SPY / QQQ


2014 Outlook: The Return of Commodities and Financials

January 1, 2014 (6:00 PM)

Happy New Year!

It’s been just about 12 months since I started posting my trading and investment rationale on this blog. Is there a better time to review my overall strategy than the start of a new year? Let’s start by thinking about last year – the good as well as the bad – and resolving to change those aspects that could make us more successful in the new year.

I highly encourage others to participate in this same exercise. What worked last year? What didn’t? As the well-known proverb states simply: “do more of what worked and less of what didn’t.”

After reviewing my trades over the past year, I added a few trading rules to (hopefully) improve my success rate in 2014.

  • ALWAYS Use Contingent Sell Orders. Place a contingent sell on options orders (or a stop loss if using shares) every single time I enter a trade. This accomplishes two tasks: (a) it completely takes the emotion out of selling a losing trade by making the sale automatic, and (b) it forces me to determine – before I even enter a trade – what level I’d exit a position if it doesn’t follow my expected path.
  • NO Impulsive Trades. Do not enter a position – any position – without a predetermined trading plan with well-defined entry and exit levels. I’ve found that those trades I took impulsively, too quickly, or emotionally turned into losing trades more often than not.
  • Think Longer-Term. A few days ago, Joe Fahmy wrote Everyone’s Becoming Too Short Term. I highly recommend it (don’t worry… it’s short). It made me realize that I need to get back to the basics. For years, I viewed each investment with a much longer-term, multi-month perspective. Only in the last 18 months did I begin trading on the short-term, and then on the extremely short-term (and, occasionally, intra-day). I was somewhat surprised to find that I just about broke even across all of my short-term trades; it was those trades that focused on longer-term trends that accounted for the vast majority of my profits in 2013.
  • BONUS: Stop Focusing On Apple. Even after suffering large losses in Apple through late 2012 and early 2013, I continued to focus on the name until just a few months ago. I continue to love the company, but will only invest in the name opportunistically – and will no longer take outsized positions. It has taken me too long to come to this realization, but there are simply too many great stocks to focus on just one…

2014 OUTLOOK: THE RETURN OF COMMODITIES AND FINANCIALS

A number of commodities, commodity-related names and financials have extremely bullish charts heading into the new year. This gives us two clues as to what the primary themes of 2014 will be:

  • Inflation-Related Stocks will Lead. The Fed’s recent action to slightly taper back on its enormous stimulus operation will ease the downward pressure on inflation. Domestic and global growth is slowly returning; so, while we may not see an immediate rise in inflation, the perception of its eventual return will positively impact inflation-related names. We expect commodities, commodity producers, hotel and gaming operators, and other investments that tend to do well in inflationary environments to outperform.
  • Financials Are Past the 2008 Crisis. During the 2008 financial crisis, many bank stocks fell by over 90%+ from their peak just a year earlier. While most have seen significant recovery’s over the past five years, those financial names that were hit hardest (BAC, C, AIG) continue to trade 75%+ below their peak prices. By no means do we expect them to trade back up to their all time high prices anytime soon (and maybe ever), we do expect that the highly discounted trading multiples assigned to those names will continue to rise as investors become more confident that the woes of the crisis are well beyond these firms.

With those themes in mind, let’s take a look at some charts.

APPLE (AAPL). Let’s get this over with… you know we’re going to show some AAPL charts. Looking at the very long-term charts, it seems like the 2013 under-performance is a direct result of the false breakout in 2012. Based on both fundamental and technical analysis, we do expect shares to return inside this wedge in 2014.

AAPL1

Another look shows two completely different, but unbelievably similar trend lines. One is a log graph, the other is linear. One shows 10-20yr trend lines, the other two five year trend lines. In both cases, however, we see a breakout and re-test of the top trend line in 2012, and firm resistance throughout all of 2013. We’re currently sitting at an important inflection point on both charts; we continue to expect EPS growth (and, more importantly, a shift in perception) to lead to a strong rebound in 2014.

