Some Perspective on Market Breadth

The stock market indexes keep going up. They may seem to be moving as fast as they did in 2009 and 2010. But that is really just because our recency bias. The last few months have been full of rotation and consolidation before a move back higher. This lack of rocket fueled movement higher seems to have a lot of smart traders and investors worried. They look to other indicators to try to get a clue of any change in direction. The problem with that comes right back to that recency bias. Using a common measure of breadth, the NYSE New Highs minus New Lows index is a great place to look to illustrate this.

nyhl day

The chart above shows this index for the last 6 months. You can see there was a strong period of positive prints from mid May to late June. But then the strength in the latest push fell short of that strength in both absolute numbers (the peaks) and duration. This is one reason that some are stating that the market looks tired here. But what if you looked at that same index weekly over the last 15 years instead to get a good baseline, like the chart below.

nynhnl

From this perspective, the area to the right of the spike down in late 2011, corresponding to the last 20% down move in the S&P 500, looks extremely bullish. There has not been a move below -200 since December 2013. Touches below there were commonplace from 2004 through 2007 before things got bad in the market. In fact those more frequent dips to -750 in mid to late 2007 gave you 6 months warning before the crap hit the fan. Breadth does not look anything like that now. So why does the New Highs minus New Lows Index look so scary? Recency. Next time someone hands you a statistic that is designed to scare your money out of the market, make sure you look at in the proper perspective before you act.

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Forget the Cup and Handle, Buy a Pint and Handle of Brew

It’s late in the week, and we have already gotten through the Federal Reserve Open Market Statement, with Alibaba and Scotland votes on tap. Time for a beer. Specifically a Craft Brewers Alliance, $BREW. Not to drink, you still need a clear head for the rest of the week and Option Expiration, but to add to your portfolio.

brew

The chart above tells why. After a long downtrend this year capped by the falling red resistance line, the stock price is now breaking to the upside. Additionally there is a Cup and Handle pattern triggering as the price moves over the most recent prior high level at 13.57. This gives a target to the upside at 17.07, near the start of that red line. That sounds good as it is. But with a little imagination you can see that a move over 15 the late April high would make for another big Cup and Handle, maybe a Pint and Handle that would target 20. Cheers!

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Playing Gold From Down Under

Australia has long been known to currency traders as a country where the currency is highly tied to swings in commodities. But over the last six months a position in the Aussie Dollar could be a straight proxy for just one commodity: Gold.

fxa

The chart above shows the Australian Dollar ETF ($FXA) as a line with the Gold ETF ($GLD) as the gold area. The strong correlation is evident since the end of March. And the momentum indicators on the chart support the Aussie continuing lower. Does this mean that Gold will continue lower?

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Stalking Illinois Tool Works for a Trade

The chart of Illinois Tool Works ($ITW) stock price looks a lot like the temperature here in Cleveland. Rising into the summer, but then the polar vortex took hold and summer was more like spring weather. But heading into the end of August that heated up again. From what I see in the chart though I expect some divergence with the temperature into the fall.

itw

The price action from the beginning of 2014 through to early June traced out a bearish Deep Crab harmonic. This called for a possible pullback near 89.45 and what happened was a nearly 61.8% retracement of the pattern. A strong nearly perfect reset. The buying then created a sharp ‘V’ shaped correction back to prior resistance. What makes it interesting now is there are two technical patterns that suggest more upside. the first is a Measured Move. Looking at the move from 82 to 89.50 and then projecting that higher from the slight pullback to 87.50 carries a target higher to 95. The second is an Inverse head and Shoulders pattern that would trigger over 89.50, in this case the neckline, and carry a price objective to at least 97.30. What is important is that both point higher independently and are supported by a rising and bullish RSI.

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Is the Run in the Chinese Market Over?

The Chinese market has been on a tear lately. So it is no surprise when you look at the weekly chart of the Shanghai Composite below, price is pulling back. It has been an 11% run up from the bottom at 2000. Technically it printed a topping doji candle last week and is confirming it this week with the move down. And this happened at the 200 week SMA. You can see that the price has not closed over that 200 week SMA since April 2010. No one should be surprised if it consolidated or pulls back here. The question though is whether this a short term or long term top. To answer that you need to look at the monthly chart.

ssec w

The monthly chart presents some clues that any pullback or rest might be short lived. First, the price has consolidated along the rising 200 month SMA since mid 2012 and is rising now. Next it broke above the 5 year down trending channel two months ago and has followed through higher. It also shows a touch at the 50 month SMA and a slight pullback so far. The RSI is breaking above the mid line, very close to the July 2009 high level and is rising. As long as the Composite can stay above the 2200 level it looks ripe for more upside. and potentially a change of character to a long bullish run.

ssec m

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Trading Yahoo in a Post Alibaba World

