SPX: Five Bullish Patterns

The Bullish Falling Wedge target of 927.09 (the top of The Wedge) got MADE in yesterday's trading. "Take profits, or at least some profits, when targets get MADE." There's no guarantee that the two remaining bullish targets will get MADE, so it's always a good idea to bank something.

Bears who didn't take any profits when their Bear Flag target of 898.18 got MADE got squeezed 30 points higher, and some of them watched their paper gains from the Bear Flag breakdown at 930.56 nearly evaporate in yesterday's session.

Wedges and Flags like this one in the daily chart, as we know, are notorious for "morphing" into other patterns, an example of which we'll see next in the intraday chart, with the Bull Flag (pattern in red). EDIT: Sorry, it's the pattern in purple, not red.


The rally to the 927.09 target is another example of the significance of "nested" patterns, and of multiple patterns. In this particular case, the 40 point rally off the 888.86 low contained five bullish patterns, beginning with the little Ascending Triangle in yellow, the Falling Wedge in blue, then the Cup & Handle in white (best seen in the intraday chart that we looked at last week), and finally, the Bull Flag in red, that "morphed" into the Ascending Triangle in orange.

Very nice chart structure and execution on the part of The Bulls, getting to the 927.09 target.

VLO, GOOG, IBM & SPX: Target Practice

At the weekend, Mark asked:

2 questions: What can be determined when a stock fails to meet a target by a large amount?

One of the things that can be determined when a stock fails to meet a target, whether it's by a large or small amount, is that the fundamentals trumped the technicals. That can be the release of earnings, or a company raising or lowering earnings estimates between earnings releases, or some news item that the market expects will materially affect earnings, even if that "expectation" later proves to be unwarranted.

In the case of VLO, which we looked at when it gapped down below the low of the Symmetrical Triangle (in purple) and smack on the low of The Triangle (in green), it's pretty safe to say that THE REASON for the gap down can directly be attributed to the market's response to the release of earnings.

That opening was downright cruel because the Ascending Triangle (pattern in blue) and The Rectangle (pattern in green) targets in the 24's came oh, so close to getting MADE at the 23.615 high, but the "Take No Prisoners" opening on June 3 put everyone who was long those patterns under water, which is why I tried to short it at 19.91 at the open that morning (didn't get filled).

As I said back then, if you're long, it's a very tough play to sell into a crash opening like that because the inclination is to "wait for a bounce," but more often than not, selling into a serious break of support like that is the right decision.

On the way down from late 2008, all of the downside targets got MADE. Ahead of April earnings, GOOG broke below a Bear Flag, with two downside targets IN PLAY that got missed by a mile. What can be determined about that? Again, the fundamentals trumped the technicals. GOOG came through with much better than expected earnings.

If you know any "TA purists" who say that the technicals ALWAYS correctly anticipate the fundamentals, please show them these charts of VLO and GOOG, and say, "Ba-a-aloney!" LOL.


IBM broke out of an Inverse H&S in early January, putting a target of 106.45 IN PLAY. IBM got only to 96.98, well shy of the target, when the Bear Flag broke down on February 13. Why? I don't know. There might have been news on IBM, but we know that the general market also was breaking down below patterns so in my view, "Why ask why?"

Asking "What is the market going to do?" "Will the 106.45 target get MADE?" are the wrong questions to be asking, in my view. The questions that we need to be asking are, "Am I going to stay long on the break of this Bear Flag?" "Am I going to short the break of this Bear Flag?" "What's the downside target?" "Where is my stop?"

Quite often, THE REASON for something occurring only can be reconstructed with the benefit of hindsight. All that we knew at the March low in IBM was that:

1. It had sold off into that low with the general market
2. The Bear Flag target of 86.69 got MADE
3. It was holding at what appeared to be a Double Bottom
4. It was showing excellent relative strength vs. the general market

IBM went on and broke out of the Double Bottom, and the Inverse H&S target of 106.45 eventually got MADE in early May. When the Bear Flag broke down in February, however, if we asked, "Why didn't the target get MADE? Does that mean that 106.45 won't get MADE?" the answer was, "We don't know, so let's try to FOLLOW the program, as best we can."



In the SPX, the Symmetrical Triangle target of 971.57 has not been MADE. Do we want to ask why, and spend a lot of time trying to figure out if "the market went to far, too fast," or "Are we going to $#%# in a handcart?" or would we like to get out of long positions when the Bear Flag broke at 930.64, putting a downside target of 898.18 IN PLAY, which got MADE on June 23?

On June 25, while Bernanke was testifying before Congress, do we want to speculate about the market rallying because of manipulation, or do we want to look at the Ascending Triangle and the Cup & Handle patterns that broke out to the upside in the intraday charts, and the Falling Wedge in this chart that broke out the upside, putting at least the June 19 gap at 921.23 IN PLAY?

You see why Mark's question is difficult to answer. THE REASON isn't always apparent unless it's something very clear, like the market's raponses to VLO's and GOOG's earnings. Other times, THE REASON only can be reconstructed with the benefit of hindsight, if we can figure it out at all. Sometimes, markets/charts are "random," or "chaotic," or "trendless," and we can drive ourselves a little bit crazy trying figuring out what something "means," when there simply isn't anything discernible going on. We're trying to force some interpretation that simply isn't there. At least, that's my own experience.

AKS, MS, And FSLR

AKS opened down on the JPM upgrade Friday morning. I found that interesting because the stock had a little Fakeout/Breakout on Wednesday (the Doji Star) that didn't hold on a closing basis, then a breakout on Thursday that did hold on a closing basis, but that did not take out Wednesday's high.

