The Bull Technical Case For Stocks Right Here

Posted on Sunday May 22, 2016

Last week I spent a ton of time talking about and making a very big bearish case for stocks. Then again, in this week’s weekend journal, I discussed the fact that it felt to me like this was just an OPEX bounce held up by the real lack of a complete bearish catalyst, and the dynamics that draw price toward the max pain points on OPEX

However, I have trained my brain over my years of trading, to be very very flexible, and to listen and observe the price action and ignore every other thought and or bias. I so badly wanted to go into swing mode last week after the breakdown and just sit back and ride the trade into the target. However, the reversal pattern into the close Thursday and the follow through Friday, forced me to change my original plan. What this did was trigger a bear trap back into the H&S top range, and we must take that very seriously and consider the bearish thesis very possibly wrong.

Another thing that caught my attention which I outlined partially here, is that the risk on indexes (Biotech and Chips) caught a bid, while some of the risk off vehicles saw weakness (Metals and Japanese Yen). It may be nothing, but to completely ignore it is just plain ignorant, and there is no room for ignorance in my trading. As they say, being wrong is fine, staying wrong is not. So the trader and analyst that I am, decided to flip it upside down and try to find some price action that might start making a bullish thesis more probable.

The question I pondered is, is there anything in the price action horizon that could take this market higher?

The answer is maybe yes but to me the April high is still absolutely critical. 

The reason for this in my mind is because, we have seen this bullish flag pattern before. Everyone is calling this a pennant, or bull flag only to see the bottom eventually fall out. So for the bulls to have any case what so ever, they need to break this pattern of failed bull flags.
To do so, they not only need to break above the pennant, but hold it on any attempted bull trap. Doing so, would then outline a path to test the April highs.

I also want to outline the fact that a failed H&S top can very often turn into the handle of a cup/handle. One of the most relevant examples I can think of is the 2010 topping pattern on the weekly chart of the SPX.
Notice how we had a clean topping pattern in place only to have a failed breakdown, the neckline established itself as support again and away we went. 

So here is what that would look like today. History doesn’t necessarily repeat itself, but a H&S failed breakdown, can be epic, so keep that in mind.

Now that we have sort of the bigger picture in mind, let’s lower the time frame and look to see a way the bulls could make this happen. The first step (outlined here blue), is to trigger and complete this little inverse H&S. Basically take a path similar to the green
Doing so gives us a technical target of 2090.79.

Completing that pattern would be a huge win for the bulls. It would also trigger a much larger double bottom pattern with an upside target of 2127. What the bears want to do is prove to us this was an OPEX related rally and roll this thing over right here and take us back below Thursday’s low.

THE BOTTOM LINE:

People like to make technical analysis so complicated. We can simplify it by using patterns and price action. I have laid out a case here to take us much higher, and reduced it down to a much lower time frame to show you how that rally, if it going to happen is likely to occur. 
Let me close by making it real simple. The key for the bulls right here is that any further weakness MUST hold above Thursday’s low of 2025.91.
If the bulls can take out Friday’s high 2055.48 it triggers the bullish pattern targeting 2090.79. Focus first and foremost on this tiny scenario as neither new highs or new lows occur until someone wins this battle right here in front of us.
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