Monthly Archives: September 2019

Dunkin’ Brands – Momentum And Money Flow Suggest Possible 18% Downside

Shares of Dunkin’ Brands (DNKN) have been trending higher since early 2016. The move from $35 to its current level of $78.14 represents a 122% advance. But as the rally in the stock progressed there were also periods of retracement along the way. Two technical conditions on the weekly chart have signaled several of these recent pullbacks.

At the top of the chart is the relative strength index or RSI. Overlaid on the RSI is a 21 period moving average of the indicator. When the RSI line has crossed below the 21 period average the stock price has declined.

At the bottom of the chart is the Chaikin Oscillator a money flow indicator that is a derivative of the Chaikin Money Flow indicator. It is overlaid with its own 21 period average. The vertical lines on the chart show how the RSI and the Chiakin Oscillator have been moving below their 21 period average in unison.

This bearish synchronization of momentum and money flow indications has been followed by tradeable opportunities to short Dunkin’ Brands.

This year the Chaikin Oscillator crossed below its 21 period average in June, but the RSI was still above its 21 period average. The Chaikin oscillator has continued to track lower and below its signal average, and this month the RSI has finally caught up and dropped below its 21 period signal average.

The conditions on the weekly Dunkin’ chart are different this time. We don’t see the initial coordination between the indicators that we saw in previous move. Additionally, price while it has drifted lower, has not broken down. There is, however, a well-defined line of support situated in the $76.50 area, and the technical indicators are now in sync. If Dunkin’ shares were to penetrate this $76.50 support level the downside could be deep.

The percent declines of the previous pullbacks have increased over time, and if there was another pullback, even one the same degree as the December 2018 retracement, there is the potential for around 18% downside. This percentage move would take the stock price down to $68.50, in a relatively short period of time.

Watch the $76.50 support level for a tradeable breakdown, but don’t get ahead of the trade. Confirmation is required before trading. The previous bearish pattern could fail to play out this time and support could hold. It that case, Dunkin’ Shares should bounce, potentially retesting their highs.

Disney Downside Price Target – After Technical Tops On Multiple Time Frames

Disney (DIS) shares spent the four years between 2015 and 2019 consolidating in a triangular range. That range narrowed from $30 at its widest, to $15 at its most compressed. In April this year Disney broke out. The breakout can be seen on the weekly chart.

The long consolidation period formed a triangle pattern on the weekly chart. The triangle is defined by a series of higher lows under horizontal resistance in the $115 area. Like many technical patterns it projects a potential upside price target if the stock breaks above resistance.

The price projection is arrived at by taking the height of the triangle and adding it to the breakout level. The weekly Disney triangle is $30 wide and if you add that to the $115 resistance level the result is a $145 price target. The arrows illustrate the projection process.

Disney stock touched the projected $145 price target level in July. It has since pulled back to $130, just above the 40 week moving average. A pullback is expected after a technical target is achieved, but Disney shares may be in for more than a pullback.

Notice the overall price action over the last two quarters. It is ominous to say the least. A well known bearish reversal pattern has formed, especially noteworthy because it follows the completion of the longer term weekly move. It suggests the upside momentum in Disney is exhausted. The daily chart illustrates this in more detail.

A head and shoulders reversal pattern can be seen more clearly daily charts. The left shoulder formed in May and June, the head in July, and the right shoulder in August and September. Right shoulder upside resistance is supplied by the 50 day moving average. That average is also rolling over. Again, the horizontal neckline is located around $130.

Head and shoulders patterns are reliable technical patterns that often appear at significant market tops. In addition, this head and shoulders pattern has formed just above the wide $10 upside price gap that formed in April.

This, in effect, isolates Disney’s price action since May. If there is a neckline breakdown and it is severe enough to cause a gap to the downside this time, it would create an island head and shoulders top. Individual or group island reversals have greater significance than normal reversals. They represent abrupt changes in trader sentiment often brought on by important and unanticipated fundamental events.

