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.

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.

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.  

Watching TDG TransDigm Group

It appears TDG is at a key turning point for its longer and intermediate-term trends. Long-term the trend remains higher and only now seems to be returning to its average trajectory. The intermediate trend has been down since October, but we may have seen the turning point recently that could begin the next leg higher.

Monthly

The pattern is robust. The stock consistently finds buyers when it approaches its long-term trend average. Buying near these areas goes a long way to tipping risk/reward more in our favor.

*A monthly signal is not confirmed at this time as December's bar has simply bounced off a low. Follow-through higher next month and a close above this month's high will be necessary to confirm the pattern will continue.

Weekly

The Weekly timeframe remains in a correction (it should be noted most of the lost momentum recently was due to a special dividend of $24/share that was payable November 1st). It is interesting however that the stock has now recovered to the 50 Week SMA and has now traded the last two weeks inside the 12/2 Weekly bar. A move through that high would be a great sign of an end to this decline.

*The Weekly timeframe is not confirmed at this time as price remains with lower lows and lower highs.

Daily

Here is where things get interesting. On 12/2 the stock fell more than $10 early in the session only to rally all the way back and close positive. After a 2-Month decline buyers stepped in and established themselves. This kind of reversal pattern can be extremely powerful, the risk/reward is well defined also. Should the stock trade back through that 12/2 low all optimism for the pattern would be killed off. Above that low however this is a stock to hold, own, add to, etc.

Hourly

Zooming in on the Hourly view we can see how TDG completely rejected lower prices. I call this kind of bar an "F You" bar. Its saying it wants nothing to do with those levels. Stops get run, sellers go short, while the market takes it and flies in the opposite direction.

Moves of this nature, especially those that occur near the long-term trend average, can create monster rewards in our favor for very little risk. This is how we can combine all the timeframes to structure a very solid probability trade and a strong risk/reward.

The Monthly chart is the ultimate reason we like this stock; a pattern this consistent is one we want to participate in as often as possible. This is what it means to identify supply/demand in the market. The key is being able to see when a notable change takes place.

When a change like this occurs it pays for us to notice. We can take an earlier entry point in the blooming trend, then as further milestones are achieved we can expand our timeframe. Hopefully it can become one of those trades we hold for a long, long time.

Managing Risk vs Reward

The SP500 tagged its first upside objective on Friday as the surge since the election continues. I don't like calling this a "Trump Rally", many of these groups had been strong all year prior to the election and the resolution of the event simply caused many out-of-position investors to reallocate.

Its not a Trump rally, its a FOMO rally as the economy is not nearly as bad as many suggested it was. As usual investors let fear lead their investment process and are now scrambling to adjust as they have done over and over throughout history.

We on the other hand like to think independently of the emotional fear and greed slaves. We prefer to find where money is flowing, where value may be lurking, and where risk/rewards may be out of favor. Its our job as systematic traders/investors to not concern ourselves with politics, media hype, or the like. We are hear to find key turning points for new and old trends.This doesn't mean we pick tops or bottoms, what we want to find are new base setups to position into before the media and emotional traders figure out what is happening.

At a glance it appears the rotations continue to flow into Tech and Energy after multiple weeks of consolidation. Just because these groups didn't react as strongly as others to the initial wave up in the market doesn't mean they should be ignored. Quite the opposite really, now that the first wave of leaders are well extended from their bases I want to see where the next leg of the rally will be coming from. I am not bearish on Banks and Industrials, but I am not a buyer at current levels either as the pattern in place we have already positioned into when they first emerged from their bases (note I am quite bullish on Banks and Transports long-term). For new funds I am liking what I see in Large Cap Tech especially. This appears to be the next area of interest as the breakout is only now getting underway.

XLK

The weekly chart of Technology signaled a new bull flag breakout after trading sideways since July. This is a 17-week secondary base formation that is now resuming to the upside after the initial July surge from the nearly 2-year primary base structure. When we are discussing strong risk/reward this is what we are talking about. It is also the first time the group has closed a week at new all-time highs since the first week of August.

After completely reversing last week's bearish outside range, XLK regained new highs and the rising 20 SMA. That's very bullish behavior. In contrast to this orderly consolidation take a look at Industrials and Financials currently over the same timeframe:

XLI

XLF

Most news has been suggestive of caution toward Technology and growth stocks recently, and with reason as they haven't traded strongly in the past month. While many deem that as "worrisome" behavior for the market in general, I simply see it as a prior leadership group that took a rest and is now ready to resume what it was doing in July.

Different groups come in and out of favor all the time. The steady flow of funds from relative expensiveness to relative value and back again is very normal. When you trade these longer term charts, sitting through periods of digestion is often necessary to catch the biggest moves. Looking at the XLF above my trend method had two strong risk/reward entry points prior to the large surge; the last week of July was the first major trend change, then again at the close of September was another.

As most know it was difficult to get involved once the November breakout was already underway. The consensus narrative was that the move was just a "knee-jerk" or "too far too fast". But had one been willing to sit through several weeks of orderly consolidation and followed the initial signals (while everyone was obsessing about the election and when the next market crash was coming), there were tremendous rewards gained for trading the price and pattern rather than the news flow.

For the past couple months Tech stocks have mostly churned, it now appears they are likely to step into the next leadership position.

AAPL

MSFT

NFLX

GOOGL

BABA

Stocks go both up AND down. I know it seems when stocks are rallying they will never give us a good entry again and when they are correcting they will never turn things around. Its important to remember that the consolidation is necessary to set up the next rally opportunity. The swing point tells us where the real buyers are and allows us a better reward to risk for our money. The key is to not get caught up in the narrative and execute the signals when they first present themselves. Most are afraid to buy the early base signal still fearing the negative news flow, by the time the real move has been made only then do they have the confidence that its finally safe to enter. This behavior leads to chasing and getting shaken out repeatedly, or buying high and selling low.

