It’s a Matter of Interpretation

Most every chart can be either bullish or bearish depending upon which side of the plate you swing from. Your bias regardless of what it is, can be confirmed providing confidence you are right in your conviction. But that bias is like the black death of making money because the best investment decisions are made by reviewing the price action, and then developing confidence and conviction, not the other way around.  The most successful price analysts are agnostic.

To illustrate the case let’s take a look at the junior mining stocks ETF, GDXJ. The first view, that of the bearish case, shows price was rejected and reversed at an area where you would expect it to struggle. The blue horizontal line (and open gap) acted as resistance in the past. Notice how momentum in the upper pane was waning and created negative divergence warning of a correction. Since that time price is now sitting right on the neckline of a bearish head and shoulders topping pattern. Notice also, in the lower pane the days with the largest volume were established on down days (red).

fee only san ramon retirement planning cfp - gdxj bear - 11-3016

Switching sides the only thing that has changed is the pattern is no longer a bearish reversal but setting up to be a powerful bull flag marking the halfway point of this move. The overbought divergent momentum has unwound and still remains in the bullish zone. The correction we are in was due and should be considered a normal part of the ebb and flow of price movement. The huge selling volume that occurred 4 weeks ago was capitulatory and we should expect to find a bottom (and reversal) soon. Finally, when in doubt the direction of a move out of consolidation, the prior trend must be given the higher probability outcome.

Independent bay area cfp financial advisor - gdxj bull - 11-30-16

So! What’s it going to be?  There are clear and supportive arguments for both sides. Pick your flavor.  Bull or Bear?

If you answered with either of those, I have failed. The right answer is neither. As of now neither of the patterns have confirmed and until that occurs investors should remain agnostic and wait for the confirmation signal(s) before committing investment capital.

One final feather in the bulls cap, is that an ideal bull flag would include declining volume in the flag portion of the pattern. As you can see volumes were at their highest and as such while not invalidating the pattern it makes it suspect.