USO - Bullish Island Reversal

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posted by Melf Elf @ 7/11/2008 09:43:00 AM

"This morning, USO ripped to the upside at the open, disappointing the shorts, and the 119.17 target got MADE in the first minute of trading."

Rarely do targets get MADE to the exact penny, and even more rarely does that target turn out to be the exact top or bottom, but in this case, that Ascending Triangle target was THE TOP in the USO.

What an interesting chart this is! Lots of good lessons here. We'll start with the H&S Top pattern, late 2007-early 2008:

1. Head & Shoulders Top: It's tempting to get short a pattern like that, particularly in the Right Shoulder, right before the pattern is ready to break down. Stop: the high of the Right Shoulder, which was 73.43.

But, what if it the pattern doesn't break down? If the high of the Right Shoulder gets taken out to the upside (we had that very thing in the 1-Minute chart of the SSO that I posted yesterday), that's a very good indication that the pattern might resolve to the upside, which is why it's a real good idea to cover a short position there, and even got long with a stop below the neckline.

If the high of the Head gets taken out to the upside, the shorts are in trouble on the UPSIDE breakout of the pattern. If they get stubborn and don't cover their short, they can get dragged a lot higher, as we can see in the chart.

For the upside target, measure the distance from the Head straight down to where the neckline was when the high was made that day, and ADD it to the high. That put a target of 89.65 IN PLAY. (If the pattern had broken down, we would have subtracted the height of the pattern from the neckline).

After the upside breakout, the USO came back toward the high of the head and found support there before going on its upside rampage through the channel in blue. That kind of validation of "former resistance acting as support" is ver-ry nice confirmation of the upside breakout.

2. The Channel: Notice that there were three "hits" to the top of the channel, and four "hits" to the bottom of the channel. Those are validated trendlines (3 or more "hits") suggesting that a break of either one "should be" meaningful (there never are any guarantees).

After the 119.17 target got MADE, the USO broke below the channel three days later. At that point, look for horizontal support at the lows that were made in the channel. In this case, the USO found some support near the low at Black #2. Draw a trendline across the chart connecting those two lows, and see if anything happens later on.

3. Symmetrical Triangle - Off that support, the USO had a rally and formed a Symmetrical Triangle. When it broke to the downside, it provided A LOT of information. It not only gapped below that pattern, it gapped below horizontal support, as well. At that point, the Symmetrical Triangle sure looks like the Right Shoulder of a H&S Top, and the Left Shoulder would over in the channel (I should have circled those...ask if that isn't clear). The horizontal black line is the neckline. That put a target of roughly 59.00 IN PLAY (Subtract the distance from the Head to the neckline, then subtract that from where the neckline was when the Breakaway Gap to the downside occured.

4. Gaps - We talked yesterday in the comment section about gap retracements. Breakaway Gaps like this one on October 2 usually don't get filled for a long time. Longs waiting for a fill of that gap to get out of the stock never get the chance, and everyone who still owns the stock above 88-89 is trapped, and becomes "the dreaded bagholder" (that's such an unkind term, but it is descriptive).

Lesson: When serious support gets taken out on an UGLY gap down like that, don't hang on. SELL.

5. Failed Retest - "Bear markets descend on a cushion of hope." When the USO rallied off the 72.95 low, everyone who is trapped above the black horizontal line is "hoping beyond hope" that the stock will continue higher so that they can get out even, and it usually is "beyond hope." They seldom get a chance, and they didn't get one in this case unless they were very quick about it. The rally failed at 89.16, below the 89.63 low of the Symmetrical Triangle (little pattern in red).

We'll move down to Chart #2 now.

6. Bearish Island Reversal - the USO had gapped up on that final move to resistance. It spent five days struggling to get back through there. It finally failed on a gap down, leaving a Bearish Island Reversal there, right below resistance. Anyone who got long there was standed on the "island" of five days' trading.

7. The Falling Knife - During a waterfall decline like the USO had after the Bearish Island Reversal, it isn't a good idea to step in front of it, even if we feel that something is cheap. "Cheap can get A LOT cheaper," as we can see here. It's better to wait until the stock/fund/index does something bullish.

8. Bullish Island Reversal - Yesterday was the first time since the top that the USO did anything bullish, and it still might not end up bullish. Last Friday, the USO had a gap down. On Monday, the USO put in a Bullish Inverted Hammer, then on Tuesday, it put in a Bullish Hammer. Those only are bullish with upside confirmation, which we got yesterday on the Bullish Island Reversal. The three prior days form a little "island" of prices that are detached from the preceding prices and are detached from yesterday's prices.