Notice that Wednesday's candle was a sell pivot candle based on the 21/34 RSIs being at Bearish Synchronicity. The "sell" was confirmed by that particular indicator when the low of that session got taken down in Thursday's session. The sell is negated if the high of that candle is taken out. Notice also that we had a sell from the 8/13 RSIs at Blue #3. Those "fastest" RSI signals usually are good for a quick trade, as this one was. It was good for nice day trade the following session when AKS gapped down below the "pivot day" low.

But, also notice that this chart is a great example of what I mean when I say that we do not allow indicators to TELL US what to do. Indicators don't know what the chart looks like when they "give us" a buy or sell signal. They only are tools for us to use, and it's up to us, as analysts, to decide whether or not to buy or sell.

In this case, the trend is bullish, and when the 21/34 RSI's gave us a "sell" on Wednesday's apparent Fakeout/Breakout candle, we had our four Data Points of a BULL flag. In my view, it would be fine to go ahead and short it on the apparent breakout failure, but stop it out (Buy To Cover), if the high of the "pivot candle" gets taken out to the upside (which it did on Friday) and even consider reversing, and going long.

I hadn't looked at AKS for the past few sessions until I heard that JPM upgraded it. When it started down, my plan was to buy it if it returned to UNCH, but it happened so quickly while I was looking at other things, I missed it. I don't like using Buy stop limit orders/ I've never been comfortable with entering those automatic orders. I feel that if I enter a limit, they'll blow right past me and not fill it, which sometimes happens to me on limit orders, or that I'll get a lousy fill if I don't use a limit. That's neither here nor there, that I missed the trade. The more important thing is the discussion about these "sell pivots" and the pattern that broke out.

One of the stocks that I was watching was Morgan. We discussed the Triple "nested" H&S Top last weekend (the pattern in red), then the Double H&S Top fractal in the intraday chart, a few days ago.

Just about the last thing that I expected to be doing on Morgan was getting LONG the stock, but that's what I did yesterday, based on this "nested" Symmetrical Triangle (smaller one in yellow, "nested" within the larger one in white).

It is said that triangles that go beyond two-thirds of the way toward the apex (where the trendlines converge) are much more likely to fail to breakout than triangles that breakout prior to the two-thirds point. I went ahead with it anyway and bought it for 28.05, based on the fact that it was a "nested" pattern, which I like a lot, and I didn't plan to play it beyond the 28.47 high of the smaller Symmetrical Triangle, given that we've still got the H&S Top target of 27.25 IN PLAY.

I also figured that a breakout would be a "surprise attack" from The Bulls, which would squeeze the shorts higher and have them retreating back for another defense of the neckline of the broken H&S Top, which they "own."

I sold at 28.46, right below the high of the smaller Symmetrical Triangle (Yellow #1), but Morgan did breakout above that, and squeeze the shorts back near the recent neckline retest highs of 28.88 and 28.90. Friday's session high was 28.82. Morgan now is "in the in betweens," below the H&S Top breakdown, but above the Double Symmetrical triangle breakout (I didn't measure these targets since all I wanted was 28.47).

NOTE: The top of the Yellow Triangle is a validated trendline, with the third "hit" at the yellow arrow. Breakouts above/below those "usually" have some significance, as this one did.

In the daily chart, which doesn't show the intraday Symmetrical triangles, Morgan has headed back up in the direction of another retest of the H&S Top neckline. If I were coaching for The Bulls, I would have them leave Friday's high in for a "flatish top" of an Ascending Triangle, at 28.90 and 28.82 (Purple #1 and #3), and go down an put in Purple Data Point #4 for the ascending line of the pattern, then go at The Bears on an Ascending Triangle breakout.

If I were coaching for The Bears, I'd chew them out for NOT making that 27.25 H&S Top target yet, and for allowing The Bulls to breakout of that DOUBLE Symmetrical Triangle! LOL.

Since FSLR also appears on the Real-Time Execution screenshot below, a brief explantion of the trade. As you will recall, FSLR had a HUGE Breakaway Gap on earnings, but didn't even get close to the 235.31 target that is IN PLAY, prior to breaking down below what "should have been" a Bull Flag (pattern in black).

Friday morning, FSLR put in a new low for the move off the 207.51 high, was looking "bull flaggy," and it rallied about $7.00 off the morning low.

I went long on the pullback for a "momo" play with a little over a dollar stop. Later in the session, FSLR held the earlier 159.91 pullback low, printing 159.90 (probably busted a hard stop, a penny below the 159.91 low), but it didn't do anything else on the upside.

Late in the session, I figured that I probably had a chance to get out for a 161.10 "break even," but I didn't want to risk giving back all of my gains in Morgan, so I raised my mental stop to "the mid-160.20's" and threw it in for a loss when I saw the BID moving down to that level.

As it turned out, FSLR did rally to my 161.10 break even shortly before the close, but I also "could have" lost all of my gains in Morgan. I view that situation as making a business deal. "Yeah, I'll take the small gain, rather than come out of the session with a loss."

Morgan Gain: $1,050. FSLR loss: nearly $850. Gain on the session: roughly $200.

SPX Quiz

The gap from Friday's SPX 921.23 close got completely filled at yesterday's print high of 921.42. The market rallied to that level because:

A) Bernanke manipulated it while he was testifying before Congress. He was using a hand puppet under the table.

B) Bernanke is a hand puppet.

C) Two patterns broke out to the upside in the chart, the second of which put the SPX 921.23 gap IN PLAY.

D) Sentiment was too bullish at the June 11 SPX 956.23 top, and sentiment has gotten even more bullish since then.

E) Market participants were cheating, just like everyone except Mark did on last weekend's homework assignment.

