PCLN: The Possible Bearish Wolfe Wave

After putting in a possible Wave 5 Fakeout/Breakout of a putative Bearish Wolfe Wave, PCLN sold off to the 21-day Kijun-sen (solid red line), and a little lower, then reversed and is making a bid for the top of the Wolfe Wave. Stop busters are (1) a takeout of the 169.00 high at Wave 5, and then (2) the top of pattern, which comes in today at 170.04, particularly a CLOSE above the latter.

Back in July, the MACD made a positive divergence at Blue #1, ticked higher from there, at Blue #2, then went up through the signal line on July 15, at Blue #3. The next session, PCLN took out the high of the Right Shoulder of the H&S Top in the price chart (UH-OH), then took out the 119.14 high of the Head several sessions later (UH-Oh-h-h)), which put roughly 137.00 IN PLAY. The Bears got squeezed badly if they didn't cover either of those takeouts (the Right Shoulder and the Head).

In the current time-frame, the MACD has put in a positive divergence (Blue #1) and has ticked higher from there (Blue #2). Bulls have some momentum. Bears need to defend here.

SVA: Falling Wedge

From Sept. 25, on SVA:

"The stock now appears to be looking for Data Point #4 of a Falling Wedge from which to attempt a rally. A continuation lower could morph that possibility into a Falling Channel."

SVA rallied off that 7.51 low, so it looks like Data Point #4 is in. The top of the Falling Wedge comes in today at 8.869. The slope of that trendline is 0.1911, so subtract that amount each session to watch for a possible technical breakout, or failure. It will come in on Wednesday, Sept 30, at 8.678.

Wolfe Wave Elements

In Friday's Comment Section, Neo said:

"Are there any good books or free websites/blog that will teach me more about WOLFE WAVES?"

Try VoodooTrader.com, and also try Google, using "Wolfe Wave." Here's a piece that I wrote in my May 2, 2008 Blog entry:

WOLFE WAVES:

Step 1: THE LEAD-IN - Start at an important high or low basis whatever time-frame you're using. There should be an obvious, sustained directional move during the Lead-in. There will be down days, but overall, a sustained directional move. When that strong move ends, that's Wave 1.

Step 2: The following Waves 2-5 have to be in the direction of the Lead-in. If the Lead-in was a rally, the next Waves have to be "HIGHER highs" and "HIGHER lows," like a Bear Flag, or a Bearish Rising Wedge. If the Lead-in was a selloff, the next Waves have to be "LOWER highs and LOWER lows."

Step 3. After Waves 1-4 are established, we look for a WAVE 5 FAKEOUT of the pattern that puts everyone "wrong-footed," on the wrong side of the trade. In a Bearish Wolfe Wave...The Bulls buy the breakout at Wave 5, and The Bears "Buy To Cover" the breakout at Wave 5, and it's exactly the wrong thing for everyone to do. As a result, the selloff is often sharp and swift. The opposite is the case for a Bullish Wolfe Wave (see SKF examples below).

Step 4. To determine the target line for Wave 6, connect the HIGH of Wave 1 to the LOW of Wave 4. If it's a valid Wolfe Wave, the target will get MADE, or pretty close to it.

Additional Comments: Wolfe Waves can look like Bear Flags/Bear Channels (parallel lines) in Chart #2, or like Bearish Rising Wedges, as in Chart #1. Also, it's nice if there is some symmetry between the waves, e.g. if the moves down from Wave 1-2 and from Wave 3-4 are equal in time, or have some Fibonacci relationship. Also look for symmetry between the two highs and the two lows (Waves 1-4)

The back-to-back Wolfe Waves in the SKF in 2008 probably are my favorite examples of Wolfe Waves. This prospect of the target getting MADE in this first one looked nearly impossible, the upward slope of the target line (#6)was so steep, but it did end up working out.

Interestingly, the day that the first Wolfe Wave target got MADE was the beginning of the Lead-In for this second Wolfe Wave. This one had a Double Breakdown Fakeout on September 19, on the "no shorting" ban on financials. Ironically, although "no one" wanted to be short financials. that second move down put the proverbial everyone "wrong-footed." Buying the SKF (3X short financials) turned out to be the right play, and the Wolfe Wave target got MADE.

SVA: 7.85 - 7.88 Targets

From September 4, on SVA:

"Basis the 10-Minute chart, the "island" candle in the daily chart is a Symmetrical Triangle, which got broken to the downside on Wednesday's opening Gap Down. That put a target of roughly 7.88 IN PLAY.
Math:

12.50 - High of the pattern
10.01 - Low of the pattern

12.50 - 10.01 = 2.49 points subtracted from the trendline break at roughly 10.37.

10.37 - 2.49 = Target: 7.88 IN PLAY"

Back on September 4, we were at the red arrow in this daily chart. The Rising Wedge (pattern in blue) that formed thereafter is a good depiction of our discussion about the "push and pull" between Bulls and Bears after the Parabolic Blowoff Top to 12.50. Rising Wedges, particularly after a huge volume blowoff like we had in SVA, generally are weak patterns that suggest a continuation to the downside.

Notice that when the pattern broke down, it put a target of 7.85 IN PLAY, within three cents of the 7.88 target already IN PLAY off the Symmetrical Triangle breakdown in the 10-Minute chart that we looked at three weeks ago. Never any guarantees with these things, but that target off the daily chart breakdown reinforced the target off the 10-Minute chart breakdown, thereby increasing the likelihood that the 7.85 and 7.88 targets would get MADE. They did in yesterday's trading.

At yesterday's low, SVA was down 40% from its Parabolic Rally high of 12.50, which is the kind of selloff that can be expected after a HUGE volume Blowoff Top like that. The stock now appears to be looking for Data Point #4 of a Falling Wedge from which to attempt a rally. A continuation lower could morph that possibility into a Falling Channel.

SPX And Goldman

1074.77 wasn't a Bearish Wolfe Wave 5 Fakeout/Breakout high. While it seemed very unlikely back in May after a 200 point gain off the 666 low, the SPX rallied yesterday to 1080,15, within about five points of the Bullish Inverse H&S target of 1085.24 that has been IN PLAY since May 1.

It would be unusual for a Wolfe Wave, but yesterday's rally to a new high could have been a Double Fakeout Breakout. For that to be the case, the SPX would need to break Purple Trendline #2-#4, then get to the target line, at #6.

Meredith Whitney upgraded "The Stock That Stubbornly Refuses To Die" to $186 on July 13, which was the catalyst for the breakout of the Bull Flag (pattern in purple) that put 165.09 IN PLAY. That target got MADE in a very straight forward manner.

Meredith's 186 target got MADE in yesterday's session, but the move to that level was anything BUT straight forward. It was fraught with traps for Bulls and Bears alike.

Notice that when "the story finally was told" on the Breakaway Gap out of the Symmetrical Triangle (in black) on September 8, it was a breakout of multiple patterns/horizontal resistance of the Right Shoulder and Head, which we know can be very powerful. From that breakout, Goldman slam danced its way to the H&S top target of 183.01, and also to Meredith's 186 target.

AKS: Bullish Continuation Patterns

In yesterday's Comment Section, David said...

"Have you seen US Steel (X) lately? Looks like we missed a head and shoulders bottom. Look at a 1 year chart. It has had a breakout and a retest of the neckline."

Yes, I've liked AKS and posted on it a time or two. It's been a huge winner in that sector, up 367% off its November, 2008 low. Notice that since the triangle breakout in April, AKS has had four upside breakouts out of bullish continuation patterns.

SPX - Possible Bearish Wolfe Wave

The pattern in purple is the possible Bearish Wolfe Wave that we've mentioned. The strong directional Lead-in is the rally from the July 8 low to Purple #1. The pattern that emerges after the Lead-in should be in the same direction, and it is. Ideally, for this to be a Bearish Wolfe Wave, the rally to the 1074.77 would be the Wave 5 Fakeout/Breakout, putting the proverbial everyone wrong-footed. Bears get stopped out and have to buy to cover the breakout. Bulls buy the technical breakout. "Everyone" is a buyer at the wrong time because the market reverses to the downside, and usually quite sharply. That's the ideal bearish scenario.