The high of the island is 53.92. Yesterday the USO gapped up to 54.39, pulled back to 53.94 leaving a gap of only ONE PENNY (53.93), then rallied some more. No one should be allowed to have the USO at those "island prices" of 53.92 and below. If that gap of one penny, at 53.93, gets filled, this is MUCH, MUCH less bullish than it appears to be at the moment, because it then would not be a Bullish Island Reversal.

Sorry for any mistakes. I'm running late and will proofread later.

SSO: Post Fed

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Post Fed Announcement:

"The SSO just printed 29.61, the bottom of the wedge, which is the minimum downside expectation off the wedge breakdown."

That was just about the low off the Fed announcement. The SSO bottomed at 29.50, which turned out to be the bottom of a Bullish Inverse H&S pattern! The Right Shoulder (in yellow) was a Symmetrical Triangle, strengthening the pattern, and look what happened when it broke out!

From this morning:

"If the SSO can take out the morning high of 30.75, that would put a target of 31.89 IN PLAY. (30.75-29.61 = 1.14 points + breakout above 30.75 = Target: 31.89)."

The SSO rocketed higher and the 31.89 target got MADE, and more. Keep your eye on the birdie, huh?! Wow!

SSO: Bearish Rising Wedge

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Pre-Fed comment: "..basis the 5-Minute chart, this is looking like a Bearish Rising Wedge/possilbe Bearish Wolfe Wave developing. The bottom of the pattern is a validated trendline (there have been at least 3 hits to it, including the arrow). That suggests that it's important support, so keep an eye on that."

The Bearish Rising Wedge actually broke down before the 2:15 announcement, rallied back inside the wedge, sold off on the news, rallied back inside the wedge, then sold off again. The usual Fed gyrations, eh?!

The SSO just printed 29.61, the bottom of the wedge, which is the minimum downside expectation off the wedge breakdown.

SSO: Ahead Of The Fed

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The targets of 30.49 and 30.98 both MADE, and we've just put in a new high on the day, at 31.32, below the remaining 31.89 still IN PLAY.

Off yesterday's 24.72 low, the SSO has enjoyed a parabolic rally of 26.2%, so far. Although The Bears could get dragged much higher on a short squeeze, basis the 5-Minute chart, this is looking like a Bearish Rising Wedge/possilbe Bearish Wolfe Wave developing. The bottom of the pattern is a validated trendline (there have been at least 3 hits to it, including the arrow). That suggests that it's important support, so keep an eye on that.

SSO: Morning Consolidation

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This morning, the market has been digesting yesterday's huge gain. The SSO had a breakout of a Symmetrical Triangle (pattern in yellow) that put a target of 30.98 IN PLAY.

It rallied to 30.75 then pulled back to 29.61, which was the last low of the Symmetrical Triangle (at Yellow #4, and held it exactly. From there, the SSO put in an Ascending Triangle (pattern in red), which also was looking like the Right Shoulder of a possible Head & Shoulders Top. It broke out the upside, though, putting a target of 30.49 IN PLAY. The 11:59AM high was 30.47.

Support:

1. 30.05 - 30.06 - The top of the Ascending Triangle
2. 29.61 - 29.61 - The "neckline"
3. 29.43 - The morning low

If the SSO can take out the morning high of 30.75, that would put a target of 31.89 IN PLAY. (30.75-29.61 = 1.14 points + breakout above 30.75 = Target: 31.89). The gap from the October 21 failed Ascending Triangle at SPX 985 Resistance was SSO 31.70, very near the 31.89.

Targets against the dominant trend are less likely to get MADE. Use stops accordingly.

SSO:: 4 Bullish Pattern Breakouts

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Bullish Pattern #4, a little Symmetrical Triangle (pattern in blue) just broke out. The Bullish Inverse H&S target of 26.40 got MADE shortly afterwards.

SSO: 3 Bullish Pattern Breakouts

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The Bullish Falling Wedge (pattern in red) became part of a larger Symmetrical Triangle (pattern in yellow), which broke out, pulled back inside the Symmetrical Triangle, then broke out again to the upside. Sloppy, but it's still short-term bullish.

SSO: Opening Gap To Crap

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The SSO had an opening "Gap To Crap" into yesterday afternoon's resistance area. Thereafter, the SSO quickly formed a H&S Top and sold off.

50% and 61.8% gap fills of an opening gap is very commonly, especially when the gap is into resistance, like this gap was. In this particular case, the SSO filled the 24.73 gap entirely, within one penny, retracing all the way back to 24.72.

From there, the SSO put in a Bullish Inverse H&S bottom and broke out, then put in a Bullish Falling Wedge (pattern in red), and also broke out above that. So, the SSO has two bullish breakouts and a Double Bottom (24.73-24.72) in the VERY short-term, but that must be viewed in terms of the larger context, which is bearish, so use stops accordingly.

