Todays Big Stock – Limited Brands (NYSE: LTD)

From time to time, I like to give readers a heads up on potential trading opportunities. Before considering any trades that I might outline in Chart School, always remember that you must decide for yourself if you like the trade.

A key factor in making that decision will be to decide which side of the trade you believe gives you the highest probability of success. In other words, do you like the short side of the market, or do you like the long side? You don’t necessarily have “know” what side to be on, but it certainly helps to take a stance. So, if you haven’t thought about it, review the overall indices themselves. Take a look at the S&P 500 for example.  Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

One trading opportunity that I’d like to review today is that of LTD (Limited Brands).  Before discussing, please review the 1 yr. chart of LTD that I have outlined below, with my added notations:

If you have read any of my previous Chart School newsletters, you will already know that I believe the simplest to be the best. In my experience with other traders and students that I have coached to trade, the ones that kept it the simplest always seemed to do better than others who may have overcomplicated things a bit.

This simplicity is on full display when you look at the chart of LTD above. LTD has formed a very clear trend line of support (blue), as well as a nicely defined trend line of resistance (red). As you can see, the trend lines are converging on one another. At some point, doesn’t LTD have to break either through resistance or below support?

The Tale of the Tape: LTD (Limited Brands) has formed trend line support and resistance over the last 6-9 months. If LTD were to break above the down trending resistance on above average volume, entering a long position could be advised. If instead LTD were to break the up trending support level, a short position could also be advised. Now, could you also enter a long position if LTD approaches that same trend line support? Yes, just like you could enter a short position if LTD approaches the trend line resistance. However, the breakout trades tend to be more desirable.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Trade watch trio! – AMP, BAM, MSCI

From time to time, I would like to give readers a heads up on potential trading opportunities. Before considering any trades that I might outline in Chart School, always remember that you must decide for yourself if you like the trade.

Well, today I’d like to share a trio of potential trades and here they are:

 

AMP

The setup:  AMP has created a very nice up-trending support line over the last 8 months. The length of time in which this trend line has formed, coupled with the number of times it has been tested, demonstrates how important this support is. The stock has recently stalled at $65 and appears to be rolling over for a pullback.

The trade: A long position on a pullback to the support line.

(Back-up trade: If the trend line support does not hold and AMP was to break below $60 (current trend line support), you should re-evaluate for a short position with a stop above $60.)

Tale of the tape: After creating an up-trending support line over the last 8 months, AMP looks to be pulling back to that support line. At this time, support is at approximately $60. This would be an excellent entry for your long position with a recommended stop below the $60 level.

 

BAM

The setup:  After a very nice rally from July to January, BAM has formed a rectangle consolidation pattern from $32-34.  This is known as a “battle between the bulls and the bears”.

The trade: A long position on a break above $34 or a short position on a break below $32.

(Optional trade: Long position on a pullback to $32. Due to the obvious trend of stock, I would not advise an optional short at $34.)

Tale of the tape: BAM is stuck within a rectangle pattern. Most traders will wait to see who wins “the battle”. So, look for a breakout above $34 to enter a long position with a recommended stop below $34, or a breakdown below $32 to enter a short position with a recommended stop above the $32 level.

**If you enter the optional long at $32 first, you could add to that position if BAM breaks above $34.

 

MSCI

The setup:  MSCI has rallied from July until it’s peak in December. Since October, MSCI has formed the common head and shoulders reversal pattern. Although this does not guarantee a breakdown, it does commonly happen.

The trade: A short position on the confirmation of the H&S pattern, which would be a breakdown below the $34 support.

Tale of the tape: MSCI has formed a very nice H&S reversal pattern after a long 8-month rally. A short position could be entered on a break below $34 with a stop above $35.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

 

Good luck!

Christian Tharp, CMT

…and one more thing

When it comes to inter-market analysis, there’s something I always think of: Bear Stearns Company. More specifically than the company, I think of the letters BSC as a reminder of a very common phrase: Bonds lead stocks lead commodities.  Typically this would be leading as in higher and lower. Could it also lead inversely?

I have recently written (2) Chart School newsletters in regards to potential breakdown of the stock market. These newsletters highlighted a very long-term Dow channel and a very important support line for the S&P. Well, if bonds lead stocks, could bonds give us a heads up?