We strive to not be emotional traders, have a systematic process based on the price action, and follow the signals the system triggers regardless of the current narrative of the financial media. Making these small adjustments in the overall process helps improve our long-term expectancy and profitability.

Thanks for reading
ZT

Lg-cap Portfolio Review 12/3/2016

Large Cap stocks are performing well as a group, there are laggards and even fairly soft breadth (this is mainly due to the complete lack of any buying in sectors like Utilities, Staples, and Healthcare, although Tech has recently joined the group), but overall the SP500 is at all-time highs with Financials, Industrials, and now Energy leading the charge.

There is much talk of how the Nasdaq is not participating and creating a key divergence. Growth traders like IBD have been discussing a topping trend due to this underperformance. While this is true that names like Facebook, Amazon, Gilead, etc have been underperforming, but there are plenty of opportunities to make money right now, isn't that why we are all here?

If you are simply following the rotations Financials, Transports, Energy stocks have been showing relative strength for some time. Now no question these could pullback over the intermediate term, they have been making monstrous moves. But isn't it our goal to catch these types of moves rather than think and worry how money has rotated out of some other select groups? I don't know about you but I find it a natural flow for sectors to come in and out of favor. Lets not forget that Technology, and Healthcare lead much of the way since the bull market began in 2009. Financials, Industrials, and Energy have all underperformed the market over the same period, but are seeing strong new rotations as the market moves to new highs.

I for one am not fighting this action and positioning accordingly.

At the open of December our Lg-Cap Portfolio is 80% Long and 20% Cash

We own positions in UNH, EOG, CVX, HAL, BRKB, JPM, AIG, CAT, GE, UNP, MSFT, FB, CSCO, GOOGL, PCLN, CMCSA, SBUX, PCG

UNH

EOG

CVX

HAL

BRKB

JPM

AIG

UNP

GE

CAT

MSFT

FB

GOOGL

CSCO

PCLN

CMCSA

SBUX

PCG

A Look at Alibaba on Multiple Timeframes

I find using multi-timeframe analysis helpful for identifying strong turning points. Being a long-term swing trader I want to position myself in a blooming trend early to capture large profit opportunities. The kind of moves I prefer take time to develop, they don't occur over a one or two week period. If I position correctly and the stock cooperates I may hold for a year or more.

BABA is offering the type of opportunity I look for as long-term swing trader. Not only do they sport solid growth numbers, but also a very low 33% Institutional ownership at the current time. It should be noted, according to finviz.com Institutions added 6.5% more exposure in the most recent quarter. When the Big Money are accumulating shares it is often a positive sign for future growth. BABA grew EPS by nearly 200% in the past year and posted 60% Sales Growth Q/Q.

It appears the fundamental numbers are headed in the right direction, now lets take a look at the four primary time periods I use to identify these turns:

Monthly

For my methods it all starts with the monthly view. Being that BABA is a relatively new issue stock it is only recently showing a 20 SMA, which is now turning higher. The rally this year extended in the late summer and was trading more than 40% above the 20 Month SMA. When this amount of "air" exists between price and the 20 SMA I know its time to wait for a better risk/reward and let the stock settle out for a while.

Since the $110 high in September BABA has pulled back to just above the prior breakout level near $85. This has allowed the trend to rest and has shaken out a lot of the excess bullishness as traders chased the prior rally. Much of the air has also been filled as price is now approaching the rising trend average.

Weekly

The Weekly view is where most of my signals generate from. For BABA to trigger an entry we first need to see price above the prior week's high, currently that comes in at 95.30. For a valid weekly Buy signal to confirm price will need to close above that prior week's high.

I have alerts set for 95.30 to notify me when the trend is making the "higher high" we are seeking. We will then watch how the week plays out to see if price can hold and suggest a turn is in place.

Daily

Drilling down to the Daily timeframe can give us an indication of the underlying patterns that may be forming. There are a few things that stand out to me right away. First we have a gap fill from the August breakout that also coincided with a 61.8% retracement of the summer rally. Secondly I notice the pullback has seemingly formed a very clear 5-wave pattern that may have completed after the gap fill and Golden Ratio tag.

If we remove all bias from indicators and simply look at the trends we can see it is still a bit early to determine if the trend has fully bottomed. In July price began making higher highs and bull flag type formations. This action continued until the October rally failed to break higher and instead rolled to the downside. Since that trend change price has made lower lows and steady bear flag formations.

We don't need to be in a hurry here as we still see lower highs and lower lows on all three major timeframes. But price is now approaching some interesting support and the patterns that are forming are suggestive of a healthy pullback rather than a long-term trend failure.

Hourly

  If we continue down to the intra-day action on the 1 Hour chart we can see the start of a possible trend change. But we must be careful not to get caught in a similar situation as a few weeks ago. In mid-October the price action tried to firm up and got above both a rising 20/50 SMA. Yet it failed to make a higher swing high and instead led to much more downside. This is why we really want to see the prior week's high at 95.30 taken out. That would suggest this potential low may hold and the trend could be ready to turn higher.

--The bottom line is Alibaba is giving multiple indications of more upside to come in the intermediate term once this pullback runs its course. We don't have enough evidence at this moment to plow into the stock but we could begin building a position soon if conditions suggest a low is really in place.

The first signal that the turn may be ready would be to break above the 95.30 resistance area. A move through that and I will begin to nibble at a position. Should we then see a weekly close above the prior week's high I will add more on the confirmation.

Thanks for reading
-ZT