Saturday, October 21, 2017

Interest Rates to Never Be Lower

I have been building a thesis over the past year or so that Interest Rates are in the process of bottoming on a multi-decade timeframe. It is my view that we will never see lower rates in my lifetime.

As we know from historical study, markets often telegraph turns in economic conditions well ahead of mainstream evidence being made available. Prices will top out on the best news possible and bottom on the worst. When the conventional opinion is leaning one direction, the market begins to tip the opposite. It is up to us to see through the noise and listen to what the market is really telling us.

This brings me to the 10-year Treasury Yield (TNX)
   The first piece of evidence is the price action over the past 5-6 years. In 2012 the TNX made a new low not seen in its history. Rates were able to rally for much of 2013 (recall the bull market for stocks during that year as well). We then saw a steady decline over the next two years which culminated in an even lower low that held for less than one week before reversing back higher.

Note that momentum was much higher on the 2016 low compared to the 2012 low, creating a strong positive divergence. Since the beginning of the year Rates have consolidated orderly and have formed a Bull Flag pattern into the now rising 20 Month SMA. Regardless of the asset class, this is my bread-and-butter setup and has led to many monster upside moves over the years for me.

From a price and momentum structure this is what I would call a multi-year Double Bottom pattern. Often it is suggestive of major lows being set and very strong price recoveries ahead.

I want to look at the structure of momentum by itself as well.
This is the momentum pattern going back to the mid-70's. I use MACD differently than most; MACD is an excellent indicator of trend. When momentum is above the Zero line price can be considered to be in an uptrend; when momentum is below Zero, price can be considered to be in a downtrend.

If we look at this chart it shows us only one time in the last 40-years when Rates were in a sustained uptrend (1975-1982). The rest of the time momentum has been < Zero and only breaching the line for very brief periods before retreating once again. This is downtrending behavior.

It should be noted that the activity over the past few years has been changing from the previous pattern. At no point in the last 30-years has the indicator been able to move > Zero and then sustain above the line. Each attempt to get above Zero was then followed by at least 5-years of action back below Zero.

However, the most recent movement has recovered Zero within 2-years of the prior visit. The pattern appears to be changing for the first time in its observable history. The more time momentum can hold above Zero, the more confidence we can have in this thesis.

So how do we make money based on this theory? If Rates are going to increase steadily over time, what will be the primary beneficiary of the change in trend?

In my view it is Bonds that will suffer the most, while Bank stocks and especially the Regional Bank stocks, set-up to benefit the most.

 JPM

  KRE Regional Banks

These formations are a decade long or more and have only made new highs within the past year. Typically the length and size of the base gives an indication to the length and upside potential of the price trend to follow.

As the saying goes, "the bigger the base, the higher the move in space". In the examples above, JPM has been building a 17-year horizontal base pattern. Regional Banks have been in the process of emerging from an 11-year base of their own. The upside that can come from these formations we know from studying the great winners of the past. In my experience and study, these are some of the highest probability structures to focus long-term positions on, and we have been doing so.

Members of zentrendstrading.com have been receiving alerts and position management education in the above names as well as others in this space. If these trends can persist we may be establishing positions that last for the next decade or more. Just this week the Regional Bank space is offering yet another opportunity to participate in the blooming trend.

If this is something you would like to learn more about please contact me @ZenTrends on Twitter or visit our website.

Thursday, October 19, 2017

Food For Thought


This is a yearly chart of the SP500 from 1962 to 2017. Is it just me or do those two periods look similar?

-From 1963 through 1980 the market remained in a sideways trading range (17 years)
-From 1999 through 2013 the market remained in a sideways trading range (14 years)

Trading volumes are notable as well; Heavy distribution volume came in through 2000-2002. The level of supply that was created went on to contain price for the next decade.

It wasn't until the last few years that we began seeing some accumulation volume come into the market. Following 2006, volume declined every year until 2012.

Trading volumes are now increasing as prices rally away from the base. 

The previous instance when prices cleared decade long range highs, the market rallied for the next 18 years with less than a handful of negative years during that period.

