Morgan: Topping Example

From this morning's comment to Susannah:

"Good observation about Morgan getting close to the analysts' price targets...

...I'd suggest looking at intraday charts in Morgan for any sign of a reversal, like the TRIPLE nested H&S Top in the SKF earlier in the week in the 10-Minute chart..."

I want to give a specific illustration of what I meant when I said that to Susannah because it really gets to the heart of what we're told to do when we first learn about the market, which is to FOLLOW "the message of the market." We all shake our heads up and down in agreement when we're told to do that, and then we don't do it! LOL. Rather, we focus on trying to predict what the market is "going to do," and focus on "making calls," rather than focusing on what the market "is doing."

For example, since December, I never "called" or "predicted" that any of these targets in this daily chart would get MADE, but all of them did. I don't mean to imply that they ALWAYS do. There's no "always." I simply followed the patterns, and described what was IN PLAY. When the intervening bearish targets formed and broke down, I described those targets that went IN PLAY. I simply followed the patterns, so don't anyone go giving me credit for any "great calls." I never made a single call and I never knew whether they would get MADE, or not.

Now, let's say that someone shorted Morgan at Friday's close, basically "calling a top," and expecting a decent move to the downside. That's perfectly fine, of course, and certainly reasonable predicated on the facts that TWO outstanding upside targets from last December got MADE on Friday, that Morgan is nearing analysts' targets, that it's had a big run, etc. In that case (shorting it), set up a decent risk:reward on the play. Example: "Stop it out if it goes up another point. Cover when it goes down 2 points (1:2 risk:reward) or down 3 points (1:3 risk:reward), etc." Something like that is perfectly fine as long as we structure the trade and we have a plan, i.e. "Plan the trade, and trade the plan."

But, my overall point is, what if we consistently tried to FOLLOW the market, and simply wait until she TELLS US something and we "followed instructions," like following the breakouts and breakdowns in this daily chart? Not so bad, huh?

Back to my comment to Susannah about looking for signs of a top off the intraday charts. Let's zoom in on the realatively small H&S Top that formed in the daily chart in January, best seen in this chart that I posted in January, right before the breakdown.

I very much like these "nested" patterns, as I've said many times before. This one, like the one in the SKF last week, also is a TRIPLE nested H&S Top. Entering short right here in the Right Shoulder is fine. Shorting the break of the Right Shoulder Rising Wedge (pattern in orange), is a VERY NICE entry. That's a confirmation of a breakdown of that particular pattern, which strongly suggests that the entire H&S Top will break down as well. I'd stop it out above the Right Shoulder high if it doesn't break down. Shorting the actual breakdown also is a fine entry short.

Retests of pattern breakouts and breakdowns are common, and are to be expected, although we didn't get that in the SKF and FAZ H&S Top breakdowns this week. They both went into freefall on the downside, but if they had retested their broken necklines, that would have been a fine entry short, as this one was in Morgan.

I almost said "Goldman" again, Susannah. LOL.

When the decline got going for the shorts, that's a nice, nice position to be in! You're in the proverbial catbird seat as far as where you want to cover and take profits, and there aren't any rules about that. If you want to cover half when 50% or 61.8% of the target gets MADE to lock in a winner, that's something to consider. If you don't see any problem with a bullish pattern forming and want to wait for the target get MADE, that's fine, too. YOU are controlling the boards in this situation, so to speak. You aren't sitting around in a position "hoping" that you'll get bailed out. You know WHERE you would enter short. You know WHY you entered short. You know WHERE your stop is (I use a takeout of the Right Shoulder high, once the pattern breaks down), and you know WHERE you're going to cover and take profits.

The 14.77-14.90 target got MADE with no problem, and was exceeded on the downside by quite a bit. The low for the move was 13.10.

Bigger picture, let's extrapolate from that short-term pattern example and apply it to this Ichimoku Kinko Hyo chart, which means "At A Glance...The Table of Balance." The vertical lines, known as the Kumo, or "Cloud," represent support and resistance and we can see "at a glance" if the chart is above it (bullish), below it (bearish), or neutral (whipsawing above and below it).

Despite the 285% rally in Morgan off its October low, we can "see at a glance" that Morgan still is bearish and coming up on Kumo (Cloud) resistance. The last time that Morgan tried to get through it in the Summer of 2008, the Kumo (Cloud) was more like Kumo (BRICK WALL) than "cloud." The highs of the two patterns both failed right at the bottom of it, and when the DOUBLE pattern broke, down she went in a horrific smackdown from the $40's to the October low of 6.71. Yeesh!

What if shareholders had FOLLOWED what this chart was telling them? They would have gotten outta there long, long before that wicked decline. This chart has been bearish since late October, 2007. And, what if they followed all of these patterns, and SHORTED all of the pattern breakdowns?

You probably have heard the expression, "Youth is wasted on the young." I'm an old man now, and oh buddy, do I understand that with respect to my personal experiences in the stock market. "If I knew then what I know now..." Oh, buddy!

What I "know now," basically, is what we've been discussing about FOLLOWING the market with at least some kind of plan for success, whether that's using Elliott Wave Theory, or fundamentals, or whatever you choose to do consistently, and stop throwing money at the market, "hoping" that we'll be successful.

Sorry for the long post, but hopefully it will answer some questions that you folks have about "a way" to play the stock market, and an understanding about why I can't and don't try to predict what anything is going to do tommorrow, or next week, or thereafter. I simply don't know. But, I can know these patterns, support and restistance, trendlines, retests, etc., and I can know how to structure a plan for playing them, as I've discussed in these blog posts.

Have a great Sunday!