In the daily scenario as in the weekly, the pattern projects a price target. The daily head and shoulders target price is measured by taking the distance from the head of the pattern to the neckline. Then by subtracting that $17.50 number from the $130 neckline you arrive at a $112.50 price target. This would close the April gap, which in and of itself is a vacuum that needs be filled, and represents a 13% downside retracement.

The current outlook for Disney shares is bearish on both the weekly and daily time frames. The previous weekly triangle pattern played out perfectly, achieving the projected upside price target. The daily head and shoulders pattern is clearly defined and a confirmed break below neckline support projects significant downside.

There is no guarantee, however, that the daily pattern will play out as well as the weekly pattern, if it plays out at all. Confirmation of these patterns is, of course, important and traders should not be afraid of missing the early stages of a potential move. They should be patient and wait for the move to develop.

Of note, on the daily chart is the hammer candle that formed on Thursday right on the neckline. It suggests a bounce but does not change the intermediate to longer term outlook.

Patience and proper money management are the keys to longevity and success as a trader.

S&P 500 Index – What Gaps Can Tell Us About Where The Market Is Headed

The S&P 500 index spent most of the month of August consolidating in a 4% wide channel between 2940 and 2820. This month it broke above resistance and traded up to the area of the July highs.

A closer look at the S&P 500 daily chart shows new resistance in the 3030 to 3020 area. Support is the gap between 2960 and 2940 created earlier this month. Last week a strong looking hammer candle formed on Tuesday, followed by strength on Wednesday. That momentum petered out in the final two sessions as the index approached resistance.

The more sensitive momentum indicators like the Stochastic oscillator suggest the market is overbought. Less sensitive momentum indicators like the RSI do not and, along with the money flow indicators, continue trending higher.

Historically, the allure of new highs has a powerful magnetic effect on stock prices and, conversely in this case, everyone knows that gaps like to be filled. But the primary market motivators more recently have not been technical. They have been news driven and interest rates will be the driver this week.

On Wednesday and Thursday the Federal Reserve Board meets and will make a determination on interest rates. The pundits seem to think that a quarter point cut is baked into the market. So, if we only get a quarter point cut the market will likely be disappointed and head lower. The President will try to counter the downside action with a tweet storm railing against Chairman Powell. It will not help and a pullback into the end of the week could see the support gap between 2840 and 2820 filled in short order. The potential for a breakdown would be high.

On the other hand, a half point rate cut would be considered bullish and the market should power through resistance to new highs. It is hard to say how sustainable any rally would be. The necessity to lower rates at this point is not a ringing endorsement of the current condition of the economy. But the bond proxy stocks will jump and the risky high yield bond funds will benefit. The 3030 and 3020 gap now become support.

An upside target for a breakout move is difficult to project, unless we see another bullish “gap” up in price, for example, a jump above 3030. Then we would take particular notice.

Gaps sometimes come in threes. The first in the sequence is the “breakaway” gap. It usually occurs after an important consolidation period. The 2960 to 2940 gap earlier this month might be considered a breakaway gap. Let’s assume it is. If we were to then get a second gap (potentially triggered by a half point rate cut) that takes the S&P above the 3030 level, and it might be considered a measuring gap.

A measuring gap usually occurs around the hallway point in a trend. In this case, the trend would have started with the move off the August low. There has been a 7% move higher off the August low. If that is the halfway point then another 7% move would follow. At that point the textbook says to expect the third gap. The third and final gap is called an “exhaustion” gap. It usually marks a blow-off top and an end to the trend. This second 7% measuring gap rally into an exhaustion move takes the S&P index up to the 3150 area. At this point, the book says that the rally off the August lows would come to an end.

This thesis is, of course, technical speculation, but this kind of exercise helps to maintain a flexible perspective on the market. And it is a “noisy” market but the news and the tweets have helped to create the trend lines and the price gaps. So, trade around them and remember preserving capital is job one.