Is a Big Sale at Macy’s Right Around the Corner?

I have been watching in awe the unwinding of Macy’s (M) stock for the past 9 months as it peaked at almost $72/share last July. I am so disappointed I missed the huge profit opportunity it created on the short side. Since that time you can see in the weekly chart below its share price has been more than cut in half bottoming just under $34 in December. Since then it has formed a huge topping pattern that, if you squint real hard, looks kind of like a deformed head and shoulders (H&S) pattern. A thing of beauty and symmetry, it is not. In addition, if it were a true H&S pattern its projected target is zero. Macy's would be going out of business. Not likely! For this reason I ignore the pattern but can’t ignore the rest of the chart. With a strongly downward pointing 200 day moving average and RSI momentum in the bearish zone and falling, combined with lower highs and lower lows hints of more downside for the stock.

Quite frequently when looking at weekly charts you will see smaller, shorter term patterns form within the much larger pattern and Macy’s is no different. Zooming in more closely at the right shoulder of the H&S pattern on the chart above we can see a smaller, more symmetrical and better formed H&S pattern that is sitting on important support as shown below. This pattern has a much more reasonable downside target in the $27 area if it were to trigger and complete.

With Macy’s (M) reporting earnings tomorrow I wanted to get this post out ahead as it could be the catalyst to start its next leg down. While I don’t give it a high probability and because news trumps the charts, if they blow away the number that December low could turn out to be “the” bottom and marks the start of a new uptrend. Either way, this is going to be fun to watch!

Bear Trap 2

What I am not writing about

What I am writing about …

While ever so slight, the US dollar index closed just below critical prior swing low support level a week ago and then immediately reversed higher closing back into the channel on Friday. While volume is not available as this is not a tradeable index, using the tradeable proxy (UUP) the reversal occurred on almost 2x the volume.

Bear Trap Definition - A bear trap occurs when shorts take on a position when an investment is breaking down, only to have it reverse and shoot higher.  This counter move produces a trap and often leads to sharp rallies.

With this weeks close back into the consolidation channel and combined with a higher close next week, this latest move could be a classic example of a bear trap. If so, I would expect we see a sharp rally in the coming weeks carrying the potential for the index to break out above the most recent 100-101 swing high.

Why do Bear Traps produce sharp rallies? - The first wave of buying will occur when the most recent broken support level is exceeded, due to the number of shorter term traders who have their stops slightly above the most recent swing high. The second wave of buying comes into play once the stronger realize that it is not just a dead cat bounce, but that the move has much bigger potential. This will produce the second bounce, which will often precede the short-term top in the counter move.

If all this talk about bear traps sounds vaguely familiar, it should. I wrote about another potential bear trap in the mining stocks back in February. Since that bear trap, the GDX has rallied almost 100%. Now, I am not saying the dollar will rally 100%, as that is all but impossible, but if this does turn out to be a bear trap the implications are enormous. A strong dollar can push bond prices higher (yields lower), make the recent rally in commodities, precious metals, emerging markets and large cap US stocks (with large foreign sales) a thing of the past as these typically move inversely to the dollar. Sure, money can be made by being long the dollar but it will pale in comparison to those who short those falling inversely correlated investments.

There are no guarantees, but if the dollar breaks higher, this is setting up to one be the best money making opportunities this year. Stay tuned as the next few weeks is going to get really interesting.

A Technical Look at Earnings

The fun thing about technical analysis is you can take virtually any data and analyze it through its lens. For example we all understand the positive relationship between corporate earnings and stock prices. Higher earnings = higher prices and vice versa. Earnings are a key tool fundamentalists use in their analysis of the markets to look at valuations and other metrics. Now, if I plot reported GAAP earnings on the SP500 companies against the price of the SP500 stock index over the past 20 years it would look something like this …

In the upper pane is GAAP earnings (blue line) and the lower is the SP500 index price. I have added a simple 200 day moving average to earnings (orange line) to smooth out its gyrations and use as a trigger line for a very simple investment system.  That system would be to sell stocks when earnings cross below the moving average and buy when they cross above.  I have added red vertical lines indicating where those sell signals occurred in the past.

While I have not back-tested this “system”, just using the ol’ eyeball test, it seems to do a pretty good job of avoiding a big chunk of major corrections and keeping you invested while the trend is rising. Like any system using moving averages it is susceptible to false signals/whipsaws like the one that occurred in 1998. Time will only tell if the recent “sell” signal turns out to be a whipsaw or not, either way investors should tread lightly here as the weight of the evidence is flashing warnings signs.

April's Charts on the Move Video

The US stock markets are extended and beginning to tire from their February bottom.  Its likely we see some consolidation or potentially a much deeper correction over the next few weeksl While stocks are stalling, the materials and mining sectors are on fire putting in what may be an important long-term tradeable bottom. My latest video, view-able at the link below takes a look at the cooling US stock indexes and red hot traditionally "inflation trade" sectors. Let me know what you think.

https://youtu.be/E0MYQfrB4kQ

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.