Author Archives: Rob Moreno

Be Alert To This Pattern On The S&P 500 Chart: It Formed At The December High And Every High Since October

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.

These Indicators Suggest There Is Volatility Ahead

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.

Market Outlook: What Was Once Solid Support Is Now Formidable 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 Financial SPDR Fund (XLF) – Levels Of Fibonacci Fan Support And Resistance

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.

Gold Poised To Retest Long Term Resistance

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.

The S&P 500 Pares Half The Year’s Losses In The Last Four Trading Days – Happy New Year Algos!

The S&P 500 index was down nearly 13% for the year on December 24. We were officially in “bear market” territory with a 20% peak to trough decline in 2018.

But the sharp low-volume rally over the last four trading days of the year recovered half the 2018 loss and lifted us out of bear market territory. We are safely back into correction mode.

Happy New Year, Algos!

Let The Amazon Chart Be Your Market Guide Over The Short Term

Wednesday’s broad based rally formed “morningstar” patterns on a large number of daily charts.

The morningstar is a three-day formation that consists of a large down-day candle, followed by a narrow opening and closing range “doji” candle, and completed by a large up-day candle. It is considered a reversal pattern and represents a transition in trader sentiment from bearishness-to-bullishness. It is often seen at important bottoms in price.

A morningstar formed on the Amazon (AMZN) chart in Wednesday’s session. But, so far in trading today there has been little in the way of bullish follow-through. This gap down and lower price action is forming a bearish harami on the Amazon chart and, no doubt, many other charts.

The bearish harami is a dark body candle that is engulfed by or sits within the opening and closing range of a previous large white body candle. It can be a sign of a shift in the trend but more often precedes smaller fluctuations in price.

In the case of the current harami on the Amazon chart it is most likely a sign of temporary price uncertainty. Monday’s drop and Wednesday’s pop, leave a lot for the stock and the broader market to absorb.

At today’s intraday low the Amazon harami candle was solid black and that was particularly bearish. As the session draws to a close the market is bouncing back a bit and more of a hammer candle is forming on the daily chart. A hammer is bullish.

In any case, the bottom end or the “doji” low of the morningstar would have to be taken out to invalidate the bullish reversal pattern. While a daily close back above the $1475 top of the morningstar on the Amazon chart would be bullish reversal confirmation.

Action in Amazon appears representative of a number of stocks in the broader market, and as such could be a good indicator of broader market action over the short term.

Chairman Powell Hammers The “Hammer” Bottom Scenario

On 12/11, Jim Cramer featured RightView Trading’s take on the technical condition of the major market indices on the “Off the Charts” segment of Mad Money. It is always a pleasure to be a part of the show and we thank Jim for that opportunity.

At the time, we noted that the major market index charts had arrived at a zone of support on their weekly charts. These areas was defined by the lows made in February and April this year.

When we made this observation the DOW, the S&P 500, the NASDAQ Composite, and the Russell 2000 were all above their lows for the week, and looked like they were attempting to bounce. The best case scenario we speculated, would be for the index charts to form a weekly hammer candle close. That is a close in the upper half of their overall range. This would infer a low was in place and a possible return to the November highs.

The support zone seemed like a logical place for a bounce, but that was not to be the case.

Instead of closing in the upper half of their range the Dow, S&P, and NASDAQ closed near their low and right on support. The Russell closed on its low but broke through its support zone.

While we were optimistic when we outlined the bullish scenario, we also looked at the alternative bearish outcome. What if these weekly levels of support were to give way? The Russell chart we speculated would give us an idea of how much lower the indices could go.

The small caps had led the broader market lower, the thinking was they might also, lead the market higher.

By taking the overall height of the Russell’s November consolidation range and subtracting that number from the 1450 support line, we projected a measured downside move of about 6.6%.

This would take the Russell back down to the 1340 level where there was buying interest in the first half of this year. It is also, the 50% Fibonacci retracement level of the 2016 and 2018 range. The 1350 level seemed like another logical place for the index to find support.

As it turned out, Chairman Powell was able to take the Russell back down to the projected 1350 level in a matter of minutes. The Federal Reserve quarter point hike and the statement that accompanied it took the entire market down on Wednesday. The DOW, S&P, and the NASDAQ all crashed through their support zones and finished the session near their lows.

In early Thursday trading the indices have continued lower, however, the Russell remains around its measured move target area, near the 50% Fibonacci retracement level. It is a long shot but there is one last possible bullish outcome to the weekly trading scenario.

The weekly candles are not fully matured, that is, there are still two days of trading to go in the week. If indices were able to rally and close up an equivalent 45 S&P 500 points from their present level, they would move back near their support areas and form hammer candles on their weekly charts.

It is a lot to ask in this current market environment and it is not a probable outcome, but the markets have experienced some volatile reversals recently and no one knows what the machines are going to do next.

Short High Yield Corporate Debt With This ETF

Total corporate debt is estimated to be around nine trillion dollars. There is increasing concern over how companies will manage this load as credit spreads widen.

At some point in time, rising interest rates will slow economic activity and the credit cycle will turn. Corporate profits will decline and some companies will see their investment grade debt downgraded to junk status.

There is a way to trade this gloomy outlook for corporate bond prices. Trade being the operative word.

The ProShares Short High Yield ETF (SJB) seeks daily investment results that correspond to the inverse of the daily performance of the Markit iBoxx $ Liquid High Yield Index.

It is a short term trading vehicle whose return, because of daily compounding, will differ over time from the target index. It is not an investment vehicle because over the long term, inverse funds are likely to lose money.

It does offer an opportunity to trade a potential breakdown in the iShares $ High Yield Corporate Bond ETF (HYG) without taking a short position.

The HYG made a high in October but immediately reversed direction. It moved below its 40 week (~200 dma) moving average and has returned to support in the $26 area. The inverted image of the SJB shows the inverse fund back above its 40 wma and testing resistance in the $23.25 area.

The indicators at the bottom of the chart reflect improving SJB price and money flow momentum. But the trade is triggered by a breakdown in the HYG that is confirmed by a breakout in the SJB. Take quick profits or losses.

Again, the SJB is a trading vehicle and meant to be held for a short period of time.