Monthly Archives: October 2019

Morningstar Candle Formations – Eleven Bullish Reversal Charts

The morningstar formation, as most readers know, is a three-day bullish reversal pattern. It consists of a large dark down-day candle , foloed by a narrow opening and closing range doji candle, and completed by a large white or up-day candle. It represents a transition in bearishness, to a neutral stance, to bullishness.

The formation is usually seen at the end of declining periods in a stock price, and is considered a fairly reliable technical pattern.

A number of morningstars appeared on the charts after trading on Monday and here are just a few:

S&P 500 “Doji Storm” Follow-Up

The S&P 500 index gapped higher last Friday but, as I noted in the previous post, the initial move faded and the close was well into the day’s lower range. That pull back formed a spinning top candle. A spinning top and also the doji candle, is a candlestick whose close is at or near its open.

The inference to be drawn from one of these candles is that the market is conflicted. In this case, it is skeptical of the early strength and retreats back down to a more neutral position. Take a look at the 30 minute S&P chart.

The last seven sessions have taken the S&P higher. It is back above its 50 day moving average and approaching its all-time highs. But as we have noted a series of higher wick candles have formed and volume is weak. Aditionally, the Chaikin Index, a gauge of money flow, has turned into negative territory just as the recent upside began, and this week it has continued to decline.

The combination of the high wick late session fades and an increasingly negative money flow reading suggest a lack of conviction behind this move towards new highs. But if the S&P can manage a new high it may encourage a stronger level of trader commitment. While a new high is a short distance away, it is going to take a strong effort to get there.

The thing to watch is the S&P weekly close. If trader resolve erodes any more the Index could see a decline that would have a negative effect on next week’s session. If, however, it can hold at its current early Friday morning level or higher, what had been indecision and uncertainty on the daily chart would translate to confidence and strength on the weekly chart. Note the strong white weekly candle at this early point in the today’s session. That would remain in place with a neutral close or get taller with a higher close, and either would be a strong positive going into a new week.

“Doji Storm” On The Major Market Index Charts – And What It Could Mean

While the action that played out on the charts of the major market averages on Friday may seem at first bullish, there were some underlying technical issues.

The Dow Jones Industrial Average was up over 500 points early in Friday’s session and finished out the day 319 points higher. The S&P was up about 2% at its Friday session high and closed up a little over a percent. On the surface these numbers represent very bullish action but looking a deeper at the technical picture the outlook is less clear.

The problem showed up very late in Friday’s session with a sudden and sharp sell-off. This created what chartists call a “gravestone” doji candle on the daily chart. A regular doji or doji star candle forms when the opening and closing price of a stock or index are the same, or very close to the same price. When the opening and closing ranges are both situated at the lower end of the overall candle range it is called a gravestone doji candle.

The gravestone doji price action creates a large upper shadow or wick. This represents early and strong buying interest that fades later in the session. It indicates a failed rally attempt and often suggests a trend reversal, in this case, from bullish to bearish.

Gravestone doji candles formed on the daily charts of all major market averages on Friday. But this doesn’t mean that the broader market is going to immediately reverse direction and head lower. The late day pullback may just have been the markets seeking equilibrium after the initial gap higher. Or it could have simply been Friday afternoon profit taking.

But volume on Friday was also problematic. It was just under the 50 day moving average of volume. A move of Friday’s magnitude should have produced more upside volume, but that was not the case. In fact, while the overall volume picture was weak, that weak volume may not have even been positive volume as is indicated by the volume bar on the chart, and the On Balance Volume indicator.

The volume bar is colored either dark (positive) or red (negative) based on whether that day’s close is higher or lower than the previous session close. The OBV indicator is a cumulative measure of volume also based on the close. If the close is higher than the previous close the volume is added to the indicator, and if the close is lower than the previous close it is subtracted from indicator. These are very basic measures of volume and the preferred measure, in my opinion, is the Accumulation/Distribution line. It is the basis for the Chaikin Money Flow indicator and the Chaikin Oscillator.

The A/D line tracks money flow not by simply the closing price but by where the close is relative to its overall range that day. If the close is in the upper half of the session’s range than it is considered positive volume, and if it is in the lower half of that day’s range it is considered negative volume. Volume is added or subtracted from the line as indicated.