All of that needs to be viewed in the context of the entire chart, which is very bullish. We need to keep in mind that the putative H&S Top (in red) was a huge Bear Trap, and that the putative Broadening Top (in black) wasn't a Broadening Top. The first selloff on the break of the Descending Triangle (the little pattern in red), from Purple #1 to Purple #2, was another Bear Trap. After the selloff from Purple #3 to Purple #4, finishing off what looks like a Bear Flag/Bearish Wolfe Wave/Rising Channel, we've ripped to the upside again. Merciless for The Bears.

Technically, yesterday the SPX closed back inside the putative Bearish Wolfe Wave, so the Wave 5 Fakeout/Breakout setup is in place. The top of the pattern came in at 1067.38. The close was 1064.66. The slope of the trendline of the top of the pattern is 1.646, so we add that amount each session. The SPX would need to close today above 1069.03 to regain the breakout (1067.38 + 1.646 = 1069.03).

ARNA: Response To The News

Normally, I like to take at least some profits off the table as targets get MADE, but I had a relatively small position in ARNA and I liked the chart so well, I held it when we got to the first two targets (5.23 and 5.64).

ARNA rallied to over $6 in after hours on Thursday on news that the company would hold a conference call at 8AM Friday morning, but during the call, it traded down about 30%, in the low 4's, in response to the news on trial results. UGH.

Pre-market trading was well below the bottom of the Ascending Triangle, so it was marked for a "Take No Prisoners...This Is Just For Openers" opening. I don't try to interpret the news in terms of how the stock "might respond" later on. When a pattern gets broken, I simply want outta there. ARNA came off the lows right before pre-market trading ended at 9:15AM, so I sold it for a small loss. As it turns out, the CEO spoke at about 10:30AM on CNBC, after which the stock rallied sharply. I would have been fine holding it, but that's a "coulda...shoulda...woulda." More often than not, holding a Gap Down opening below a pattern, like we had in ARNA Friday morning, gets punished, so I don't hold those.



Loss: $250

ARNA And PCLN

From September 11, on ARNA:

"The 5.64 and 5.61 highs set up a flat top for a morph into an Ascending Triangle. If ARNA pulls back here, then breaks out above 5.64 - 5.61, that would look fine."

ARNA not only pulled back after the first two targets got MADE, it came within about four cents of validating the ascending line for a second time, and the Symmetrical Triangle (dotted black line), indeed, has morphed into an Ascending Triangle. At 4:01PM yesterday afternoon, there was this news item announcing that ARNA would have a conference call at 8:00AM this morning. There wasn't any indication that I saw regarding whether the news was good or bad, but the stock was flying in after-hours, above $6.00. At midnight, there was this release:

Arena Pharmaceuticals Reports Positive, Highly Significant BLOSSOM Trial Results for Weight Management; NDA Submission on Track for December
Arena Pharmaceuticals Inc
ARNA | 9/18/2009 12:00:00 AM

--- Lorcaserin Meets all Primary Endpoints and FDA Benchmark ---- 63% of Lorcaserin Patients Who Complied with the Protocol Lost at Least 5% of Their Weight ---- Lorcaserin Patients in the Top Quartile Achieved Average Weight Loss of 16% or 35 Pounds ---- Combined Phase 3 BLOOM and BLOSSOM Data Set Confirms Lorcaserin's Excellent Safety and Tolerability Profile and Rules Out Heart Valve Effect ---- Conference Call and Webcast Presentation Scheduled for 8:00 a.m. ET on September 18, 2009 -

SAN DIEGO, Sept 18, 2009 /PRNewswire-FirstCall via COMTEX News Network/ -- Arena Pharmaceuticals, Inc. (Nasdaq: ARNA) reported today positive, highly significant top-line results from the BLOSSOM (Behavioral modification and LOrcaserin Second Study for Obesity Management) trial. BLOSSOM confirms the results previously reported for the BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management) trial and completes the lorcaserin Phase 3 pivotal registration program of 7,190 patients evaluated for up to two years. Arena plans to submit a New Drug Application, or NDA, for lorcaserin to the US Food and Drug Administration, or FDA, in December."