The low of the Right Shoulder of the Bullish Inverse H&S pattern is 25.15. That "shouldn't" get taken out. The low of the Bullish Falling Wedge is 25.35.

SSO: Wolfe Wave Breakout/Fakeout

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"On any selloff, support "should be" the trendline from Waves 2 and 4, then the top of this morning's Symmetrical triangle (pattern in yellow)."

After the breakout:

1. The Wave 2-4 trendline wasn't support.
2. The top of the Symmetrical Triangle wasn't support.
3. 26.26, the last low prior to the Symmetrical Triangle wasn't support.

In addition to that information, suggesting that the Wolfe Wave breakout was a fakeout, the SSO rallied to 26.78 at 3:10PM and failed right at the top of the Wolfe Wave (white arrow). They pulled the plug on it right there. The SSO tanked almost 8% from there in the final hour of trading, closing at 24.73.

SSO: Wolfe Wave Breakout

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The SSO spent the morning trading in a Symmetrical Triangle (pattern in yellow), then headed to the top of the Wolfe Wave, which broke out to the upside. On any selloff, support "should be" the trendline from Waves 2 and 4, then the top of this morning's Symmetrical triangle (pattern in yellow).

SDS & SSO: Wolfe Waves

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Friday's "Crash" opening put me in mind of the SKF (Ultrashort Financials) 25% Crash Opening on September 19 (see Chart #1), the morning after the ban on shorting financials was announced. "You had to be crazy" to be long a fund that was ULTRA short the financials when no one was alowed to short them, but the Crash in the SKF was over at the open and the fund began its 135% rally to the Bullish Wolfe Wave target that got MADE one day after the ban was lifted. Go figger, huh, but that September 19 open sure put a lot of folks wrong-footed! UGH...

On Friday morning, just about everything had a big gap down, but not as much as was expected. The show was over for the day right at the open, as far as any crash on Friday was concerned. Any further crashing next week remains to be seen. I try to keep my opinion out of the equation, and see if I can make anything of the charts ;)

Chart #2 is the SDS (Ultrashort S&P 500). Chart #3 is the SSO (Ultra S&P 500). Both funds attempt to roughly double the performance of the S&P 500 on the downside (SDS) or the upside (SSO). These are 10-Minute charts, so they don't have the significance of a daily, weekly, or monthly chart, but they often can give us clues about short-term moves.

On Friday's "crash" opening, the SDS made an upside Wave 5 fakeout move above the Bearish Wolfe Wave pattern, and the SSO made a downside Wave 5 fakeout move below its Bullish Wolfe Wave. A Wave 5 "fakeout breakout," or "fakeout breakdown" is the hallmark of a Wolfe Wave. It puts the proverbial "everyone" wrong-footed if they play the breakout or breakdown. Initial confirmation of the fakeout is when price comes back inside the pattern. Stop loss: the high of Wave 5 (or low of Wave 5 in a Bullish Wolfe Wave).

Additional confirmation can be if any other patterns form when price gets back inside the Wolfe Wave. In the SDS, for example, we've got a Bear Flag (pattern in yellow) that broke down and was being retested at the close on Friday (yellow arrow). Final confirmation in the SDS would be a break of the bottom of the pattern. In this particular case, we've had TWO trendline validations (white arrows) of the bottom of the Wolfe Wave (Waves 2 and Waves 4). That suggests that the market strongly supported the SDS any time that it was tested, and further suggests that it "should be" meaningful on the downside if it gets broken. There's no "ALWAYS" in the stock market, which is why we use stops. If the pattern gets broken, I'd stop it out above Friday's late afternoon high of 108.45, or above whatever nominal high is made early Monday, prior to any breakdown. On a breakdown, the target line is at #6, roughly the low 90's in the SDS.

Interestingly, in Chart #4, the daily SDS, there is a gap at 92.08-92.85, right in the area of the Wave 6 target line in the 10-Minute chart. Gaps don't "have to" get filled, and sometimes they get filled much later in time, but a pullback to that gap, which also is roughly where the up trendline of the Symmetrical Triangle comes in, would fit nicely. Almost too-oo nicely. LOL.

If the Bearish Wolfe Wave in the SDS does breakdown, that gap/trendline area "should be" support. In this daily chart, the SDS has had a Bullish Symmetrical Triangle breakout, which looks to be a larger fractal (repeating pattern) of the little Symmetrical Triangle that broke out September 29, so the SDS is bullish basis the daily chart (bearish for the S&P 500).

