Fabbing Semiconductors for a Trade

SMH, the semiconductor stock index does not contain Apple but its major holdings are very dependent upon Apple’s orders. As Apple goes, for the most part, so goes the index.  And with Apple reporting after today’s close I thought I should get this post out a bit early as I think with as many eyes and ears as there are on their forward guidance, I expect we may see a wild swing in the direction of the market’s take on the news.

The busy chart of SMH below is a mixture of bullish and bearish arguments so trying to position ahead of any move is foolish, in my opinion. Let price action lead us to the highest probability outcome. The bullish case shows the (red) 200 day moving average in the initial stages of turning positive; RSI momentum in the upper pane is in the bullish range; on balance volume in the lower pane is in a strong uptrend from the Sept bottom and a 50/200 moving average golden cross occurred earlier this month.  

The bears are pinning their hopes on a couple of key points. Firstly, it may be hard to see but in the past few weeks we have formed a double top with price failing each time it reached the $55.55 area.  Finally RSI momentum has created negative (bearish) divergence with price indicating a pause or correction is likely to occur. A breakdown from the neckline projects to an initial target a piddly 4% lower. If that level does not hold, a second and more significant target of ~10% lower is a good possibility.

If you focus your attention to the center and left side of the chart you will see that over the past 18 months we have had two prior occurrences of topping patterns combined with bearish momentum divergence. They lead to more than a 19% and 24% drop from peak to trough. It’s important to remember and not get too excited about jumping ahead that bearish divergences are not a sell or short signals in and of themselves but they are caution flags and definitely should not be ignored.

While the current price action in SMH warns of a corrective decline ahead, the other possibility is this topping pattern morphs into a bullish consolidation flag (on a break and confirmed close above $55.55) suggesting there could be a lot more upside from here since the overbought condition has unwound. Either way, I think Apple will be the catalyst for a nice setup, regardless of whether it turns out to be a bullish buy or bearish short.

Stay tuned.

An Internet Minute

A fascinating chart I saw regarding what happens on average every minute on the internet for the sites with greatest activity . I can honestly say I am active in 3 of them daily and only 2 others on a weekly basis. What about you?

Silver Bells

As always I get lots of questions regarding precious metals so I thought I would give a quick update on Silver. As you can see in the weekly chart below, silver bottomed at the end of last year and since then to the delight of the bulls has created a series of higher highs and higher lows. To confirm a bottom you want to see the formation of a typical bottoming pattern and silver did not disappoint as it formed what I would consider an ideal inverse head and shoulders. This provided what I needed to conform an intermediate bottom was likely put in. The upside target for that pattern is the red horizontal lined labeled “formidable resistance”. Once it makes it there I expect to see a choppy pull-back which would create the right shoulder of a much bigger head and shoulders pattern.  If this were to occur it would all but seal the coffin of any remaining silver bears and provide a “back the truck up” or “full position” type portfolio opportunity.

This is by no means an endorsement to go out and buy silver right now.  If you missed the train leaving the station based over the past 3-4 months, the extent and speed of the run-up has been overdone and the risk/reward I feel provides a poor entry point right now. Oversold divergent high conditions on the short term charts raises a caution flag for me and until those conditions have had a chance to unwind I will be content with my existing positions. Anyone who missed the boat or wants to add to their position would do well to wait for the next higher low to be made.

Just Because

I'm Paranoid Doesn't Mean They're Not Out to Get Me

Gold bugs have a reason to be paranoid as precious metals (and the miners) have been one of most unloved investments from their 2011 top. Since that time, every little rally has brought them out in droves proclaiming the bottom is in only to be sent back with their heads in their hands and their pockets significantly lighter. While they are a resilient bunch, the 4+ years of continuous beatings have made them paranoid and rightfully so.

Based upon the technical signals I watch, we are ever so close to hosting a bear funeral party for precious metals. If/when that becomes the case it will provide the justification to increase our exposure from partial to full position. Until then I remain cautiously bullish but always skeptical Ms Market is out to steal my money. Always on the lookout for signals to abandon ship, along comes one of my favorite technicians, Tom Mclellan with his latest … a full frontal bucket of ice water to the head of gold bugs and those long PMs.

Read on   … Let’s hope his fishhook is wrong

Gold revealed an interesting bit of information this week when it formed what we call a “fishhook” structure.  Fishhooks are important because they can reveal the potential for a more powerful move.

For background on this signal, see this article in our Learning Center on “Fishhook Rules”. 

The basic point is that a fishhook forms in the chart of a Price Oscillator (and some other indicators) after a high value top, and then as the Price Oscillator is working its way back down toward neutral, it turns up again briefly and then turns back down again.  Fishhooks can also form in the other direction, after a deep bottom.

The best fishhooks form when the Price Oscillator is about halfway down to the zero line, although they can certainly form in other places.  The one we saw this week is just about ideal, although that still does not guarantee it is going “work” perfectly.  This business is not about getting guarantees, but a signal that reveals probabilities is a useful thing to watch for. 

It is important to also note that an upturn halfway down to zero is not necessarily a fishhook structure until it turns back down again.  If the Price Oscillator turns up and keeps rising, it is not a fishhook, it’s a real reversal. 

The reason why a fishhook is such an important structure is that it reveals a failure by the forces of reversal.  In gold’s case, the bulls tried to start a rally again, but then quit after only 4 days of upward price movement.  This shows us that they just did not have the ammunition to mount a meaningful rally when they had the opportunity, and so that means they probably don’t have the capacity to stop a further decline anytime soon. 

The stock market in 1987 showed us two of the most important lessons about fishhooks.  Here is what I mean:

The first point is that a fishhook represents potential for a powerful resumption of a trend.  But not all fishhooks work out that way.  The one which formed in May 1987 did not result in anything more than just a retest of the prior low.  But a nearly identical looking fishhook in early October 1987 brought a much bigger selloff, and showed the potential that a fishhook can represent.  

So the message to take away from this new fishhook structure in gold prices is that it tells us there is the strong potential for a big decline, something which the COT data have been calling for recently, as we have discussed each Friday in our Daily Edition.  

How Much Do You Spend on Taxes?

How bad is the tax burden in America? According to the Tax Foundation, people will spend more on state, municipal, and federal taxes than the annual financial burdens of food, clothing, and housing combined, according to its data.

The calculation is based on the date of Tax Freedom Day, the point at which Americans have gone enough days to pay their annual taxes, beginning from the first day of the year. This year, that date will be April 24. It is worth noting that U.S. tax payers are better off than those in several other countries.

The organization’s researchers explain:

·         This year, Tax Freedom Day falls on April 24, or 114 days into the year (excluding Leap Day).

·         Americans will pay $3.3 trillion in federal taxes and $1.6 trillion in state and local taxes, for a total bill of almost $5.0 trillion, or 31 percent of the nation’s income.

·         Tax Freedom Day is one day earlier than last year, due to slightly lower federal tax collections as a proportion of the economy.

·         Americans will collectively spend more on taxes in 2016 than they will on food, clothing, and housing combined.

·         If you include annual federal borrowing, which represents future taxes owed, Tax Freedom Day would occur 16 days later, on May 10.

·         Tax Freedom Day is a significant date for taxpayers and lawmakers because it represents how long Americans as a whole have to work in order to pay the nation’s tax burden.