullbacks. Next week we could see some retracement which could either be healthy for the market, or could take the indices down through some important levels of support.
Let’s start with a look at the weekly charts.
There is a bearish flag-like pattern on the S&P 500 chart. This week, after touching the flag resistance line in the 2800 area, a dark cloud cover candle formed over the previous week’s candle. The implication of this dark cloud candle is that next week the index could begin moving back down, towards another test of the rising support line of the flag, in the 2700 area.
The pattern on the DJIA chart is similar to the one on the S&P chart. Flag support on the Dow chart is closer on a percentage basis than flag support on the S&P chart. If retests of these flag support levels were to happen, the industrial index would probably test first. How well it handled such a test would be a major influence on the S&P index.
Despite some recent weakness in the notable FANG names, last week the NASDAQ Composite Index managed to make a new all-time high. It started this week by opening above the previous week’s high, but closing below it, and below the previous January high. If there is further deterioration in the FANG names the Composite will break its steep short-term trend line.
But it does not necessarily follow that breaks in these weekly support lines will precipitate major moves lower, although the flag pattern’s measured moves do project to considerably lower levels. Secondary base lines could form and contained pullbacks could evolve into horizontal channel patterns. There are, of course, any number of less volatile outcomes.
The daily charts show the support areas more precisely.
Right now the S&P index is sitting on its 50 day moving average. The 2725 level looks like flag support. Break down confirmation would require two consecutive lower candles closes below this level.
NASDAQ support is situated between the 7440 and the 7460 levels. Its 50 day average is currently about 171 points lower and would be the next logical level of support, should the composite index breakdown.
Finally, the Dow has been trading in a symmetrical triangle or wedge pattern on its daily chart. Triangle support is in the 24,700 area. It is currently under pressure as the index nears the pattern apex.
What all this implies is that the indices look fatigued and in need of a recovery period. This could mean a period of lateral movement or a pullback. The risk of a pullback is that when certain technical or psychological levels are breached their failure could initiate further selling.
But what if the market is firmer next week and after several days of gains the flag resistance levels are taken out? That would quickly turn the conversation to talk of DOW 2900 and take the NASDAQ to new highs.
I think the bearish scenario is more likely not just because of the weak looking index charts, but because of the technical weakness in names like Salesforce.com (CRM),Apple (AAPL), Alphabet (GOOGL), Intel (INTC), and Home Depot (HD).
I’m not suggesting shorting the market, rather to simply be aware of the fragility of some of the big names and the broader market in general.
