Reason to stall?

As the markets rallied on Friday, I was curious as to why the markets seemed to stall all day at or near the high. Why not sell-off? Why not rally higher? I decided to analyze a few charts to see if there might have been a reason. Well, I found 3 or 4 good reasons why the market may have stalled.

Let’s take it one chart at a time. First, please take a look at the 1-year chart of the S&P that I have shown below. You will also notice my notations.

As the S&P has moved higher, it appears to be trending within a common price pattern known as an up trending channel. The S&P seems to be struggling at the top end of this channel. When it comes to trend lines/channels, my view is that (2) connected points create the trend line, but a 3rd confirms it. So, we’ll have to see how this plays out as the markets continue higher.

In addition, the same 1150 area of resistance created by the channel now also acted as resistance back in January.  This area could be a tough nut to crack in the short term.

So, let’s move on to chart #2!

The chart above is a 5-year chart of the S&P. I have added a down trending resistance line that connects the 2007 bull market high with what may end up being the April bull market high of the 2009-2010 rally. If you believe in the secular bear market returning, then that April high could prove very important. Although the S&P hasn’t actually made it to this trend line, it sure is getting close. Will the 3rd hit confirm it?

And one last chart:

Although I usually pay more attention to the S&P over other indices, I do tend to keep tabs on the NYSE Composite. It never hurts to know what all stocks combined on the NYSE Exchange are doing. Some traders actually prefer this index for their market analysis rather than the S&P or even the Dow. You will notice that the NYSE Composite also hit what appears to be an up trending resistance. Also, is there the possible formation of a bearish wedge pattern on the NYSE? It could be a little premature, but definitely something to keep an eye on.

The Tale of the Tape: The S&P seems to have created a channel pattern to watch. The 1150 level of resistance is also a familiar resistance level, which also happens to be where the top end of the channel’s resistance lies too. A longer term S&P resistance line is coming into play as well. The NYSE also seems to be at the top end of a resistance line.  These areas may prove to be difficult levels to get through, at least in the short term, especially after such a great September run.

Watch for pullbacks to the support levels I’ve highlighted above, especially if the S&P falls back below the key 1130 level that was referenced in a previous Chart School newsletter. These supports could provide ideal entry points. The resistances I’ve outlined will also give you a heads up for stop loss management. Breakouts or breakdowns of the levels above will provide entry points for either additional longs or new shorts.

Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. 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.

Good luck!

Christian Tharp, CMT

Trade watch – Visa

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.

A key factor in making that decision will be coming up with which side of the trade you believe gives you the highest probability trade. 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 V (Visa).  Before discussing, please review the 1 yr. chart of V that I have outlined below:

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 V above. V has been forming lower highs on each rally since June. At the same time, V has created a significant support level at $70. Although V has dipped below that $70 level a couple of times in the past few months, you will notice from the closing price chart below that it has never actually closed below that key $70 level.

Until yesterday that is! The series of lower highs seemed to give a hint as to what was coming. Although the hint may have been there, getting the confirmation of the breakdown is the “signal”. So, what does this tell you about the future direction of V?

The Tale of the Tape: V (Visa) has recently broken a key level of support.  When stocks or markets break key levels, they tend to accelerate in the direction of the break. Having broken the key $70 support level, V could be expected to go much lower. Entering a short position with a stop above the $70 level might provide you with an excellent trading opportunity.

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

Euro – Follow up

You may have read the article I published last week in which I detailed the prospects for the euro. For review, click here.

In that article, I analyzed the FXE, which is an ETF that allows investors and traders to capitalize on the movement of the euro without actually having to trade the currency. Below you will see the chart from that article with the notes I had added at that time:

Quick recap: After breaking the down trending resistance labeled #1, the FXE started its 10-week rally. Then, in the first week of August, the FXE hit its down trending resistance #2. The FXE quickly turned down from that resistance and immediately broke its short-term up trending support labeled #1. This break of support sent the FXE heading towards the up trending support I have labeled as #2, which is wear the FXE had a slight bounce as expected.