The current market is in year 5 of the most recent breakout.

Is it possible we remain early in this emerging trend? Does it look like America is failing?

Yes. No.

Monday, October 9, 2017

6+ Week Bases

Something I always like to do as an exercise is go through my positions or watchlists and find periods of sideways consolidation lasting 6-weeks or more.

The process of looking for these periods of consolidation I feel offers a glimpse of the quality of setups currently in the market. These setups also tend to offer very favorable risk/reward scenarios.

Currently these are some I find particularly attractive:

FB
AMZN

CRCM

SIRI

JPM

FANG

CVLT

HTBK

MDSO

Periods of consolidation tend to be followed by periods of expansion. The length of these bases can lead to explosive upside. If we are wrong we know so quickly as the pattern will fail to hold the breakout area.

These are all positions our members have been following and/or participating in based on larger monthly patterns for some time. It now seems there are additional opportunities appearing over the intermediate-term as well.

If you would like to be a part of the ZenTrends trading community to follow along as we identify, manage, and trade these positions and others, please visit our site at zentrendstrading.com

Tuesday, September 26, 2017

Earnings Reactions

I am a believer that insider trading exists and that the “smart money” has access to privileged information when it comes to company’s data, such as earnings. I mean, do we really think Yahoo Finance gets the same info on the same timeline as Goldman?  

If you study price action like I do, you begin to see patterns where odds begin to favor a particular outcome. I hear a lot of talk that “you can’t game earnings” or “it’s a completely random event”. While there is a certain degree of randomness in any market situation, I do think it is possible to “game” earnings reports with better than 50/50 probability (and I do know successful traders who do so).

If my theory is accurate and Smart-Money investors are privy to exceptional information ahead of the general public, we should be able to glimpse their behavior ahead of a market moving event. As the saying goes, “the majority of surprises tend to occur in the direction of the dominant trend”. Of course not all surprises follow this thesis, but overall more than 50% do in my experience.

An example of this is occurring right now after-hours with initial earnings reactions to Nike (NKE) and Micron (MU).


I am in the camp that Big Money is right more often than not and they will telegraph their moves to those who are watching. I always watch how a stock trades about 6-weeks or so ahead of earnings

MU

Notice the trend into the earnings report? Major buyers have been bidding the stock higher in anticipation of a strong result for the last quarter. Did they have exceptional information? I don’t know. But what I do know is that they were right to do so as MU is trading higher by +3% on their initial reaction following the report.

Contrast this look with Nike over a similar period; they too announced earnings after the close today:


Nike is currently trading lower by -4% after-hours following their report.

Now, this could all be coincidence that MU trading in an uptrend while Nike traded in a downtrend ahead of the report, but I have seen this happen too many times to count to think there is nothing to it. I would conclude that investors where accumulating shares of MU for a reason and likewise distributing shares of NKE.

We can also point to examples where this wasn’t the case, again this isn’t right 100% of the time. But overall if we are watching the price action we will see patterns like this occur for a better than 50/50 outcome.

There is another pattern that emerges leading into an earnings event that can be a powerful risk reward; Looking at SQ as an example of how price will consolidate orderly ahead of an earnings report within an overall uptrend 

SQ

When a pattern persists like this with a series of rallies and tight consolidations, it is a sign of lack of investor interest in selling. The orderly pullbacks show tight supply and suggest the Smart Money is happy to hold their shares for more upside to follow.

If we watch for the behavior of the largest investors we can get hints as to their overall knowledge and expectations. Since they are the “Smart Money” they tend to get it right more often than not, and ultimately that is what this game is all about. 

Saturday, September 9, 2017

Position in Review: ABBV

For several months now we have been long ABBV in monthly basis accounts. March provided the initial signal and then June followed through to new highs.


Both of these signals came off of bullish consolidation patterns and Inside/Up triggers off the prior month's tight range. Most importantly, the overall base structure here is what was so attractive to me.

Following the 2-year rally beginning with the Abbott Labs spin-off, the stock churned sideways for another 2-years. The action began to tighten considerably near the 20 Month SMA in early 2017, just before this recent leg higher began.

