Back on November 9th a large wick shooting star candle formed on the Dow Jones Industrial Average daily chart and the $&P 500 Index chart. A large dark engulfing candle formed on the NASDAQ Composite daily chart. These candles suggested a broader market pullback was in order. There was a brief decline, but not the short to intermediate top that might have been expected. In fact, the averages quickly returned to their November 9 levels.
Now another indication of a possible short to intermediate term top has formed on all three charts. It is the bearish eveningstar reversal pattern. This 3-day pattern consists of a large up-day candle, followed by a doji-like candle, and completed by a large down-day candle. The eveningstar represents a transition in price action and investor sentiment from bullishness to bearishness.
Today’s finishing dark candles formed because of a late session waterfall decline in all the averages. It can be seen on the ten minute DJIA chart. The eveningstars could trigger declines to the next levels of support on the individual index charts. It looks like the Dow and the S&P are likely to retest their October highs. The NASDAQ may be headed down to a retest of its 50 day moving average.
This market quickly absorbs good news and just as quickly discounts bad news. It’s a tough one to trade. Keep any eye on these index charts and keep your stops tight.
The broad market indices seemed to have absorbed and then quickly discounted (to some degree) today’s positive Covid-19 vaccination news. Within the first hour of trading the initial rally in the indices began to fade. They wound up finishing the session near their lows. The Dow was still up nearly 3% and the S&P 500 index was up a little over 1%, while the NASDAQ Composite was down 1.5% on the day. But the charts were damaged.
Today’s erratic price action transformed the look of the index charts from bullish to bearish. The great news, while initially reflected in the opening gap up on the charts, evaporated as dramatically as it appeared. Within the first ten minutes of trading the indices began pulling back. Mid-session there was an attempt to regain some of the initial positive momentum, but by 2:00 o’clock the fade returned and accelerated into the closing hour. The candles that formed on the charts look ominous. The price action now suggests a more negative scenario than positive for stocks over the near term.
Look at the Dow and the S&P daily charts. Today’s candles are called “shooting star” candles. Investopedia defines a shooting star as a candlestick that forms when a security opens, advances significantly, but then closes the day near the open. The result is a small lower real body candle with a large wick.
Shooting stars are often seen as reversal candles when they appear near old highs or other important levels of technical resistance. An interpretation of the price action suggests that buyers have lost control and sellers are taking over.
On the NASDAQ daily chart a bearish engulfing candle formed and it may be even more negative than the shooting star candles. This particular engulfing candle opened near its high of the day and closed near its low. In the process, “engulfing” with its real body range the entire range of the two previous trading sessions. This clearly negative price action is taking place right near the September and October highs. Of course, this opens up the possibility of a triple top formation.
The upshot of these candles is that it appears investor sentiment may have shifted bearish after turning bullish at the beginning of the month.
Bitcoin has been making a steady series of higher highs and higher lows since it established its March low. In the process, it has also completed the right side of an inverse head and shoulders pattern. This pattern projects a considerably higher price target. But there is another interesting technical dynamic on the weekly chart that can be seen after making a small adjustment to a Fibonacci measurement.
Normally, Fibonacci retracement levels are measured from a previous high to a recent low. But if you adjust that rule slightly and draw the Fib retracement lines on the Bitcoin weekly chart using the 2017 high and instead of the 2019 low, use the 2020 low instead, the new multiple retracement levels fit perfectly onto previous levels of support and resistance on the chart.
The 38% retracement matches the inverse head and shoulders neckline level; the 50% retracement level marks what would become this year’s August high; and the 62% retracement level mirrors the 2019 high.
Adjusting these Fibonacci measurement points might be called “form fitting” and that would be fair. Nonetheless, I will be watching the action around an advance to 62% retracement level at the 13,861 area or the action around a pullback to the 50% retracement level, near the 12,000 level. They have been relevant in the past and could be again. History doesn’t always repeat itself but it often rhymes.
Poor start to trading this week. The talking heads are out with a number of fundamental reasons for this morning’s downturn, that they didn’t see coming on Friday. What concerns technical analysts is not so much cause but effect. Simply, how information or misinformation plays out on the charts. The pictographs are where the truth resides.
This Dow Jones Industrial Average daily chart has received a lot of use over the last several months. The quality of information it represents has been excellent. Areas of support and resistance have maintained their validity on the way up and on the way down.
The DOW has been finding support in the 28,200 area this month. In September this support level was neckline resistance for a bullish inverse head and shoulders formation (highlighted in green). At this point in the Monday session the 50 day moving average is acting like support. If this level were to fail the next area of support on the chart would be 27,500. A large head and shoulders pattern formed in August and September (highlighted in blue) and the 27,500 level was neckline support for that pattern.
