Wednesday, April 29, 2015

Gold miners ETF (GDX) showing interesting action

First, let's look at the 18-month chart of GDX:

Gold miners dropped 40% from August 2014 to November 2014. Then it seemed to be forming a possible continuation H&S top, which, if completed, could start another decline.

Now let's focus on the last 7 months:

A textbook continuation H&S top. But look at the possible right shoulder: seems to be a rising wedge. A rising wedge is usually a bearish pattern. But sometimes the price breaks above the upper boundary and creates a bullish running wedge, as it may be doing here.

So instead of a possible textbook continuation H&S top with a textbook rising wedge as a right shoulder, we may instead have a textbook continuation H&S top failure with a running wedge as the right shoulder.

Remember, trading is about mere possibilities and never certainties. Staying mentally flexible allows us to spot patterns and trade set-ups that are opposite to our expectations. This set-up in GDX may be one of those instances.

Never chase and don't worry about what others are dong. Just because there is a "textbook" set-up does not mean it is easy to trade. Trading well means betting only when there is a highly favorable entry spot and we are able to catch it. If we miss it, so be it. There may be another opportunity to enter. Or not. But it is better to sit out a trade than chase and lose money.

There will always be more set-ups.

Traders must be flexible and consider other possibilities

Not much has happened since late 2014: SPY is trading between 200 and 210. For the past month, SPY has been in a rising channel, which is also within a 3-month trading range:

A bullish scenario is that stocks stay within this rising channel and later break above the late-February high.

A bearish scenario is that this channel could be a bearish flag that could send SPY back down to around 204.

Or it could be nothing as prices form a new pattern.

I'm not going to guess. As noted, I try to participate rather than anticipate. If we try to pre-position ourselves by making anticipatory entries, we are likely to get chopped up by this choppy range-bound trading. Staying patient is always a challenge, but we can do it.

Sunday, April 26, 2015

Participate, not anticipate

Stocks have been range-bound throughout 2015:

With the mini-rally last week, SPY is at the top of its trading range.

Will SPY break through resistance and close at a new high? Nobody knows. The market is going to go wherever it wants to go. If stocks decisively close above resistance, then traders will have a chance to go long after stocks prove themselves. If SPY is turned back here, traders can stay out or go short.

So much of trading well is positioning and making a bet only when the reward-to-risk ratio is favorable. We don't have to make a big long bet here and hope for a breakout. We can let the market reveal its direction and hitch a ride, if we see a favorable entry spot.

Wednesday, April 22, 2015

Big-picture view of stocks

As we continue to chop around in range-bound trading, let's zoom out and see how we got here and where we stand. We'll use the Dow Transportation Average ETF, IYT, to do so.

First, let's look at the weekly chart of IYT:

A textbook H&S bottom started the current bull run. The measured-move price target for this massive 6 year pattern is around 160, which is the exact middle of the current range-bound trading as seen in the next chart focusing on the past 10 months:

IYT has been forming a rectangle since December.

Bears will be tempted to conclude: now that the price target from the massive H&S bottom has been reached, stocks are out of breath and it's time - finally - for a real decline.

And this scenario may come true. And I agree that the current run has been quite a sight, even unbelievable at times. The rectangle may turn out to be a reversal pattern that starts the decline. But it may not. And looking at this chart, it seems it could go either way. After all, who knows which way prices will go out of that rectangle. I try to remember that my primary goal as a trader is to participate rather than anticipate. So I'm going to do my best to be patient until the market makes it move.

Two other things. Note the uptrend channel. Also note a possible breakout from a possible 1-month ascending triangle.

Charts like these are why I am a classical chartist. A textbook pattern launches a massive run. And the price target happens to be the dead center of the current trading range. Such "coincidences" make classical charting so interesting and useful.

Saturday, April 18, 2015

Should the failed breakouts on Friday worry stock bulls?

It seems fair to say that stocks failed to break out yesterday. IWM (Russell 2000) dropped 1.62% and failed to break through to new highs. The NYSE index closed below the July 2014 high after briefly overcoming it. So was the recent action a bull trap? Should we expect stocks to decline next week?

As always, nobody knows.

I think we can say that stocks are essentially trading in a range. Let's look at a 1-year chart of SPY:

Stocks have been essentially range-bound for the last 6 months and in an even tighter range for the last 2 months. I don't think the other indices are going to make a sustained run, up or down, until the current range-bound trading in SPY is resolved.

Wednesday, April 15, 2015

Stocks breaking out?

Yesterday, I discussed how the NYSE index was making a 5th attempt in 9 months to break above the July 2014 high. Today, about half way through the trading day, the NYSE index has finally overcome this stiff resistance level. Let's take a look:

Today's development doesn't mean an easy and straight path up. We should expect, as we always should, tough retests. We must also be ready for a reversal of the breakout and even pattern failure. Anything is possible. Indeed, stocks may retreat by the end of today and the NYSE index may close below the resistance that it overcame just hours ago.

