Saturday June 4, 2016
- Every Dip is bought
Very few developments this week, as the market continued to digest it’s rally from the previous week of trading. We are now in a small 20 point trading range where every attempt to push the market lower failed. Even off what many would consider a disastrous jobs report, buyers stepped in. The bearish thesis is hard to see here. I could argue for a short against the April High, which I am sure many are doing. So if we do breakout, it will likely be epic.
The cleaner more obvious trade to watch for right now is a breakout above last week’s highs and then continuation above the April highs, which will trigger the cup/handle shown below. The target is 3.5% higher setting new All Time Highs in the S&P. This pattern is our number 1 priority. Not the Jobs Report, not the Fed-speak next week, not Br-exit. None of it matters! The only thing that matters is where price is going. And a breakout above these levels targets all time highs.
I will use Friday’s lows as the Area to re-evaluate the bull thesis, so calculate risk/reward off of that.
~75 points of upside for ~10 points of downside.
Looking at the DJIA, it too has a bullish Inverse H&S pattern, that is also yet to trigger, but is on our radar. We’ll want to be on alert for a bull trap setup much like we saw on the bear trap 2 weeks ago, but never the less, the trading plan is well defined on this one. I will use that VWAP off the lows (orange line) as my area to re-evaluate. I won’t want to be long below it, but I will get back in if it loses it and then regains it. Certainly a possible scenario. If that area is lost and starts to become resistance rather than support, we will probably be looking more bearish, so stay tuned this week to the nightly reports.
With all the bullish talk here, I still believe that april high is critical and do remain a bit skeptical until it is taken out with conviction. The reason being, we have seen these retests of the rally high fail time and time again since last May.
Taking out that swing high from April, will certainly change that pattern. This is an area near the top of a very large 2 year trading range. So we want and need to trade the price action, but respect that there is still resistance ahead.
Looking at the Russell: Something that would garner more bearish attention is if the 115 level fails to hold. It did on Friday. However the Momentum divergence could cause an epic move lower if 115 fails to hold.
This still looks far too much like December to be comfortable. Nothing to think of above 115, but below it could get ugly fast.
Slight improvement in breadth this week despite a pretty flat week in the markets.
The Bottom Line:
We are in the exact opposite situation as we were in 3 weeks ago. We have very bullish setups targeting all time highs with resistance still above. It will be important here to have a plan to trade these patterns with proper risk controls in place. I laid out my thoughts above, (i.e where I would re-evaluate, take risk off until those levels are held again). We also want to be on alert for bull trap reversals on breakout (much like we saw in the bear trap. Remember, we are still in a 2 year trading range. We have to trade what we see, but be on the lookout for changes in the plan and react. At the moment there is very little bearish thesis to work with, but watch that Russell very closely. Strong Yen and a failed move in Russell will likely take everything with it.
This Week’s Chart’s in Focus:
Let’s review a few charts that I consider worthy of your attention:
Emerging Markets (EEM): A few of you asked me about EEM this week. We have an inverse H&S setup worth watching for sure. However, there is massive overhead supply above, which needs to be respected. If it can regain and hold 36, it could be a good long. Remember, this area is still resistance until it is not. The measured move is ~48 so there will be plenty to be made if that zone can be regained and become support.
Yen: We talk about this one every week. This is supposed to be the risk off asset, so has many including myself scathing their heads. This guy is about to breakout of it’s cup/handle formation. In theory, not good for equities. So we want to continue to watch this closely. It certainly increases my skepticism about the US indexes, but we don’t have bearish price action to work with in the indexes just yet.
DBA->Agricultural ETF continues it’s move for the 23.59 Inverse H&S target. Look for this one to flag at some point for entry. Something like the drawing below. Flags with a bullish base below make great trades.
IBB-> I was engaged in a Twitter debate over this one this week. Until 290 becomes support again, there is no long term bull thesis. There was a small inverse H&S in the pink box below on lower time frame, that played out to it’s target this week.
Great. Now you wait. It is sitting 10 pts below major overhead supply. I am not saying it can’t do it. but why would one be chasing this into this kind of resistance? When resistance becomes support again you want to be a buyer. Let this one prove itself now, is all I am saying.
This looks very much like December still. A nice rally, lower high and then it rolled over. This time may be different, but let it show us.