Author Archives: Rob Moreno

Preparing For Next Week: A Multiple Time Frame Review Of The Major Market Indices

Last week could have been a transitional period for the major market averages. The Dow Jones Industrial Average rolled over and sliced through its 50 day moving average, accelerating lower in Friday’s session. The decline in the S&P 500 Index began on Tuesday and picked up speed as the week progressed closing below its 50 day average. On the other hand the NASDAQ Composite, near its April and February highs, fought to hold that position. But the weight of the Friday decline in the broader market became too much and the Composite closed near its daily low.

This is how last week’s action looked intraday on a 30 minute chart:

On the daily time frame the declines look as you would expect deeper for the Dow and more subdued for the NASDAQ, with the S&P was somewhere in the middle. Downside Dow volume on Friday was large, about 70% greater than the 50 day moving average of volume. This onslaught of selling pressure took the Stochastic Oscillator into a deeply oversold condition. Bounded oscillators like the stochastic oscillator can stay in an oversold or overbought condition for long periods, but the more optimistic take is that the Dow attempts to moderate about the middle of next week.

Often the greater truth about price direction over the short-to-intermediate term is found on the weekly timeframe. This is how last week’s price action played out on our index charts.

These trend lines however arbitrary have been on these charts for some time. The Dow has sliced through its uptrend line, the S&P is resting precariously on its trend line, and the Composite, again is retesting previous highs. What does appear bearish about the action on the NASDAQ chart is the fact that prior to this week the Dow and the S&P were trending higher. The Naz, however, has ben trending sideways in a horizontal channel. In that context with the Dow and the S&P potentially breaking down the Composite is more likely, in my opinion, to follow lower than lead higher.

What about the monthly timeframe, is it too early to gain some information form those charts?

The monthly S&P 500 chart shows the strong rally that began in April 2020 and continued for over a year. This last April was a particularly strong month followed by a neutral May “doji” candle. (Some of you may know where I am going with this.) If the index continues lower next week and closes out the month near its lows, it would form a large dark June candle. This April-May-June pattern of strong up-month candle, neutral or doji-like month candle, completed by a strong dark or down-month candle, is called an eveningstar pattern. It represents a transition in investor sentiment from bullishness-to a more neutral position-to bearishness, and it is considered a fairly reliable reversal sign at or near market tops. A previous eveningstar-like pattern formed on the monthly chart and it marked the conclusion of the 2019 rally.

The overall conclusions to be drawn from this analysis is that all three of the indices have a high probability of continued downside early next week, with possible moderation by mid-week. This Friday’s close will be as significant as was last Friday’s close. A lower Friday close would form a large dark candle on the monthly chart. It would also most probably mean that the NASDAQ Composite had come off its third attempt at moving through the upper channel bound and would probably have dropped below its 50 day moving average. Then there would be talk of the “illusive triple top”. On the other hand, the best case scenario for next week is mid-week moderation and a strong close to the week.

Either way expect volatility next week. It will difficult to trade and should, in my opinion, be observed from the sidelines. There will be a lot to learn from observing next week’s action. I’ll be watching the S&P’s movement near its 50 day average and the integrity of the uptrend line on its weekly chart. On the DJIA daily chart the 3300 level, which was the March high, should supply some support. The NASDAQ Composite is the tricky one. It has room to move around within the sideways channel it has been in for so long, and its a wide range.

Drilling down on the Composite my focus will be on the uptrend line within the channel drawn off the May low to the current high. The next level of support below that trend line is the 50 day moving average. A break below that average is trouble. Of course, channel resistance is closer than channel support and the Naz spent most of last week testing the upper bound. A break out is a possibility, you know what they say, “there is no such thing as a triple top”. But I do not think it is very likely.

In conclusion, be patient and remember that your first priority as a trader is to protect your capital.

Double Eveningstar Pattern On The Dow Jones Industrial Average Chart

What is an eveningstar pattern and what does it mean when there are two eveningstar patterns on a chart.

An eveningstar is defined by Investopedia as:

The evening star pattern is considered a very strong indicator of future price declines. Its pattern forms over a period of three days:

1. The first day consists of a large white candle signifying a continued rise in prices.
2. The second day consists of a smaller candle that shows a more modest increase in price.
3. The third day shows a large red candle that opens at a price below the previous day and then closes near the middle of the first day.

The sequence of candles reflects a transition in investor sentiment from bullishness, to neutrality, and concluding with bearishness. It is usually seen at tops and is a bearish reversal signal. An eveningstar pattern formed on the Dow Jones Industrial Chart last week and a second formed by the end of trading on Tuesday. One eveningstar is negative but for a second to immediately follow the first and make a lower high should be particularly concerning to bulls.

