Monday January 4, 2016
Key Data points:
Key Developments :
- Market sees large gap down open to quickly capture H&S price target
- Potential Inverse H&S triggered into close, watching for follow through or completion tomorrow.
- December Lows have so far been defended as a first line of defense by the bulls, keep the market in it’s range.
With weakness overseas and re-emerging concerns over China, the market took quick advantage of the H&S topping pattern which triggered to close out 2015. This was followed by choppy consolidation, and 3 triggered bullish patterns, one of which completed, one of which failed, and one of which closed the day on it’s way to it’s upside target. Lets review using the charts as our guide.
As you can see below, Thursday’s close triggered a bearish H&S top. If you did not hold over the weekend, you didn’t have much opportunity to enter the trade it. In fact, I was covering my futures pre-market due to target acquisition. I am one that likes to trade targets and re-evaluate, so money was left on the table, but it puts me in position to prepare for the next move without a bias. It’s what has worked for me.
Drilling closer into the price action, we can see that around 11AM, bulls resurfaced and triggered and completed an inverse H&S pattern. This was followed by minor pullback and consolidation to trigger a cup/handle. However, the 2nd pattern eventually failed by taking out the handle low. The bulls did not stop there though. Bears failed to take advantage of this failure and Bulls resurfaced in the last 30 minutes.
We can see that Bulls were quick to buy below the handle failure triggering a mini inverse H&S that closed the market well above the day’s consolidation. This leaves the market with a bullish Inverse H&S targeting 2021.90.
The only thing I don’t like is I do not particularly like single day patterns that do not complete intraday. That is the inverse H&S pattern we have in motion, was created with only 1 day of price action, so these can really be a bit of a gamble to hold overnight. I went home flat from a Futures perspective because of this. If we are to see this pattern complete and form another bullish pattern, I will likely jump on that train in the morning. However, one day of price action is just not a big enough pattern for me to bet overnight on. As you’ll notice, the pattern that fired on Thursday, took about a week to form. That is a pattern I had much more conviction in. It is not to say this pattern won’t complete, it is just lower conviction for me on one day of price action. I am not discounting the chance of a gap and grind higher.
The Bottom Line:
The bull bear tug of war continues. Watch tomorrow to see if the bullish pattern we closed with can complete it’s target at 2021.90, or if strength is once again sold overnight. If indeed the strength is sold tomorrow or in the coming days and December lows are no longer defended, the next thing I will be on the lookout for is the 61.8 Fib retrace and or the 2051 gap (seen below). This continues to be a tape that requires very hard work and concentration to trade. It doesn’t mean that we can’t make money, but we must remain focused and discipline. Keeping an eye on potential scenarios both bullish and bearish and honoring stops. Today’s cup/handle was an example. It shook many out, but gave you another opportunity to enter.
Chart of the Day:
Watch the Semis closely. We are seeing not only a large H&S top formation, but within the right shoulder there appears to be a smaller H&S that has triggered. Let’s see what happens on any retest of the smaller pattern’s neckline.