Once I establish a position in a strong long-term chart, I will begin to look for opportunities on the Weekly timeframe to add shares for a more aggressive trade.

 
The Weekly signal to kick off June was a combined Inside/Up pattern on both the monthly and weekly timeframes, this was the aggressive add spot for us. Price then rallied nicely for 6-weeks, pulled back in mid-August, and then kicked off again from a new Bull Flag pattern. This second signal was another spot to trail stops and add again.

The last two weeks have been vertical, trading higher more than +17%. Due to the series of very strong risk/reward entries we had quite an overweight position by late August. This surge has taken the stock into a notable level based on the monthly pattern that I feel warrants reducing some exposure, re-balancing the trade a bit.


As price approaches this 161.8 extension level, and due to our significant overweight holding, plus the vertical price action, I reduced some exposure (1/3) on Friday.

Price has extended substantially over the past few months and a consolidation would not be unexpected. Should that play out we will look for new opportunities to add back exposure in the right situation or continue to run our current holding should the stock rally further.

Based on the big picture look in ABBV I do not think this move is over at all and I intend to stay bullish until proven wrong. I have found great success following large base patterns over the years and this one seems like no exception.


If you are interested in receiving our live Weekly/Monthly trade alerts and being part of the ZenTrends Trading community please reach out to me on social media @zentrends. We are excited to announce that our expanded service offering will be available in the next few weeks.

Monday, August 7, 2017

Monster Stock?


Let's take a look at something I find fascinating. I love studying historical patterns and then watching very similar structures play out over and over across many different time periods. Take for example this little trio here:

1986-1989

 2006-2011

2009-2017

Now let's see what happened next:

1990-2000

2012-2017

2017- ?

Will this follow in the footsteps and rhyme like the others? Ultimately we don't know. Fortunately we don't have to know. All we need to do is be sure to manage our risk and let it play out. I'll tell you this, if it does turn into a similar outcome I better be participating when it happens.

How easy would it be to just say "oh this stuff is all completely random and this stock is too high. Its probably going to crash and fall apart". But what if it doesn't? Imagine being the guy in 2011 that said MA doesn't have a chance to play out in a similar way as MSFT did in the 90's, "its probably going to tank".

Granted MA hasn't had the same percentage run that MSFT did, but the outcome of the pattern was similar in that both experienced tremendous expansion. Also note that MSFT's run lasted 10-years and MA is only 5-years into its move at our current time.

So now we ask, can MDSO do it too?

Why not, is my question? Why can't it? Because the market is up too much? Didn't people say that in 1995 and again in 2013? Why is this time any different? Why can't a medical cloud computing company growing EPS Q/Q +60% and Sales Q/Q +20% participate in a similar uptrend?

I'm willing to give it a chance (disclosure I am Long MDSO from February '17 at $56/share)

Tuesday, July 18, 2017

Should Amazon Buy Tesla?

This idea has just recently occurred to me, should Amazon buy Tesla? They seem to making headways into every aspect of our lives, why not energy generation and electric cars too?

Likely the most upside could come from merging their space programs, Blue Origin and SpaceX. A joining of Elon Musk and Jeff Bezos could reshape technology in a completely new direction.

What kind of growth premium could space exploration demand? Think of the possibilities in travel, colonization, etc. 

I saw a stat last week on Twitter showing AMZN gaining $20B in market cap since the Whole Foods acquisition, and therefore paying for the deal 1.5x already. What an interesting purchase..

Probably the most accessible and immediate application would be Alexa in your car. Imagine the scenario of leaving the office, climbing into your Tesla and your wife calls saying we need a few things from the store. You say: "Alexa, I need Peanut Butter, Milk, Bread, and 1lb of Hamburger". You drive to your newest Whole Foods, pull up outside the entrance, and an employee delivers the groceries to your vehicle. No need to pay either because your Prime account has already been billed.

What Tesla needs is funding, Amazon could provide all the capital they would ever need. Tesla offers the most brilliant engineering minds in the world. Intellectual property meets unlimited capital.  

As far as the stocks are concerned both continue to trade near their all-time highs and are in strong position going forward as growth leaders.