SPX - 985 Triple Resistance

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From October 21: "In Chart #3, by the way, note how the SPX came back and retested the breakout TWICE (see arrows). That's called a Trendline Validation, and also is called a DOUBLE successful retest of the pattern breakout. Those are very, very nice ;)

UPDATE: In the Hourly Chart, we got the reverse of that. We got a breakdown, a failed retest of the bottom of the triangle at this morning's high (see arrow), then a continuation to the downside, taking out the morning low.

SPX: 985 Triple Resistance & QLD

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Chart #1: The Ascending Triangle pattern broke to the downside going into yesterday's close, putting a target of roughly SPX 911 IN PLAY. Notice the small Ascending Triangle (in yellow) the formed and broke down after the larger one broke down.

Chart #2: The QLD broke down below a Symmetrical Triangle after 1:00PM this afternoon, below 32.00. That put targets of 31.25 (bottom of the pattern) and roughly 30.52 (measured move) IN PLAY.

SPX - 985 Triple Resistance

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After rallying straight up 120 SPX points from 865 to 985, the SPX is consolidating in an Ascending Triangle, with TRIPLE resistance at roughly 985. I like that. Parabolic Rallies (like the 120 pts.) tend to have a Parabolic Return because there is no structure built along the way, and no consoliation of the gains. If the SPX can take out 985, that likely will bring in shorting covering (buying) and new longs who want to get in on the breakout (more buying). A target of roughly SPX 1030 would be IN PLAY. (985 high - 940 low = 45 Points added to a breakout above 985 = a target of SPX 1030. Be aware that targets against the dominant trend are less likely to get MADE, but all of the targets so far off the 865 have been MADE. (see Charts #2 and #3).

I'd prefer to see SPX 985 get taken out tomorrow morning on a nice Breakaway Gap that is not too far above SPX 985.

In Chart #3, by the way, note how the SPX came back and retested the breakout TWICE (see arrows). That's called a Trendline Validation, and also is called a DOUBLE successful retest of the pattern breakout. Those are very, very nice ;)

UYG: 14.08-14.50 Resistance

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Chart #1: After a smackdown of 62% from the spring high, a Bullish Morning Star showed up at the July low. That pattern probably is the most bullish and one of the most reliable of the Japanese candlestick patterns.

Pretending for a moment that we don't know what happened after that, what kind of rally would we expect off that 14.08 low? We can see that 28.47-28.48 was the neckline of a H&S Top, so that's serious resistance, and that 24.01-24.28 was next horizontal support. We know that "former support 'should be' resistance on any retest." Let's see how we did.

Chart #2: Off the Bullish Morning Star low of 14.08, the UYG rallied smartly, right into that 24.01-24.28 resistance, getting to 24.79 on the first rally bid for a quick gain of 76%, consistent with Bear Market rallies which notoriously are sharp in terms of both time and percentage gain. That big percentage move occurred over only six days' time.

From there, the UYG traded sideways, essentially. It made a nominal new high at 25.03, then broke decisively below the Ascending Triangle (pattern in purple) on September 15. On September 18, the UYG was headed to the first target of 14.01 (the Bullish Morning Star low), but it stopped and reversed at 14.50, then closed at 18.77 for a gain of 29% off the 14.50 low.

Okay, maybe that rally "might have been" for a retest of the bottom of the broken Ascending Triangle, but when the news came out after the closing bell that no shorting of the financials would be allowed until October 2 (later extended to October 8), I had to conclude that "sumbuddy knew sumpthin" that spawned that 29% rally on September 18. LOL. Regardless, we have to play it as it lies when something fundamental trumps the techincals in the charts, and it did.

Instead of finding resistance at the bottom of the Ascending Triangle, which it "should have," the UYG had a HUGE gap up at the open on September 19 to the top of the Ascending Triangle, squeezing the shorts half to death (LOL), but look where the rally stopped. 24.88, right below the Ascending Triangle high of 25.03, which many players would use as their stop. If they had nerves of steel and held their short positions based on the technical stop, they were alright. Not only alright, the UYG tanked 70% over the next three weeks and the 14.01 and 9.60 Ascending Triangle targets got MADE in the process.

So, where from here? Let's do again what we did at the Bullish Morning Star low of 14.01 in Chart #1. Where was it "likely" that the UYG would attempt to rally from that low? First horizontal resistance, at 24.01-24.28. Did it get there? Yep. It got a little higher than that: 25.03.

