Todays Big Stock: Canadian Natural Resources Limi (NYSE: CNQ)

It is nearly impossible to talk about chart patterns on stocks without eventually discussing the very common Head and Shoulders (H&S) pattern. An H&S pattern is a reversal pattern that forms after an uptrend. A textbook H&S pattern starts to form when a stock rallies to a point and then pulls back to a particular level (shoulder #1). Next, the stock will rally again, but this time to a higher peak (head) than the previous shoulder. After forming the head, the stock will pull back to the same support as the first shoulder did. Finally, the stock rallies a 3rd time, but not as high as the head (shoulder #2). The level that has been created by all 3 of the pullbacks is simply a support level referred to as the “neckline”. The formation of an H&S pattern warns of a potential reversal of the uptrend into a possible downtrend.

As with any chart pattern, a trader will usually not want to act on the pattern until the stock “confirms” the pattern. Confirmation is the break of the key level that has been created by the pattern.  In the case of an H&S, confirmation would be when the stock breaks the neckline (support).

What some new traders do not know is that H&S patterns can also form upside down after a downtrend. This pattern would simply be called an Inverse Head and Shoulders pattern. To see such a pattern forming, please take a look at the 1-year chart of CNQ (Canadian Natural Resources Limited) below with my added notations:

After a 7-month trend lower, CNQ has formed what appears to be an Inverse H&S (pink). I have noted the head (H) and the shoulders (S) to make the pattern more visible. (For future reference, if you imagine this pattern flipped upside down you would have a regular H&S pattern.) The neckline that CNQ’s Inverse H&S has formed is at the $38 level (green/red). CNQ would confirm the pattern by breaking up through the $38 neckline and the stock should be moving higher from there.

Lastly, keep in mind that simple is usually better. Had I never pointed out this Inverse H&S pattern, one would still think this stock is moving higher if it simply broke through the $38 resistance level.  In short, whether you noticed the pattern or not, the trade would still be the same: On the break above the key $38 level.

The Tale of the Tape: After a 7-month downtrend, CNQ formed an Inverse Head and Shoulders pattern. A long trade could be entered on a break above the $38 neckline with a stop placed under that level. In reality, since there is no guarantee that CNQ will break out at all, a trader could enter a short trade on a rise up to $38. Lastly, $33 (purple/navy) should act as support on any pull back.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. 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.

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

Todays Big Stock: Newfield Exploration Company (NYSE: NFX)

Newfield Exploration Company is an independent oil and gas company engaged in the exploration, development and acquisition of oil and gas properties. Newfield’s domestic areas of operation include the Mid-Continent, the Rocky Mountains, onshore Texas, Appalachia and the Gulf of Mexico. Internationally, the company operates in Malaysia and China. Mid-Continent division is focused primarily in the Anadarko and Arkoma basins. Its Greater Monument Butte is the Greater Monument Butte field area, located in the Uinta Basin of Utah. During the year ended December 31, 2010, approximately 82% of its proved reserves and 90% of its probable reserves were located in resource plays, primarily in the Mid-Continent and the Rocky Mountains.

Please take a look at the 1-year chart of NFX (Newfield Exploration Company) below with my added notations:

Over the last 4 months, the stock has seemed to find support or resistance on or at the increments of $5. First, notice the $45 topside resistance (red), which was also previous support (green). Next, you can see the common $40 level (blue) and the bottom level of $35 (purple). The great thing about NFX is that it shows you how to trade it no matter what direction the market moves. If you like the short side of the market, you could either short NFX on rallies up to a $5 level or on any breakdowns of them. If you want a long play instead, you could buy NFX on a pullback to a $5 level or on any breakout through one of those levels.

The Tale of the Tape: NFX finds the levels of $5 important. These price points always appear to act as either support or resistance and sometimes both. If NFX rallies back up to $45, you could enter a short play. If it breaks back above $45, you could enter a long play. You could also buy NFX if it comes down to $40, or short the stock if it breaks that $40 support. Etc., etc., etc!

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. 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.

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

Todays Big Stock: HMS Holdings Corp (NasdaqGS: HMSY)

The stock market has had a rough week or two and most stocks seem to be breaking lower. However, there are a few stocks still maintaining an overall trend higher. In addition, there are the rare few that have hit 52-week highs. Stocks that have held their ground through the current market sell-off, and are near their 52-week highs, could be the ones that rally strongest if the market eventually does move higher.

When it comes to trading a stock hitting a 52-week high, I prefer to look for ones hitting a “NEW” high. To me, his would be a stock that hasn’t hit a new 52-week high in quite some time. In addition, and more importantly, I want the stock to have broken through a key area of resistance. One such stock that fits that description would be that of HMS Holdings Corp.

HMS Holdings Corp. provides a variety of cost containment, coordination of benefits and program integrity services for government and private healthcare payers and sponsors. HMS’s clients are state Medicaid agencies, government-sponsored managed care plans, Pharmacy Benefit Managers, child support agencies, the Veterans Health Administration, the Centers for Medicare & Medicaid Services, commercial plans, self-funded employer plans and other healthcare payers. Coordination of benefits services route claims already paid by a government program to the liable third party, which then reimburses the government payer.