Possible Breakaway Gap in ARNA at the open.

Okay, okay, Kevin, I owe you a couple, so I downloaded the chart and did the analysis. LOL.

PCLN has been in a powerful Bull Market since its October, 2008 low, up about 275%. Of note, there were a number of bullish breakouts prior to the 50/200 Bullish Cross, and we have another example here of a H&S Top that got taken out to the upside, so the points for the measured move get added to the high of the head.

Your Bear Wolfe Wave possibility looks very decent. The volume is markedly low in this move higher, so that's suspicious. Yesterday's close was just eleven cents above the pattern. Add 0.462 per day to 165.89, which is where the trendline came in yesterday. Good luck if you play it!

SPX 1060

Since the May 1 breakout of the Bullish Inverse H&S, above 877-875, the SPX has rallied 190 points, and has rallied 400 points off the March low. Goldman's year-end price target of SPX 1060 got MADE yesterday as that index got to within about 17 points of the 1085.24 target that still is IN PLAY. As we discussed in the post "Broken Indicators...Broken Systems," sell signals in a strong trend like this haven't been reliable. The most bullish thing that a market can do is to get overbought and stay that way, as this market has done.

XLB - The Broadening Top

A month ago, we looked at Thomas Bulkowski's putative Broadening Top in the XLB. After the big run-up from the July low to the top trendline, the XLB settled in and formed an Ascending Triangle (pattern in black), then broke out of it last week putting 32.83 IN PLAY. Yesterday, the XLB closed above the top of the putative Broadening Top, so nothing bearish going on here thus far.

SDS - The MACD Slap Shot Signal

From August 26, "SDS: Broken Indicators...Broken Systems:"

At yesterday's new low in the SDS, the MACD pulled back to the signal line, and it's positively diverging with price. The MACD is at -1.889. The signal line is at -1.924, so it's poised for a "slap shot" to the upside, like a puck sliding into the hockey stick, and then....WHACK...slapshot to the upside.

Yesterday's candle in the SDS is a Bullish Hammer, but it's only bullish with upside confirmation. Initial confirmation of anything bullish for the SDS would be a print high of 43.28, above yesterday's high.

The SDS still in freefall, knife-catching mode. Anyone who has been caught with his/her hand in the cookie jar has gotten it slapped very severely, but this setup could be good for at least a pop to the upside, and possibly more if it can print 43.28 and continue higher.

CAUTION: Knife-catching can be dangerous to our wealth. I don't make recommendations. As always, if we play anything, USE A STOP."

The SDS got a pop on that signal, but it was good for only a "One Day Wonder" rally in the SDS. The MACD still is showing a positive divergence, but as we discussed last month, positive divergences without price confirmation can be very misleading.



The SDS still is making new lows.

NDX - The Ascending Triangle

This is the chart of the NDX that we looked at in the August 23 post, "NDX: The New Bull Market." The Bears got trapped on the false breakdown of the Ascending Triangle, and the pattern just had broken out to the upside, putting 1678.54 IN PLAY.

The Ascending Triangle (dotted lines in this chart) appears to have morphed into a Bear Flag/Rising Channel, but the upside target got MADE last Thursday. Given the big Lead-in rally off the July 8 low, this pattern in black also takes on the look of a Bearish Wolfe Wave, although the symmetry between Waves #1-2 and Waves #3-#4 seems a bit lacking.

As we know the key to a good Wolfe Wave is a Wave 5 Fakeout/Breakout to the upside, putting the proverbial everyone wrong-footed, followed by a reversal that breaks trendline #2-#4. We got the upside breakout on Thursday, which held on Friday by about two points.

Bear Flags/Rising Channels aren't always bearish. The NDX has been in a bull market for ten months come next Monday and has hit all of its marks on the upside, so that needs to be taken into account. The Bears have not respected the trend, and have been punished for it. At the moment, the NDX is in another upside technical breakout, so the onus once again is on The Bears. They need to close the NDX back inside the Bear Flag/Rising Channel pattern, and then take out trendline #2-4.

As long as the NDX trades above the pattern, 1786.23 is IN PLAY.

ARNA: Targets

The targets of 5.23 and 5.64 both got MADE in yesterday's trading, the latter within three cents. The session high was 5.61.

The 5.64 and 5.61 highs set up a flat top for a morph into an Ascending Triangle. If ARNA pulls back here, then breaks out above 5.64 - 5.61, that would look fine. With Symmetrical Triangles, though, we also want to look for a possible morph into a Bear Flag/Rising Channel, so we create what I call a "morph line," which is the red line on the chart. It has an upward slope that is exactly the same as the rising trendline connecting Blue Data points #2-#4. We anchor the "morph line" to Blue Data Point #3. Notice that ARNA ran right to that red "morph line" yesterday, then backed off.

That's alright, and a pullback toward the Symmetrical Triangle breakout can be expected, but we don't want to see ARNA close back below the breakout, nor do we want to see the blue #2-#4 trendline get taken out. That would be a breakdown below what could be a morph into a Rising Channel.

ARNA - Symmetrical Triangle Breakout

ARNA broke out of the Symmetrical Triangle, above DOUBLE validated resistance, on almost 4X average 100-day volume. The targets listed on the chart are IN PLAY as long as the breakout holds.

ARNA: Coiling...Coiling...Coiling

ARNA still is noodling its way toward the apex of the triangle. There's good news out this morning from VVUS. Their Qnexa obesity trials met main goals, so if it rallies, ARNA could rally in sympathy. The TWICE validated upper trendline comes in today at 4.884, so a print of 4.89 would be a technical breakout of the Symmetrical Triangle.

If it breaks out, first resistance is Purple Data Point #2, at 5.02. Next resistance is Blue Data Point #3, at 5.23.

The MACD, at 0.00984, is slighly above zero, and has pulled back to ju--u-ust above its signal line, which is at 0.00916, so it's in position for a bullish slap shot.

SVA: Another Parabolic Rally

In Wednesday's Comment Section, nydk7777 said...

"Hello melf
what is your opinion on sva?
buy or sell? thanks"

So that everyone understands, I normally haven't time to do "analysis by request," and I also don't make recommendations. In my view, it isn't as simple as buy or sell. WHERE is something a buy or sell? WHY is something a buy or sell? WHAT is the price target, and WHERE is our stop? Answering those questions takes time. Giving my opinion about something being a buy or sell is completely worthless to you. My opinion is wrong far more often than it is right. Example: Back in March, my opinion would NOT have been that the FAS would rally more than 100%...maybe 200%. Result: The FAS rallied 610%! So, you see what I mean ;)

Apologies to nydk7777, and to everyone, for my seeming to be ungenerous. If I had the time to do more analysis, I would, but I simply don't. With that aside, here we go...

When I saw SVA racing higher in pre-market yesterday morning, I remembered nydk7777's question and decided to have a quick peep at the chart, despite the fact that I knew that I didn't have time to do a thorough analysis. I didn't need to. The only question in my mind was WHERE I was going to short it, which I'll explain in a moment.

First, let's go back about five years so that we can get an idea of the nature of this beast, SVA, and what a beast it is! This stock is an excellent example of "Parabolic Rallies ... Parabolic Returns," meaning that it has monster rallies, straight up, that get called most of the way back to the origin of the rally, and sometimes lower. Catching the rallies has been tremendously profitable, but "staying too long at the fair" has been equally devastating for those caught holding the bag.

I particularly remember the huge rally off the Rising Wedge breakout four years ago, in the autumn of 2005. These swine flu stocks were like "religion" for some message board posters. "This thing is going to $20 ... $30 ... $50 ..." When SVA topped out near $8 and sold off, it was "I'm doubling down." "I'm doubling down again!" SVA plummeted to $1.81.