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By the end of the week Alibaba ($BABA) will be trading on its own. I do not think there is anyone on the planet that does not know that Yahoo ($YHOO) has a very large stake in Alibaba and will be selling some of it. But there are a lot of opinions about the value of Yahoo’s stock. The prevailing view seems to be that it is inflated because of the IPO and when that settles Yahoo is a broken company to sell. Only the chart of the stock price says that perhaps you should ignore the noise opinion and take another view. In fact it is screaming at you!

yhoo

The monthly chart of the stock price above says a lot. First the stock has been in a tightening range since 2002 with resistance at 40.80. Second, there is further resistance at 45 above that from 1999. Third, the stock price is moving into that range, over 40 and below 45, for the first time since 2000. Next, the stock has been under accumulation since 2012 and it is picking up. The RSI is bullish and rising, supporting further upside in the price action. Finally the yellow box shows there is very little cumulative prior experience (volume) above $45.

Those are the facts. So what do you do with them? Despite the noise of overvaluation, this stock shows a clear bias to the upside now. Should that last candlestick hold up through the end of the month it will be hard to make a case not to be long this stock. The IPO will be over. There is a natural stop at 40.80 and possible massive upside through the 45 level. Even if you do not like the 15 year view the shorter 24 month picture still reveals a move higher and consolidation before a return higher targeting 60 on a Measured Move higher.

So sit back and watch the IPO. You have time. But if this stock holds over 40.80 post IPO write it off as noise or nonsense at your own peril.

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Another Reason the S&P 500 Could Reach 2500

I spent a few minutes with Jeff Macke at Yahoo Finance last week talking about the S&P 500. I was a little afraid to meet him so I tried to be polite. In that interview I discussed how the current price action looked like consolidation on a longer term chart, but that 2390 was a good long term target. The full story and interview can be seen here. But there was one chart I left out because I did not want to scare him. Here it is.

spx

The chart above shows the Elliott Wave interpretation of the S&P 500 since 1993. If you don’t know Elliot Wave Principles see a 5 Wave impulsive structure in the direction of a trend followed by a 3 Wave corrective pattern. Within both the 5 and 3 Wave patterns the waves alternate positive and then corrective. The pattern can then repeat or do something else. This 5 Wave pattern played out from 1993 to 2000 followed by a 3 Wave correction that ended in March 2009.

Since then the new 5 Wave impulsive pattern has been running and it looks like Wave III has just completed. Moving into Wave IV might then be scary and cause worry of a pullback, and it could. But another principle of Elliot Wave is that is Wave II is a corrective pullback, then Wave IV often corrects mainly though time. It is flat. The Final Wave V then would project higher approximately the same length as Wave I, or to the 2400-2500 area.

As it turned out Jeff Macke was a very nice guy and friendly. And I hope you see now that Elliott Wave does not have to be scary either.

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The Cup Looks Full on Sally Beauty Holdings

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Sally Beauty Holdings, SBH, hit my radar this weekend as a stock that is setting up to make a move.  The chart abovwe shows the price action has traced out a Cup and Handle pattern, and it at the trigger point.  A move over 28.20 triggers a target of 32.40.  That is a big move in itself.  But the 2 peaks highlighted at the left of the chart suggest that there could be a series of Cup and Handles in the future that would target higher to 36!  Maybe it is time top buy some make up!

6 Ways to trade Workday this week

Workday, Ticker: $WDAY
wday

Workday, $WDAY, has been making higher lows and higher highs since finding a bottom in May. The price action is forming an ascending triangle that carries a target to 120 on a break higher. The Bollinger bands are channeling the price higher with the 20 day SMA as support. The RSI is in the bullish zone but pulling back in the short term with a MACD that is level. There is resistance higher at 92 to 93.60 followed by 96 and 100 before 105 and 109 with the prior high at 116 above that. Support lower may come at 85.75 and 82 before 77.40. Short interest is high at just under 10%. Option open interest this week is heaviest at the 95 Strike.

Trade Idea 1: Buy the stock on a move over 93.60 with a stop at 90.60.

Trade Idea 2: Buy the September 92.5 Calls (offered at $1.25 late Friday).

Trade Idea 3: Buy the September 92.5/95 Call Spreads (85 cents).

Trade Idea 4: Buy the September 92.5/95/97.5 Call Butterfly (75 cents).

Trade Idea 5: Buy the September/October 95 Call Calendar ($2.10).

Trade Idea 6: Buy the September/October 95 call Calendar and sell the October 85 Put (50 cents).

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After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which, heading into September Options Expiration Week sees the equity markets looking tired and ready for a pullback. Elsewhere look for Gold to continue lower while Crude Oil does the same. The US Dollar Index is strong and looks to continue higher while US Treasuries are biased lower. The Shanghai Composite is also strong and biased higher with Emerging Markets looking to continue their pullback. Volatility looks to remain subdued keeping the bias higher for the equity index ETF’s SPY, IWM and QQQ. Their charts show more consolidation in the zone for the IWM and a possibility of consolidation or even a pullback for both the SPY and QQQ. Use this information as you prepare for the coming week and trad’em well.