Please review the TLT (iShares 20 Year Treasury Bond Fund) ETF chart below with my notations:

While the stock market has rallied higher over the last 6 months, bonds as illustrated by the TLT have sold off. This same inverse correlation also existed when the stock market sold off from April to August, while bonds rallied during that same time frame. If you notice the TLT above, you will see it has been stuck within a downward channel. Yesterday, the TLT broke out through the topside of this channel indicating potential higher prices for bonds.  Summing up, if bonds and stocks are moving inverse to one another, and bonds lead stocks, then could the TLT’s breakout signal and eventual stock market breakdown?

The Tale of the Tape: Yesterday I wrote about a very important channel resistance that has come into range on the Dow and today I wrote about a very important S&P support line. Bonds and stocks have been moving against one another and bonds can tend to lead stocks. Yesterday’s breakout of the TLT seems to be signaling a move higher in bonds, which in turn would signal a potential move lower in stocks. Already knowing that the Dow was at a very important resistance, we could be seeing a major move unfolding.

What to do? If you like what you see in my charts, buying the TLT or UBT would make sense. You could also short the TBT. If bonds move higher, I’d expect rates to move lower which should favor the dollar and hurt the euro. So, you could also buy the UUP, short the FXE (euro) or buy the EUO. Upon purchase/short, make sure to set a stop below the breakout/breakdown point in case the market still has some steam and is faking us out yet again.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Follow up to Dow channel article.

As a follow up to yesterday’s Chart School newsletter about the long-term Dow channel, http://www.themeshreport.com/2011/02/potential-stopping-point/, I just wanted to give readers a heads up as to what to watch for in case the stock market sell-off yesterday does turn into something bigger.

Please review the S&P 500 chart below with my notations:

The trend line I have drawn should be a formidable one. However, if we break it, I would think that if nothing else a correction would be in order.  The Dow channel resistance area that I wrote about yesterday lies somewhere within a range of 12,400 and 12,700, but we could even go higher than that without actually breaking through it. Rather than try to pin a top on the channel, I’d look for the support line that I have drawn above to breakdown.

The Tale of the Tape: Yesterday I wrote about a very important channel resistance that has come into range on the Dow.  It is difficult to say where the resistance line on the channel actually lies, but the point is simply that we are within its range.  The first sign of trouble would be the break of the S&P trend line I have illustrated above. When that line eventually breaks, which it will at some point, we could be seeing a top of some importance in the market.  Be cautious on long positions and look for shorting opportunities with stocks as well as the indices when this happens.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Potential stopping point?

As everyone has seen over the past several months, the stock market simply goes up.  Sometimes it seems borderline comical. No matter what the news, no matter how sluggish the economy, no matter what the start of the day looks like nor what the technicals look like, up we go.

So, weeks ago I began telling the students that I coach that I had given up on the idea that a resistance for the market exists since the market never seems to resistance anything. As the saying goes, “Resistance is futile”.  Instead, let’s just let the market play out and eventually it will tell us when it’s going lower. After all, let’s not loose sight of that fact: The market will pullback, it will correct, and it will eventually enter a bear market again. These are the facts of the stock market. What isn’t a fact is when any or all of these things will happen?

Last week, I noticed a trend line moving into range that I had not looked at for years.  I don’t look back more than a year or so very often, but with the market going up, up, up, an important potential resistance came into play. So, please take a look at the long-term, quarterly chart of the Dow I have shown below:

This channel has been forming for decades, so it’s importance is paramount.  As I tell my students, any (2) points can start a trend line, but a 3rd or more confirms it. If you notice my notations, you will see how often the channel resistance (red) and support (green) have been tested.  Remember, after the 2nd test of these levels, the market decided they were important levels, not me. You will also notice how often the 50% mark (blue) between these levels has acted as either support or resistance, such as with the 2009 low.

As the market has rallied over the last 6 months, you can now see why the upper trend line resistance came into my view.  However, here’s the problem: It is very difficult to pin an exact number on where that resistance lies. I’d look at it as more of a range, somewhere in the general 12,500 area. Again, depending on how/where the individual draws this channel, that target price can have a several 100-point variance above or below.

The Tale of the Tape: A very important channel resistance has come into range on the Dow.  In the long run, if you believe the market is still in a secular bear market that will return, this range around 12,500 could be a potential turn around point. This level is of more importance to you if you are the long-term trader or investor. For you, make sure protective stops are in place, or feel free to lock in some great gains at your discretion. For short-term traders, the trend is still up, but be on the look at for a reversal. If the trend were to change from up to down, you would obviously want to adjust your trading strategy.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT