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.

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.

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.

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.

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.

Tuesday, January 3, 2017

Trading Goals for 2017

When setting goals for a new year it is most helpful to set attainable goals. It is important to be realistic of what we can reasonably control and what we cannot. For example a realistic trading goal for 2017 is "I want to place even more emphasis on identifying higher quality setups". An unrealistic goal for 2017 is "I want to make 30% this year". Maybe we will make 30% profit this year, but that is not exactly in our control, and if we fail to achieve our goal it would be seen as a disappointment. We have no control over what the market may or may not do in the new year. What we do have control over is how we will respond to its signals along the way. I can't control the number of opportunities that will present themselves, but I can control the quality of setups I choose to take. That is a realistic market goal

My Trading Goals for 2017:

-Focus on finding value setups during normal sector rotations

This is something I try to do anyways but also feel I can improve my patience and focus to exploit the best risk/reward scenarios even more efficiently. What I want to look for are stocks that have Monthly uptrends (the price is trading at or above its rising 20 Month SMA), but have pulled back for multiple months to fill the "air" between price and the moving average.

Most of these moves will appear to be from weak or lagging groups, the financial media and shorter-term traders will be bearish, yet the stock will simply be undergoing a very normal rotation back to its long-term trend average. This is where we want to be hunting.

-Focus on using multiple timeframe analysis to really drill down into a potential blooming trend

I generally look at multiple timeframes when following a stock. But in the past I have been more hesitant to really begin to build a position based on these more speculative short-term setups. In 2017 I want to utilize the shorter-term charts more to kick-off new positions.

How this would look for example would be when I find a stock with "value" (see above) on the Monthly chart within an uptrend, I will then look to the Weekly chart for any possible bull-flag consolidation or inside bar. Then move down into the Daily/Hourly charts for the most specific turn in the action. I may be looking for a gap reversal or a very large candle that rejects lower prices and ignites a fast turn in the direction of the long-term trend. I will try to "get a piece" of the position on any notable reversal and then look to build that position with a follow-up buy or two as the higher timeframes begin to confirm the setup with their own reversal signals.

If we can accumulate these Monthly pattern turns as they emerge on the shorter timeframes and then add to the position once the Weekly/Monthly resume the prior trends, there will be a lot of money to be made with strong risk/rewards.

-Stick to my process of cutting losing trades fast and keeping risk/reward in my favor

This goal is all about my discipline to stick to my plan, don't hold and hope with losing trades, and seek the strongest risk/reward trades as possible. Following this goal is the most important part of my potential success in the new year.

We traders are nothing without our process and discipline. We need to be able to ignore noise suggesting that we alter our strategies in the face of volatility, and we need to listen to the market as best we can because the market is ultimately what pays us. Our opinions, research, news flow, macro-headlines do nothing for our bottom line. We can have all the opinions in the world, can research a stock for days and days, but if the market doesn't go along with our plans we will lose money. Its that simple.

Those are my trading goals for 2017. I hope you can create attainable goals that focus on your own process as a trader. The purpose of this exercise is to recognize your inherent faults and where your process could use improvement. None of us have all the answers, we all have plenty to learn. But only by attempting to make yourself a better participant can you have any hope of achieving long-term success.