Chart #1: This chart is a great illustration of why I try never to predict anything, and why it is so important to FOLLOW the market as best I can, which still doesn't mean that it's easy ;)
As of the February 7 close where this chart ends, the USO had rallied 85% from its January, 2007 low of 42.70 to the 79.09 high in early January, 2008. The price of oil was "too high" according to many market participants, and the USO had formed this H&S Top with a Triple Bottom neckline. I've read many times that Triple Bottoms ALWAYS break to the downside, so with the H&S Top AND the Triple Bottom, this chart looked headed down about 10½ points (see the math on the chart for the target calculation).
Chart #2: There's no ALWAYS in the stock market! The Triple Bottom never broke down and instead, the USO went up and took out the high of the Right Shoulder (73.43) on February 9, two days after Chart #1 ended. That was a very important clue for what was to come. The high of a Right Shoulder "shouldn't" get taken out to the upside, and when it does, it can be very dangerous for shorts, as we can see by what ensued in the chart.
The next clue was when the high of The Head, 79.09, was taken out to the upside. Instead of subtracting 10½ points from the neckline if it had broken down, we ADD that amount to the breakout above 79.09 and get a target of 89.68 IN PLAY.
Notice that during the pullback after the breakout above 79.09, the USO printed a low of 79.40 at Purple #2 during the formation of the Symmetrical Triangle (pattern in purple). "Former resistance 'should be' support on any retest." It was. That was ver-ry nice confirmation of the breakout ABOVE The H&S Top pattern.
The Symmetrical Triangle broke out to the upside (continuation pattern), and the USO was off to the races, making "higher highs" and "higher lows" as it climbed the channel to the July high. Anyone who played their opinion that "oil was too high" or who stubbornly hung onto their prediction that oil would go lower got dragged inexorably higher throughout the spring and early summer. UGH.
Lesson: "Play what you SEE, not what you think."
We also can "see" that the channel was very well-defined: three "hits" to the top of it; four "hits" to the bottom of it. When it broke down at roughly 111.00 in mid-July, that was to be taken seriously. The USO fell all-ll the way back to its January, 2007 low of 42.70 and below it, to 39.16, and currently stands at 41.36.
Although it is tempting to try to predict Ms. Market because that feeds our Ego Demon's "need to be right," a lot of money can be made if we simply FOLLOW Ms. Market. Not always easy, admittedly, especially the fakeouts that we often get, but I still think it's better to follow, rather than to predict. At least for me, it is.
For the record, I would have predicted a break to the DOWNSIDE of the H&S Top and the Triple Bottom in Chart #1. WRONG! Do not try to predicting anything, Melf! LOL.
6 comments:
Great post, Melf!
Seems that the main purpose of the stock market is to make fools out of all of us! Or at the very least, to keep us guessing, to teach us that there is no such thing as a sure thing.
I too had heard about the triple bottom rule, that they always break to the downside. I wonder whether that's a rule for stocks, and whether commodities might be a different animal?
(Seems that the main purpose of the stock market is to make fools out of all of us!)
Greg,
I swear that's true! LOL.
(I wonder whether that's a rule for stocks, and whether commodities might be a different animal?)
I don't know, but I suspect that there have been triple bottoms in the commodities charts as well, simply because I've never found any ALWAYS that works.
Have a great Thanksgiving, Greg!
thanks, Melf.
You have a good one too!!
Excellent analysis, Melf. We are presently at an important point of the spx. What do your charts tell you, up or down? And I know, follow the market and don't try to predict the direction. But you are a pro.
And I was going to pick up on "In the mountains" use of the word "always" applied to the stock market, but you already did.
And I have read "In the mountains" comments for some time and admire his insight.
Boy would I love to find an always rule, but as "ITMs" said, it always makes a fool out of us. One trader told me that the minute he put on a trade, he would analyze what was wrong with it, not what was right about it. A good philosophy.
(One trader told me that the minute he put on a trade, he would analyze what was wrong with it, not what was right about it. A good philosophy).
Katzo,
That is a good philosphy. When we take a position, we already know what we like about it, so it's a good idea to examine what we WOULDN'T like about it.
Example: My UYG trade recently, when I said that I WOULDN'T like to see it break the .618 retracement of 6.42, then see 6.39... 6.38 ... 6.37, etc. Those prices put the UYG back below the retracements, and more importantly, back below the "possible" Bullish Wolfe Wave. We now know that it wasn't bullish, and if I hadn't sold at 6.32 for a 3% loss, I would have been looking at a paper loss of 51% if I had held on to the 3.22 low. Yikes.
"Try to recognize as quickly as possible where we're wrong, and GET OUTTA THERE." LOL.
I don't know what the market is going to do here (I never "know,") but as I discussed in my last post on the NASDAQ, it did what it needed to do to spring the "Bear Trap," short term, by getting back above that broken trendline (1391 on November 24).
The NASDAQ not only got back above the broken trendline, it GAPPED above that trendline, put in a low of 1397, and the session ended up being a "Gap and Go." The Bears who were waiting for a pullback to the trendline to cover, or who kept shorting the rally, got trapped.
The top of the gap and the lower trendline (1384 and 1378, respectively) now are important support on any strong pullback.
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