To review HMS’s stock, please take a look at the 1-year chart of HMSY (HMS Holdings Corp) below with my added notations:

As you can see, HMSY has been in an overall sideways move for most of the year. Meanwhile, that stock has run into a clear resistance at $28 (red). Even though the market has caused most stocks to break lower, HMSY has broken through $28, which was breaking to both a new 52-week high and through a clearly defined resistance level. Last week HMSY pulled back down to the $28 and is currently testing it as new support (green).

The Tale of the Tape: HMSY formed a key resistance level of $28, which was a 52-week high breakout when the stock broke above it. This should signal higher prices ahead for the stock. A long trade could be entered if HMSY pulls back to $28, with a stop set below that level. If the market were to sell-off substantially, and bring HMSY back down below $28, a short position could be entered with a stop above that level.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. 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.

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

Monolithic Power Systems, Inc. (NasdaqGS: MPWR)

Monolithic Power Systems, Inc. is a fabless semiconductor company that designs, develops and markets analog and mixed-signal semiconductors. Monolithic Power combines advanced process technology with its analog designers to produce high-performance power management integrated circuits for direct current to DC converters, light emitting diode drivers, cold cathode fluorescent lamp backlight controllers, Class-D audio amplifiers, and other linear integrated circuits. The company has Its products are used in computing and network communications products, flat panel televisions, set top boxes and a range of consumer and portable electronics products. Monolithic Power operates in Taiwan, China, Korea, Japan and Europe. Its products include DC to DC converters, lighting control products and alternating current (AC)/DC offline solutions and audio amplifiers.

Before discussing the potential trading opportunities with MPWR (Monolithic Power, Inc.), please review the 1 yr. chart of MPWR that I have outlined below, with my added notations:

MPWR seems to have created (2) very important price levels in which to trade off of. First, the $13 resistance (maroon), which was also previous support in March. Second, the $11 level (navy) has been support both before the September drop and after the early October rally. MPWR is currently trading in between those (2) levels and appears to be on its way down to the $11 level again.

The Tale of the Tape: MPWR is trading between (2) important price levels at $11 and $13. A rise to the $13 resistance would be a great opportunity to enter a short trade, while a break above that $13 could be a nice long trade. A trader could also enter a long trade on a pull back down to the $11 support, or a short trade on a break below the $11.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. 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.

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

Todays Big Stock: Transocean Ltd (NYSE: RIG)

Whether the market goes up, or the market goes down, I like to trade stocks thatforecast their movement either way. In other words, stocks that seem to tell me how to trade them. This could be in the form of a pattern, visibly important levels,or maybe a little bit of both. If you can find stocks that clearly show you their mostimportant price points, then you will most likely be setting yourself up for success.Bottom line: Knowing where to get in is half the battle. One stock of many that Ithink fits that description would be that of RIG (Transocean, Ltd).

Transocean Ltd. (Transocean) is an international provider of offshore contractdrilling services for oil and gas wells. Transocean operates in two segments:contract drilling services and other operations. Contract drilling services, thecompany’s primary business, includes contracting Transocean’s mobile offshoredrilling fleet, related equipment and work crews primarily on a day rate basis todrill oil and gas wells. Its other operations segment includes drilling managementservices, and oil and gas properties. It participates in oil and gas exploration andproduction activities.

To review potential trading opportunities on Transocean’s stock, please take a lookat the 1-year chart of RIG (Transocean, Ltd) below with my added notations:

Notice all of the important price levels I have highlighted on RIG. The stock seemsto always find support or resistance on or at the increments of $5. For the first (4)months of the year RIG held a very important support level at $75. Once RIG brokethat support, down it went. Then RIG broke its $70 level, down it went. Next up wasthe $65 level, break, lower it went. Once the stock broke $60, $55 didn’t stand achance, but $50 held it’s ground for a while. Every time RIG broke a level of $5, thestock went lower. Did you also notice that every time RIG rallied it found resistanceat those previous support levels of $5? Next up, the 52-week low support at $45.

The great thing about RIG is that it shows you how to trade it no matter whatdirection the market moves. If you like the short side of the market, you can shortRIG on rallies back up to any $5 level. If you want a long play, you could buy RIG onany pullback to a $5 level or breakout through one of those levels.

The Tale of the Tape: RIG finds the levels of $5 important. These price pointsalways appear to act as either support or resistance and usually both. You can tradethis stock no matter what it does. If it rallies back up to $50, you could enter a shortplay. If it breaks back above $50, you could enter a long play. You could buy RIG nowas it sits on $45, or short the stock if it breaks that $45 support. Etc., etc., etc!

Before making any trading decision, decide which side of the trade you believe givesyou the highest probability of success. Do you prefer the short side of the market,long side, or do you want to be in the market at all? If you haven’t thought aboutit, review the overall indices themselves. For example, take a look at the S&P 500.Is it trending higher or lower? Has it recently broken through a key resistance orsupport level? Making these decisions ahead of time will help you decide which sideof the trade you believe gives you the best opportunities.

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

Good luck!

Christian Tharp, CMT