Monday, June 2, 2014

Jun 02. Dow Jones Transportation Is Extremely Overbought.

Today the Bullish Percent Index of the Dow Jones Transportation Average (TRAN) has reached the maximum reading of 100. It means that all constituents of the index are on a buy signal on their Point & Figure charts. Though this reading speaks about strength in the TRAN, it also indicates the extremely overbought conditions. It is a rare event which is happening the third time over the last ten years. In two previous cases it put a lid on the TRAN and the index retraced to its monthly EMA (20). Note that the index can continue to rise for a while before giving ground.

Monday, May 12, 2014

May 12. SPX: Bullish Breakout.

I wrote in my last post that a consolidation in the SPX within a bigger uptrend has rather bullish implications than bearish until the major trendline is broken. Today’s market action apparently supports this statement.
Let’s look at the short horizon 2-box reversal P&F chart (box size is volatility adjusted). The SPX has broken out from the last three week consolidation which looks like an upside triangle (lime) and issued a triple top buy signal. What more important is the index closed above two previous highs. The breakout from the consolidation and a new 52 week high close imply higher prices ahead in the short term. The horizontal count from the triangle consolidation projects the 1936 target. Now, let me be clear, nobody has a crystal ball and is able to forecast the future. Analysing charts we assess probabilities. Today’s market action has shifted probabilities to the bullish side in the short term. A decline below the bullish support line (blue) will negate the breakout.

Friday, May 2, 2014

May 02. SPX: Once More About A Top Formation.

I am writing this post after reading Michael Harris’ article “A Top Formation in S&P 500 Index”. Michael has touched a subject of rigid, straightforward interpretations of consolidation patterns leading to mistaken conclusions of possible outcomes. I couldn’t agree with him more. The human brain is hardwired to look for and find repetitive patterns even in an environment where they don’t exist. Rather than trying to fit the chaotic price movement of a loose consolidation into one of the preconceived patterns let’s look at the ongoing consolidation in the S&P 500 within a broader price action context.
Here is the 2 box reversal P&F SPX chart with a box size equals the ATR (250). The 16 point box size filters daily average (over the last year) noise. Objective trendlines give a good visualization of the trend. We see that since the beginning in the second half of 2012 the current uptrend accelerated two times breaking out of the blue channel and forming two new channels - grey and purple. The upper trendline of the purple channel lies within the grey channel and indicates that the second acceleration was less powerful than the one which had formed the grey channel. However, this fact can hardly prove the trend reversal claim. The price isn’t even close to the lower trendlines. Moreover, it has not violated the interim bullish support line (light blue) yet. A consolidation within an uptrend is considered to be bullish first. Only when the price starts breaking down through the support lines, a possibility of reversal will come into play. Until then let the price dictate trades, not a preconceived opinion.

Wednesday, April 30, 2014

Apr 23. Dow Theory Confirmation.

The concept of confirmation in the Dow Theory states that the primary trend is confirmed when both the industrial and transportation averages reach new secondary highs or lows together on a daily closing basis yet not necessarily at exactly the same time.
The Dow Jones Industrial ($INDU) and the Dow Jones Transportation ($TRAN) printed its new secondary highs in December 2013 and January 2014, respectively. Both averages experienced a decline in the beginning of 2014 only to start rising in February again. Since then the TRAN has made three consecutive new highs while the INDU has been struggling to overcome its December high. Today the INDU has closed at a new high thus confirming that the market primary uptrend is still intact.

Tuesday, April 22, 2014

Apr 22. HFC: Long Setup.

After the 2012-2013 bullish run HollyFrontier Corporation (HFC), an independent petroleum refiner in the United States entered a multi-month consolidation period. It looks like an interim fulcrum bottom has been building since then. Someone can identify this consolidation as an inverse head-and-shoulders pattern or rounded bottom but it doesn’t really change anything. The truth is that only a decisive break above 55 will signal about the end of a multi-month sideways market. Should price meet resistance at 55 and turn back, a more complex consolidation pattern would be considered to unfold.
Anyway, since July 2013 HFC has been moving within an upward channel printing higher highs and higher lows. The last four consecutive days HFC closed above 50, a psychological level which served as strong resistance over the last year, printing a new 52-week high. The unfolding price upswing within the raff regression channel and a rise above the middle line of the channel and above the strong resistance at 50 increases the probability of reaching the upper trend line in the 55 area.
Disclosure: Long HFC.

Monday, March 31, 2014

Mar 31. How To Trade Gold Today If You Have To.

It’s crucial for me as an independent trader to know when to be in the game and when to sit on the sidelines. Taking high-probability trades significantly increases my chances of survival while active trading in the market with low predictability threatens to bleed my account to death despite the proper risk management.
In my opinion, Gold is currently going through the period of low predictability. In July 2013 the Gold ETF (GLD) entered a consolidation phase (blue rectangle) and right now is in the centre of this consolidation. I could draw some charts and speculate what form this consolidation is going to take: a rectangle, triangle or inverse head-and-shoulders. The truth is it’s irrelevant and not necessary from the practical point of view. At this moment trying to predict the complete form of the ongoing correction in Gold and trade on this prediction gives no better odds than the tea leaves reading. The ADX (14) shows a lack of directional trend in the environment of low volatility. It is somewhat similar to the conditions that Gold traded in the first half of 2012.
The long horizon P&F chart gives a better visual representation of the ongoing consolidation process.
The current market conditions don’t favor directional trades in Gold. Experienced option traders may consider range bound directional neutral strategies (long butterflies, long condors).

Wednesday, March 12, 2014

Mar 12. SLW Is Setting Up For Higher Prices.

Silver Wheaton Corporation (SLW) - a silver and gold streaming company has completed forming an interim rounded bottom and is consolidating in a nice bull flag pattern just above the 24-24.5 strong support level. Decreased volume indicates that the market participants took a pause after February’s strong run. The recent volume spike (red arrow) when price tested the EMA (20) and bounced back confirms the validity of the EMA (20) as dynamic rising support during the current short-term uptrend. Note that SLW is outperforming Silver and Gold (upper panes) and any sustained strength in precious metals should trigger an upside breakout from the bull flag.
The horizontal count from the interim fulcrum bottom on the short horizon P&F chart projects the potential target at 29.5 which coincides with the next resistance level.
Disclosure: I am long SLW calls.