Author Archives: Rob Moreno

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.

Bullish Morningstar Reversal Pattern On The SPY Chart Suggests Retest Of Recent Highs

Thursday on Twitter we pondered the possibility that a bullish morningstar reversal pattern could be forming on the $SPY daily chart. The only piece of the pattern missing was the third and final large bodied up-day candle.

That was exactly what we got at the end of Friday’s strong session, with the formation of a large white candle and the third piece of the candlestick formation. For those unfamiliar with this pattern, please buy a book on candlestick charting and read it. In the meantime, a morningstar is a three day bullish reversal pattern. The first day is highlighted by a large dark bodied down-day candle, it is followed by a narrow opening and closing range doji candle, and is completed by large bodied up-day candle.

The combination of the three candles represents a transition in trader sentiment from bearishness, to a neutral posture, to bullishness. It is a beautiful name that coins an elegant technical metamorphosis from continued negative prospects to future optimist possibilities.

Continuing on, the morningstar and its sister pattern the bearish eveningstar pattern are considered by most chartists to be fairly reliable patterns. Ths is specially true when they form at important technical levels like moving averages or Fibonacci retracements. In the current case, it has formed at this month’s earlier lows. The 282.50 level is support based on prior bounces after the formation of hammer-like candles. Each of those 4% bounces that took the SPY back up to the $293.50 area, and the 50 day moving average. That is now consdered the first level of overhead resistance.

So, while the day-to-day machinations of the market seem erratic and without explanation, this turbulence is occurring within clearly defined levels of support and resistance. Your own trading style and stomach for volatility will determine if you can trade within the zone, or if you prefer to be patient and wait for confirmed breakouts from those levels of support and resistance, which that suggest the direction of the market over the intermediate term.

Powell’s Cat: The Market In Superposition

Federal Reserve Chairpersons never reveal very much about the Board’s economic policy between formal board meetings. Chairman Powell may break that tradition when he speaks at 1:00 PM today. The markets will wait and whatever they are given in the way of new, or regurgitated information, they will attempt to use to further reiforce their either bullish or bearish thesis.

Good will be good, or good will be bad; or bad will be good or bad will be bad. Right now good and bad are in superposition, that is like in quantum physics they occupy the same space. “Powell’s cat” is alive (bullish) or dead (bearish) until 1:00 PM.

But take a look at the recent individual candles on the daily index charts. They are clearly reflecting weakness and have rolled over in the last several days. This could be expected after they have approached or made new highs, and the Fibonacci retracement levels on the S&P 500 chart are modest potential pullback levels.

What is becoming a growing concern however is the combination of the continued call for lower interest rates against a back drop of higher equity prices, low inflation numbers, and low unemployment. The market must think at least one of three things: equity prices are headed lower, or inflation is about to surge, or the employment figures are not accurate.

Employment figures would seem the least volatile over the intermediate term, and do interest rates first have to go negative before a sudden bout of inflation can be adjusted for? It looks to me like the primary concern is asset prices readjusting. But while lowering interest rates will temporarily spark equity prices higher, they will only worsen that eventual downside adjustment when it does come. Market forces should almost always be allowed to play out naturally.

Right now the market needs a 10% pullback more than it needs a 10% rally.

Medial Devices and Instruments ETF Is Breaking Out

The medical devices and scientific instrument and research companies are showing strength this month. Several in the space like Danaher (DHR) and EXACT Sciences (EXAS) look like they are ready to break out.

One way to take advantage of the broad sector strength is to trade the iShares US Medical Devices ETF (IHI). The daily chart of the fund shows it breaking our of a symmetrical triangle-like consolidation. A successful breakout projects a pattern target price that makes new highs.

The RSI indicator is tracking above its center line confirming the positive price momentum, and the Chaikin Oscillator is above its center line reflecting improving buying interest.

The trade offers a good risk-reward ratio at its current position.

Investor Concern Replacing Complacency – Reversal Pattern On The Volatility Chart

The iPath Short-Term Futures ETN (VXX) tracks an index with exposure to futures contracts on the CBOE Volatility Index with average 1-month maturity. It resets daily so traders should use it as a short term and not a long term trading vehicle.

That said, a bullish morningstar reversal pattern has developed on the VXX weekly chart. The pattern formed just above the $26 level which correlates with the 15 level on the Volatility Index (VIX). Monitoring how this pattern plays out on the weekly time frame can provide context to analyzing the daily time frame.

