Monday, November 21, 2011

Take you neck down a notch

Below is a daily chart of the $SPY ( ETF of the S&P 500). As I have marked on the chart, there is reason why traders may look at the below chart and conclude a retracement to roughly 111 will result in a bullish inverse head and shoulder patter, with right shoulder outlined in green, the low being the head, and the target for the right shoulder outlined by a green rectangle in the lower right hand quadrant of the chart.

Now, before we make any conclusions, we must acknowledge an extremely important factor of this formation, and that is the neckline. The neckline of an inverse head and shoulders pattern is the level where the left shoulder peaks at and begins to go down again to form the head, and the head pauses at the same level and retraces to form the right shoulder. perhaps the neckline is best illustrated with a picture of an ideal inverse head and shoulders pattern:

The line that puts the cieling on prices during the formation is the neckline. So a breakout of the neckline tends to mean the formation was successful.

But, what would make an inverse head and shoulders even more potent is a downward slanted neckline. A downward slanting neckline is especially bullish because all of the sellers are trying to put pressure forming a very tight range, and still, the lows cannot be tested. So in short this is bullish because all of the present sellers are showing their hands during the right shoulder formation, and still the sellers are not strong enough and a higher low is made.

So, logic may dictate while a downwards sloping neckline adds bullishness to an inverse head and shoulders pattern ,that an UPWARDS slanting neckline extracts bullishness from this pattern. Reasoning being the opposite of the downwards slanting neckline. In the case of the upwards slanting neckline, the bulls are putting upwards pressure breaking out of the range to the upside, but has little strength, and cannot make a new high. So here too, buyers are showing their hand too early and using up a lot of energy on an unsuccessful attempt to make a new high.

So both tweaked necklines, is a case of bulls (upwards slanting) showing their hands too early and not making a new high , and bears (downward slanting) showing their hand too early and not being able to make a new low.

Right now, on the $SPY, we have a case of the former. The neckline is slanting up, implying that bulls used too much energy and showing their hand too early, and failing to make new highs while breaking the range. Showing that their ammunition was deeply dipped into and revealed to the bears. Here is the first chart showing this:

Now, since the bulls have wasted alot of energy too soon, they may not have enough energy to defend the lows of this year, and a new low may be made before the bulls can gather more strength,, which may turn into a broadening bottom formation :

So we see a pattern here. When the volatility expands or contracts to quickly, it skews the results. When we break to the upside before completing the formation, we cause an upwards slanting neckline, inviting the possibility of exhausted bulls allowing a new low to form. When volatility contract too soon before the formation is complete, bears exhaust themselves causing a downwards sloping neckline and a more explosive upwards breakout can occur. Note that with a broadening bottom, even though a breakout to the upside is slightly in favor(53%), an inverse head and shoulders is wildly bullish (95%), so this new development of an inverse head and shoulders turning into a broadening bottom does massively hinder the bullish connotations (a 42% decrease)

Friday, November 18, 2011

Double Jeopardy

Below are two possible scenarios. One is bullish, based on a pattern, and one is bearish, based on trends. Both are equally possible. Neither should be considered more likely than the other. The best way to " foresee" the likelihood of a possible scenario is to look at individual leading stocks. Here is the bullish chart, followed by the bearish one:

Thursday, November 17, 2011

The Few, The Proud, The Strong

On days like today, while the trading is hard, it enables focused traders to take notice of the strong names. The strong names that posses relative strength. When the market recovers, these strong names are names to look to:

Sitting, Waiting

Below is a trade I am patiently waiting for, ready when it presents itself. If it presents itself. As of now we have a bearish rising wedge. What am I waiting for is the break below, everyone to get short, and it hits the purple line-support, so I can buy. The breakdown ends up being a fakeout, like is happening fairly often, and a vicious bounce follows. My buy target is the green box on the purple line support. Maybe not an extremely high probability trade, but low as hell risk, as long as size is kept small and stop is appropriately positioned. maybe 122.80 stop, 1/2 size.


It's presence is a present

A major gift support buy is now present. Please click on chart below:

Wednesday, November 16, 2011

The Semis Look like bull material

Following are some quality names in the Semicondictor Equipment and material space. Favorites are $NVLS and $CREE :

The Chemicals Between Us

Below are some select chemical names that look ridiculously awesome:

A Trade I Simply Cannot make

Sometimes, when a stock gets hit, it may be profitable and prudent to play support bounces. However, sometimes, even if there is a bounce opportunity, the risk outweighs the reward potential so much that it is simply a trade I cannot make.

Take Abecrombie & Fitch. They reported dismal earnings, however, looking at the margins and debt, they are a wonderful company, and this drag on the economy is causing the stock to get pummeled. However, seeing as the company is growing beautifully in general, this may be a great opportunity to get great book value for very cheap market value. The holders of $ANF are disgusted by the recent earnings, and selling out for fear the growth is over.

This might present a rare buying opportunity for cheap. However, as a technical trader first, when a stock breaks every level of support like a hot knife through butter, we are being told that this stock is being killed for a reason. And if indeed big money sees value in a great company caused by minor earnings bumps, than bids would indeed hold this support. And they are not. So maybe, this theory that, this "temporary" earnings disappointment is merely a reflection of global economic woes, and this company is still poised for speedy growth, is not true, and the slowdown is for real. As we can see from the speedy support slicing like dominoes, value funds do not see a reason to bid for $ANF. So while a bounce happens many times off support, these realities make the risk far too poignant. Thus, this is a trade I simply cannot make.

Have A Cigar

We are looking at a decent gap down this morning, and yet again, there is panic in the air. However we must, as professional market participants, simply sit back, and look at the big picture. As you can see on this daily chart of the $SPY, we are holding true within this bull flag formation, and bumping against both the top and bottom range is not only normal, but it's essential in attributing more credence to this formation.

Moreover, I would like to direct your attention to the big bullish hammer candle on August 3rd. Yes, we continued downward, but this candle does not by any stretch signal an immediate reversal, it simply signals a possible new buying presence that is beginning to take control possibly. And and this case, it signaled that the forced selling was pretty much done, and a significant bullish force has now stepped in on August 3rd.

So those prices provide a key reference point for the future. That level from August 3rd where the bulls stepped in must prove that there are new bulls coming in. Meaning its normal for that area to be a major congestion level, as the bulls who stepped in on August 3rd will indeed take profits here. But we want proof that they are not the only buyers. We want to see that even with the bulls from August 3rd selling because they are now seeing profits, we want to see new bulls taking the reigns at that 124 level.

So even before the bottom of the bull flag is tested, that 124 level should show us whether new buyers step in, or everyone who bought at August 3rd 124 is gone, and there is no one left. Here is the daily chart, followed by the 60 min chart for a closer look:

So watch this level, keep the reference points in mind, and relax. It is more than fine to miss a trade, but fatal to chase a trade. So have a cigar, and wait.

Tuesday, November 15, 2011

Giving it Another Shot

My first blog post titled "long idea" was a bit half assed and rushed and it was a mistake on my part. My sincerest apologies to all ,but mostly to myslef. I would like to elaborate on the long $APKT idea here. As you can see, the stock has been killed this past year. As my friend and a really great trader @stocksage1 Rober Sinn pointed out recently, technicals confirm fundamentals. A technical analyst who really applies himself is looking for signs of big money and what they are doing. The big funds will normally accumulate stock that has a fundamental reason why they are buying or selling, whether it is because of value/growth/catalyst potential. So as technical analysts, we can see those footprints in the price action. A stock that looks technically promising looks that way because some big money believes the stock may be fundamentally promising. I guess the best way to really drive my point home is by showing you a chart of $APKT and at the same time, pointing out the fundamentals. My fisrt chart of $APKT shows you that $APKT was destroyed this year.

At this time, the quarterly operating income was erratic at worst, and stagnant at best, take a look at operating income for the past three quarters:

Operating Income
12.83 22.6 21.26 22.11 16.34

Meanwhile, operating income for 2010 was more than double that of 2009. So the parabolic rise in 09-10 was caused by growth smart money trying to profit from this growth And we see that the money that caused the rise started selling out after this awesome number came out, in early 2010, and the euphoric crowd that saw these amazing growth numbers caused the price to inflate so high, that once we saw that 2011 numbers were slowing down, they all sold out.

So what possibly happened was that the big value/growth funds who profited from these great margins, took profits in early 2010, and all that were left was the rest of the crowd hoping this performance would continue in 2011. Once the margins reported by $APKT came out, pretty dismal numbers, everyone else piled out, killing the stock. And the price was in the 80's so the insane disconnect between market price and value was too wide, causing them to sell.

Now, however, the once growth stock is also a value stock, at a price of 37 dollars, and there are some metrics, such as price to sales ratio, which hint that this stock might be cheap at these prices. Check out this chart and you can clearly see that there is big money bidding in support for $APKT.

Remember, the big funds will only buy a position that has value and/or growth, as their positions are way too large to simply trade in and out. So it cant ake months to accumulate a full position, and months to get out. So they look for fundamentally safe and healthy stocks generally. So a healthy chart signals that it is possibly a fundamentally strong company.