AAPL2

ALUMINUM CORP OF CHINA (ACH). Over the past five years, ACH has formed an enormous triangle. It’s nearing an inflection point here, and has been testing the top trend line for the past three months. An upward breakout of this triangle will likely lead to a surge in price.

ACH

AMERICAN INTERNATIONAL GROUP (AIG). AIG is one of our favorite names for 2014. The chart below shows a complete vacuum of any volume between $52-$200; there was not a single trade between $125-$200 and only FOUR WEEKS worth of trading between $52-$125 over the past TWENTY YEARS. If the shares break $52, there is almost no resistance for quite a ways up.

AIG

AKSTEEL HOLDING CORP (AKS). AKS has broken out of a multi-year triangle with a potential double bottom at $2.50. There is a lot of potential upside in this name.

AKS

AMAZON.COM (AMZN). Since its IPO almost 20 years ago, AMZN has formed a validated trend line. That trend line, which stands $75 below its current lofty level, is likely to be re-tested (even as it continues to climb).

AMZN1

Looking at a linear chart, AMZN has gone absolutely parabolic. As often as this name is discussed as one in which investors “never expect profits”, at some point this will change and we’ll see a significant correction. We’re steering clear.

AMZN2

ARM HOLDINGS (ARMH). ARMH has a very bullish long-term chart. After re-testing it’s all time high price heading into 2013, it was finally able to break out earlier this year and has successfully re-tested that previous high price. The shares have also formed a relatively steep rising trend line and is now forming a bull flag – not only above a recently formed wedge, but also at fresh all time highs.

ARMH

BANK OF AMERICA (BAC). After quickly recovering to the $15-$20 level following the crash, BAC subsequently re-tested its lows in 2011. It took all of 2012-2013 for the shares to get back up to that $15 level. With the financial crisis firmly behind us, we expect shares to continue picking up steam as it rides along the two year uptrend line (green). Above the $16 level, we expect shares to continue up.

BAC

BED BATH & BEYOND (BBBY). Shares of BBBY have formed a very well-defined ascending triangle over the past six months. It’s recent breakout can be expected to continue up through the high $80’s over the coming months.

BBBY

BROADCOM CORP (BRCM). Shares of BRCM have had a rough year. Shares gapped down from $31 (previous support) to $28 (subsequent resistance for the past six months). After the recent breakout above $28, we could see shares continue up to the $31 level, which is likely to put up significant resistance. The 200DMA will likely put up resistance for (potential) a few weeks before breaking through.

BRCM1

If shares of BRCM do continue up to that $31 level, it will have broken out of the fourteen year triangle shown below. This is one we’ll be following closely.

BRCM2

BERKSHIRE HATHAWAY (BRKB). Shares of BRKB recently broke out of a six month consolidation triangle, and also was able to re-take its longer-term rising channel. This is a very bullish medium-term chart.

BRKB1

Looking at the longer-term chart, shares have formed a rising trend line that’s currently sitting at $80. This doesn’t concern us, however, since it has gone many years without testing that trend line in the past. It is currently forming a well-defined bull flag at all time highs after a significant rally.

BRKB2

CITIGROUP (C). The chart of C looks strikingly similar to AIG. Shares dropped through significant support at $100 – a level in which hadn’t seen any volume since 1995 – and formed new resistance $50. Shares are currently forming a bull flag at that firm resistance level. A break above $52.50 or so could bring a multi-year rally to $100.

C

CATERPILLAR (CAT). CAT recently broke out of a two year trend line as well as a long-term resistance level at $89. Shares are now consolidating at another longer-term trend line at $91. If the shares break above this level, there’s little resistance up to $98.

CAT1

On the longer-term, that triangle above looks a lot like a very bullish flag formed after a $90 rally since 2009. The recent break out above the triangle leads us to be very bullish for the longer-term.