Let's look at Chart #2. Where is horizontal resistance? 14.01-14.50 (the horizonal dotted blue line). What else have we got? So far, we've had a 64% rally from the 7.31 low to 13.00, then a pullback to 8.80. We know that after a break of 14.01-14.50 support, a retest after a low is put in is a very possible. If we get it, expect that "former support 'should be' resistance." Or, at least "some" resistance. A lot of longs who are trapped above that level would like to get out at a break even after having a paper loss of roughly 50% or more at the 7.31 low.

If we continue higher here, it will have the look of a Bear Flag rally: (higher highs and higher lows) that will end somewhere at Red #4, in the 14's/ high 13's. The first leg of the rally was 5.69 points, from 7.31 to 13.00. If we get a rally of equal length, we add the 5.69 points to the October 16 low of 8.80, and that would put us at 14.49, right in that 14.01-14.50 resistance area.

If the UYG can rally from here and do anything more than that, the next resistance is the 15.81-15.95 gap.

SKF: How The Ban On Shorting Played Out

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The SKF is an UltraShort Financial Fund that attempts to mirror roughly TWICE the performance of the financials on the DOWNSIDE. Chart #1 is a repost of the Bullish Wolfe back in July (bearish for financials). The steep slope of that target line (#6) looked impossible to achieve, but it got MADE on July 15.

The elements of a Wolfe Wave, basically, are (1) a strong directional move; (2) a pattern that develops in the direction of the Lead-In (in this case, down), (3) a Wave 5 Fakeout to a new high or a new low (in this case a new low), then a HUGE RIP in the other direction to the target Line #6.

The basic idea is to get the proverbial "everyone" wrong-footed on the breakdown, at the Wave #5 fakeout.

After the Bullish Wolfe Wave got MADE on July 15, the SKF immediately tanked, which became the Lead-In for another Bullish Wolfe Wave! In Chart #2, we can see that we got the Wolfe Wave pattern (#1-#4) and then the Wave 5 Fakeout on September 8 (Green #5) getting everyone thinking that the financials would rally because this UltraShort Fund had broken down. Wrong, and it "should be" wrong. That's the hallmark of a Wolfe Wave: to fake "everyone" out.

The SKF broke out to the upside, al-lmost got to the target line in mid-September, then the "bad news" hit for SKF (UltraShort). The fundamentals trumped the technicals at that point.

September 18, after the market close, it was announced that no shorting would be allowed in the financials until October 2, later extended to the October 8 close. As a result, who in their right mind would want to own the SKF, and ULTRASHORT fund? No one!

Let's look at what happened. The September 19 open for the SKF was a dreadful CRASH opening. It gapped down 24.6%, from 115.44 to 87.63. Tremendous fear of being short the financials because "everyone knew" that the financials would rally if no one could short them. WRONG. It was another downside fakeout, then the technicals trumped the fundamental news.

The CRASH opening turned out to be the exact LOW for the SKF! Actually, 87.00 right after the opening. Despite the intervention, i.e., outside interference in the markets, the SKF rallied and the Bullish Wolfe Wave target MADE on October 9, one day after the shorting ban was lifted, indicating that the finacials tanked on their own without anyone shorting them. The no shorting ban not only didn't prevent the financial stocks from tanking, it very like exacerbated the decline or at least contributed to it.

Independent of all of that, I thought that the TWO Bullish Wolfe Wave targets in the SKF getting MADE was interesting, and VERY interesting that the gain in the UltraShort Financials (SKF) was a whopping 136% gain from the $87 "no shorting" opening on September 19 to the eventual high of $205 on October 10.

This is a great example of how those who go against "conventional wisdom" can make so much money. Whew! I wish that I could tell you that I was one of those who did, but I didn't. I made some on the UYG (UltraFinancials) off the October 10 low, but not anywhere near what I should have. Coulda..Shoulda...Woulda...we all "coulda" been geniuses. LOL.

Semiconductors: H&S Top Target MADE

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When targets get MADE or come close, that doesn't mean that the stock or index will reverse in the other direction, but often within a few days, that's just what occurs as we can see from the Rectangle target that got MADE on May 19th. That day also was the exact intermediate high in the Semiconductor Index (SOX).

On Friday, October 10, the SOX came within a half a point of achieving the 231.47 target that has been IN PLAY since the September 4 H&S Top breakdown, and the candlestick is a Bullish Doji Star Hammer which, naturally, only is bullish with upside follow-thru.

Bear market rallies notoriously are sharp in terms of both price and time. If Friday's candlestick, indeed, is a Bullish Doji Star hammer, I would expect the SOX to recover a minimum of 50% of the distance between Friday's low and the neckline (horizontal blue line on the chart) in a relatively short period of time. That distance is roughly 100 points, so I would expect to see the SOX at roughly 280 at a minimum, which is 14% higher from here, and quite possibly higher.