Tesla's stock has just thrown back to retest a 3-year horizontal resistance level. It appears TSLA is beginning a new secular breakout.


I think Goldman has been doing some buying...I'll put it this way, they don't make downgrades to prove how smart they are to us lowly retail investors. They want to accumulate positions...Just a hunch ; )

This doesn't even have to be a full takeover, though I don't see the regulators having too much conflict in such an event. But in my view it appears to be a match made for a possible future merger.


I am sure there are those much smarter than myself who could offer plenty of additional reasons why this should or should not be done, I simply find it intriguing from a technology and diversification standpoint. Whether it ever happens or not I have no idea, but the possibilities from such a merge could absolutely change the way we live.

Saturday, July 8, 2017

Regional Banks Build Bullish Patterns

Taking a look at Regional Bank ETF KRE on multiple timeframes

Monthly
In November of last year KRE emerged from a 10-year base following its inception in 2006. This is the equivalent of a "post-IPO" base for a newly issued equity. The recent breakout above the prior high from 2006 is what has my attention here.

The base has formed a decade-long Cup/Handle pattern that is currently in motion. November's breakout kicked off the pattern and since we have seen price consolidate sideways, all the while holding above that 2006 high.

This is a huge pattern and these don't resolve overnight or over the course of a few weeks. Often the length of rally will resemble the length of base its emerging from. It is not impossible we could only be 7-months into a 10-year bull market for Regional Banking stocks.

For this analysis to be invalidated price would need to trade below the November 2016 low.

Weekly
The Weekly shows a closer look at the 7-month breakout consolidation. Participants got quite negative in March and then again in May when there was a lot of discussion that KRE was forming a Head/Shoulder Top. As with any price pattern, nothing is confirmed until price breaks down through key support. In this case the support from those prior highs in '06 was never violated and price has since reversed back higher and is pressing against a significant resistance level.

A breakdown below the $51 support would become more problematic for the intermediate-term trend. Above that however the setup remains very constructive.

Daily
The Daily chart looks very positive to me as well. Price continues to press against the $56.50 resistance. Once the range from 3/21 is overcome it should be a quick shot to the prior highs near $60.

Due to the size of the overall pattern on the larger timeframes, this range breakout could be the launchpad to reignite the prior trend.

Hourly
Zooming in on the Hourly chart the trend is in firm position. The past 4-weeks have formed a Cup/Handle pattern and recently a bull flag into the rising 50 SMA. A move over about $56 would kick off this shorter-term pattern.

When viewing Regional Banks on multiple timeframes it appears to me that they are all suggesting the same thing. Patterns don't always play out but they give us an indication of the market's intentions and a way to measure risk.

From my view it looks like these Banks want to push higher, until price suggests otherwise I will continue to put money to work as the patterns suggest.


Sunday, June 11, 2017

Tech Rotation

To close out the week we saw many of the major leading names get pounded along with any other tech stock you can think of. The NASDAQ Composite declined -1.8%, while the QQQ and XLK ETF’s dropped -2.5%.

What is astonishing despite this carnage is that the SP500 finished the day unchanged and the Dow Jones was up nearly ½ a percent! Normally if the market was set for a broad correction, when the leading index completely falls out of bed the other Indices follow suit and decline even more.


However, Friday was a day marked by textbook market rotation. Hardly any other sectors were phased by the slaughter that went on in Technology. In fact, Financials, Industrials, Health Care, and Materials all rallied fairly substantially. 

We've been waiting for the extended Tech sector to cool-off and it seems that time may have arrived. This doesn’t mean sell everything indiscriminately, but it is prudent to reduce exposure to the prior large winning positions we have held for some time now. 

I want to discuss what it means to watch price behavior for adverse “changes” to a prevailing trend. When a trend has been tremendously strong (at least on an intermediate basis) it pays to stick with that trend through normal retracements as long as the behavior of the price action is within a “normal” character. Let’s look at the Financials (Regional Banks-KRE) for a recent example of what this means. 


