The US stock markets are extended and beginning to tire from their February bottom. Its likely we see some consolidation or potentially a much deeper correction over the next few weeksl While stocks are stalling, the materials and mining sectors are on fire putting in what may be an important long-term tradeable bottom. My latest video, view-able at the link below takes a look at the cooling US stock indexes and red hot traditionally "inflation trade" sectors. Let me know what you think.
Fabbing Semiconductors for a Trade
SMH, the semiconductor stock index does not contain Apple but its major holdings are very dependent upon Apple’s orders. As Apple goes, for the most part, so goes the index. And with Apple reporting after today’s close I thought I should get this post out a bit early as I think with as many eyes and ears as there are on their forward guidance, I expect we may see a wild swing in the direction of the market’s take on the news.
The busy chart of SMH below is a mixture of bullish and bearish arguments so trying to position ahead of any move is foolish, in my opinion. Let price action lead us to the highest probability outcome. The bullish case shows the (red) 200 day moving average in the initial stages of turning positive; RSI momentum in the upper pane is in the bullish range; on balance volume in the lower pane is in a strong uptrend from the Sept bottom and a 50/200 moving average golden cross occurred earlier this month.
The bears are pinning their hopes on a couple of key points. Firstly, it may be hard to see but in the past few weeks we have formed a double top with price failing each time it reached the $55.55 area. Finally RSI momentum has created negative (bearish) divergence with price indicating a pause or correction is likely to occur. A breakdown from the neckline projects to an initial target a piddly 4% lower. If that level does not hold, a second and more significant target of ~10% lower is a good possibility.
If you focus your attention to the center and left side of the chart you will see that over the past 18 months we have had two prior occurrences of topping patterns combined with bearish momentum divergence. They lead to more than a 19% and 24% drop from peak to trough. It’s important to remember and not get too excited about jumping ahead that bearish divergences are not a sell or short signals in and of themselves but they are caution flags and definitely should not be ignored.
While the current price action in SMH warns of a corrective decline ahead, the other possibility is this topping pattern morphs into a bullish consolidation flag (on a break and confirmed close above $55.55) suggesting there could be a lot more upside from here since the overbought condition has unwound. Either way, I think Apple will be the catalyst for a nice setup, regardless of whether it turns out to be a bullish buy or bearish short.
Stay tuned.
Silver Bells
As always I get lots of questions regarding precious metals so I thought I would give a quick update on Silver. As you can see in the weekly chart below, silver bottomed at the end of last year and since then to the delight of the bulls has created a series of higher highs and higher lows. To confirm a bottom you want to see the formation of a typical bottoming pattern and silver did not disappoint as it formed what I would consider an ideal inverse head and shoulders. This provided what I needed to conform an intermediate bottom was likely put in. The upside target for that pattern is the red horizontal lined labeled “formidable resistance”. Once it makes it there I expect to see a choppy pull-back which would create the right shoulder of a much bigger head and shoulders pattern. If this were to occur it would all but seal the coffin of any remaining silver bears and provide a “back the truck up” or “full position” type portfolio opportunity.
This is by no means an endorsement to go out and buy silver right now. If you missed the train leaving the station based over the past 3-4 months, the extent and speed of the run-up has been overdone and the risk/reward I feel provides a poor entry point right now. Oversold divergent high conditions on the short term charts raises a caution flag for me and until those conditions have had a chance to unwind I will be content with my existing positions. Anyone who missed the boat or wants to add to their position would do well to wait for the next higher low to be made.
Just Because
I'm Paranoid Doesn't Mean They're Not Out to Get Me
Gold bugs have a reason to be paranoid as precious metals (and the miners) have been one of most unloved investments from their 2011 top. Since that time, every little rally has brought them out in droves proclaiming the bottom is in only to be sent back with their heads in their hands and their pockets significantly lighter. While they are a resilient bunch, the 4+ years of continuous beatings have made them paranoid and rightfully so.
Based upon the technical signals I watch, we are ever so close to hosting a bear funeral party for precious metals. If/when that becomes the case it will provide the justification to increase our exposure from partial to full position. Until then I remain cautiously bullish but always skeptical Ms Market is out to steal my money. Always on the lookout for signals to abandon ship, along comes one of my favorite technicians, Tom Mclellan with his latest … a full frontal bucket of ice water to the head of gold bugs and those long PMs.