-----------------------------------------------------
Results of the Wall Street Sentiment Survey, June 8, 2009 (3 days ahead of the SPX 956.23 top):

Bulls: 11%
Bears: 78%

The survey chart, posted at Traders-talk.com (thank you) shows that Bearish Sentiment has not been this extreme since early 2003, coming out of the 2000-2002 Bear Market.

June 10, 2009 5:41 AM
--------------------------
American Association of Individual Investors members are:

(as of 6/10/2009)
Bullish: 39.25%
Neutral: 21.50%
Bearish: 39.25%

(as of 6/17/2009)
   Bullish: 33.33%
   Neutral: 20.24%
   Bearish: 46.43%

(as of 6/24/2009)
   Bullish: 28.00%
   Neutral: 23.20%
   Bearish: 48.80%
---------------------------------------

MS: Double H&S Top Fractal

From Monday, on MS:

"I went with the 28.10 for a short entry, but I didn't get filled. It didn't matter if I had chosen the 28.06, either. The session high was 28.04. Curses! LOL."

I fared better yesterday on a short entry into Morgan. I put my order in at 28.22, just below the complete fill of Monday morning's gap down from Friday's 28.27 close, and got filled. The 28.27 gap was filled entirely. Morgan went through it and rallied to 28.47 where it topped out for the session.

Stocks often trade in "fractals," which is a fancy way of saying, "repeating patterns," so don't be intimidated. In fact, at cocktail parties the coming weekend, we'll say, "By jove! Did you notice that DOUBLE fractal in Morgan last week?" Then, just when everyone is terribly impressed with what geniuses we are, we'll pour our drinks down the front of ourselves to demonstrate what imbeciles we really are :)

In this DOUBLE H&S Top "fractal" of the larger H&S Top in the daily chart, there is a self-contained H&S Top "nested" within the Head (pattern in yellow) of the larger H&S Top pattern (in white). When it broke down, that put a target of 27.91 IN PLAY.

28.47 - High of the Head
28.19 - Neckline

28.47 - 28.19 = 0.28 points of downside on a break of 28.19

28.19 - 0.28 = Target: 27.91 IN PLAY

Given the fact that the general market was holding up well, I covered my short at 27.91 when the target got MADE, and planned to reposition short at a better entry, depending on what transpired as trading progressed.

By mid-afternoon, Morgan had a "possible" Double Bottom in place at 27.89 and the 27.91 DOUBLE H&S Top fractal that got MADE. When a target gets MADE, that doesn't mean that its going to stop right there and turn in the other direction, but sometimes it does, as we can see here.

Just ahead of the Fed, the Double Bottom broke out, putting an upside target of 28.33 IN PLAY.

28.12 - High of the pattern
27.91 - The more conservative of the 27.89 - 27.91 lows

28.12 - 27.91 = 0.21 points of upside on a takeout of 28.12

28.12 + 0.21 = 28.33 IN PLAY

As we know, targets that are against the trend (trend is bearish) are less likely to get MADE, and this target didn't. The high of the Double Bottom breakout only was 28.27, which was disappointing. I was looking for a better rally on the Fed release to short into, and then a selloff. We got the selloff, but not the rally that I wanted.

These two pattern targets were rather puny in terms of gains, but remember that they're smaller "fractals" of a larger pattern. The same technique applies for measuring pattern targets in hourly, daily and weekly charts, regardless of how large or small they are, so it's good practice to look for patterns in various time-frames, as we did in the "blank canvas" exercise in Morgan at the weekend.


Gain: $300

XING And APWR

Some of you might think that I've been joking when I've said that my opinion about what the market, or a stock, is going to do (PREDICTING) is wrong more than 50% of the time, but I honestly am not joking. I am absolutely horrible at "predicting" anything which is why I try my best to FOLLOW what the market, or a stock, is doing.

Not "going to do." "IS DOING." Then based on what it "is doing," I decide if I want to play it and, if so, structure a trade accordingly. Example: My recent trade in XING. I bought it for 2.07 on May 13 based on what I saw it "doing." XING had broken out of The Falling Channel (in blue), established a a neckline at 2.19 ... 2.12 ... 214 for a Bullish Inverse H&S breakout, and it was retesting The Falling Channel breakout. I didn't know what it was going to do, but based on what it was "doing," I bought it with a stop at April 28 low of 1.63 for a risk:reward of roughly 1:2 if XING broke out and the 2.84 target got MADE, and a 1:3 if the 3.34 got MADE.

The day after I bought it, XING dipped below The Falling Channel, to 1.81, finished the session on a Bullish Hammer, then four days later, broke out of the Bullish Inverse H&S and rallied to 2.2299. That was a new high for the move, so I raised my stop to below the 1.81 low, which improved my risk:reward on the trade to roughly 1:3 and 1:4.

After the breakout, XING pulled back to 1.89, then broke out again to a new high, on heavy volume. I raised the stop again, to below 1.89, again improving my risk:reward on the trade. In the back of my mind, though, I really didn't want to see the 2.19...2.12...2.14 neckline again, after a DOUBLE breakout of The Falling Channel and the Bullish Inverse H&S pattern. Is this thing bullish or NOT? C'mon, here!!

After about a week and a half of lackluster trading, with no upside follow-thru, I threw it in at 2.10 when XING went below the 2.19...2.12...2.14 that I did NOT want to see again. In my view, if a retest of the top of a DOUBLE breakout didn't attract A LOT of buying interest, I wasn't interested either. My sale at 2.10 ended up being the low of the day, just to further annoy me. LOL.

Did I "know" or "predict" that XING would be at 1.80, at yesterday's close? Certainly not. I was "following" XING, and I simply didn't like what I was seeing., so please don't think that I "predicted" anything. I didn't.

At yesterday's 1.80 close, I wouldn't have been stopped out below 1.87, and if I had kept the stop below 1.81, I would have been stopped out there, as well. That leaves only the stop below the 1.63 low of the Right Shoulder. The top of The Falling Channel comes in today, June 24, at 1.689 and the bottom of the Kumo (Cloud) comes in at 1.675, so if XING should go down there and bounce off those supports, then "all is not lost." As we discussed at the weekend, a takeout of a Right Shoulder should NEVER occur, and while there's no "always" or "never" in the stock market, the rule is pretty close to a "never." The majority of Right Shoulder takeouts really are failures, in my experience.

Geez, I might end up using those "thousand words" if I make this one as long as XING, so I'm going to try to be brief on this one. LOL.

On APWR, again, I'm not capable of "predicting" anything. I only can "follow" what it "is doing," and what it "is doing" is breaking a lot of support levels:

1. The top of the Symmetrical Triangle (Purple Trendline #1-#3), which "should have" acted as support on a retest.

2. The 9.60 low at Purple #4, the "last low" prior to the Symmetrical Triangle breakout. That "shouldn't have" gotten taken out before the 15.11 pattern target got MADE, but it did get taken out.

3. The top of the Kumo (Cloud), represented by the vertical lines. That "should" act as support on a retest, and if it doesn't, the chances are increased that the bottom of the Kumo (Cloud) will get tested, which it did.

4. The 7.79 low of the Symmetrical Triangle. APWR has made a "lower low," below that.

The .618% retracement of the 389% rally is 7.46. The Bottom of the Kumo is 7.48. Yesterday's low was 7.22, so that's in the ballpark, and some analysts use the more arcane .764 retracement (the reciprocal of .236) as an acceptable level of retracement.

Stocks that come down on very heavy volume, like APWR did, usually need time to do some basing before another rally, if it's still bullish. The selloff was so dramatic, a snapback rally here up toward the top of the Kumo (Cloud) and toward the 8-Day Tenkan-sen (green line) and 21-Day Kijun-sen (red line), which have had a Bearish Cross, might be on tap, but longs who bought the technical breakout of the Symmetrical Triangle at 11.10, or higher, are trapped up there if they didn't sell the earnings disappointment on June 16, and they're feeling some pain at today's price of 8.04. Some of them will be sellers into a rally. The 21-Day Kijun-sen is at 10.95.

I'm running late, so no time to proofread. Apologies for any mistakes.

MS, SDS, SPX, And IBM

Morgan gapped down at the open, from 28.27 to 27.85. I decided that I liked the H&S Top and the risk:reward on the trade well enough to go ahead and short it if I could get it at a 50-61.8% retracement of the opening gap, so 28.06-28.11.


I went with the 28.10 for a short entry, but I didn't get filled. It didn't matter if I had chosen the 28.06, either. The session high was 28.04. Curses! LOL.

From the weekend, on the 21/34RSIs at Bearish Synchronicity:

"...the release of that "compressed energy" ... often results in a nice move, which sometimes can be quite explosive."

It sure "looks like" the SDS exploded out of that DOUBLE breakout of the Falling Channel and the Ascending Triangle! LOL.

This chart also is an excellent example of "Bull Traps" and "Bear Traps." Since this is an inverse fund, we have to "think backwards." On Friday, the breakdown of the validated channel (white arrow) was a Bear Trap for the SDS players, therefore a Bull Trap for the SPX players.

Both legs of the "W"-Bottom (in blue) violated the channel, "trapping" SDS players if they thought the breakdown was bearish, thus a "Bear Trap." We came into Monday morning with TWO patterns in place: The Falling Channel and The Ascending Triangle. On the gap up opening in the SDS, the Bear Trap "got sprung." Anyone shorting the SDS on Friday's breakdown (the blue circle) got SERIOUSLY trapped on the Gap Up opening. Similarly in the SPX, the Bulls got trapped on Friday's move to SPX 927. On the Gap Down in the SPX yesterday morning, The Bulls were SERIOUSLY trapped.

When a trap gets "sprung," we get into a situation where "selling begets selling" when players see that there isn't going to be much retracement of the opening gap, thus this "power move" higher in the SDS as the SPX went down.


A problem that I have with "playing in size" is that if I pay "just any price" for a stock or fund, it can cost me a fair amount of money. The Gap Up in the SDS was to 56.59, from 55.60. I knew that I wanted to be long the SDS after the Gap Up, but if I could get any kind of retracement at all, back near the 56.18...56.14...56.11 top of the Ascending Triangle, I'd really rather not "hand over" a $700 - $800 premium by paying the 56.59 opening price, if I can get it on some kind of gap retracement, which often occurs. Another consideration was that a good part of the gain already has taken place on the big gap up, so the risk: reward on the trade isn't very favorable with the Ascending Triangle target at 57.52.

I went with an entry at 56.22, above the top of the Ascending Triangle but, obviously, I didn't get it. I got shut out on BOTH of my orders. Cursaes! lOL. That's fine. Quite often, I do get filled on those gap retracements.

The 57.52 target got MADE, and a good bit more on the DOUBLE pattern breakout. Muliple breakouts and "nested pattern" breakouts and breakdowns do "tend" to give strength to moves, as this one did.

The Descending Triangle (10-Minute chart with the Triple Bottom at 915, posted at the weekend) target of 904.15 got MADE, and the Bear Flag target (daily chart) of 898.18 also got MADE.

From June 16, on IBM:

"Looking at the pattern in red, are you thinking what I was thinking yesterday morning, when I sold IBM into a "possible" Right Shoulder?"

This is the BEFORE picture, posted last week...