In November price made what appeared to be a major bullish shift in momentum by breaking out of a multi-month range. We then saw a sharp rally for 6-weeks which consolidated orderly with no real shocks to the prevailing trend. Consolidations after rallies can have little shakeout attempts (as seen in the middle of January) but follow-through is important to watch for in the following week or two. Price held the initial dip and then resumed normally to new highs.

It wasn’t until the gap higher rally that then saw a shocking reversal the following day that participants began to be alerted to a potential change in character. It is one thing for a consolidation to provide a one day shakeout, it is another to see a very bullish indication (gap higher from a consolidation) immediately sold and reversed so strongly, which occurred on March 2nd.

The ensuing action the next week or two provided zero sign of recovery, price continued to drift lower and all rally attempts were faded quickly. This is the follow-through confirmation we look for.


Clearly something had changed in the behavior after the Outside reversal from new highs, shares were then being distributed on any strength rather than accumulated in an orderly consolidation.

Seeing no relief during this time the bottom finally gave way mid-March with a selling day that has defined the market action since. There was a bit of a pop at the end of March but for all intents and purposes, price has been contained in a volatile sideways trend bounded by the March 21st range since.

Turning to the Tech sector, it is possible we may be seeing that initial shock to the prevailing, extended trend. 

The Nasdaq 100 (QQQ) has been red-hot since the January breakout

It should be noted there have been two one-day shakeout attempts since the January breakout began, one in mid-March and another mid-May. Note that neither saw a single day’s worth of follow-through.

One key item that seems different to me with Friday’s reversal is the sheer width of intraday trading range. While the other two attempts to break trend were relatively wide, Friday’s range was roughly double those prior days.  

Obviously the most important factor will be watching how price now reacts over the next couple weeks. If there is no problem and this too was just another shakeout attempt, we should see price stabilize quickly and recover. What Tech bulls don’t want to see however would be action similar to the Financials in mid-March; they don’t want to see Friday’s low taken out on a closing basis and certainly don’t want to see any rally attempt sold into strength.

Bottom line the trend remains intact for now as no lower lows were made, price is above its 50 Day and 20 Week SMA’s. But evidence is beginning to mount that suggests Tech may be due for an extended rest over the coming summer doldrums ahead. 

Saturday, April 29, 2017

CRHM: Position Review

I received many questions regarding the increased volatility in CRHM this week. This is a position I have been involved with since the middle of last year and would like to discuss my ongoing management of this trade.

To preface, this is a perfect example of what I discuss with members about not chasing extended Monthly charts. When prices begin to stretch well beyond the longer-term trend averages the likelihood of an adverse retracement increases substantially. The proper time to get involved with a long-term uptrend is after prices have rested and are near the trend average.

 A lot of traders get caught up in the Daily movements of stocks and assume after a 3-week pullback that the stock is in strong posture to continue in the desired direction. However without assessing the longer-term trends they often are entering a position that has much higher risk than they are preparing for. In this game managing risk is of paramount importance, knowing when a stock in the vicinity of "high risk" can go a long way to reducing that initial risk. This is not to say that momentum cannot continue and the stock cannot become more extended, it certainly can. But in the market we are not forced to trade, we can wait for our pitch, it is not necessary to take an increased risk for the chance that this particular stock continues to defy the odds.

In my experience and testing it is not the strongest play to ignore long-term posture of the stock even when entering for a shorter-term trade. Unless you are a highly experienced, highly skilled, and very short-term trader, most often returns will grind to a halt because of chasing stocks that are due for a period of longer-term consolidation. Stock trends ebb and flow, depending on your timeframe that can mean the difference between a normal trend digestion and a shakeout due to increased short-term volatility.

Key point #1 to effectively manage risk and trade fast growing stocks: Don't chase extended Monthly charts

This is the first rule I consider when entering a new position; has the monthly chart rested and coiled near the longer-term average OR has price expanded beyond its prior base support, leaving a significant amount of "air" between price and the trend average?

According to my method of trading longer-term growth stocks, CRHM has presented 3 places to enter at the lowest risk/reward. Only three times since the IPO has this stock offered the "right pitch" for me to strongly enter with the best odds of success.