Oh, my! You see what I mean about "staying too long at the fair."

The rally in September, 2007 off the Ascending Triangle, on renewed swine flu fears, was spectacular, but equally devastating for those who over-played their hand. A year later, SVA found itself in Penny Stockland, at $0.75. "Parabolic Rally ... Parabolic Return," and BELOW the low of the Ascending Triangle. UGH.



This chart is "textbook" for what a sustained bull market looks like. What a thing of beauty! Instead of going parabolic like it had in the past, SVA digested the big gains after each rally with lovely bullish continuation patterns and breakouts along the way to an absolutely stunning gain of 1,567% off its December, 2008 "Penny Stockland" Bear market low. Have mercy!

Buying ANY of these four pattern breakouts was a great entry long for swing trades and intermediate-to-longer term positions. There never was a problem with any of the breakouts. Smooth sailing!



This is the chart that I saw yesterday morning, when SVA was racing higher in pre-market. A 3-day Bearish Island Reversal on HUGE volume. Uh-oh. The candle in the middle, circled in blue, is the "island." Price gapped up from the prior day's high of 9.95 printed a low of 10.01, and closed at 10.46. Wednesday, SVA gapped down, printed a high of only 9.87, then tanked and closed at 8.53, leaving longs who bought Tuesday's candle at prices between 10.01-12.50 stranded on that island.

UGLY reversal.

So, my only question was, "Do I short in the 9.80's-9.90's, making a play that the island gap will NOT get filled, or do I short it near the closing gap from 10.46 ?"

I shorted it at 9.95 in pre-market, after which SVA immediately rallied and filled the 10.46 gap. Curses! LOL.


Basis the 10-Minute chart, the "island" candle in the daily chart is a Symmetrical Triangle, which got broken to the downside on Wednesday's opening Gap Down. That put a target of roughly 7.88 IN PLAY.

Math:

12.50 - High of the pattern
10.01 - Low of the pattern

12.50 - 10.01 = 2.49 points subtracted from the trendline break at roughly 10.37.

10.37 - 2.49 = Target: 7.88, give or take.

At the opening bell, SVA came out of the gate and sprinted to the 10.46 gap, but that's all that she had in her. The opening was a "Gap And Crap" AT gap resistance. The session high got put in right there, at 10.48, and the stock came off quickly.

I covered on the first selloff, wanting to jockey for position and re-enter short, in case SVA attempted to get back over $10 again, but I never got the chance. The reaction high after the initial selloff was 9.94, right at my initial entry at 9.95 (where I thought that SVA would find resistance in the first place!), so the "island gap" of 10.01 (White #2) turned out to be resistance for the remainder of the session.


Gain: $700

NEM: Breakout - ARNA: Triangle

Excerpt of the math for the Ascending Triangle breakout in NEM, from yesterday's Comment Section:

"41.44 - 38.53 = 2.91 pts. of upside, added to the breakout.

41.40 + 2.91 = Target: 44.31 IN PLAY"

What a strong day for NEM! It nearly got to the target in a single session. The high was 44.09.

The Ascending Triangle pattern in purple is what I described to Alex yesterday. Interestingly, it's a little fractal (repeating pattern) of the larger one, in blue.

The best that I can say for myself on this one is that I'm glad that I covered my short last week, coming off what turned out to be Purple Data Point #3, and I'm glad that I didn't short it again. Yeeks!

The problem that I had with considering the long side was that the pattern was much smaller than the one in blue, and if it broke out, it would have to rally into immediate overhead resistance at:

1. 42.00 - The high of the Across The Board Sell Signal (candle circled in red with ATB above it). That signal did get us to the first downside target, at Blue Data Point #3. On the rallies to Purple #1 and Purple #3, the 34 and 55 RSIs gave a sell both times.

2. The bottom of the blue ascending line.

3. The 42.71-42.83 highs of the blue Ascending Triangle

4. 43.36 - Horizontal resistance from Black Data Point #3 of the Black Falling Wedge.