...here's AFTER. I got busy playing other things, but IBM would have been a nice short. After the neckline breakdown, there was a 2-3 hour "knuckle-biter," when the stock went back above the neckline, but the second attempt to regain the neckline (red arrow) was a failure, smack on the neckline. Down she went...

Morgan: H&S Top

When I looked at this H&S Top in Morgan's Hourly Chart, I assumed that the Daily chart would show a more "compressed" version of the pattern, which it does, and planned to measure the pattern before the open today to get the target. Unfortunately, I found that we've got conflicting data.

The daily chart shows that Thursday's high was 28.90, two pennies above the 28.88 failed retest high at the neckline (white arrow) in the Hourly Chart. If my data, which I download from Reuters, are correct, that means that Pattern #4 in the Hourly Chart, the "possible" Bear Flag/Rising Wedge (pattern in red) is invalid.

It also would mean that we had a minor "shakeout" of the shorts at the 28.90 high. Anyone using the 28.88 failed retest high as a "hard stop" got shaken out of their position by two pennies. That's one of many examples why I use "mental stops," rather than place a stop order. "They" seem to like to bust stops by a few pennies, which I suspect is what happened if the 28.90 high is correct.

Basis the daily chart, the neckline was at 28.9166 when the first failed retest occurred. The neckline currently is at 29.20 for today, June 22, and rises at the rate of 0.07163 per session, so it will be at roughly 29.27 on Tuesday.

Alex asked an excellent question at the weekend about whether or not an upside takeout of 28.88 would invalidate the breakdown, and made a great observation about the fact that this neckline is rising. Theoretically, Morgan could move higher and "chase" the bottom of the pattern, but technically, as long as it remains below the neckline, it's still a valid broken H&S Top, and the downside target of 25.27 still is IN PLAY. That's why I said that a takeout of 28.88 would call the breakdown into question. It wouldn't be invalid, but I'd have to question "what's going on here?" after we've already had a failed retest. Morgan "should be" moving down off that.

I haven't decided whether I'll short this or not. On a short like this, it's up to the individual where they want to put a stop, but personally, I wouldn't hold a short position on any CLOSE above the neckline, and we've got a great example in this chart of WHY I wouldn't.

Look at the Rising Channel (in blue) and the "nested" Symmetrical Triangle (in purple) back in April. I really like those "nested" patterns, and they usually give strength to a breakout or a breakdown, but this is a perfect example of how there is no "always" in the stock market.

The "nested" patterns broke down on a CLOSING basis on April 23. Morgan went down for three more days after that. On April 29, however, Morgan closed back above the lower trendline, and well inside the channel. If we showed the chart only to the close of that session, it would be a great example for the "Game Simulator." What would we do with a short position at that point?

If we hold short, the next session "looks like" a Bearish Inverted Doji Star Hangman, and it "looks like" it closed right at the botoom of the Symmetrical Triangle (pattern in purple), so it "looked like" it was still bearish.

UGH!!!!!! If we shorted the DOUBLE pattern breakdown, and didn't cover the CLOSE back inside the Channel, we would have been squeezed for close to a 50% loss at the recent 32.00 high. Horrible.

Sometimes, there is a one or two day close back inside a pattern after a breakout or breakdown, then the breakout or breakdown continues and works out fine. But, you can see from this example why I don't like to play around with CLOSES back inside patterns after a breakout or a breakdown. I'd rather throw it in, and re-enter later on if the stock gets back on track, rather than get squeezed half to death :(

Finally, the high of the Right Shoulder is 30.15 (horizontal red line). Classically, that NEVER should get taken out to the upside, or the pattern is invalid. We know that there's no "always" or "never" in the stock market, but I do agree that if a Right Shoulder gets taken out, the vast majority of the time, the pattern really is invalid.

SPX - In The "In Betweens"

We'll follow up yesterday's discussion on the SDS with a look at the underlying, the SPX. In this chart we can see that coming out of the March low, the mid-range 21, 34 and 55 RSIs immediately got "in sync," with each rallying above its "shadow," which is the next RSI down in the Fibonacci sequence. The 89, 144 and 233 RSIs quickly followed suit, and it was off to the races on the upside.

In May, we can see that the 21 RSI came down toward its "shadow," the 34 RSI, and remained above it. In late May, the 21 RSI went into "Bullish Synchronicity" with its "shadow," the 34 RSI, meaning that the readings were very close, which acts as a "compression" of sorts. If the high of that day's candle gets taken out to the upside (pivot candle), the release of that "compressed energy" at Bullish Synchronicity often results in a nice move, which sometimes can be quite explosive. In this case, the result was the technical breakout of the Symmetical Triangle (the pattern in black in the next chart), on June 1, at 919.73, which lead to a rally to 956.23, which was a Fakeout/Breakout high of the Bear Flag (pattern in blue in the next chart).

Looking at this indicator, and looking at the price chart, the first sign of any trouble for the rally off the March low was the June 15 breakdown of the Bear Flag, at 930.56. Very painful for anyone shorting for three months (early March to early June), against this trend.

The first sign of weakness in these RSIs was concurrent with the break of the Bear Flag. On the selloff to SPX 903.78, the 21 RSI fell below its "shadow," the 34 RSI, but it held at the 55 RSI. It rallied back to Bearish Synchronicity with the 34 RSI on Friday, meaning that it is "out of position" below it, in a "back kiss" compression.

The 21 RSI reading is 54.124
The 34 RSI reading is 54.1828

Friday's candle is a "pivot candle," meaning that if the 915.80 session low gets taken down, a sell signal is generated from this particular indicator. Remember, we never allow indicators to TELL US what to do. It's our job to decide whether we want to take a signal or not, based on our read of the price chart.

We want to consider the signal in context with what the price chart is doing, and indicators don't know that. We want to see if there is anything "pivotal" about SPX 915.

