Here you go. Charts with annotations:
Microsoft (MSFT) reports after the cloe on Wednesday. The stock is down over 2% in afternoon trading on Tuesday and has dropped below its rising 200 day moving average. But over the last year, the Microsoft has been a strong outperformer relative to the Technology Select Sector SPDR Fund (XLK).
Let’s look at the daily chart of Microsoft. Shares were not immune to the October to December decline in the broader market. They dropped about 18% in that time but did bounce sharply off their Decmeber low. The bounce briefly returned the stock price to the 62% Fibonacci retracement level. A pullback this week took the low today back down to the 38% retracement level.
That 38% retrcemen level is supplying some support but price action so far this week, just ahead of earnings, has been bearish. The relative strength index has moved below its center line and, while Chaikin money flow is still in positive territory, it has dropped over the last several sessions. Volume is weak and has not supported the bounce off the December low.
The price momnetum and money flow readings on the Microsoft weekly chart are also bearish. But the potential for an eveningstar pattern to form on this timeframe is particullary negative.
The evenigstar formation is a three-day bearish reversl pattern often seen at market tops. It consists of a large up-day day candle, followed by a narrow opening and closing range “doji” candle, and completed by a large down-day candle. We are currently seeing a large down-day candle on the chart, but it is only Tuesday and there are three more days left in the week for the candle to mature.
It is a pretty safe bet that a negative earnings report on Wednesday, will help form a dark candle on the weekly chart. The completed eveningstar pattern would then suggest that a retest of the long tern uptrend line, currently situated just below the $100 level, is a strong possibility. As we know, round numbers like the $100 level can act as support or resistance, for no particular reason other than a pschyological one.
If the report is positive Microsoft still has a lot of work to do to get back to its old highs, on the other hand, a break below the $100 to $98 zone of support suggests a quick test of the December low or worse.
The Barclays iPath S&P 500 VIX ST Futures ETN (VXX) was launched in 2009. It was designed to be used as a way to hedge positions against the kind of volatility experienced over the previous year. It was always best suited, however, for traders who wanted to profit from short term volatile moves.
In 2009 it was unclear how successful the VXX would be so it was only given a ten year life expectancy. You see, while it trades like an ETF, the VXX is structured like a debt instrument with a maturity date. That maturity date is January 30, 2019.
The VXX turned out to be a very popular trading vehicle with strong daily volume and large market capitalization. Barclays did prepare an indentical instrument in 2018, the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB), to take over for the VXX when it epired. It has been gaining in popularity but its daily volume and net assets are well below those of the VXX. The VXXB has a 30 year expiration date.
So what happens when the VXX goes away in a few days? Barclays will have to pay out cash to the remaining holders of the VXX. This is what could casuse the volatility crash. Ideally, traders will simply liquidate positions in the VXX and simultaneously initate new positions in the VXXB. This could cause the VXXB to see a jump.
At this point in time, the VXX is trading 17 million shares and net assets are 880 million. The VXXB is trading 11 million shares and its net assets are 220 million. The transition from the VXX over to the VXXB is not happening in any big way, with only days left before the expiration.
I am not an expert in options or the structure of complex ETF’s like the VXX and the VXXB, but it seems like this event could have an impact on the funds involved and broader volatlity space. It doesn’t seem to be getting a lot of attention in the financial press or the Twittersphere, so any additional information, comments or corrections by readers would be appreciated.
In any case, watching the VXXB carefully over the next several days should give us some sense of how this plays out.
Picture: Cointelegraph – youtube.
Roku (ROKU), the streaming TV services company, saw its share price drop 65% from its October high last year to its December low. But it looks like the stock has formed a base and could be ready to reverse trend.
Shares of Roku consolidated in a small horizontal channel last November and again in January this year. These channels formed the left and right shoulders of an inverse head and shoulders pattern on the daily chart. The head is the December 2018 low and neckline resistance is located in the $45 area. The flat 200 day moving average is currently situated just above the neckline.
A breakout above this resistance zone projects a measured upside move, calculated by taking the height of the inverse H&S pattern and adding it to the neckline. It projects a $65 upside price target.
Both the relative strength index and moving average convergence/divergence (MacD) are tracking higher and have crossed above their center lines. This is a reflection of positive price momentum and trend direction.
Chaikin money flow entered positive territory as the right shoulder of the pattern was forming last month. This suggests a shift in investor sentiment and new buying interest.
Roku shares still have a lot of work to do before the trend is officially reversed. First they need to recapture the neckline/200 day moving average resistance zone. Then it may be necessary to retest or build another base above that resistance-turned-support area, where the recent upside gains can be absorbed. This re-basing would act as a platform from which to power further gains.
If Roku cando the work and reverse trend, there is the potential for strong upside price action over the intermediate term.
NVIDIA (NVDA) shares have been trading sidewys for the last two months, and that’s a good thing. The stock was able to put a halt to the brutal >50% decline off its October high.
Since mid-November it has been vascillating around the 50% retracement level of its histroric range. This week it has held that level and moved above its 50 day moving average. Thursday’s close near the high of the session was also a new high for the month and, of course, the year.
The relative strength index is tracking higher and has moved above its center line, a reflection of the positive price momentum. Chaikin money flow entered into positive territory two weeks ago, suggesting buying interest.