The triangle (highlighted in red) has been the most recent and relevant pattern. Support has broken decisively at this time in early session trading. The next area of support as suggested by the DOW chart is near 27,500. This is former August head and shoulders neckline support. It is also September shared resistance along with the 50 day moving average.
The Dow triangle pattern, like many chart patterns, projects potential price targets, when support or resistance levels are broken. In this case support has been broken. Then by taking the height of the triangle and subtracting it from the support level, we get a downside price projection that targets the 27,500 area. As we have noted this level was both support and resistance at different times in the charted period.
In conclusion, a series of price patterns have formed over the last four months on the DOW daily chart. These patterns have shared both support and resistance levels as they have developed. This occurs because of the underlying fundamental dynamic of supply and demand. Traders should understand how the process reveals itself on the technical level, as patterns on the charts. This particular DOW chart has been very helpful in representing broader market movement.
At noon on Wednesday I Tweeted out “am I the first to call double top?” I attached this weekly chart of the NASDAQ Composite chart.
The Tweet was tongue-in-cheek but as it turned out two hours later in another tweet, I noted a possible head and shoulders pattern forming on the daily NASDAQ chart.
It looked like the one that formed on the same chart in early September. That formation was followed by a 12% decline in the Composite Index. Thursday’s weak open is not validation of the this second head and shoulders top. We will have to see how the rest of the day plays out, but it requires careful monitoring.
If the NASDAQ were to experience another peak-to-trough decline like the one in early September, it would move back down to the September low in the 10,600 area.
Yesterday we took a look at the Hasbro (HAS) weekly chart. The weekly charts put the daily timeframe in perspective and often suggest entry and stop loss levels. I have done my own anecdotal studies of weekly charts over the many years I have been trading. I found that I have a higher degree of success when trading the weekly timeframe. Success meaning the number of profitable trades not the most overall profits. How is this the case?
Trading the weekly timeframe requires wider stop loss levels and consequently smaller overall position size. This limits trading profits. The wider stops keep you in the trade longer. This prevents the kind of annoying whipsaws that seem to take out your stop before reversing, and then moving in the direction you had initially predicted, just without you. Anyway, if you’re having a bad run or the market is too volatile for you, step back and try trading the weekly timeframe.
Back to the Hasbro daily chart. The stock broke above the triangle resistance level situated around $83.25 that we saw on the weekly chart. A strong 3.5% move in Thursday’s session powered it higher. There is little resistance from here to the $91 level which is also the 68% Fibonacci resistance level of October 2019/March 2020 range. The technical indicators have been trending higher since last month’s low. More recently, the 50 day moving average has crossed above the 200 day average, the classic “golden cross.”
So, on Hasbro’s weekly and the daily timeframes, the price action and the technical indications are positive. Now, of course, there could be a short-term pullback and a retest of the $81 triangle resistance-turned-support level, but the intermediate direction of the stock price looks to be higher. The final chart in our analysis is the seasonal chart from the Stockcharts.com website.
It appears that November is the time of year to buy Hasbro. This plays into the bullish intermediate term technical take. The bottom line is, whether you put on a trade or not, that multiple timeframe analysis is a good technical exercise. Also, don’t forget about trading the weekly charts. It can be very helpful.
Hasbro (HAS) is not a stock that gets a lot of regular attention. It doesn’t come up on my equity screens very often. Stocks like Electronic Arts (EA) and Take-Two Interactive Software (TTWO) certainly have, as the shift from hands-on play to virtual gaming has continued. So, when Hasbro appeared on one of my long trade screen lists it demanded my attention.
As it turns out the Hasbro charts look good on multiple technical timeframes, as well as the seasonal timeframe. Let’s start with the weekly chart.
Hasbro’s share price collapsed between October 2019 and the 2020 March low. It lost 60% of its value but after making this year’s low a massive morningstar pattern formed, and the downtrend trend reversed direction. (The majority of readers know what a morningstar pattern is but for those that do not please click here.) The pop that followed the morningstar retraced 50% of Hasbro’s previous decline. Then the stock began making a series or higher lows below the 50% retracement level. This, of course, formed a rising triangle pattern.
Last week the stock price broke above horizontal triangle resistance and we are seeing follow-through this week. The MacD is tracking higher and is preparing to break above its centerline. The Chaikin Money Flow indicator is doing the same. These reading represent positive and improving price momentum and money flow.
There are additional positive technical indications on the daily and the seasonal charts, which we will take a look at in “Part Two” later today.