Friday's close is just about smack in the middle of support at the top of the Ascending Triangle (pattern in black) and 927-928 resistance, and then 934.87 resistance (the bottom of the Bear Flag, on Monday). That doesn't look like there's anything "pivotal" about SPX 915.


In the Hourly chart, The Bulls have a chance at an Ascending Triangle breakout (the pattern in red), the "flatish" highs of which are roughly 928 and 927. The "last low" along the ascending line was 915.80, so if the ascending line gets broken (it rises a little each hour) AND that 915.80 gets taken down, the Ascending Triangle possibility is blown.

On an upside breakout, The Bulls must face DOUBLE resistance at the top of the Bear Flag (in yellow), and the bottom of broken Bear Flag (in white), in the 930's.

Wait a minute. Did we just say 915.80 in the HOURLY chart is important for The Bulls ??? Hm-m-m...


In the 10-Minute chart, the SPX has put in a very short-term Triple bottom over the past two sessions at 915.45 ... 915.62 ... 915.80.

Hm-mm-m......there's that 915 again. STOP that!

If 915 should get taken down, it would be a breakdown of a Descending Triangle in this short-term chart. Descending highs ... "flatish" lows. A breakdown of this pattern would put 904.51 IN PLAY, within a point of the recen 903.78 low

927.09 - High of the pattern
915.80 - The most conservative of the Triple Bottom lows, and also the "last low" along the ascending line in the Hourly Chart

927.09 - 915.80 = 11.29 points of downside on a break of 915.80
915.80 - 11.29 = Target: 904.51 IN PLAY

SDS And MS

From Friday morning on the SPX/SDS:



"...my plan was to short the SPX via the SDS on any print in the 931's. It never got there, and it wasn't until afterwards that I figured out why.


The low of the trendline validation was 927.97 (white arrow). On the rally back to the bottom of the broken Bear Flag, the highs of the three Hourly bars (horizontal red line) were: 927.98...927.97...928.00, respectively, all within three cents of that 927.97 trendline validation low..."



Understanding that 927.97 - 928.00 was Key Resistance helped me to figure out the Friday's open very likely was a Bear Trap.



Going into Friday's open, there was a Falling Channel established, the bottom of which had been validated as support at 55.35 (white arrow). The open of Friday not only took out that 55.35 validated support, it also took out the bottom of The Falling Channel. Anyone using a stop below 55.35, or a stop below the bottom of the channel got busted on what "appeared to be" one of those scary "Take No Prisoners" openings because SDS had broken TWO key levels of support at the open.



Knowing that The Bears "owned" 927.97 - 928.00, and seeing the SPX race to 927 at the open, just below validated resistance, I played the Double Breakdown for a Bear Trap, and got long the SDS for a rally back toward broken 55.35 support, which "should be" resistance on a rally.



That worked out fine. I sold "early," at SDS 55.27-55.28. The initial rally high turned out to be 55.29, just below 55.35 resistance, and the SDS sold off for a retest of the early morning lows. Since we were trading in the SPX 910-928 Neutral Zone, I called it a day and didn't follow the SDS after I cashed it in, but the remainder of the session proved to be very interesting.



On the retest of the 54.70 morning low, the SDS held at 54.72 for a Double Bottom/"W"-Bottom. The pivot of the "W" was the 55.29 early session high, so an upside takeout would put a target of 55.86 IN PLAY.



55.29 - High of the pattern

54.72 - The more conservative of the 54.70...54.72 lows



55.29 - 54.72 = 0.57 points of upside added to a takeout of 55.29



55.29 + 0.57 = Target: 55.86 IN PLAY



The SDS broke out and rallied to 55.77, shy of the target, then did something very interesting. It sold off to 55.37 (red arrow), just above former support at 55.35 (white arrow) and held. That re-established 55.35 as support, and the SDS took off to the upside. The 55.86 target got MADE, and a bid was made to break out of the top of the Falling Channel.



The breakout attempt resulted in a Fakeout Breakout (down white arrow). Sometimes, fakeout moves like that are arbitrary. Other times, they aren't, and this one wasn't arbitrary, which we'll see in the third chart.










Going into the close, 55.35-55.37 support (the two up arrows) got broken again, but the SDS came on going for the Closing Bell. The late afternoon low established Data Point #4 for an Ascending Triangle (pattern in orange), the top of which is quite interesting, best seen if we clean up the chart.

If we begin our labeling at Orange #1 in this chart, we get a better understanding of the Fakeout/Breakout of the Falling Channel. The failure at the 56.11 high of the day was smack on the trendline connecting the first two highs, validating it as resistance. Without that third "hit" at 55.11, we could connect those first two highs, but we wouldn't know if was meaningful or not until it was tested. It's been tested, so it "should" have some significance if it gets taken out.

Since this has gotten so long, we'll explore this further before the open on Monday.

I've been so involved with playing Goldman lately, and looking at those Rising Wedge scenarios, I haven't looked at Morgan for awhile.

Before you look at the next chart (NO CHEATING), look at this "blank canvas" and from the recent high near 32.00, see if you can identify any patterns.

Have fun with it. If you find any patterns, see if Ms. Market validates your thesis by retesting any breakouts or breakdowns. See if you can find any "nested" patterns, which are smaller patterns "nested" with a larger pattern.

I shouldn't post the next chart yet. You guys are going to be lazy and CHEAT, aren't you? You won't learn anything by cheating. You gotta woik!

Okay, do you promise NO CHEATING? Alright...alright, I'll post the chart. Geez, I just was kidding. You didn't have to throw those erasers at me! LOL.