The optimal entry point revolves around a tight consolidation as price moves into the rising 20 Month SMA. This combination gives a relatively close stop and the coiled spring for a "liftoff" move.

Key point #2: "re-balance" position size as the longer-term trend extends.

Something I do to keep risk in check with stocks that have since run strongly from prior consolidation is to re-balance the position size at certain intervals. As an example I like to keep individual position sizes to roughly 10% of total account. Once a position grows beyond 10% of total equity risk to the portfolio becomes more lopsided to that individual issue. In terms of diversification, if a holding grows to 15% of total equity (+50% appreciation in the position), I will "re-balance" the size back to the 10% portfolio allocation. The intervals I use for rebalancing are +50%, +100%, +200%, etc.

Entry points are shown in Green with "re-balance'' sales shown in Red at +50% and +100% gain. Stops only trail to where viable support has been established. I determine established support once a new consolidation forms and then resumes higher. Currently the most recent Weekly stop is below the 12/30/16 Bull Flag signal at $5.15. Monthly stops remain under the most relevant monthly support established in September 2016 at $3.40.

The theory behind this method is twofold:

1. Continue to allocate the majority of funds toward the strongest risk/reward opportunities (those opportunities that are just emerging from periods of consolidation near the trend average).

2. Keep overall portfolio balance which allows for extended trades to have plenty of room to consolidate without emotional bias in the event of retracement.

Once stocks begin to run vertical, having a way to manage open risk becomes very important for outperforming returns. As prices stretch risk increases, some may argue this point, but its true. As prices consolidate risk decreases. I try to position my funds toward the lowest risk and reduce away from higher risk.

This method allows for a stock like CRHM to undergo a normal correction without making us react adversely in an emotional way. Since the longer-term trend has not been damaged, the position remains valid. But to ignore that prices are at a higher risk of correction places unnecessary exposure onto the portfolio. I never advocate exiting a position entirely due to it simply trading higher, but it is also not required to maintain 100% exposure to a position 100% of the time. Scaling around a holding allows for flexibility and better managed risk for the overall account.

Saturday, April 8, 2017

Quick Observation on This Week's News Events

In regard to this week’s news flow, apparently the market doesn’t think whatever it was that went on in Syria matters for US corporate profits. At the onset of the bombing Thursday evening S&P500 Futures fell 20 points, but within a couple hours prices had completely reversed and were nearly flat on the session. We also saw a softer than expected Jobs Report for March. With the combined military action and weaker than expected economic report I would have expected the market to be lower by at least 1%. That simply wasn’t the case at all as for most of the day prices flipped into the green multiple times and ended flat on the day.


It is some very interesting price action we are seeing. Nobody is committed to selling this market. In the face of bad news on multiple fronts it simply shrugged and relatively strong stocks continued to rally. The recent action overall has been softer for the past month, this “event” seemingly should have caused raucous noise and very volatile trading, yet it didn’t. Be sure to note that behavior. It is suggestive of great strength in the underlying price action. 

Sunday, March 12, 2017

Retests or Bull Traps?

Something we always need to watch out for are when bullish patterns go through their inevitable pullback/retests; we want to watch that the pattern formation doesn’t fail. Pullbacks and retests are very normal price behavior following breakouts and rallies. They are normal so long as the pattern doesn’t break and set a lower low.

When bullish patterns trigger we expect price to remain firm and hold the higher swing low created by the new breakout. If the pattern is to stay intact price will resume higher after the period of consolidation.

Take a look at CLF as an example of this:

CLF Weekly 

Since the trend reversal in early 2016 the stock has been in a steady trend of higher highs and higher lows. The stock pulls back into the rising 20 Week SMA and then resumes higher with a strong reaction breakout. Each pullback forms a higher swing low compared to the prior low keeping the pattern valid.

Currently we are seeing the fourth such pullback since 2016. What we need to watch for is does CLF hold the prior low near 8.25 and resume higher with another breakout (as it has done each time in this rally) OR does this pattern fail by breaking through the prior low?