NVIDIA still has a lot of work to do to return to its former bullish trajectory on the chart. But it looks like it may crossed a major reistance level at $150 and now successfully retested it. If it can manage to extend the recent upside move and eventually break through the $170 level, the stock would enter into the unfilled November downside gap zone. The gap is a resistance vacuum and the stock price would be expected to move up quickly to the $200 level.
In December we highlighted an interesting pattern of eveningstar reversal formations on the S&P 500 daily chart.
We noted that, in both October and November eveningstar patterns had formed on the chart. They had marked important lower highs
An eveningstar is a bearish three-day reversal formation, often seen at market tops. It consists of a large up-day, a narrow opening and closing doji-day, and is completed by a large down-day. It represents a transition from bullishness to bearishness.
When we posted the December article it looked like a third eveningstar was forming on the chart. Two days later a doji candle formed and the following day a another rudimentary eveningstar was completed, right at the declining 50 day moving average. It marked the December high and was followed by the dramatic December drop.
This week on Tuesday a large white up-day candle formed and it was followed on Wednesday by another doji candle. Wednesday’s doji high formed just as previous candles have at the still declining 50 day moving average.
The takeaway then is to be very cautious of any real weakness in today’s session because it would be a replica of several previous patterns that marked highs in the broader market.
We have been watching the wide levels on the weekly index charts, levels which had been support early in the year. They reverted to resistance following the December drop. Last week the NASDAQ Composite closed above its resistance area, while the other major market indices were just below or testing those levels.
The rebound in the indices off the December low was a sharp V-shaped move that recovered about half of the December decline. These recovery levels develop because long term investors realize they have recouped half their losses from the December high and are willing to sell, and short term traders who were able to jump on the rebound low are booking a quick profit.
There are economic and psychological reasons that technical levels develop on stock charts. They are real-time reflections of investor sentiment. It is important when interpruting candlesticks and patterns to understand the dynamic underlying the price action.
We tweeted out last week that Bollnger band width and average true range on the S&P 500 chart had contracted to a level that, in the past, had been followed by sharp moves in the index. There was no way at the time to know in which the direction the index might be headed, only that the move would be volatile.
This morning the broader market opened sharply lower and this may be the start of several days of downside action. It also reaffirms that the weekly areas of prior support remain difficult resistance.
In December the major market indices dropped sharply and broke below areas of former support on their weekly charts. These zones had provided strong support in February and April last year, and later in November.
As we know when a support level fails and price breaks down, the support level reverses roles and becomes resistance.
The market was able to halt the decline in the last weeks of trading of 2018 and book two solid weeks of upside action. But now the indices are approaching their former support-turned-resistance levels. What was once solid support is now formidable resistance. How the market handles these first tests could be critical in determining their intermediate-to-long term direction.
The nature of market participants suggests there is likely to be selling into these areas. Some long term investors will be happy to recover nearly half their losses since the October highs. Likewise, traders quick enough to have jumped on board this reversal move, will be just as quick to take their profits.
But just as solid resistance can repel, sometimes V-shaped bounces gather momentum and can pierce through tough resistance areas. The broader market’s long term directional trajectory will depend on the integrity of the zone.
The financials are one of the most beaten down sectors of the market. The Financial Select Sector SPDR Fund (XLF) is down 21% from its 2018 high and was down over 25% at its low last week.
Last week’s low touched the 50% Fibonacci retracement level of the fund’s 2015 low and its 2018 high. So far this week, the 50% retracement level in the $22 area has continued to act as support, and the 38% retracement level in the $24 area has acted as resistance.
These horizontal 50% and 38% retracement levels should be monitored for their ability to provide support and resistance over the short term. But there is another set of Fibonacci lines that should also be watched for their technical support and resistance potential going forward.
The blue lines that originate at the 2015 low and extend up through the retracement points of the 2015 low and 2018 high are called Fibonacci fan lines. They can also be used to define support and resistance, but unlike horizontal Fibonacci retracement lines which are static, the fan lines are dynamic, meaning they extend upward.
The XLF has a lot of work to do in order to reverse the trajectory of its downtrend. An initial step would be to move above the static horizontal 38% retracement level. The next step would be to begin trading above the rising 50% retracement level fan line.
The SPDR Gold Shares (GLD) have spent the last four years trading under resistance in the $130 area. This level has been retested multiple times and held firm. But it looks like another test is in the offing.
The low on the GLD monthly chart was made in December 2015, a higher low was made on December 2016, and a second higher low in October this year. This is positive technical action. In addition, the December monthly candle is a white marubozu, that is, a candle with no lower or upper shadow. An candle open at the low and close near the high is bullish price action.
On the weekly time frame, the Gold Shares ETF has broken out of a cup and handle formation with rim line resistance in the $117.50 area. The move took shares through the 40 week (~200 day) moving average, and the pattern projects an upside measured move to the $124.50 area.
The bullish higher lows on the monthly chart combined with positive price momentum readings on the weekly MacD and relative strength indicators, as well as a Chaikin money flow reading well into positive territory, suggest that the GLD could be headed even higher than the projected target price.
It is likely another test of the monthly $130 level resistance is underway. So, what if that level is broken? A breakout from the long term base foundation projects a minimum move of about $20, which would takes the GLD to the $150 level.
This is pure speculation but if it were to occur, it would represent a more than 20% advance from the current price of the Gold Shares ETF, and would probably be derived from some deeper undercurrent in the broader market. Not sure what that undercurrent would be but the implication is that it might not be a good thing.