Friday’s volume bar was colored as positive and the OBV reading was higher than the previous session. Note, however, the A/D line reading was lower because the session close was in the lower half of the overall session range. In fact it was at the bottom of the range creating the gravestone doji. So, the daily gravestone doji candle action is potentially negative and volume, while average, suggested selling at the top. (Note the late session action on the ten minute chart when the index attempted to retest the highs made in the morning.)

The point to be made in this analysis is not that the market is about to immediately reverse direction and head lower. It is simply that the upside is being built on an increasingly tenuous technical foundation and a very tenuous fundamental base. The fundamental component at this point is almost entirely represented by news regarding a China trade deal.

The tenuous technical underpinnings of the market reflect the impulsive fundamental reactions to tweets and rumors. This is a component of my thesis on why the market is may be headed much lower over the intermediate term.

RightView Trading Calling A Top On “Off The Charts”

RightView Trading was featured once again, on the “Off The Charts” segment of Mad Money tonight. Jim Cramer and his team always do a fantastic job of bringing the two dimensional pictographs to life. We greatly appreciate their work.

Tonight’s piece was a follow-up to a February segment where we examined the broader market averages. At that time we expected continued strength and the market obliged. Now, unfortunately, the charts are telling a different story.

The current technical picture is ominous and we could see a quick 10% decline from current levels. If that turns out to be the case (and the charts are not written in stone) we would hope that the monthly support line we highlighted holds. Then we could see a sharp rebound. But one step at a time, here is Jim’s presentation of our charts and a link to the CNBC recap:

…and the recap:

Thanks again, Jim.

Charting Tesla’s Recent Strength

Surprisingly, over the last four months the share price of Tesla (TSLA) has outperformed the S&P 500 index by about 15%. The stock made a low in June and then quickly reversed direction climbing higher into July. A sudden downside gap reversed that upside momentum and took price back down to the $210 level. This was a 62% retracement of the June/July rally for all the Fibonacci fans out there.

Tesla’s share range continued to compress through September and is now approaching a critical juncture. An interior uptrend line has formed with support located in the $225 area. But above is a thick layer of resistance which spans the $250 to $242 levels. Additionally, just above this zone of resistance is the declining 200 day moving average.

What does this mean for the near term direction of the stock price? The takeaway is that the path of least resistance is to the downside. This does not mean that Tesla shares will not continue to test the zone overhead or that it won’t eventually break through that resistance. It does suggest, however, that if you caught the June low you might want to bank the gain. Then sit back and watch how things develop.

If Tesla’s stock price pulls back significantly you can reload, and if it breaks through the resistance zone you can quickly jump back in. In the meantime you have protected your profit.

CF Industries Holdings: A Play In The Fertilizer Patch

CF Industries Holdings (CF) is in the fertilizer business. It produces nitrogen and ammonia based products for distribution worldwide.

Over the last three months the stock price has been consolidating in a symmetrical triangle pattern. Recent lows have reinforced the idea of trend line support positioned in the $47.50 area and today price is peeking above its 50 day moving average.

The slow stochastics indicator has bounced at and above its oversold zone, suggesting the start of some upside momentum. Chaikin money flow is trending higher towards positive territory and this suggests renewed buying interest in the stock.

There are two ways to make a long trade in CF Industries. The first is to wait until a triangle breakout above the down trending resistance line. A second trade idea is to enter a position after the next upper candle close. The second strategy being that there would be an ironclad stop loss level sitting just below the $47.50 level. This provides a low risk/ high reward long entry point.

Positioning stop loss levels is often more important than deciding on entry points. Remember that money management is the prime directive.

Charts Of Interest – $DAL, $SRCL, $BBY, $PPFT

The weekly chart of Proofpoint (PFPT) shows several attempts over the last two years to break above the $130 level. Another attempt is underway. Watch for a confirmed breakout which could potentially be the start of a new bull phase.

Shares of Delta Airlines (DAL) have been declining since August this year. More recently they have paused and gone through a consolidation. The stock looks like it is ready to breakdown and out of that consilidation range. It could be the start of a new down leg .

Best Buy (BBY) shares have also been consolidating this month but they look prepared to breakout. An upper candle close above $69 would be confirmation.

Stericycle (SRCL) had a big day on Monday, up over 3.5%. It looks like the stock has broken out of a bullish flag-like pattern. With an overhead gap that needs to be filled, Stericycle looks like a long candidate.

Remember, maintain those stops because capital preservation is job one.