Unfortunately, we don’t have a crystal ball so we can’t know with certainty whether this is the time the pattern fails or if it just resumes back higher like the previous instances. What we can do is identify character change in the market. For more than a year CLF has rallied, tripling from the first bull flag signal in April 2016 ($4 to a high of over $12), the trend of higher highs and higher lows has remained intact this whole time. If this trend were to change and price makes a lower low, we will have proof that something is changing. Maybe it’s a temporary change or maybe it completely reverses the new positive trend, we can’t know that either.

 It is our job as risk managers to avoid the situations where no pattern exists and to stick with those that do. As long as CLF can maintain its recent higher low the pattern will be intact and we will stick with the bullish pattern. If it fails we will stop out and take our gains. 

Keeping the signals and strategy simple is what gives us our edge; being able to identify with clarity what the situation is at any given time helps align us with the market. We need to be watchful of these changes in character. The individual stocks will give us the early indication of the overall intentions. When we begin to see many bullish trends fail we know that the underlying support for the market is weakening. Until the patterns break however it means we need to stick with the market as the overall trend remains intact. 


Monday, February 13, 2017

Fractal Trading Using CELG

You may have heard before that markets are "fractal". Well what does that mean and how do we apply it?

A Fractal is defined as: a curve or geometric figure, each part of which has the same statistical character as the whole. Fractals are useful in modeling structures (such as eroded coastlines or snowflakes) in which similar patterns recur at progressively smaller scales, and in describing partly random or chaotic phenomena such as crystal growth, fluid turbulence, and galaxy formation.

Simply put patterns in nature seem to repeat in similar shape or dimension on any scale. We see this fractal behavior occur in financial markets as well. Seeming chaos can actually be reduced to simple patterns that play out across multiple timeframes and in different magnitude.

For an example of this phenomenon lets take a look at Biotech giant Celgene (CELG):

Monthly
 On the long-term Monthly chart we can see this "flag" like formation following a strong rally. After the stock moves higher it undergoes a period of rest in an orderly and somewhat "flag" or triangle like pattern.

Weekly

The Weekly chart zooms in on the larger Monthly pattern and we can see following the sharp November rally price then underwent a rest period in a similar "flag" shape as the larger pattern above. 

Daily
 Taking the timeframe down a step further to the Daily it shows another sharp rally to end January and is now in a period of rest in a similar pattern.

Hourly
 Finally zooming into the intra-day action on the Hourly chart we can see today's action with a sharp rally at the open of trading and then a rest period for the remainder of the day. 

This "flag" pattern is not unique to the fractal phenomenon, there are many other examples of how patterns repeat across all timeframes in financial charting. But it should be noted that any of these formations can be traded within their own time periods for similar relative results. 

I prefer to use these patterns as confirmation of each other. When I see a stock displaying similar behavior on all major timeframes it gives a hint to how it will trade moving forward. None of this is directly predictive but it gives us a method for managing risk and making effective moves within a seemingly meaningless set of lines on a graph. 

In this game pattern recognition and risk management are the two most important aspects of success. It is critical to understand how prices behave across multiple timeframes and how to position in sympathy with that action until it changes.
 

Monday, January 30, 2017

Home Depot "Higher Range" Base

HD Weekly
Home Depot has been in a fairly wide and loose weekly trading range since the end of 2015. Each time price has reached the upper end of the range it has reacted lower, leading to a deeper pullback. 

Over the past several weeks however as price reached the upper range resistance it did not turn lower. In fact the stock held rather tightly against the resistance level and this past week powered to new Weekly closing highs. 

This behavior by the stock is what I like to call a "higher range base", meaning the stock is trading in a larger defined channel, but instead of continuing to move from the upper range to the lower it stops and settles near the highs. What this new price behavior tells me is that the stock is now comfortable with the higher price level and is due to resume an upside rally. 

The Higher Range Base is a symptom of a strong underlying bid for the stock where any viable sellers have already made their moves and are now giving up. The stock simply will not sell off anymore at this level and appears to want higher. 


Monday, January 23, 2017

UNP Rhyming like its 2010?