A morningstar, as regular readers know, is a bullish three-day reversal candle formation. It consists of a large range down-day candle, followed by a narrow opening and closing range doji type candle, and completed by a large up-day candle. It suggests a transition in trader sentiment from bearishness, to uncertainty, to bullishness. The morningstar has been rated as a reliable candle pattern.

This morningstar comes after a period of trader complacency but that attitude may be about to change. A corroborating technical development is the bullish crossover in the MacD. It reflects a turn in upside price momentum. Upside volume has also been increasing over the last month.

The VXX needs to continue higher from here to confirm the legitimacy of the morningstar pattern, and any potential reversal in sentiment. But, concern may be replacing complacency.

Prepare For The Bond Implosion Now With This ETF

Bond yields continue to reflect a risk-off environment. It has been that way for a long time but when that docile dynamic starts to reverse, it could accelerate quickly. Traders should be prepared to profit from the machinations of the “bond vigilantes,” and higher yields.

Jeffrey Gundlach, of DoubleLine Capital has been warning about corporate debt in particular for years. The “bond king” calls it an “ocean of debt,” that will create a problem for the stock market.

It is impossible to say when the reversal will come and the degree of havoc that will be wrought, but traders should be prepared to profit from it.

One way would be to buy the ProShares Short High Yield (SJB) fund. The fund seeks daily investment results that correspond to the inverse of the daily performance of the Markit iBoxx $ Liquid High Yield Index.

Let’s go to the weekly chart.

At the top of the page is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). It is up about 10% from its December 2018 low, but several warning signs have appeared in the price action.

Note the recent doji star candles. A doji is a candle with narrow opening and closing range. It suggests indecision and after a long uptrend or downtrend, the possibility of a shift in investor sentiment. It is a potential reversal candle.

When multiple dojis form after a strong move they increase the likihood of a reversal. Three consecutive doji candles are called a “tri-star” pattern which is a strong reversal signal. That is not currently the case because we’re looking at a weekly chart and the last candle is not completely formed. But keep a careful eye on this week’s candle.

Below the HYG chart is the ProShares Short High Yield (SJB) chart. Remember it corresponds to the inverse of the high yield corporate index. It correctly looks like a mirror image of the HYG. The previous dojis on this chart suggest the potential for a low of some duration, and an eventual shift in the trend.

The moving average convergence/divergence indicator for the SJB is making a bullish crossover. The crossovers on this chart have, in the past, been infrequent and generally last over the intermediate term to long term.

The bottom line is that the level of corporate debt remains high. When rates inevitably begin to rise and prices start to fall, the SJB will head higher, potentially much higher. Be vigilant and be prepared to profit.

Friday’s Market Reversal In Context

On Friday the DJIA went from being down 400 points to closing up 100 points. The broad based reversal formed what looked like hammer candles on the daily charts of all the indices. The hammer candle is usually a bullish indication, but context and confirmation are required before price patterns or indicators can be traded.

Regarding context, we noted Friday on Twitter that large spinning top candles formed on the weekly charts. The spinning top is a candle with a narrow opening and closing range situated at the center of a candle with large upper and lower wicks.

It represents an attempt by a stock or index to move higher which is followed by failure to hold higher levels, and an attempt to move lower followed by a failure to hold lower levels. The close ultimately returns to and closes in the area where it opened, suggesting basically, indecision.

The market appears, however, to have made a decision, at least, in the early going of Monday’s session.

This Pattern Has Marked Highs In The Russell 2000 Since October 2018 — Another Just Formed

All the significant highs that were made on the Russell 2000 (RUT) chart, going back to October 2018 have been signaled by an eveningstar candle pattern.

Most readers know what a candlestick pattern is and what it suggests about trader sentiment. The eveningstar is a three day reversal pattern that starts with a large up-day candle, is followed by a narrow opening and closing range”doji” candle, and is completed by a large down-day candle. This sequence suggests a transition in trader sentiment from bullishness, to a neutral stance, to finally bearishness.

Note the eveningstar formations on the daily Russell 2000 chart. They have marked highs in October and November last year and high in February this year. Another eveningstar has formed this week just below horizontal resistance in the 1607 area.

If there is a repeat of the price action that has followed the formation of these patterns in the past, then the small caps are headed lower.