Read on … Let’s hope his fishhook is wrong
Gold revealed an interesting bit of information this week when it formed what we call a “fishhook” structure. Fishhooks are important because they can reveal the potential for a more powerful move.
For background on this signal, see this article in our Learning Center on “Fishhook Rules”.
The basic point is that a fishhook forms in the chart of a Price Oscillator (and some other indicators) after a high value top, and then as the Price Oscillator is working its way back down toward neutral, it turns up again briefly and then turns back down again. Fishhooks can also form in the other direction, after a deep bottom.
The best fishhooks form when the Price Oscillator is about halfway down to the zero line, although they can certainly form in other places. The one we saw this week is just about ideal, although that still does not guarantee it is going “work” perfectly. This business is not about getting guarantees, but a signal that reveals probabilities is a useful thing to watch for.
It is important to also note that an upturn halfway down to zero is not necessarily a fishhook structure until it turns back down again. If the Price Oscillator turns up and keeps rising, it is not a fishhook, it’s a real reversal.
The reason why a fishhook is such an important structure is that it reveals a failure by the forces of reversal. In gold’s case, the bulls tried to start a rally again, but then quit after only 4 days of upward price movement. This shows us that they just did not have the ammunition to mount a meaningful rally when they had the opportunity, and so that means they probably don’t have the capacity to stop a further decline anytime soon.
The stock market in 1987 showed us two of the most important lessons about fishhooks. Here is what I mean:
The first point is that a fishhook represents potential for a powerful resumption of a trend. But not all fishhooks work out that way. The one which formed in May 1987 did not result in anything more than just a retest of the prior low. But a nearly identical looking fishhook in early October 1987 brought a much bigger selloff, and showed the potential that a fishhook can represent.
So the message to take away from this new fishhook structure in gold prices is that it tells us there is the strong potential for a big decline, something which the COT data have been calling for recently, as we have discussed each Friday in our Daily Edition.
Just for the Health of It
Chipotle Mexican Grill (CMG) was a wall superstar stock rising more than 1900% since its 2008 financial crisis bottom. The stock peaked in August of last year stopping shy of $760/share. That same month, both a salmonella and norovirus outbreak occurred. In October and November E-coli contamination was reported as was another norovirus outbreak. Needless to say, this has turned both customers and investors away in droves. The stock fell almost 48% from peak to trough, bottoming in January at $400. Since then it rallied 35% up to $540/share, topping in March. Was the bottom put in and this stock is presenting us a great investment opportunity? Lets take a look at the chart and see what it is telling us.
In the top pane we can see that RSI momentum has fallen from the bullish to bearish zone, is languishing below its midline and just reversed course, now pointing down. Since peaking, price has formed a very nice bear flag pattern which just this week broke to the downside projecting to further lower prices ahead. Price remains below a downward pointing 200 day moving average. Notice how the Jan-Mar rally was done on lower volume (bottom pane) which warns of it being just a counter-trend rally rather than a reversal. All the signs on the longer term chart are pointing to more downside, one target being the 2012, $240 lows. Ouch!
When a longer term chart is providing a compelling story I look to the shorter term charts confirm and then pinpoint my entry. In the daily chart below you can see that flag pattern has now morphed into a head and shoulders pattern. Of course, some of you will be thinking head and shoulders are reversal patterns that mark the end of uptrends and this stock is clearly not in an uptrend. You would be correct but head and shoulders are found not just in uptrends and while not quite as compelling in the middle of a move, are important confirmations to the longer time frames.
Friday’s price closed below the neckline, providing perhaps an excellent entry signal for those whose risk tolerance includes shorting stocks. The risk reward ratio for this opportunity is well beyond the 1:3 target I favor.
To make me feel better about this trade I want to see volume pick up as it breaks January’s $400 low otherwise I will remain concerned this is a potential false breakdown. A spike in volume could start a waterfall event putting a stake in the hearts of those remaining bulls. A word of caution … as with any news driven event, a similar news event could cause it to reverse course just as swiftly as it turned down. As such it is imperative investors have a game plan to protect them from this possibility.