Todays Big Stock: Tesoro Corporation (NYSE: TSO)

It is nearly impossible to discuss 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.

What a lot of newer 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, please take a look at the 1-year chart of TSO (Tesoro Corporation) below with my added notations:

After a 3-month trend lower, TSO had formed what appears to be an Inverse H&S. I have noted the shoulders (S) and the head (H) 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 TSO’s Inverse H&S formed is at the $25 level (green). Earlier this week, TSO confirmed the pattern by breaking up through the $25 neckline, thus the stock should be moving higher.

The one drawback to this setup is that traders would usually like to see volume spikes on breakouts, which TSO’s H&S breakout didn’t really have. Sometimes light volume on breakouts can be a precursor to the stock pulling back below the breakout level, thus creating a false breakout. So, always remember to use a stop!

Lastly, keep in mind that simple is usually better. Had I never pointed out this Inverse H&S pattern, one would still think the stock is moving higher simply because it broke through the $25 resistance level.  In short, whether you noticed the pattern or not, the trade would still be the same: On the break above the key $25 level.

The Tale of the Tape: After a short downtrend, TSO formed an Inverse Head and Shoulders pattern and confirmed the pattern earlier this week with the break above the $25 neckline. The stock should be moving higher from here, so a long trade could be entered anywhere near the $25 level with a stop below 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

Todays Big Stock: Terex Corp (NYSE:TEX)

Last week Terex Corp released their quarterly earnings report. Although Terex Corp.’s (TEX) second-quarter loss narrowed significantly, and it swung to a profit on a continuing-operations basis on strong sales, the stock sold off significantly. So far, the stock has declined about 37% from it’s high earlier this year and appears to be taking another leg down from here.

Terex, which makes specialized equipment such as tower cranes and rock crushers, lowered its full-year earnings outlook, although it did raise its revenue projection slightly higher. The company has been posting frequent quarterly losses, as raw materials costs and lingering weakness in construction and industrial markets weighed on the bottom line. In all likelihood, it is the lowering of the earnings guidance that caused the stock to sell-off on its earnings release.

Please review the 1 yr. chart of TEX (Terex Corp) below with my added notations:

TEX has created an important price level at $25 (red) over the last year. After the release of TEX’s earnings report last week, TEX broke the $25 level of support on very high volume and the stock should be moving lower from here. Commonly, stocks will reverse back to retest the levels they break. So, TEX’s $25 level should act as resistance on any move higher.

The Tale of the Tape: TEX (Terex Corp) released their earnings report last week and the stock reacted negatively to the news. After breaking the $25 level, TEX should be moving lower. Although a short position could be entered here, a lower risk short entry could be made on a rally back up to $25 if that were to occur. A stop above the $25 level would be advised either way. If TEX were to break back above $25, the stock might make a run back to the $30 level (pink), thus a long position could be entered instead.

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: Dana Holding Corporation (NYSE: DAN)

Last week I wrote an article in regards to DOX (Amdocs Limited) that had recently broken through a key resistance level that was also a new 52-week high breakout. As I mentioned in that article, when it comes to entering 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. This way I know that it wasn’t just any move higher. Today I’d like to review a stock that has the resistance, but hasn’t broken out yet: DAN.

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

As you can see, DAN has been stuck in a sideways move for the last 7 months while running into a clear resistance at $19 (red) the whole time. DAN also tends to find support on sell-offs near the $17 area (green). In the short run though, DAN has managed to find support at $18 (light green) regardless of market conditions. So, does DAN’s insistence on not moving below $18 mean the stock is finally gearing up for a break higher?

DAN possibly breaking above the $19 level would be the 52-week high resistance breakout I like to see.  From there, the stock should be heading higher, most likely on a new uptrend. This week’s upcoming earnings release for DAN could be the catalyst for the breakout.

 

The Tale of the Tape: While stuck in a sideways move this year, DAN has formed a key resistance level of $19, which would be a 52-week high breakout if DAN were to break above it. This should signal higher prices ahead for DAN.  Earnings releases are common catalysts for starts of new trends and DAN releases their earnings later this week. A long trade could be entered if DAN breaks out above $19, or on a pullback to $17, with a stop set below the entry point either way.

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: Six Flags Entertainment (NYSE: SIX)

Sticking with the earnings season theme, I always believe that isolating stocks with clear breakdown and breakout points could be helpful in deciphering a stock’s future move once their earnings report is released. In addition, who doesn’t like clear entry points? A stock I recently identified with clear breakdown and breakout points is SIX. (Six Flags Entertainment Corp)

Six Flags Entertainment Corporation owns and operates 19 regional theme, water, and zoological parks in North America. Its parks offers a selection of state-of-the-art and traditional thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues, and retail outlets. Six Flags Entertainment Corporation also offers various multi-media marketing and promotional programs at its parks, as well as arranges for local radio and television programs to be filmed or broadcast live from the parks. Please take a look at the 1-year chart of SIX (Six Flags Entertainment Corp) below with my added notations:

SIX has created (2) very important levels over the last 5 months. The first would be the $40 resistance (red) and the other would be the $35 level (green), which has acted as support over the last couple of months.  SIX releases their quarterly earnings report next week and the levels of $35 and $40 will be important to watch for potential trading opportunities.

If by chance SIX were to break lower than $35, the level of $30 (navy) would be the next price to watch for a potential trade.

The Tale of the Tape: SIX has formed (2) clear levels of importance over the last several months at $35 and $40. With SIX set to release their earnings report next week, traders should monitor how the stock reacts to these levels.  A long trade could be entered on a hold of $35 or on a breakout above $40. However, if SIX were to break below $35, a short trade could be entered in expectation of a move lower.

Side note: If SIX were to move considerably lower, $30 would come into play for a trade.

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: Teva Pharmaceutical Industries (Nasdaq: TEVA)

With earnings season now firmly underway, isolating stocks with clear breakdown and breakout points could be helpful in deciphering a stock’s future move once their earnings report is released.  A stock I recently identified with clear breakdown and breakout points is TEVA. (Teva Pharmaceutical Industries)

Teva Pharmaceutical is a global pharmaceutical company. It develops, produces and markets generic drugs in all treatment categories. The company has a pharmaceutical business and sells generic pharmaceutical products in a range of dosage forms, including tablets, capsules, ointments, creams, liquids and inhalants.

Please take a look at the 1-year chart of TEVA (Teva Pharmaceutical Industries) below with my added notations:

TEVA has created a simple chart pattern known as a Triangle. Combining a down trending resistance with an up trending support forms the Triangle pattern. As the support and resistance converge on each other the pattern is created. Since there is no true way to know which way the stock will break, most traders will wait for the breakout or breakdown before entering a trade.

As with most chart patterns, Triangles will provide you with clearly defined breakout and breakdown points. In the case of TEVA, the breakout would be through the trend line resistance (approx. $50) and the breakdown would be below the trend line support (approx. $47).  This stock and this pattern should be monitored until July 27th when the company releases their earning report.

Chart patterns can also provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown points to get the minimum price objective. For example, since the Triangle pattern for TEVA is $6.00 high ($51 – $45), TEVA should climb to a minimum of $57 ($51+$6) on a break higher, while falling to $41 ($47-$6) on a break lower. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.

The Tale of the Tape: TEVA has formed a simple Triangle pattern. A trader could enter a long position on a break above the down trending resistance (near $50) with a stop set under the entry level. However, if TEVA were to break below the trend line support (currently near $47), a short trade could be entered with a stop above the trend line.

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