In addition, the NASDAQ Composite has been sending a negative message since the beginning of the month. A close look at the price action on its daily chart shows the formation over the last three days of another eveningstar. And yes there is an eveningstar formation on the S&P 500 chart.

Exhaustion Gap On The Alphabet Chart – The Rally May Be Coming To A Conclusion

The rally in Alphabet (GOOGL) may be over. This is a pretty bold statement considering the strength in the stock over the last six months. I’m not making a prediction but rather reporting on a technical condition on the chart and its implications for price going forward. That’s what good technical analysis does, it suggests possibilities and probabilities. Good traders construct a trading thesis around those likelihoods.

The Alphabet (GOOGL) daily chart is highlighted with three different but related types of price gaps. They are the breakaway gap, the runaway or measuring gap, and the exhaustion gap. This particular sequence of gaps suggest that the rally in the stock has reached an end and it is now vulnerable to a serious pullback.

Let’s take a look at the Alphabet gaps and their technical definitions and significance. The first gap on the chart occurred in November last year and it is called a breakaway gap. A breakaway gap usually occurs on heavy volume and usually signals the start of a significant move. After that initial gap the stock moved sideways and slightly higher into February of this year. Then in February it gapped higher a second time. This second gap is called a measuring or runaway gap. A measuring gap is a sign of continued strength and usually occurs about halfway through the rally move. Alphabet’s measuring gap was exactly in the middle range of what would be the overall range of the rally.

Finally, a shooting star candle gapped up in Wednesday’s session. A shooting star is a candle with a high upper wick or shadow and a lower range close. It reflects an inability to hold a higher price level and, in Alphabet’s case, is made more significant by another gap opening. This gap is called an exhaustion gap, the third and final phase in the three gap sequence. It signals the conclusion of a rally.

Of course, confirmation is key to any pattern target objective or technical indication. A close below the exhaustion gap within the next several days would suggest that the move in Alphabet had come to a conclusion. Follow-through price action will be required to fulfill the most bearish implications of the three gap sequence.

Bitcoin – The Chart Pattern Targets $70,000

Whatever you want to call Bitcoin, a digital currency, a store of value, or a separate asset class of its own, it charts like an equity. It goes through periods of consolidation followed by rally periods. This price action is a function of investor interest and sentiment. The more interest in a stock, the more volume, and the better it charts. That’s why I disagree with those who say that volume analysis is dead.

I look at volume the same way mathematicians look at the “law of large numbers”. The greater the number of participants that are involved in the pricing of a stock, the better the quality of information that is revealed in the charts. Recent institutional interest in Bitcoin has increased overall volume and consequently the price patterns, in my opinion, chart with more structure and consequently more reliability. Specifically, price has traded around well-defined technical levels on the daily chart. Let’s take a look.

The daily chart shows Bitcoin moving higher this year. In the process it has gone through two periods of horizontal consolidation that have similar characteristics. The first played out in the first five weeks of the year. Bitcoin began the period by trading up to an early high in the first two weeks of January, then retraced that early move in the second half of the month. It found support at the 50 day moving average at the $30,000 level. Then it jumped back up to its old high in the $42,00 area which was prior resistance. As the rebound move off the low was underway the Relative strength Index crossed over the 21 day moving average of the index. It eventually eclipsed the 50 center line level. At the same time, the Chaikin Oscillator, a measure of price momentum, crossed above its 21 period moving average. A large white candle ultimately took Bitcoin through $42,000 resistance and signaled the start of a repeating process.

The second Bitcoin channel began like the first with an early rally up to its eventual channel high, this time situated at the $57,500 level. This second rally run was nearly identical in price range to the first rally range. It was a move of approximately $13,500. When the second target priced was reached, Bitcoin’s price fell back down to support, again, near its 50 day moving average. The bounce that followed saw bullish crossovers on the RSI and Chaikin Oscillator like the the crossovers on these indicators in the first rally. Bitcoin’s price moved back up to its previous high at the top of the channel around mid-March. This second process of rally that defines the range, a retracement, and then bounce back up to the old high, took exactly the same number of weeks as the first series. So, the price range was basically the same and the time for the process to play out was basically the same. This reflects similarity in both time and price.

Now Bitcoin is breaking above the second channel high. The question is will the process repeat a third time? My guess is probably not as precisely as the earlier patterns. But there is a good chance that the measured move off the second channel will be met after some backing-and-filling. That is a target price of about $70,400. The institutional interest and the current move over $60,000 has got to have converted many traders into HODLers and many skeptics into believers. Bitcoin has become a force to be reckoned with and however you define the force, it is powering price from the lower left of the chart to the upper right.