Pattern #1: Head & Shoulders Top (in white)

Pattern #2: Symmetrical Triangle (in yellow), "nested" within The Head

Pattern #3: Another Symmetrical Triangle (in blue), "nested" within The Right Shoulder

IMPORTANT: Notice that after the DOUBLE nested H&S Top broke down, there was a quick retest of the neckline at the white arrow that lasted for three hourly bars of trading. When that failed and Morgan went down to a "lower low," Ms. Market told us, "Yep, your neckline is valid. The breakdown is confirmed."

Pattern #4: Bear Flag/Rising Wedge (in red). We don't know yet which it is, or if it's something else. The outcome is yet to be determined, but roughly 25.10-25.20 still is IN PLAY from the H&S Top breakdown.

An upside takeout of 28.88 where the neckline was retested, and failed, would put the breakdown in question. That's now validated resistance, and it "shouldn't" get taken out before the downside target, or some reasonable approximation, gets MADE.

If anyone cheated, I want names in the Comment Section. LOL.

Gain: $700

SPX: A Random Walk

For the third session running, the top of the May Symmetrical triangle (in black) was a key factor. That trendline came in yesterday at 910.677. The open was about twenty cents above it, at 910.86. The Bears went for an early takedown, but only could take it down to 907.94 in the first few minutes of trading before The Bulls took over, and moved the index back above 910.677 by 9:40AM. The Bulls remained comfortably in control of the trendline for the remainder of the session.

As the chart stands, The Bulls still have the Symmetrical Triangle target of 971.57 IN PLAY since, for the moment, they've defended the top of the pattern. The Bears still have the Bear Flag target of 898.18 IN PLAY since the low, so far, is 903.78.

Before we move to the Hourly chart, notice the blue "thumbs up" that we discussed back when the Bear Flag was forming. That was a trendline validation, which we know usually has some significance, when taken out.

I didn't realize just HOW signifcant it was!

After Data Points #1-4 of the Bear Flag were established, the SPX made a third "hit" to the lower trendline, at 927.97, validating it as support (the white arrow). Subsequently, the SPX ralled to #5, which was a Breakout/Fakeout, then the Bear Flag broke down.

Retests of broken patterns/trendlines are common, and are to be expected. After the SPX fell to a low of 919.65 on the June 15 Bear Flag breakdown, it rallied back on June 16, for a retest. On June 16, the broken trendline was at 931.42, and my plan was to short the SPX via the SDS on any print in the 931's. It never got there, and it wasn't until afterwards that I figured out why.

The low of the trendline validation was 927.97 (white arrow). On the rally back to the bottom of the broken Bear Flag, the highs of the three Hourly bars (horizontal red line) were: 927.98...927.97...928.00, respectively, all within three cents of that 927.97 trendline validation low, which we know usually has some signifcance when broken.

The significance, in this case, was that 927.97 validated support became resistance, as it should. They "pulled the plug" right there. Down she went, to SPX 903. The failure of those three candles at 927.97, all within three pennies of being exact, in an index of this size, is further evidence that the market is only a random walk ;)

The rally off the 903 low is looking Bear flaggy. Interestingly, the lower trendline of the rally will come in today at 910-911-ish which, for the last three sessions, has been the battle line at the top of the Symmetrical Triangle (in black) in the daily chart.

FAZ, GS, SPX And POT

From June 16, on the FAZ:

"The most recent high, on June 3, was 4.97, near the 5.06 target that is IN PLAY, so if the FAZ continues higher from here (it's currently at 4.72), that's horiztontal resistance."

4.97 and 5.06 both got MADE. After the 4.97 resistance got taken out (sorry, I put 4.96), the FAZ had a nice rally. On a pullback, "former resistance 'should be' support." It was. Just as the FAZ successfully retested the 4.62 Ascending Triangle breakout, it now has successfully retest former 4.97 resistance. Although there are no pattern targets IN PLAY, that's very nice execution, technically, indicating the buyers were willing to step in to support those two price levels, which now are KEY SUPPORT.



From June 16, on Goldman:

"I look at horizontal support as targets for scaling out of short positions, which would be the lows of the pattern as it progressed higher. Those would be:

140.74 - the June 3 low (the little doji star).
133.92-134.60 - the lows at Blue Data Point #4.
128.06 - the low at the black arrow, which would be the low in Rising Wedge Scenario #1 that we looked at, originally.
113.38 - that would be a return to the origin of the pattern, in Rising Wedge Scenario #2."

140.74 got MADE in yesterday's session.

The SPX continues to try to hang onto the top of the Symmetrical Triangle (in black), which came in yesterday at 911.37. The open and close were either side of it, at 911.89 and 910.71, respectively.

Not only has that trendline been an important battle line in the daily chart, after the morning selloff yesterday, The Bulls built a Bullish Inverse H&S with the neckline right at that 911, and broke out of it.

The breakout put roughly SPX 918.50 IN PLAY, which got MADE. Session high: 918.44

This is a "shoulda had it." We've all got those ;)

On June 15, POT held the lower trendline within about six cents, for a second trendline validation, and we know how those tend to have some significance when the are broken. I checked it a few times on June 16, and POT was trading above the trendline. Yesterday morning, I looked at and saw that it had broken below the trendline rather sigificantly, and that I had missed it. Curses!

Well, okay, maybe I'd get a chance to short it on a retest of the broken trendline.

WRONG!!!

The world suddenly fell out of love with this group, and combined with the technical breakdown of the pattern, the 97.08 target got MADE faster than we can say "fertilizer."

When I saw that POT had put in a low just below the target, and the SPX had stablized and looked like it wanted to rally, I got long just above the target and got out with a quick gain. My plan then was to re-enter long if the morning low of 96.55 got retested.