I can't help notice that the setup in Union Pacific is oddly familiar to how it looked in 2010 following the '08-'09 bear market. The rally following that bottom reversal was nearly a 4x gain from the March 2010 buy signal. It appears a similar setup is in place once again. This doesn't mean it will rally to $500, but to ignore the pattern may be costly.

Monthly chart '07-'10
with MACD and Fibo of pullback


Monthly chart '15-'17
with MACD and Fibo of pullback
In both cases the stock endured a sizable correction for multiple months. As UNP began to recover to the 61.8% Fibo retracement of the correction the stock put in a few month base and then broke above the Golden Ratio line. When that resistance is broken I find it becomes a high probability trade for the stock to drift toward the prior high. In UNP's case it tends to trade back to the correction highs and then substantially higher. This pattern has repeated multiple times since the stock has been trading.

Something I look for when determining risk/reward is the position of the long-term MACD. Certain patterns in the indicator are more favorable to large rallies than others. Identifying when these patterns are in place can improve accuracy and returns over time. Just as food for thought, compare in both cases above how the Monthly MACD was positioned just prior to the large correction and how it then looked once the new buy signal took place. The posture of momentum looks very different currently to how it looked at the top before rolling over. This is what we try to identify, are we buying a stock closer to its top or closer to its bottom? I think the case is quite clear here.

Sunday, January 15, 2017

Consumer Discretionary Looks to Have Some Mojo

When looking for setups I like to see multiple timeframes aligned supportive of the same conclusion. Consumer Discretionary stocks (XLY) appear to be in position to rally substantially from here. I know, I know the market is extended too far for any more upside to occur and we are going to crash any day now. Well quite frankly underlying Sectors and stocks don't suggest that posture currently.

Looking at XLY on multiple timeframes it has the structure in place to put the risk reward in our favor.

Monthly
The setup always should start with the Monthly chart. The structure here is very positive. Price continued to test the 81-82 resistance for much of 2015 and then all of 2016. Each test of this resistance was followed by a "higher low" pullback. As they say, the more times a level is tested, the more likely it is to be broken. This works for both support and resistance.

Each time a resistance level is tested people sell the stock because that tends to be a high probability trade, to sell into resistance. Every successive test of the level fewer and fewer sellers exist at the area, supply of the stock is drying up. This also works for buyers at support levels; when a stock trades down to a support level new buyers step in. Each time the stock returns to the support fewer and fewer buyers want more of the stock because they are simply running out of money and patience with a stock that makes little headway. Eventually demand becomes weakened and the stock breaks down.

I prefer to trade at the areas of support and resistance where the imbalance shifts. I'm always watching for the place where sellers wear out and also where buyers breakdown. The momentum that can follow such a change in trend is often very powerful.

Currently XLY is in the process of expanding higher after sellers have weakened.

Weekly
Another key principle of supply and demand is once a level is broken it tends to act as a new floor or ceiling for prices on subsequent tests. This is called polarity and a throwback or retest of the prior breakout should hold this new level.

XLY made multiple peaks over the past 18-months and in November broke through those highs, shifting the balance between buyers and sellers. Buyers are trying to take control of the stock and change the intermediate-term trend.

At the end of the year price revisited the prior resistance level but coming from above resistance rather than below. The first week of January showed polarity as buyers stepped in to support the stock and confirmed the change in trend. A bull flag pattern was triggered and this week we saw initial follow-through on that pattern. This is a high probability pattern and should not be ignored.

Daily
Gap resistance from December which contained the price action for the last 4-weeks has now been reclaimed with this Friday's firm move. Thursday was a Hammer bar off the 20 Day SMA and Friday's follow-through confirmed the rejection of lower prices.

Hourly
If we zoom into the intraday action on the Hourly chart we can see the structure of this "retest or throwback" move. The action has formed yet another bullish pattern; an Inverse Head/Shoulder formation is now in motion which adds additional confirmation to our bullish thesis.

It is a very good sign when price patterns on multiple timeframes all confirm the same thinking. We always want to see this alignment. It doesn't mean prices have to go higher, but the odds tip considerably in our favor when they do so.