Thursday, August 20, 2015

NYSE completes H&S top

Last month we discussed whether the NYSE index was forming a H&S top within a bearish rising wedge. Today's price action suggests that the NYSE index has completed a significant topping pattern:

Other U.S. indexes are at critical support levels. As we discussed yesterday, IWM (Russell 2000) seems to be breaking down from a H&S top.

Remember, we must trade the actual price action rather than our wishes. I lose sight of this truth often. And the warning applies to both bears and bulls. Long-suffering bears may - may - be getting the breakdown that they have been waiting for so long. But this epic bull market has made countless stick saves to continue its run higher. We must trade with discipline and respect our stops. If we are bullish, then we may be proved right again. But we, too, must respect our stops if the market continues to break down. The stock market lost more than half of its value during the 2007 to 2009 financial crisis and 90% of its value during the Great Depression. And yes, these events will happen again for human nature is constant.

Making money is not the traders' priority. There will always be more compelling set-ups. Our priority is surviving and protecting our capital.

Wednesday, August 19, 2015

Analysis of U.S. stock indexes

The current bull market that started in March 2009 has been epic. Again and again, at key moments, the market bounced from key support levels. Countless Head & Shoulders Top patterns turned into H&S Top Failures that started yet another run higher. Countless sideways trading became continuation patterns that started the next leg higher. The market survived key tests and thrived.

We seem to be at another key test. Let's first look at 6-year weekly chart of SPY (S&P 500):

A historic run where the market has gained more than 200% in 6 years. Next, let's look at a 3-year weekly chart that shows a possible 3-year trendline support:

Next, a daily chart focusing on the past 10 months:

Intriguing possibilities. But, stocks have not broken down so far. And they haven't for 6 years. An epic breakdown is possible, but it is only a possibility. And there are good reasons to think that the market will bounce yet again. SPY is resting and finding support at its 200-day moving average. If the 200-day is pierced, then there is likely to be strong support around the 205 level.

So several things have to happen before a breakdown is confirmed. My approach is to stay patient and let the market point the way. There is no need to try to predict. We cannot. Instead, we should let the market declare its intention. We'll likely find a good entry spot even after the fact.

Let's look at IWM (Russell 2000) for comparison. I find the IWM chart the most interesting among the indexes.

First, a 6-year weekly chart:

IWM is up 265% since the financial crisis low. Will it continue higher or is a reversal near? Let's look at a 10-month daily chart:

Next, let's focus on the past 5 months:

Such a pattern within a pattern is always interesting but never guarantees a set-up will work. In fact, the more intriguing the pattern, the more dangerous. Why? Because we get obsessed with the set-up "working" and producing the wished-for outcome rather than trading the actual price action.

So, for now, we should be aware of the potential set-ups. Then we must have the patience and strength to let the market show us the way.

Monday, August 3, 2015

Ralph Lauren breaking down from a 3-year topping pattern

Let's look at the weekly chart of Ralph Lauren:

From about $30 a share at the financial crisis lows of 2009 to almost $200 a share in mid-2013, Ralph Lauren has mirrored the current historic bull market. Now, however, Ralph Lauren may have topped out and started a significant down trend. The next chart is a daily chart that focuses on the previous 18 months:

We see a 5-month continuation rectangle that could propel the breakdown.

Warning: Ralph Lauren is due to release is next earnings report on August 5, 2015. The market's response to an earnings release is unpredictable. I exit from all or most of my position before an earnings release no matter how promising the pattern. The only exception is if I am sitting on a significant profit. If I were not in this trade yet, I would wait for the dust to settle from the earnings release and then evaluate whether there is an attractive entry opportunity. If no entry spot presents itself, I must remember to let this trade go - because there will always be other opportunities.