That said, a strong, decisive, and sustained close above the July 2014 high suggests another advance for stocks.

If a trader is bearish, and I understand why a trader might be, this development will be frustrating. As I have noted, I am amazed at the historic run the market has been on since the March 2009 low. But it is futile to fight the market. Of course we know this, yet we still fight it because of pride, envy, greed, anger, denial, and other emotions that come with trading. We can always sit out and protect our capital when we are confused and emotional. There will always be more good set-ups to trade.

Tuesday, April 14, 2015

NYSE index making yet another attempt to break out higher

Here is the NYSE chart showing a possible continuation H&S bottom:

As I discussed 3 weeks ago, the NYSE index is showing a possible 9-month continuation H&S bottom. The previous four attempts to close above the July 2014 high have failed. The more a resistance level is challenged, the more likely prices break above resistance. That said, there is nothing inevitable about a breakout higher. Patterns can fail anytime. Traders must stay nimble and trade the actual price action.

American Airlines (AAL) chart analysis

Here is a 2-year chart of AAL:

Next, let's focus on the past 6 months:

As this rectangle develops, my goal is to stay patient rather than predict how this pattern resolves itself. If prices close decisively above the January and March highs, then I'll be looking to buy at a favorable spot that limits my risk should the breakout reverse. If prices decisively break down below the December, February, and March lows, then I'll be looking to short at a favorable spot that again controls risk. My goal is to participate in rather than anticipate the trend.

For more aggressive trading, I might look to buy shares at the bottom of the trading range and short shares at the top of the range. The next earnings report is due in a week or so. I almost never hold a position through an earnings announcement.

Friday, April 10, 2015

BAS: trying to breakout from a 5-month reversal rectangle?

First, the daily chart going back to November 2013:

The next chart focuses on the possible 5-month reversal rectangle:

Of course the breakout attempt can fail and this rectangle could turn into a continuation pattern that starts another downtrend. BAS is a volatile stock tied to a volatile commodity (oil) so a trader must be cautious and stick to rigid risk controls.

Thursday, April 9, 2015

CSV breaking out of a 2-year rectangle

First, let's look at the weekly chart of CSV:

Now, let's look at the daily chart and focus on the breakout:

I consider CSV a thinly-traded stock. I use extra caution when trading low-volume stocks such as CSV. Entering the trade only at a spot with a favorable reward-to-risk ratio, and even then only with a small position, is how a trader can manage risk with volatile and risky stocks such as CSV.

Tuesday, April 7, 2015

Chart analysis of Ford (F)

Here is a 2-year chart of Ford:

Now let's focus on the last 7 months:

Ford seems to have broken out of a textbook 5-point reversal symmetrical triangle in early February and has been trading in a tight range for 9 weeks. This range-bound action may lead to a breakout up or down. By the way, the measured move price target for the reversal symmetrical triangle is around 18, which is where long-term resistance holds.

And finally, a monthly chart going back to the 1990s:

This possibility may seem too incredible, but it is possible. Many things have to happen for this 15-year-plus H&S bottom to be realized. We should focus on possibly trading the next multi-week or multi-month pattern breakout. But it is always interesting and fun to think about what is possible in the big picture.

One reason why I keep this massive pattern possibility in mind is because it helps me fight my bearish bias for the market. The market has been on a historic run since the March 2009 bottom. Yet the market continues to go higher. Up and up. To my amazement. But I know that traders must accept and trade according to the actual price action and not what is "supposed to happen." We must always strive to stay mentally flexible and not succumb to our biases.

Monday, April 6, 2015

Chart analysis of AK Steel Holding (AKS)

First, the AKS chart going back to September 2013:

Now let's zoom in on the last 7 months or so:

Was that a trendline breakout on high volume in late March? Perhaps. Even if a breakout, I expect much back and forth and even a decline back to the trendline. Also, there is likely strong resistance at the $5 level.

AKS is a volatile and financially risky stock. If one is going to trade it, then one must use great caution. Using a small position is always a good way to limit risk. With a stock like AKS, the position size I use is the amount that, in the worst case scenario, I could lose entirely and still be a relatively minor loss for my trading account. There is nothing wrong with not trading a setup for whatever reason. Remember: there will always be more setups to trade. We must be patient.

AKS is due to release its earnings report in 3 weeks. I almost always exit my entire position before the earnings report. I think holding a stock through earnings is an unnecessary risk. There will likely be another chance to get in after the earnings announcement. And if no opportunity presents itself, then so be it. I move on.

The AKS chart shows possibly much potential as a long trade. But there is much work to be done and many hurdles to be cleared. As always, patience and strict risk control are required.