At the time of the writing of that article, support #2 and resistance #2 were the levels to watch for a potential trade. Since those two levels were converging on one another, it was only a matter of time until the FXE broke out in one direction or the other. If the FXE were to break through the resistance, I would expect it to move toward higher prices. In contrast, breaking the #2 support would most likely lead to lower prices for the FXE, and in turn, the euro. Well, the verdict seems to be in:

I have cleared off all other support and resistance levels from the previous chart except the one that currently matters the most. As you can see, the FXE broke its up trending support level and has already started to move lower as would be expected. At this point, what might you expect the euro to do?

The Tale of the Tape: The FXE has broke down. When stocks/securities break support, they usually do tend to go lower. The FXE’s recent break of support provides an excellent opportunity to enter a short position.

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

Gold – Update

Over the past several weeks I’ve published a couple of Chart School newsletters in which I discussed the prospects for gold. After hitting recent highs, and then retesting those levels, it would seem that gold is just an up, up, up and away no-brainer trade. I see confirmation of this when so many of the people I coach in trading ask the question on whether or not they should go long on gold. Very rarely do I get the question about when to go short on it. It just goes to show what the present psychology is in regards to the commodity.

As always, I don’t really have an opinion on any security as much as I have a chart, and currently the chart seems very clear. I typically look at the GLD ETF to analyze gold. So, please take a look at the chart of GLD below:

As you can see, the chart is relatively clear. After the 2008 overall market sell-off in everything from stocks to commodities, the GLD has been trending nicely higher for the last year and a half. As a matter of fact, it has created one of the clearest long-term uptrend lines that you may see.

When it comes to support and/or resistance levels, always remember that the more times it has been tested, the more important it tends to be. A level that has been tested as many times as GLD, and over such a long period of time, should be very difficult to break. However, WHEN it breaks, it will be equally as important.

So, whether interested in going long or wondering when to go short, isn’t the trade relatively clear at this point?

The Tale of the Tape: The GLD has been bouncing along its up trending support for the last year and a half. This level is of extreme importance. So, if you believe gold has more room to run, then a purchase of GLD on a pullback to its support would make an excellent trading opportunity. If you were patiently looking for the right time to short gold, then the GLD breaking this uptrend line would be the time to enter that trade. Unfortunately, that could happen next week or it could take another year.

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. 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.

Good luck!

Christian Tharp, CMT

…and then there’s the Dollar

So, then there’s the sister question I usually get when asked about the euro: What about the dollar?

In contrast to the euro, the dollar had a great run from mid-March to June. But since June, the dollar has had quite the sell-off. So, let’s see if we can answer the same euro questions with regards to the dollar: Is the dollar still a short or should you be looking at a potential long position?

Please review the chart of the UUP, which is the Powershares Dollar Trust ETF, with my added notations:

 

The UUP is a way for investors to buy the dollar without actually buying the currency. You will see the March to June rally I mentioned above and the current sell-off.  I have drawn an important resistance in red and (2) important supports in blue.

First, please notice the up trending support. If you had been following the UUP and noticed the break of that support level in June, wouldn’t you have probably entered a short position? Probably. Well, now look at the longer-term horizontal support at around $23.75. Is it surprising that we bounced right at that support? Probably not. So, what might you expect the UUP to do if it happened to break below the support at $23.75?

Next, let’s draw our attention to the most recent down trending resistance. If you had been monitoring the UUP last week when it broke through that resistance, wouldn’t that have been a great time to enter a long position in the UUP or dollar? Of course.

The Tale of the Tape: The breaks of support and resistance levels are usually great potential signals for entering trades. Recently the UUP broke through its resistance, which seems to be a great sign to look for a long entry on any pullback. However, if the UUP were to break down below the $23.25 area of support you might have a great opportunity to short the UUP or dollar.

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