This pattern acquisition leaves us in a undecided position. Now that the Inverse Head/Shoulder target is complete we no longer have any current patterns (Bullish or Bearish) to work from; this means we need to adjust our holdings for an uncertain environment ahead. As of this week I now am holding a significant amount of cash waiting for the market to decide which way it will choose to proceed. Based on recent history, after a key pattern target is acquired, we tend to see a period of weakening. Take a look at this chart that was originally displayed on The Kirk Report:
This is interesting because every major move in the last 2 years has been preceded by a significant reversal pattern. Whether it is a top formation like the Inverse Head/Shoulder tops in 2011 and mid 2012 or the Double Top pattern in late 2012. Each major sell off has been equally met with a reversal setup, leading the market to new highs. Now that we have completed our latest inverse Head/Shoulder pattern, we are left waiting for the next move to take shape.
The point of this is to always wait for the market to tell you where the next move will be coming from. You can drive yourself crazy trying to determine when to buy and when to sell based on random movements in prices. But if you let some setups like these form, you greatly increase your overall chances of success. Since we don't like to be on the wrong side of the trend, it is very important that we wait for the trend to shift from down to up before we jump back in. These patterns are a great way to gain the confirmation that the shift is indeed happening.
An important thing to remember when reading chart patterns is that they don't always play out or form perfectly. Sometimes the shoulders are a bit jagged or instead of getting a nice looking head and shoulders, you end up with 3 odd looking peaks with similar support necklines. Either way the patterns represent a certain consistent action of traders and their emotions in the markets. And as long as we are looking out for these clues we will be on the right track to being patient, successful investors.
Some quick notes on our watch-list stocks:
DDD
DDD broke down from its triangle formation and rising 50 DMA. They announce earnings this coming week and it will be interesting to see what kind of number they report for the quarter. As of now the price action suggests a date with the long-term uptrend support around $45-$46; that would be an excellent entry point. Lets hope for a miss on earnings and look to take advantage of the resulting sell off.
MOS
Well our perfect Inverse Head/Shoulders setup in MOS is under major pressure after this week's action. It is do or die time for MOS as it really needs to hold the $56.50 support area. I have currently closed my position in this stock (luckily I got rid of the rest on Wednesday morning). At this point I will be waiting for a decisive breakout above the neckline resistance at $62.50.
CMI
CMI broke down from its very tight trend channel this week and then failed to hold the 50 DMA at the close on Friday. I also closed my remaining position in CMI on Wednesday's sell off.
F
F failed at its $13 support area and now we are watching for a retracement back to its medium term trend support around $12.
PBW
Our clean energy fund sold off pretty heavy after its recent up move and is now flirting with the trend support, 20 DMA and key support at 4.50. I am still holding this one and have hope that 4.50 and then the 50 DMA can hold. If not, I will be looking for it to fill its gap from Jan 2 and hopefully find support around the $4.00 area.
HD
As we discussed in our Bearish Reversal post, HD has formed a near textbook Double Top. I have closed my position entirely as of Friday; I sold on Wednesday's rollover and then closed the rest out on Friday's throwback trade to the Double Top neckline. I sort of went against my original stance of holding within the trend channel because this setup looks pretty solid. The Relative Strength has also signaled a failed bounce to get back above the trend support. We will see shortly if I was premature in my selling, but luckily if I am wrong and this rallies right back above the $66 now resistance, I will just get back in. If I am right on this setup, we may be seeing an end to this nice rally. This is a difficult setup for me, i mean it failed with a very solid reversal pattern, but then held the 50 DMA and trend support. If this was just a shakeout trade, then I tip my hat to Mr. Market...You got me here if this just turns and rips higher. Just with so many trend reversals this week, I am beginning to think we may see an extended period of weakness ahead.
HAIN
HAIN was moving up so well just a week ago, but all of a sudden this thing has rolled over hard. I closed my positions in HAIN on Friday as the key support at $57 and the 50 DMA both failed on heavy selling volume. Ultimately if this can hold above the low at $52, I am still bullish on this stock long term, but if that low gives way, then another leg lower is likely.
ENB
ENB has held support well, twice recovering intra-day to close back above the 50 DMA. I expect this stock to retest the $42 breakout at some point and that would be a great buy opportunity.
WFC
WFC really bucked the overall market trend this week breaking out and following through both Thursday and Friday. The fact that the financials held up really well this week is a reason why I think this recent sell off could be just a shakeout trade and is still a reason to believe in the current rally. If Wells in fact rolls over here soon and the breakout fails, that would be enough for me to go to 100% cash and think that a deeper correction would be coming.
AAPL
AAPL still is performing terribly (great if you are shorting it!) and in my opinion this is still a short as long as it is below its declining 20 and 50 DMA's and is unable to take out its down trending resistance line. The thing to keep in mind here is that AAPL is in full trader mode. Fundamentals don't matter one bit until everyone who is going to sell has sold. I can't imagine we are too far from a bottom, but the market has a way of "remaining irrational longer that you can remain solvent" as the saying goes. This seems to be the case with AAPL and as long as there are people willing to buy and try to pick a bottom this will continue to roll lower. A note as well, we have not seen any type of reversal pattern or momentum on the daily time frame yet to signal a turn yet. 2 weeks ago there was a very short term Inverse Head/Shoulders pattern that I played (successfully) rallying back to the $480 resistance level, but other than very short term, there is nothing to like in this space.
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