Coming into trading this week, following the S&P ratings downgrade after the gong on Friday, the futures were indicating a down opening and "conventional wisdom" was that the market would tank early, then stage a rebound and even close in the green on the session because the bad news already was factored in. The market already had experienced tidal wave selling, so it would be a case of "sell on the rumor of bad news...buy on the actual bad news (the actual ratings downgrade)."
That prediction sounded pretty good given that the market was so severely oversold, right?
Rather than play other peoples' predictions about what the market is going to do, though, we want to follow what the market IS DOING, as best we can.
At Friday's closing gong, what did we know from the chart?
1. Basis the daily chart, we knew that the bottom of the 2011 Falling Wedge, at 45.893, had been violated intraday, but that it held on a CLOSING basis, at 45.99.
2. Basis the weekly chart, we knew that 44.85 support at the bottom of the Kumo (Cloud) had been violated, but that FCX also recovered from that breakdown.
3. Basis the intraday chart on Friday, we knew that FCX had found a bottom at 44.03 and had broken out of a bullish Inverse H&S pattern. The target, just below 47.00, had gotten MADE.
4. Also basis the intraday chart on Friday, we knew that FCX had broken below a H&S Top and had failed a retest of the broken neckline (the white down arrow).
At yesterday's open, FCX was called Gap Down at about 44.15, so we knew at the open that:
1. The 45.893 support at the bottom of the 2011 Falling Wedge would be broken again.
2. The 44.85 support at the bottom of the weekly Kumo (Cloud) would be broken again.
3. The 44.03 low of Friday's bullish Inverse H&S Bottom would be tested right at the open, which was the only remaining nearby support level.
If "conventional wisdom" about a sharply down opening followed by a sharp rally was going to be right, 44.03 support, or there about, would need to hold for a short-term Double Bottom. Otherwise, there wasn't any support below that, so we were about to find out fairly quickly whether or not "conventional wisdom" would be right.
SHUFFLE UP AND DEAL ;)
Just before the open, I placed my order to buy FCX at 44.08, a little above Friday's low of 44.03 with a ver-ry tight stop in the high 43.80's. I was willing to give the stock a little wiggle room for a lower leg of a Double Bottom, but not much.
The early session low was 44.05, so my order at 44.08 got filled. FCX did rally sharply off the opening low, to 45.02. The "conventional wisdom" scenario was playing out fine. I was up nearly $5,000 on the trade (at White #2).
What I wanted to see from The Bulls was enough strength to fill the gap at 45.37 (the horizontal yellow line). What I did NOT want to see was anything more than a 50% or 61.8% of the early rally. Anything much more than that would suggest another retest of 44.03-44.05 Double Bottom support, which would mean a Triple Bottom. That kind of weakness would lack credibility. Triple Bottoms don't have a very good chance of holding, especially not in a stock in which there is no support whatsoever below the putative Triple Bottom.
I raised my mental stop to "anything below 44.30," which would be an unacceptable give back of the rally to 45.02 and would strongly suggest to me that:
1. The 44.03-44.05 Double Bottom was about to get broken.
2. "Conventional wisdom" about a sharp rally on the bad news about the S&P downgrade already being factored into the market would be wrong.
I threw the trade in when FCX printed 44.29. Yeesh..
After the Double Bottom broke, FCX:
1. Broke down below a Falling Wedge (pattern in white)
2. Broke down below a Symmetr4ical Triangle (pattern in orange)
3. Broke 43.08-43.10 Horizontal support (horizontal red line)
4. Failed a retest of broken horizonatal support, at 43.08 (first red down arrow)
5. Staged a weak late day rally to 43.08-43.10 resistance, which fizzled.
6. Finished the session down nearly 9%.
So much for "conventional wisdom," eh?
Market Lesson:
Follow what you SEE, not what you HEAR others predicting.
Now I will slap myself for not shorting those pattern breakdowns.
Slap! Slap! SLAP!!!(Ouch! Ouch! OUCH!!!)
First Resistance on any rally is 43.08-43.10 in the intraday chart above (horizontal red line).
Second Resistance is 44.85, the bottom of the Kumo in the weekly chart (see Sunday's post for that chart)
Third Resistance is the bottom of the 2011 Falling Wedge, which is roughly at 45.88
Gain on the session: $900. I really "shoulda" shorted all of those breaks of support, but I'm glad to have made anything being long a stock that was down nearly 9% on the session. Yeesh...
Market Lesson: "Don't get emotionally involved with stocks. Want what Ms. Market wants." I just plain didn't wanna short it. My loss ;(
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