On August 31, the 8, 13, and 21 RSIs were at bullish synchronicity, so the September 1 print of 40.65, a penny above the 40.64 high of August 31, was a Buy Signal from those particular indicators.

As analysts, we have to decide if we like the chart well enough to take the signals from our indicators. Given the "mixed signals" from the RSIs, and given the immediate overhead resistance, I passed on getting long, and then I passed out when Alex called my attention to the rally yesterday. LOL.

Congratulations to any of you who were long gold stocks yesterday. Outstanding rally.

ARNA has had three trendline validations, all of which were within about a penny of being exact, give or take. The first two were validations of the upper trendline, so that's DOUBLE validated reistance. The third one was yesterday's validation of the lower trendline.

Statistically, stocks that go beyond two-thirds of the way to the apex of a Symmetrical Triangle before breaking out to the upside end up as failures. The reason for that is that the trendlines are narrowing, and the stock eventually is going to "fall over" one of them, rather than "break out" or "break down" above or below them. I've seen stocks get VERY close to the apex (where the trendlines meet) and successfully break out to the upside, but just be aware that, statistically, a bullish outcome isn't favored if desultory meandering inside a Symmetrical Triangle gets too long in the tooth, as it were.

The upper trendline comes in today, Sept. 3, at 4.923. The slope is -0.01281, so we subtract that amount each session. If, for example, ARNA were to be called higher this morning on good news, at BID: 4.92 ... ASK: 4.93, that would be a very strong indication of a bullish Breakaway Gap at/above the pattern, and that the stock is going higher.

Conversely, if the stock were to be called lower this morning on bad news, at something like BID: 4.33 ... ASK: 4.34, that would be a strong indication of a "Take No Prisoners ... This Is Just For Openers" opening, and the stock likely would go lower. The slope of the lower trendline is +0.01462, so we add that amount each session. It will come in today at 4.3608. Yesterday's low was 4.36, so any print below that would be a technical violation of both the trendline and the low of yesterday's bullish-looking candlestick that closed at better than 50% of the prior day's black "real body."

SDS: The MACD Slap Shot

From August 26, on the SDS:

"At yesterday's new low in the SDS, the MACD pulled back to the signal line, and it's diverging positively with price. The MACD is at -1.889. The signal line is at -1.924, so it's poised for a "slap shot" to the upside, like a puck sliding into the hockey stick, and then....WHACK...slap shot to the upside."

The MACD ticked higher at Friday's close, from ju-u-u-ust above the signal line. That was a positive divergence, and a non-confirmation of the new low at 42.09, setting up the chance at a slap shot.




On Monday morning, the SDS came off the signal with a Gap Up, and left 42.92 to 43.58 unfilled on the chart. Those gaps often get called back, as this one did. On yesterday morning's rally in the SPX, the SDS went back and filled nearly all of the gap, putting in a low of 43.01, and then ripped it to the upside. Slap shot! The Bears scored their first close above the 21-day Kijun-sen (solid red line) since the July 8 top. Quite nice.

When a chart is bearish, as this one is, these MACD signals (and, signals from other indicators) can turn out to be "One-to-Three Day Wonders," like we had on August 17 when the SPX broke down below the Descending Triangle, then quickly reversed to the upside, so we need to keep that in mind. On August 17, the SDS gapped up and made a run for the 21-Day Kijun-Sen (solid red line), fizzled, then had another leg down. Yeesh. Review the August 26 post, "SDS - Broken Indicators...Broken Systems" for some other examples.