Last month a head and shoulders pattern formed on the Dow Jones Industrial daily chart. The neckline of the pattern around the 27500 level was intersecting with the rising 50 day moving average. A break through those support levels projected a return to the 2600 area and had the potential for a much deeper loss.
The subsequent break through neckline support reached about 26500 and at this point a morningstar pattern formed. The morningstar is a bullish three day reversal pattern consisting of a large down-day candle, followed by a narrow opening and closing range candle, and completed by a large up-day candle. It represents a transition in trader sentiment from bearishness to bullishness and suggested the pullback was over.
Over the following weeks the Dow moved back up above its 50 day moving average. Now it has returned to the 28500 level. An interesting pattern has formed during this process of pre-breakdown consolidation, then recovery, and finally the move back above the 50 day average. It is an “inverse” head and shoulders pattern. This pattern is the reverse of the normal head and shoulders and it suggests a bottom has formed.
In this particular case, the inverse pattern shares its left shoulder with the right shoulder of the prior head and shoulders pattern. In that way it is called conjoined. This shared pattern may seen unusual but it appears more often than you might think.
The broader market is in rally mode today, at least at this point in the session, and the Dow is attempting to break above inverse neckline resistance. It looks like breaking above this 28250 level is the key to moving higher and making a new all-time high. On the other hand, the old neckline at 27500 looks like support. Taking out that support level could power a move that revisits the September low.
The saying goes, “may you live in interesting times.” The source is as unclear as is its intention. Widely accepted as an acknowledgement of good fortune, it’s original intent was ironic and actually meant to be a curse. Interesting times can be dynamic and new. Times when men walk on the moon and the internet connects us all. But interesting times can also be troubling, turbulent, and painful periods of history. It depends on your perspective.
We do live in interesting and ironic “market” times. At first glance the market is bullish. The negative aspect of this bullishness is that under the surface the market is being manipulated. It is being supported by excess liquidity, a need for yield, and by accommodative Federal Reserve Bank policies. This conflict
Therefore, any casual observer of market dynamics must come to the conclusion that the fundamentals (in many not all cases) have lost their primary relevance. Stock valuations are no longer judged by dictum set down in Wharton. Not even close. Why? Because profits don’t matter, big ideas matter. A company that captures investor imagination is often bought, even if it takes years to or never makes a profit. Valuation has lost its meaning in the traditional sense. What is valuable now is an “innovative” concept even if there is no actual market for it, big Broadway presentations, and cool CEO’s.
Interesting times, indeed. Maybe someday a Wharton instructor will look something like this:
(BTW Microsoft is a great company and the video is not meant to be an example of a company that is all show. It’s just a great video.)
Funny fundamentals then often translate to tricky technicals. One day short term fortune, the next a curse. So, what should you do if you find yourself blindsided and whipsawed by the fates. There are two options: widen your trading perspective or; shorten your trading perspective. The first option means simply to trade the weekly timeframe. Weekly charts make sense in almost any trading environment. They require wider stops which means smaller position size, but often they will keep you in a trade long enough for your original trading thesis to play out. The second option is the day trading option. It requires larger position size but tighter stops, and never holding a position overnight.
I prefer the former. Using the weekly charts is a good idea for beginners because it can limit frustrating whipsaws which discourage neophytes to the business. There is nothing worse than developing a trading idea based on a chart pattern, watching it begin to develop then suddenly reverse. You get stopped out and then, of course, it reverses once again. Now the price action plays out exactly as the set-up had predicted in the first place. Interesting, right? But it sucks. I like weekly charts and suggest new traders or traders in a slump give them a try.
When it comes to the market “interesting times” are negative in my opinion, and familiar times are better traded.
The previous post looked at the possible formation of a bear flag on the NASDAQ Composite daily chart. It implied a decline that retraced 50% of the previous March/September rally range. Another bearish reversal formation is under construction and near completion on the Dow Jones Industrial Average chart. A classic head and shoulders pattern has developed over the last two months.
As the Dow chart clearly illustrates the August high formed the right shoulder, the head is the September high, and this week’s lower high may be the right shoulder. Neckline support is located at the 27500 level. This is an important support level because it intersects with the horizontal support line drawn off the June high, a three month uptrend line, and the 50 day moving average. If this nexus of support were to breakdown the head and shoulders pattern projects another approximate 6% decline from current levels. This would revert the average back just below its 200 day moving average.
A break below the neckline 50 day average would be a major technical moment. If accompanied by the NASDAQ taking out its key 10750 level the outlook for the broad market would be clearly negative. In both cases, however, confirmation is required just like any technical price pattern.