Chi-Osc


Stocks to Watch

January 8, 2013 (1:15 pm)

Boeing: Three28Capital took a short position in BA this morning. We had highlighted Boeing as a potential short when it rose above multi-week rising wedge. The shares plunged yesterday on news of fire on a new 787 plane, but bounced off the lower trend line. We took a position this morning when it sliced through that lower trend line. The rising wedge has a $5 target move to the downside.

BA

SodaStream: We took a short (as well as a put option) position in SODA based on negative divergence on both the RSI and ChiOsc. This indicates that the shares are rising on decreasing momentum, and is a bearish signal. We took the position as it reached the top trend line of a multi-week rising channel and entered oversold conditions. We sold out of both positions for a 30% profit on the put option as well as a 7% return on the short position (during 4 and 3 trading days, respectively).

SODA

Netflix: NFLX has been forming a multi-month rising wedge that is compressing tightly here, just as the RSI is signaling negative divergence. On a break below the lower trend line, we’ll likely take a bearish position. If the shares are able to break out to the upside, we’ll likely wait to take a bearish position when it falls back within the wedge (known as a ‘false breakout’).

NFLX

Google: GOOG has been trading within a well-defined rising channel since early November. It has since formed a three push up pattern (forming a rising trend line with the first two highs, and failing to reach that trend line during the third push up). It has also formed negative divergence on the Chi-Osc. We’re waiting for a break below the rising channel, as happened during a similar scenario in mid-October, before taking a bearish position.

GOOG

Bank of America: BAC has also formed a well-defined rising channel since early November. It is nearing the bottom trend line with negative divergence on the RSI and ChiOsc (decreasing upside momentum associated with rally’s). Will support at the lower trend line hold? We may take a bearish position if it does not.

BAC


Apple’s Bullish Set Up

December 31, 2012 (9:45 am)

Apple is sitting at an important inflection point right here. As we’ve discussed multiple times, the shares have formed a very clear downward sloping trend line since the start of the correction. It did have a false breakout in late November, but quickly fell back under the trend line. The rally this morning has brought it right back to this trend line. Another break to the upside will likely end this trend line’s long reign over the shares. Rarely does a trend line as strong as this have more than one false breakout.

The Reigning Apple Trend Line

AAPL Trend Lines

The Falling Wedge

Adding a lower trend line to the previous one creates an enormous falling wedge. As we’ve explained, the falling wedge is a very bullish pattern. Just as the chart above, Apple is sitting directly on the top trend line right now. A breakout will likely cause a surge. The timing on this would make some sense. The entire world is discussing how the likely rise in tax rates starting at midnight tonight has driven a large share of the selling pressure. Since that all ends tonight, anybody looking to sell has very likely already done so. So it makes sense for a rally to be sparked starting today.

AAPL Falling Wedge

On the other hand, this falling wedge pattern isn’t as picture perfect as it could be. Two points creates a possible trend. A third point validates that trend. Currently, we only have two points on the lower trend line. Hitting $499 would make it three points and a very clear falling wedge. That said, the upper trend line is crystal clear. In my opinion, a clean break to the upside would call an end to this correction.

Buy and Sell Signals on the Three Year Chart

The chart below illustrates the buy and sell signals generated by the Chaikin Oscillator. At or above the 30mm level has historically been a sell signal, while anything below the -20mm level has historically been a buy signal. The red (sell) and green (buy) dotted lines correlate to those signals, along with the similarly-colored circles on the price chart. Both of these signals have a very strong track record.

AAPL 3 Year Chart

What’s more is that when you combine the buy signal on the Chaikin Oscillator with an oversold indication on the RSI, you create a sort of “super buy” signal, illustrated by the thick blue lines. Look at the track record of that signal. It has called either the intermediate-term absolute bottom or at least a coming very strong rally. The last signal was generated when the shares were at $505 and directly preceded a $90 run. Another was just signaled.

Mr. Market

The SPY (again, the S&P500 index) bounced right off multi-month support/resistance at $139.50 this morning. We explained yesterday that before a more significant intermediate-downtrend could continue, we expect a re-test of the recent highs (which would eventually fail). We also expected the shares to rally in order to clear the oversold RSI conditions before continuing down. We’ll be watching the SPY closely here and are holding no positions.

SPY Channels

We have seen Apple decouple from the markets multiple times in the past. In fact, shares of Apple led the market down in September and October. We’d expect to see the opposite happen as well. Apple could bottom here, days or weeks before the market, and begin to rally. Then we’d see the broader markets bottom and follow Apple up into a potential Fed-induced melt-up rally into 2013. That’s not a prediction, just a possibility. QE3 hasn’t been discussed at all in the financial press. When nobody is watching is precisely when you see melt-up rally’s take effect.