Still, The Bears capitalized on the bullish MACD signal and put in a good day, so they are to be commended. They've got a chance at something here. If I were coaching The SDS Bears, my game plan would be to go up there to the 47.74 horizontal resistance area to establish a neckline or a flat top for an Ascending Triangle, pull back for a Right Shoulder or an ascending line, giving the 8-day Tenkan-sen and 21-day Kijun-sen an opportunity to make a Bullish Cross, then go back up and knock out 47.74, head for Kumo (Cloud) resistance, and start banging away at it. Biting a few Bulls in the ankle would be alright, as long as no referee is looking. Bears can't afford any more penalties after Monday's Gap Up got called back for roughing The Bulls ;)

SSEC: Getting Shanghaied

The Shanghai Composite made its Bear Market low on October 28, 2008, three and a half weeks before the NAZ 100 made its Bear Market low, and four and a half months before the SPX bottomed over here in The Colonies. The SSEC rallied a sizzling 109% before it finally put in a top on August 4, which is quite a move for an entire index. We don't want to make any assumptions, but if the August 28 high of 1039.47 is a top in the SPX, and if the August 28 high of 1668.01 is a top in the NAZ 100, that would be three and a half weeks after the top in the SSEC.

A few observations about this chart:

1. The first move above the Kumo (Cloud) in early December, 2008 got "called back." That's often the case. Charts are much stronger if they pull back, and form a better base from which to launch a sustainable rally.

2. Notice how the Kumo (Cloud) flattened out in December, 2008 and January, 2009 while the SSEC was forming the Right Shoulder of a Bullish Inverse H&S pattern.

3. When the Inverse H&S pattern broke out on January 19, 2009, the close also was above the Kumo (Cloud). The index rallied smartly into mid-February, at Black #1.

4. When the SPX bottomed in early March, 2009, the SSEC was pulling back to find Black Data Point #4, to establish a Symmetrical Triangle. At market bottoms, we tend to want stocks and indices that are "cheap," and making new lows. Those aren't the easiest ones to play because they often will need time to form a base if they're putting in new lows.

When the SSEC broke out of the Symmetrical Triangle on St. Paddy's Day, the base-building work was done, and it was good to go. We can "See At A Glance ... The Table of Balance" from this Ichimoku Kinko Hyo chart that it was nothing but blue skies and clear sailing into the August 4 high for a rally of 60%, just from the Symmetrical Triangle breakout. The 8-day Tenkan Sen remained above the 21-day Kijun-sen throughout the entire rally.

Tops and bottoms are very difficult to predict, and anyone who tried during the first half of 2009 had a very bad time of it because the first sign of any problem didn't come until July 29, when that big black candle got put in. That sure "looked like" a top might be in.

Tops often have traps, or "hooks," convincing us that the stock or index is going down, then convincing us that its going higher. Arrrrgh! In this case, the big black candle was a Bear Trap. The SSEC immediately turned higher, and took out the high of the black candle, stopping out some Bears, and inviting Bulls to enter. The new high was a Bull Trap!

The first clear evidence that a top was in, was when the neckline of the H&S Top got broken. That still "could have been" a Bear Trap, and if it "had been," cover shorts on a CLOSE back above the neckline. That never happened. The SSEC only managed a one-day rally off the top of the Kumo (Cloud), which acted as temporary support, but then the SSEC tanked, and the H&S Top target of 2917.39 got MADE.

Notice how after the SSEC closed below the Kumo (Cloud), it became resistance. The Ascending Triangle formed below it, indicating that a "sea change" likely had taken place. Initial confirmation of that was when the index CLOSED below the pattern, on August 28. That was a pretty good indication that at least one of the downside pattern targets would be achieved, which it was on August 31 when the 2761.62 target got MADE. 2626.82 still is IN PLAY. Yesterday's low was 2663.


We've witnessed a lot of H&S Tops and Bottoms in these charts. That certainly doesn't mean that we'll get one here in the SPX, but we don't want to rule that out, either. The possible neckline is the SPX 978 area.

We've had a MAJOR Bear Trap, at the successful retest of the May 1 Bullish Inverse H&S neckline (pattern in purple), on July 8-10, followed by the upside takeout of the putative H&S Top (pattern in black). We've also had a MINOR Bear Trap, the upside takeout of the little Descending Triangle (pattern in blue), and a MINI Bear Trap, the August 28 1039.47 nominal ("in name only") takeout of the 1037.75 August 25 high.

That "could be" a Bull Trap. We'll see. We never want to see anyone get shanghaied, but it only seems fair that a few Bulls get tricked after those deceptive Bear Traps ;)