CAT2

SPDR DJ INDUSTRIAL AVERAGE (DIA). The DIA has formed a very long-term rising wedge; shares not only broke above the wedge, but also successfully re-tested that level. Needless to say, this bodes well for a bullish continuation of the rally into 2014.

DIA

DRY SHIPS (DRYS). Shares of DRYS recently broke out of a well-defined five year falling wedge. We’re bullish on this name in 2014.

DRYS

EBAY INC (EBAY). EBAY has consolidated just below it’s all time high price and recently re-tested four-year trend line. Above the all-time high price, we’ll enter long-term bullish positions.

EBAY

FORD MOTOR (F). Shares of F recently tested a significant long-term trend line at the $18 level, just as a five-year uptrend line came into play. It broke down below the five year trend line over the past few weeks, meaning that $18 resistance remains firmly in place. It now looks like a bear flag is in the forming.

F

FEDEX (FDX). Shares of FDX look exceedingly bullish here. It recently surged above both its all time high as well as a very long term rising wedge, and is now forming a bull flag at those levels. We’re bullish on the name in the longer-term.

FDX

GENERAL ELECTRIC CO (GE). Shares of GE broke above a long-term rising channel, and re-tested the top trend line successfully. As part of that re-test, it formed a W bottom and has broken through recent highs.

GE1

That W bottom also happened to be a successful re-test of its very long-term trend line that it recently broke. Shares look very bullish in the longer-term as well. This is another of our favorite names for 2014.

GE2

GOLD (GLD). Gold has gotten hit exceptionally hard in the past year. Everyone seems to hate gold here… we can’t even begin to count the number of bearish articles we’ve read in the past few weeks. However, there are two charts that make us very bullish here. The first is that GLD has formed a potential double bottom at exactly the 50% fib level since it began trading.

GLD

The second is that the spot price of gold has formed a very long-term uptrend line over the past 12 years. It is now hitting that long-term support level at exactly the 61.8% fib level. Is it a coincidence that GLD and GOLD are both hitting very significant fib levels at exactly the same time GOLD tests its very long-term support trend line? This is a big one for us in 2014.

GLD2

STARWOOD HOTELS & RESORTS (HOT). Shares of HOT continue to outperform. Rally, consolidate, rally, consolidate. We’ve taken advantage of a number of breakouts this year.

HOT1

While it may look like the rise in HOT may be unsustainable in the short-term, the longer-term chart says just the opposite. Shares have formed new highs every eight years or so, and we’re right on track with that schedule. Shares are now bull flagging at all time highs, as price broke above a two year wedge.

HOT2

INTERNATIONAL BUSINESS MACHINES (IBM). IBM has formed a falling wedge over the past year and just recently broke above the wedge. It has done so on a potential double bottom, which could propel shares higher in the near-term.

IBM1

The recent double bottom just happened to take place exactly on a longer-term trend line, suggesting the current rally is very sustainable.

IBM2

RUSSELL 2000 (IWM). The broader market, as illustrated in the below chart of IWM, is looking very bullish here. Shares have risen above a 15 year rising wedge with a successful re-test. Further, over the past year, we’ve climbed up a fairly steep rising trend line with a number of tests.

IWM1

While that one-year rising trend line may look unsustainable, when taking a closer look, it is formed by a series of small rallies and subsequent consolidation periods. We’re not seeing any parabolic trends here.

IWM2

COCA COLA (KO). Shares of KO have recently broken above a longer-term significant resistance level. The next level of significant resistance is around $42.

KO

The previous all time high price of $34 was recently broken (with a successful re-test) and we’re seeing shares continue higher.

KO2

LAS VEGAS SANDS (LVS). LVS is consolidating at all time highs. It recently broke out of a long-term rising channel, and formed a W bottom as it re-tested the top trend line. It is likely to continue rising the medium-term.

