“Semi” Short

I use the semiconductor ETF, SMH, as my go to chart when looking at old tech. Semi’s have been around for 30-40 years, most all have excellent business models, pay a dividend and provide strong and growing cash flow.  A look at the current weekly chart of SMH shows price has been in a steep uptrend since the start of the year and has formed a bearish rising wedge. During this ascent, price has bounced off the converging trend lines the requisite 5 times, sits very close to the apex of the wedge all while momentum has formed bearish divergence.  While not a death nail, this pattern is warning of something that has come too far too fast and needs at least a rest, if not more. When combined with the other evidence, I find this a potential compelling short setup.  Any break below the lower rising support with confirmation would be the signal a correction is has started and to expect further downside with a target of about 9 points or 13% below.

Don’t take this post as a suggestion, recommendation or an endorsement to short SMH because there are no guarantees as this, like all patterns can fail. Shorting strong stocks (or most any stock in a bull market) is a great way to lose money if you don’t have a system to manage the position in case you are wrong.  Being wrong is a normal part of investing, staying wrong and losing a lot of money in the process is foolish.

Some struggle with the part about being wrong. You shouldn’t. The best investor/traders I know are wrong between 60-70% of the time but they make a ton of money. Why? Because they have a plan and make sure they aren’t wrong for very long.

And speaking of failed patterns, right here on this same chart is a great example. From the middle of 2014 through the entirety of 2015 price formed a head and shoulders reversal pattern which warned of lower prices. The downside target if the pattern played out was about 30% below Jan 2016’s low. Anyone that attempted to short this stock without waiting for confirmation would have been wrong and lost a bunch of money. As is typically the case, once a pattern fails it can becomes a powerfully strong investment in the other direction. In the case of SMH, on confirmation of the patterns failure in May, price rose 25% in 5 short months. This is a great example of two important technical analysis tenets 1) never invest in a pattern that has not yet confirmed and 2) do not give up on an investment if a pattern fails as it is likely to give you very strong gains in the other direction.

Weak Coffee

Starbucks has had a wonderful run over the past 5 years, rising more than 200%. Over this time frame it, as you can see below, went through two major upward thrusts and (now) three consolidations. Each of the prior consolidations lasted about a year. The first one in 2012 was more had a more downward direction as it lost almost 30%. The second one which started at the end of 2013 was more of a sideways move as it lost just 17%. The good news for SBUX investors was that each consolidation resolved to the upside.

Fast forward to today and you can see the weakness in price and the fact price is stuck in another consolidation. Looking like the last sideways consolidation (at least so far) as it has muddled along for not quite a year and has lost 16%. RSI momentum in the upper pane shows this is the only consolidation that started off with a negative divergence warning. Also, price has formed lower highs with each thrust higher while the $52-$53 area has acted as significant support. Finally, the descending triangle pattern that has formed warns of continued weakness.  Those long SBUX need to be concerned that while the current level has held 4 times in the past, the more times price touches a level the higher the probability it will break through (in this case to the downside).

All in all, like so many stocks right now, SBUX is at a crossroad. A break above the descending triangle resistance line and we are likely off to the races and in for another big run higher. A break below (red) support with confirmation, a test of the ~$41 level, some 20%+ lower is the pattern's projected downside target.

Those already owning SBUX need to keep a close eye out for a breakdown below both (red) horizontal and blue rising support as that would provide a high probability we see weaker SBUX prices ahead.

September 2016 Charts on the Move Video

With the 3rd quarter in the rear view mirror and the worst historical month for stocks dead ahead and the presidential election cycle staring us smack in the face investors need to be nimble and have plan. My take is in the youtube video link below. What's yours? I'd love to hear from you.

https://youtu.be/fSKG6V5LIHo

Beast Mode

Acacia Communications (ACIA) has been in beast mode since it IPO’d back in May of this year gaining more than 350% (from peak to trough) in 3 short months. Since it peaked, it has been consolidating sideways, digesting its gain and setting up for its next move.  Any time price consolidates it has the option to continue or reverse. Which way will ACIA go?

On the bearish side, the current consolidation has formed a symmetrical head and shoulders bearish reversal pattern with negative divergence which if confirmed has a target below some 29% lower, filling the gap.

The bullish interpretation is the recent consolidation is needed to set up for a push higher. Instead of the consolidation being a head and shoulders bearish reversal pattern it could easily morph into a bullish flag continuation pattern once confirmed with the conservative upside target some 100% higher.

As always there is a way to interpret any movement as both bearish and bullish, depending upon your bias. Since bias is one of, if not THE, biggest investment problems it is imperative to be agnostic when investing and wait for confirmation and have a plan in case you are wrong.

The stakes and return on this investment is big so it’s important to get it right. For me a close and hold above prior $128.73 highs is the confirmation I would be looking to go long. If, on the other hand, price closes and stays below the red horizontal support line at $102, I would expect a quick and violent decline back to fill the open gap below so those who feel comfortable shorting could initiate a position then. While price is stuck between the upper and lower boundaries I am happy to sit and watch the bulls and bears fight it out.

Small Cap Struggles

One of the first things I learned as a market analyst is to keep your eyes on small cap stocks. They are usually the first out of the gate in a burgeoning bull market and the first to fall at the commencement of a bear market.  As such, whether I am invested in them or not I watch closely for hints on expected future broader market behavior. As of right now while they have had a strong short term run, small caps have yet to confirm the broader market bull thesis by making new highs.

 In the weekly chart below you can see the current price sits just below the prior high made in June of last year. As such and as of this instant we have formed not only one lower low but also one lower high. Additionally you can see the head and shoulders pattern that has developed at the same time negative divergence has formed on RSI momentum.  If you are bullish this is not what you want to see. Looking to the left half of the chart you can see the last time this same set up occurred was in 2008 where the market subsequently dropped 60%. The target of this pattern if it were to play out is a slightly less gut-wrenching 50%.

With the charts warning of potential serious trouble is it time to sell everything, batten down the hatches and crawl into your fallout shelter? Probably not. A small 1% rise and hold will invalidate the topping pattern while further strength can easily wipe out the divergence.  This market, for whatever reason, continues to defy gravity and ignores all fundamental reasoning. As such, it is likely the small caps, like many other sectors, corrected and are playing catch up to the broader market. If this is the case, and we will likely now in the few weeks, this is one more feather in the bulls cap and further confirmation the trend is up (until it isn’t) so don’t fight it.