Caution – Rising Wedge Ahead

Oil has been in a relentless uptrend since its Feb bottom at ~$26/bbl. The divergent low told me to expect a good rally but this has gone well beyond anything I expected especially when considering the fundamentals and head winds it faces. This trader’s fueled rally has now taken it up to an area of major resistance, $51-$53. As you can see, price has formed a divergent oversold high bearish rising wedge with falling volume.

Investing offers no guarantees but a confirmed break of this pattern (before it has a chance to confirm a close above resistance – otherwise all bets are off) to the downside provides an excellent exit for those long black gold. And for those blessed with excellent position management skills and ability to short, the first downside target of this pattern is the $41-$42 area offering a 15%-20% profit opportunity.

Small Cap Breakout? or Fakeout?

The US small cap stock index (IWM) has gone nowhere for more than 2 ½ years. Since peaking in June of last year it has been in a protracted downtrend falling 25% peak to trough and during that time formed a series of lower highs and lower lows as you can see in the 5-year chart below.

Just recently, the index broke above the downtrend line. One thing I like to see on resistance breaks as confirmation the break will hold, is for price to immediately fall back to the upper side of that resistance (now turned to support) line, hold and then move higher. This is exactly what happened and adds to the confidence and probability of higher prices ahead. Another bullish note is that price has crossed and held above the 200 day moving average which is just now beginning to curl higher.

While these signals are constructive, small caps are not out of the woods just yet. There is plenty of overhead supply that bulls will have to eat through which should make for a slow grind but most importantly the pattern of lower highs and lower lows still needs to be broken if this index is going to move substantially higher and worthy of long term investment capital.

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Their competition.

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Sipping The Long Bond

In the early part of 2015 the US long bond proxy (TLT) peaked right at $134/share. I remember it well as the bond bears were out in force predicting the end of the world for those who owned bonds. They had a good reason to believe this was going to be the case, remember the FED started jawing very loudly about raising rates. And rising rates is not good for bond holders. From that point, TLT lost more than 16% (peak to trough) at the same time unwinding its overbought condition in its downward consolidation.  But a funny thing happened the fundamental story stopped working. The market apparently inserted its earplugs because TLT's price has been in an upwards trajectory since the June low and is now just $2 away from the Jan 2015 high.  This is a great example of why paying attention to just fundamentals or the talking heads can get you in trouble. Price is all you need.

As you can see in the weekly chart of TLT below, the past year and a quarter price has consolidated and formed a very nice cup and handle continuation pattern. This consolidation has the (red) 200 day moving average change from down, to flat, and to now up.  Additionally, the overbought RSI momentum condition has had time to unwind but not too much as to send it into the bearish zone. Finally, with cup and handle patterns additional validation comes from seeing volume decline when forming the handle of the pattern which is exactly what occurred.

As with all chart patterns, this cup and handle is no different and will need to confirm before it becomes valid. This would occur with price closing and holding above the rim of the cup (~$134), which it has not yet done. And because we are up against major resistance combined with the fact today is a FED day and their announcements (unfortunately) can and do move the markets, I am not convinced this “continuation” pattern will actually continue. It could just as easily turn out to be a major reversal level and the pattern fail. Either way, the ramifications to all markets could be enormous and as such all investors need to keep what happens to bonds front and center.

As a side note, knowing price patterns can greatly help increase your success rate when investing. But buying or selling in anticipation of the pattern development and confirmation provides no edge at all and, in my experience, will hurt your returns.

A Suicide Shot

What’s a suicide shot you ask? - Squirt a lime in your eye, snort a line of salt then finish it off with a shot of 180 proof alcohol. Sounds like a killer time, eh?  You’re likely not going to die but there will be a lot of pain with little upside (other than your friends can laugh at your foolish escapades). This sounds as much fun to me as investing in the US stock market right now.

While the markets (and my opinion of them) can change on a dime, I wanted to show you 4 charts, 3 different US stock sectors and one of the SP500 as examples of what I am seeing and why I am so sour to committing investment capital to the long side at this time.

The first chart is that of the US small cap proxy, IWM. You can see for the last year it has formed a series of lower highs and lower lows and the red 200 day moving average has a negative slope. In addition, a head and shoulders (red) top has formed but yet to trigger as price still remains above the blue neckline. A break of the neckline and I think cascade lower and challenge the Feb lows.

We all know that a healthy stock market requires a healthy banking sector so it’s always good to take its pulse.  The banking sector looks very similar to the small caps as we have a series of lower highs and lower lows combined with a downward sloping 200 day moving average. And, while I do not show it (in an attempt to keep the charts as clean as possible) the most recent April peak has formed overbought negative RSI momentum divergence.

My next chart is that of the Nasdaq 100, QQQ, a proxy for large cap technology stocks. The 200 day moving average has been flat for months but just recently started to slope downward. A huge head and shoulders topping pattern (blue) has been forming since August of last year. In addition, notice how the right shoulder of the bigger pattern has formed its own mini (red) head and shoulders pattern. While neither has broken their respective necklines, this is an extremely bearish setup and portends of lower prices. The one upside and difference from the other charts above is that we have not formed a series (at least 2) lower highs and lows yet as we have had only one lower high (back in April) combined with two lower lows.

My final chart is that of the SP500. This chart should look familiar as it shows a series of lower highs and lower lows combined with the 200 day moving average sloping slightly south. Also, the most recent consolidation from late March to present has formed a symmetrical head and shoulders topping pattern.

The market feels real heavy here and I feel is looking for a catalyst … in either direction.  Any daily rally that hasn’t reversed and turned red have been weak and the sectors you want to be leading, aren’t. My $.02 is if the bulls cannot take control and push this broader market to all-time highs soon, the bears will take it lower and make a run at forming the next lower low. Putting that aside, this week being OP-EX (option expiration) tend to be pretty bullish so if they bears were to grab the market, in spite of the ominous looking charts, I expect some patience will be needed.