LVS1

In the longer-term, LVS is slowly climbing up a trend line formed over the past five years. It has climbed relatively slowly (compared to many other names in the space) over the past three years and may be primed to continue its bullish run.

LVS2

MARATHON PETROLEUM CORP (MPC). Over the past year, shares of MPC have formed a large “cup” formation. There are two likely scenarios here: (a) shares see a small pullback over the coming weeks and form a handle, or (b) shares break through resistance and continue to all time highs.

MPC

NORDIC AMERICAN TANKER SHIPPING (NAT). Shares of NAT have surged out of a year-long triangle and have formed a bull flag at its previous resistance level. Next stop is likely at the $11.50 level.

NAT

TOKYO NIKKEI AVERAGE (NIKK). This one isn’t directly actionable (it’s an index – not an ETF), but thought it was very interesting to see the Nikkei sitting exactly at the top trend line formed over twenty years. This is clearly an important inflection point.

NIKK

NORTHROP GRUMMAN (NOC). Over the past twenty years, NOC has formed a well-defined rising channel. Earlier this year, shares broke out of the channel and haven’t looked back since. As long as it remains above the green trend line, we’re bullish on the name.

NOC

SINA.COM (SINA). Shares of SINA have formed a fairly well-defined falling wedge, which it has recently broke out of. Additionally, shares have created a long-term rising trend line that was recently re-tested as part of the falling wedge. We expect a strong upward continuation in this name in the near-term.

SINA

SILVER (SLV). Like gold, shares of silver have taken a beating this year. Over the past year, shares have formed a fairly well-defined triangle. Currently, they’re sitting right near the bottom trend line. Will this act as support, or simply the first step before a continued breakdown?

SLV1

The longer-term chart shows the $17.50 level as a fairly significant trend line. This, combined with the fact that shares are resting on the bottom trend line of a larger, longer-term triangle, leads us to believe that this level has a reasonable chance of holding. We’d be confident taking longer-term positions here – but make sure to keep your stops tight. As a side note, it’s also interesting to see the 61.8% fib level put up serious resistance.

SLV2

SANDISK CORP (SNDK). Shares of SNDK have climbed up a five year trend line as it continues to re-test its long-term (15 year) resistance at the $70 level.

SNDK1

A longer-term look at SNDK makes it clear that a break of $71 will be very significant. We’ll be very bullish above that level, but will keep our stops relatively near that level.

SNKD2

NATURAL GAS (UNL). Natural gas has recently broken out of a four year downtrend line and is forming a bull flag above its recent resistance. We’re bullish on the longer-term prospects for this name.

UNL

VALERO ENERGY (VLO). VLO has been climbing up a relatively steep trend line over the past three months and continues to make new highs. It also broke above a year-long trend line with a successful re-test.

VLO1

Over the past twenty years, VLO has formed a relatively well-defined rising trend line. It recently tested this trend line before breaking out of a seven year trend line. We’re bullish the energy sector for the coming year.

VLO

VERIZON COMMUNICATIONS (VZ). The declining trend line in VZ was re-tested on the last trading day of the year before closing above its 200DMA. This trend line, along with its rising longer-term trend line formed a triangle that it recently broke out of. We’re bullish here, but have stops below the 200DMA.

VZ1

On the longer-term, VZ has formed a five year rising wedge and is sitting squarely at long-term support. We’ll continue to be bullish as long as the uptrend line remains in tact.

VZ2

WYNN RESORTS (WYNN). Over the last five years, WYNN has formed a well-defined rising wedge. Shares recently broke out, consolidated, and have since rallied hard into year end. We continue to be bullish this name, and the gaming sector more broadly.

WYNN

US STEEL GROUP (X). This is one of our favorite names for 2014. Shares of X consolidated above its 52 week high before breaking out to fresh highs. It has since consolidated for the past few days and we highly expect a continued run in the medium term.