Making progress

As you can see from this 10 min chart of the $SPY, we cleared this descending channel, after testing the bottom of channel rather smartly earlier today. With rising 195EMA, which is the 5 period EMA on a 10 minute basis, we are looking for horizontal resistance at 127:

Long Idea

I would like to profile Acme Packet here $APKT. I will attempt to combine fudamentals with technicals. Below is the annual income statement. What I really like is the rapidly growing operating margins over the past 3 years ( operating income/net sales) Normally with that kind of growth, the growth rate of SG and A and COGS expenses will grow at a similar pace, but the growth of those expenses is very contained relative to the operating margins, and the revenue growth. Using normalized 3 year growth rates, there is a speculative target based on these metrics of a 52 dollar target, but that is speculative. I'm young and new at this. Probably not very good, but this is my first post incorporating fundamentals. I am still learning. Below is the Income statement for $APKT. I realize that there are many many metrics with which to measure value/growth, please realize and don't judge me too harshly here, as this is a "feeler position". Thanks.Again, please note, I based these numbers on the past three years:

231.23 141.46 116.36 113.05 84.07
Total Revenue
231.23 141.46 116.36 113.05 84.07

Cost of Revenue, Total
41.13 27.28 24.67 23.11 18.0
Gross Profit
190.1 114.18 91.69 89.94 66.07

Selling/General/Administrative Expenses, Total
88.14 65.95 54.44 44.6 29.39
Research & Development
35.57 28.2 23.05 20.81 13.5
0.0 0.0 0.0 0.0 0.0
Interest Expense (Income), Net Operating
0.0 0.0 0.0 0.0 0.0
Unusual Expense (Income)
0.22 -3.19 0.0 0.0 0.0
Other Operating Expenses, Total
0.0 0.0 0.0 0.0 0.0
Operating Income
66.18 23.22 14.21 24.53 23.18

Now below is some technical analysis of $APKT. ( decent, in my humble opinion)

Breaking out of falling channel, inverse head and shoulders neckline meets horizontal resistance at 40 bucks, measured move to 55. additional HR at 45

Wednesday, November 9, 2011

A War Is Coming

This blog has nothing to do with war. I am not a politician, I am a trader, and while I have strong opinions regarding political events, they have zero to do with each other. But hey, at least I got your attention. Anyways, I just wanted to show you a quick 60 min chart of the $SPY. As you can see, and as the legendary trader and amazing person @traderstewie pointed out on the S&P 500, we formed a massive head and shoulders top on the $SPX 60 min.

I noticed a very similar,pretty much identical developed on the $SPY. Well, obviously they are similar, the $SPY mirrors the S&P500. Anyways, I just wanted to point out the power of reference points. What is the neckline of this massive head and shoulders pattern is also the UPTREND LINE FROM THE LOWS OF THE YEAR. As you can see, reference points represent significant points of stock changing hands, and are often relevant for longer than we think.

Tuesday, November 8, 2011

Let it Be

Since 1994, on the $SPX monthly chart, we have closed the month below the 20SMA twice (Before September of this year). Each time we closed beneath the 20SMA on the SPX monthly since 1995, it resulted in a slight retest of the 20SMA GENERAL (but not even close to the actual 20SMA) area, but could not come close to getting back above it or even retouching it by any stretch whatsoever, and subsequently declined over 50 percent each time.

This September was the third time since 1995 we closed beneath the 20SMA on the monthly chart. Odds say, we would decline 50 plus percent, right? Well, for the first time since 1995, we broke the 20SMA on the monthly chart, and closed safely above it the next month!

So what to expect? The closest resemblance to this action in 20 years is 1994 when we closed below the 20SMA monthly, closed ever so slightly above it the next month, and than hung around the general area for around a year before we broke out majorly in 1995. So we may see a very similar thing now. Just like in 1994, even though we broke below the monthly 20SMA, there were a ton of bulls who kept a bid for a year until they took control, similar case here where even though we closed below 20SMA for the third time in only 15 years, the case may be where there are still a ton of buyers here, apparent from the close the very next month back above the 20SMA monthly.

So we may have a battle in this range until someone gains definitive control, just like in 1994 ( A green rectangle is around it). Two things to watch. One is that even though we put in a higher low last month, the RSI made a lower low which is a bearish divergence ( The RSI is circled in pink).

Also, The trendline from the start of this long term uptrend since 1994 (pink line) was broken, and this bullish SMA monthly action could mean we retest the underside at 1450. What is also positive is that we had a very successful retest of the broken downtrend line from the year highs at 1500 ( I circled the successful retest in light green). So we can easily test 1450, underside of longer term uptrend line since 1994 when we broke out. So dont fight the trend. Whatever your bias is, watch these levels of reference, and trade accordingly. We have free air up ahead until then. So until than, let it be.Cheers.