Ten Tradable Stock Charts with Positive Price and Money Flow Momentum

I scan primarily for stocks with a combination of positive price momentum as measured by the Relative Strength Index (RSI) and positive money flow momentum as suggested by the Chaikin Oscillator. You can scroll through the “Chart School Technical Indicator” section of Stockcharts.com for information on these two indicators. Then from that list I drill down and pick out stocks with strong positive candles that appear to be moving out or preparing to move out of consolidation or base patterns. These are usually safe and profitable trading candidates.
However, the price action over the last week has been erratic to say the least. So use caution when trading, keep stops tight, and follow your discipline.

Here are some candidates for Monday:

Bitcoin – This Chart Pattern Suggests 20% More Upside and a New All-Time High

A bullish triangle pattern formed on the Bitcoin chart last month. It signaled a pause in the long term uptrend and the beginning of a consolidation phase. This month Bitcoin is breaking out of the triangle consolidation and is moving higher.

Follow-through price action is suggested by taking the height of the triangle pattern and adding it to the breakout point. This measured move targeted about a 30% move higher. Bitcoin is up 10% since the breakout and has the potential for 20% more upside from its current level.

Bitcoin’s breakout was initiated off a small base just above the 50 day moving average. The average has been steadily rising, tracking from the lower left of the chart to the upper right. Stochastics has crossed above its centerline reflecting improving price momentum. On balance volume is back on the rise and above its 21 period signal average. The combination of positive price action and money flow, and the strong bounce off the 50 day average is a very bullish combination.

If Bitcoin is able to to achieve the measured move target price it would also make a new all-time high. At this point, it is likely that it would begin constructing a series of higher highs and higher lows. This would mark the start of the second phase of its primary uptrend.

Five Stocks Making Bullish Morningstar Reversal Patterns

One of the most watched for candlestick formations is the morningstar pattern. It is a three-day series of candlesticks that suggest the end of a down trend and a reversal to the upside. The first component of the pattern is a large dark down-day candle with the close near the low of the day. It is followed by a doji-like candle. A doji is a candle with a very narrow opening and closing range, meaning that the close is at the same level as the open. The morningstar is completed by a large up-day candle with the close near the high of the session.

The implication of the three-day pattern is represented visually by the price action. It is simple: bearishness, followed by indecision in the doji, and finally bullishness. A clear visual of the transition in investor sentiment.

Friday’s open looks a little weak so remember all technical patterns require confirmation and a close below the doji low negates the bullishness of the pattern. That said, here are five morningstar set-ups:

SPC Commerce: The Cycle Of Higher Highs Continues

SPC Commerce (SPSC) is a cloud-based supply chain and logistics firm. The stock price has been making a series of higher highs and higher lows since September last year. It has established a strong uptrend line above the rising 50 day moving average. Chaikin money flow is in positive territory and the relative strength index is above its center line. These readings reflect positive price and money flow momentum. There is another bullish indication that at first glance is not as evident.

During SPSC’s four month run the highs it made in September, October, December, and January all follow 29 day cycles. That is, approximately every 29 trading days a high in the cycle of higher highs was established marking the end of one cycle and the beginning of another cycle. The most recent low was made on January 14 last week and a continuation of the 29 day cycle suggests that the next high will be made on February 22.

There is an old technical saw that says something along the lines that once a cycle pattern is recognized, it fails. That remains to be seen but ultimately the trend continues or ends based upon the integrity of the simple red uptrend line. If it continues to hold the trend is intact and if it is broken the trend is considered broken. The bottom line at this point in price and time, however, is that SPSC is in a primary uptrend and the technical picture is bullish.

(Picture courtesy of: https://valuestockguide.com/)

Bitcoin – Has Reached A Technical Measured Move Price Target – Time To Book Some Profits?

Bitcoin (BTC/USD) broke out of an inverse head and shoulders pattern in June on the weekly chart this year. The neckline of the pattern at the time was intersecting with the downtrend line of a three year triangle pattern. This multi-year triangle pattern projected an upside measured move price target of around $29,000 or roughly a 190% gain. The move is calculated by taking the height of the triangle and adding it to the breakout point. It seemed an ambitious goal. I always question the reliability of such large patterns but this triangle had three data points on the support line, and three on the resistance line. They clearly defined the pattern but while a clearly defined pattern is one thing, reaching a very large price projection is another.

In the last half of 2020 Bitcoin rallied and rallied hard. It has now reached the $29,000 triangle price projection. In fact, Bitcoin is up over 300% since the start of the year. So, the question is: do you trust the pattern and its achievement and take profits, or do you see better things for Bitcoin in the new year and HODL on? There are a number of individual factors that come in to play. Traders are sometimes lumped into one category but we are all different with different trading requirements and personal goals. I always see the middle of the road as a good option. Take some profits. If you own a bunch of or just several Bitcoins then take some profits. It just seems like a logical option at a logical price level.