February was more or less a sideways month for the markets. Jobless claims continue to decline signaling a steady but slow job recovery and the stock market continues to flirt with all-time highs. The Federal Reserve continues to prop up the market with its ongoing stimulus activities (here is the POMO schedule for March).
Sideways markets tend to be the hardest for me to trade. I seem to be able to outperform the market during up trends and down trends, but during sideways trades I tend to under perform significantly. This is something I will continue to work on. Each time I go through a sideways market I improve, but I am still not where I need to be in this environment. For this week's discussion we will be looking at a shorter time view; all charts shown are 30 minute bar charts covering roughly the past 2 weeks to one month.
As for the recent trading action, the SP500 is beginning to show some signs that it wants to continue higher after its recent pause and chop. Since completing its inverse head/shoulder reversal at 1,525 two weeks ago there has been a lot of talk about a top being in the market and significantly lower prices just ahead. However this market continues to be resilient and is once again trying to throw everyone a curve ball. We seem to be forming another inverse head/shoulder pattern that is trying to reverse the near term down swing. For this pattern to trigger we need to see a close higher than the 1,525 resistance area. Along with the pattern triggering on a 1,525 break we would also break the recent pattern of lower highs. This HS pattern has a 40 point measured target which would be acquired at 1,565 and would be within 1% of reaching new all time highs.
DDD
One way I intend to trade the breakout in the market (if we get one) will be through DDD. 3D Systems is a fast mover and those are the types of stocks we want to trade for short term gains. Also you can see above that DDD is forming its own inverse HS pattern that would trigger with a break above 38.30. I would look to buy this aggressively if the SP500 breaks out.
HD
This is a perfect lesson of how even with a solid trading plan we can succumb to emotions and make poor decisions. Here is good old Home Depot which I decided to take my profits and get out of the way once this Double Top pattern triggered. Even though it was still in its long term trend channel, I chose to sell, just to watch it turn and rip in my face. This was actually a pretty sweet setup watching it with a clear head; The Double Top pattern triggered and completed almost exactly on trend support. That would have been an excellent place to add to a position, yet I failed to assess that in real time and have since had to watch this one run on me.
Making one mistake however doesn't mean compounding that mistake with another. It is not a good idea to chase this one right here. We have missed this leg higher and we will need to wait for this to set up again.
PBW
PBW is looking rather unpleasant in the short term here. Forming a pretty nasty HS Top formation. You can also see the Relative Strength has performed poorly recently and has also broken its uptrend. With a break below 4.35, this has a measured move target to about 3.85. This isn't an end to my clean energy thesis and if you are playing this one longer term, there isn't too much to worry about yet. As a trade, we need to put this on ice for a while and wait for it to set up.
CAT
Caterpillar isn't one of our main watch list stocks but I thought I would share this one with you. I follow this regularly on my big watch list and really like how this is setting up. We have seen a HS Top form in late January to early February and has now completed and it attempting a reversal to continue the longer term uptrend. Similarly to DDD, I plan to trade CAT aggressively if the SP500 can manage to break out with its own pattern.
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