Later, I saw that POT was headed back to the lows, and I noticed that it had put in "nested" triangles, and had broken down from them. That would have been a nice short entry when those broke, for the ride back to the lows.

I put in an order to buy at 96.59 with a stop down around 96.00, to allow for a minor shakeout if the low got broken, which would preserve part of my earlier gain. Upside target was a retest of the bottoms of the "nested" Symmetrical triangles. I got the shakeout, down to 96.27, then a rally. I decided to put my stop below that shakeout low.

Unfortunately, I got busted by fifteen cents on another minor shakeout, to 96.12, so I called it a day. Too bad, because look at the rally that ensued off the 96.12 low! It ended at the nexus of BOTH lower trendlines of the broken "nested" Symmetrical Triangles, which would have been a beautiful entry short.

Gain: about $350.

We never want to compare a paltry gain like that to the $14,000 that the trade was worth on a short of the technical breakdown at 111.19, to the target of 97.08. We might lose our temper and, momentarily, forget to be grateful.

Curses! Curses! Curses!

FAZ, APWR, IBM, SPX And GS

From yesterday's Comment Section, on the FAZ: (See Comment Section for math on the pattern):

"The most recent high, on June 3, was 4.97, near the 5.06 target that is IN PLAY, so if the FAZ continues higher from here (it's currently at 4.72), that's horiztontal resistance.

Remember that targets that are against the trend (the trend is bearish), are less likely to get made than targets that are with the trend."

The FAZ got to 4.94 off the Ascending Triangle breakout and the successful retest (white arrow) of the breakout in yesterday's trading, three cents from horizontal resistance at 4.97 (red line).

Suggestion: When you get that close to targets/resistance, it's a good idea to take at least "some" profits. The losses in the FAZ since the March low have been horrific. From the 4.62 breakout, that's a GAIN of nearly 7%.

From June 15, on APWR:

"It has established three data points for a possible second bullish continuation pattern if it can find Data Point #4 (question mark), then break out to the upside again."

APWR disappointed on earnings yesterday morning. It gapped down from 13.09 to 12.03, rallied back to 12.90, almost filling the gap entirely, then went into a serious tank on the heaviest volume in at least two years, if not all-time record volume.

I was looking for APWR to get through earnings, establish Data Point #4, then break out above the top of the pattern, but we can see "that ain't gonna happen." APWR had rallied 389% over the past three months, and "could have" tacked on even greater gains, but yesterday's 24% loss on very heavy volume tells us that it not only was "Buy the rumor...sell the news," the selling was very heavy on the BAD news (APWR missed the earnings estimate).


I bought IBM last Friday for 108.27.

IBM has had back-to-back Symmetrical Triangle breakouts and last Friday, it held above the top of the second one (pattern in blue) for a successful retest, at that point.

On Monday, the SPX broke down below the Bear Flag that we looked at last week, but IBM held at the top of the Symmetrical Triangle on a closing basis, within two pennies. The top of the triangle came in at 107.60. IBM closed at 107.62.

Given that IBM has had TWO bullish breakouts, and as of Monday's close, it also had TWO successful retests of the second breakout, I hated to give up the position, but I also didn't like the breakdown in the SPX. I "sold into strength" on the morning rally, and I was glad that I did. IBM held up very well all day, but got smacked going into the close and finished the session at 107.32, below the top of the blue triangle, which came in yesterday at 107.466.

Notice that prior to the first pattern breakout, IBM failed at the top of the pattern (white arrow), which validated it as resistance. Pay attention to those. When validated resistance gets taken out, the usually has some significance.

The lows of the second pattern (in yellow) successfully retested the breakout of the first pattern, then the second pattern broke out. That one was a "sloppy" breakout. IBM came back below the breakout, which always is a knuckle-biter, but then broke out again and went into the $110's.

Looking at the pattern in red, are you thinking what I was thinking yesterday morning, when I sold IBM into a "possible" Right Shoulder?

On Monday, the SPX broke the Bear Flag (pattern in blue) at 930.56, putting a downside target of SPX 898.18 IN PLAY.

956.23 - high of the pattern, which also was a Fakeout/Breakout
923.85 - low of the pattern

956.23 - 923.85 = 32.38 points of downside from the break at 930.56.

930.56 - 32.38 = Target: 898.18 IN PLAY

Interestingly, the top of the Symmetrical Triangle (in black), the breakout of which put 971.57 IN PLAY, came in yesterday at 912.069. Yesterday's low was 911.60. The close was 911.97, just ten cents below that trendline, so officially, the 971.57 target goes ON HOLD until we see what develops. This is a "knuckle-biter" for the Bulls. Similar to the break back below the second pattern (in yellow) in the IBM Hourly Chart above, unless/until the SPX rallies back above the trendline (IBM did break out again), the breakout is in question.



Goldman put in the second leg of a Double-Bottom/"W"-Bottom at the close on Monday afternoon, then broke out above the 144.45 pivot of the "W" yesterday morning, putting an upside target of 145.89 IN PLAY.

144.45 - high of the pattern
143.01 - the more conservative of the 142.90 and 143.01 lows

144.45 - 143.01 = 1.44 points of upside on a break above 144.45.

144.45 + 1.44 = Target: 144.89 IN PLAY

The target got MADE within four cents. Goldman rallied to 144.85, which was the session high. When Goldman sold off, then rallied back to near-term resistance (horizontal red line), I shorted it (red arrow) for a playback to the 144.45 "W" pivot support area, and covered the short on approach to that level. That worked out nicely, for a change, given how Goldman has been blowing past my short entries. It went down from my entry fairly quickly, and was in the trade for under fourteen minutes.


Gain on IBM: $500. Gain on Goldman: $800. Session Gain: $1,300.