Sugar, Sugar

Back on March 18 I posted a bullish pattern setup on Sugar, titled “How Sweet It Is” where I wrote

Right now price sits just below prior resistance and has formed an inverse head and shoulders reversal pattern. If price can break above the red horizontal resistance with confirmed volume and hold, I find this a very attractive commodity play with plenty of upside potential, the first projected target some 25+% higher.

Here is a look at today’s closing chart. While it didn’t quite hit the 25% target, today’s high was 23.5% higher than the price on the date of my post. Close enough for government work. 

For those who followed along and took the trade, congratulations! I don’t provide buy and sell signals so you should follow your plan on how to manage. But if I owned it, I would consider locking in some or all of my profits as 1) we have hit our intended target and 2) we are now in an area of major resistance and moving into overbought conditions. With a series of higher highs and higher lows and a rising 200 day moving average, for those with a good management plan, once the consolidation is over, it looks like it has room to move much higher. Some may ask why I would consider selling some if the upside has more potential. My only reason is because it’s a rule. If I enter based upon a pattern, I look to exit (at least some) on completion of the pattern target. I prefer to not give back my gains and attempt to make sure every position makes money. Oh yah, I have also learned not following a plan and switching horses in the middle of the stream can quickly derail profitable investing.

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.

What Amazon Eats for Lunch

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.