Don’t Let the Sun Go Down on Me

Solar stocks took quite a beating in 2011-12 that includes Sunpower, SPWR, which lost more than 80%, bottoming below $4/share. What a buy that level turned out to be for those that had the intestinal fortitude and bottom picking skills as it rose more than 1000% (trough to peak) topping in June 2014. You can see during the topping process negative divergence was created warning of weakness and of a likely correction.

The blue horizontal line at ~$18 acted as support many times prior to the week of May 9th as it finally gave way turning to resistance. After support broke, price attempted to rally back to $18 but the backtest failed and immediately turned lower.

One has to have an imagination and be slightly cross-eyed to see it but that topping pattern could be an extended, complex head and shoulders pattern. If so and it comes to fruition, the future does not look bright for Sunpower stock. The two downside targets are the $4-5 range and GULP! $0. Regardless of whether the pattern confirms or not, the series of lower highs and lower lows combined with a falling 200 day moving average should give warning to anyone holding this stock that they may want to reconsider.  For those who are successful short traders this provides an excellent opportunity for a big payday.

“Shine on You Crazy Diamond”

The longer term chart of Google (now Alphabet) has some interesting activity of late and I thought blogging about what is setting up may be an interesting example to learn from. The current price movement has formed a triangle pattern and rests right on its lower support line. Because triangles can break higher or lower with no edge to up or down, the investor is best to wait for confirmation and hold before entering any position. One other important piece of evidence we cannot ignore is the fact we have negative RSI momentum divergence. This gives the slight edge the eventual break will be to the downside.

You can see this is the second triangle that formed as one sits directly below the current pattern. This triangle was textbook as price broke out with above average volume and moved strongly higher and slightly exceeded its upside target before putting in a 15% correction. Notice how, at that time, RSI momentum was near the midline and with no divergence. The edge given to an upside breakout.

What happens if I add another triangle, turn it around and put it back to back with the upper one?  You get (a sloppy) diamond pattern.

The diamond pattern is a rally to a new high and weakness to an intermediate support level, a second rally to a higher high and a sharp decline through support, followed by a modest third rally and a decline through longer-term trend. Because diamonds are very large patterns, the technical implications are often extremely large.

The diamond formation reversal pattern is found relatively infrequently. When it does form, however, it usually does so at market tops rather than at bottoms. This is consistent with its appearance, which suggests a confused, active market found at a top more often than at a bottom. As the figure shows, the diamond starts off as a broadening formation and then consolidates, usually forming a symmetrical triangle. The combination of price patterns first broadening and then consolidating gives the geometry for which the diamond is named. This shape becomes more apparent when trendlines, like those shown, are drawn connecting successive peaks and valleys. The shape has also been described as a complex head and shoulders with an odd center movement.

One critical thing investors who use patterns need to do is to insure they do not jump the gun. Do not invest before the pattern has completed. Just because a pattern is developing and acting ideally does not mean it will finish that way. As such, it is imperative to wait for confirmation which is, in this case, a break out from either side of the blue trendlines. For the diamond pattern your odds of success increases as 1) breakout occurs closer to apex and 2) the number of touches price makes on the trendlines increase.

While this is an excellent example if we circle back around to see what eventually happens, the ramification of Google breaking out (to either side) of this pattern has significant consequences due to is importance and contribution to the indexes.  A breakdown suggests we are in for another correction and a retest of the February lows. A breakout to the upside suggests we are off to new highs and the next leg of the bull market in US stocks has begun.

Stay tuned it should be exciting either way.

Occam’s Razor

“The simplest explanation is probably the right (best) explanation”

For those looking for “why” the following chart provides the best explanation as to why world equity returns have struggled this year. Virtually every major market around the world has seen a net outflow of money out of stocks since Jan 1st.

There you have it.  Until this chart gets turned upside down, caution is warranted.

An Epic Battle

On a longer term weekly perspective, the US stock market SP500 index has rallied from the February correction bottom now to just below July 2015’s prior $2126 highs as it closed the week at $2096, just 30 handles lower. With the bulls knocking on the door of all-time highs, a breakout and hold could open up the door to a huge rally, as the resistance void that would be created has the possibility of producing a price vacuum sucking stocks much higher. If you want to see what that looks like go check what happened to the SP500 as price broke out to new all-time highs in the second quarter of 2013. I am not saying that is what will happen rather just that it is one possibility we need to be aware of.

The bears haven’t thrown in the towel just yet though. Last week’s candle formed a cautionary gravestone doji thereby adding the 2nd of the 3 necessary for a bearish reversal shooting star pattern. To confirm this pattern, the bears need to close the index lower next week, preferably below the first candle in the pattern otherwise the pattern will be considered dead and void. 

Taking a look at a shorter term daily chart below, you can see in the upper pane of RSI momentum we formed bearish double divergence. While divergence is not a sell signal, it is a warning price has gotten ahead of itself and warns of, at least, a pause, or worse, a correction.  For the past 2 ½ months price has been contained within the (red horizontal) trading range but finally broke out to the upside on Wed. Friday we fell back into the range warning of a false breakout. We still need confirmation and follow through next week but if the false breakout sticks, it raises concern about the potential of “from false breaks comes big moves in the opposite direction”. Notice too, how the volume (bottom pane) on the breakout was lackluster, well below its average telling us not that the bulls were strong but rather the bears were taking a break. One final feather in the bear’s cap is the fact price has formed a bearish rising wedge (blue dashed lines).  Because it has yet to confirm with a breakdown below the lower support channel line, it allows for the possibility of one more move higher before any break occurs (forming triple divergence).

My read is the bulls and bears are locked in an epic battle. With an eye on the longer view a slight edge must be given to the bulls. On the shorter term, the bears are out in the lead.  Add to this mixed message the fact we are in the throes of a dull seasonality period (June-August) which will likely keep any move (higher or lower) in check as most market movers are on vacation. So with no clear winner, patience is needed as there is not enough evidence on our longer term investing time frames to commit to either the bullish or bearish case.

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.