X1

On a slightly longer time frame, our bullish view on X becomes more clear. Not only did it break a five year trend line that happened to be right at the 50DMA, but it also broke (and successfully re-tested) a ten year trend line. It also bull flagged just above that level.

X3

Going out even further, we can see the significance of those two trend lines. We fully expect shares of X to continue to be bullish through 2014 and have a longer-term target at the blue consolidation level near $40.

X2

EXXON MOBIL (XOM). Shares of XOM have made successive new highs throughout 2014. It recently broke through a trend line that joined all previous highs of the year (with a successful re-test) and continued higher. We continue to be bullish on this name.

XOM1

Over the past twenty years, XOM has formed a well-defined support trend line that currently rests at $85. Shares tested this level three months ago before surging to new all time highs, and above a significant five year trend line.

XOM2

YELP INC (YELP). Shares of YELP rallied strongly for the first three-quarters of the year before spending the last four months consolidating. Shares have since formed a well-defined descending triangle (all triangles are continuation patterns), broke out, and successfully re-tested the pattern. We expect fresh highs over the coming months.

YELP

YAHOO! INC (YHOO). Since its IPO nearly twenty years ago, YHOO formed a massive, twelve year symmetrical triangle and broke out earlier this year. It has rallied $25 from its breakout point. While there has been a massive rally over the past twelve months, the width of the triangle it broke out from is over $120. The next level of resistance is around the $45 level.

YHOO

I wish you a happy – and very profitable – 2014! Thanks for reading, and please leave any questions or comments below.


Looking at the Markets: A Technical Perspective

November 3, 2013 (10:30 pm)

S&P500 ETF (SPY) has broken out of a multi-month wedge, signaling bullish continuation as it remains above the 10, 20, 50 and 200 DMA’s. Its very long-term trend line is reaching into the low $180’s. May this be the intermediate-term target?

SPY

S&P500 ETF (SPY) has also been trading in a well-defined rising channel for multiple years. Interestingly, the top trend line is in the low $180’s – aligning almost exactly with the (very different) trend line above.

SPY2

Volatility (VIX) is relatively low right now, signaling that fear is not a big factor in most investors minds right now. Further, it seems to be forming a bear flag, which could indicate that the VIX will continue lower (and, conversely, the SPY will continue to rise). It’s important to note, however, that a low VIX often precedes a correction.

VIX

Bank of America (BAC) has formed a head and shoulders pattern. It fell below the neckline as the MACD turned down, signaling significant downside ahead. Hard stop above $14.11, as that would invalidate our thesis.

BAC

Ford (F) has a significant, long-term trend line that has acted as support recently. It has also formed a multi-month rising wedge / consolidation pattern.

F

Google (GOOG) has formed negative divergence with both RSI and MACD. We expect more downside ahead. We’ll consider our thesis valid unless the shares rise above the all time highs (>$1,042).

GOOG

Starwood Hotels (HOT) has broken out of a long-term multi-month ascending triangle and has now formed a bull flag. We’re long above the red box ($75 level), with a hard stop below it ($73.50).

HOT

LinkedIn (LNKD) has formed a long-term trend line that has acted as support until its recent earnings release. The shares are now trading below that trend line for the first time all year.

LNKD

Las Vegas Sands (LVS) has broken above a year-long rising wedge. We unfortunately weren’t watching this one closely – otherwise, taking a position as it successfully re-tested the upper trend line would have been a no-brainer. It could be forming a bull flag here, but we’re watching from the sidelines for now.

LVS

SodaStream (SODA) has broken down from a multi-month triangle and has failed its re-test. It has since fallen sharply. There may be more pain ahead, but we’re watching from afar for the time being.

SODA

Yelp (YELP) has created what looks to be a classic bump and run pattern over the past year. It was trending above a multi-month trend line for the first six months, before it began to rally sharply for the past few months (forming a much steeper trend line). It has since broken down from that steeper trend line. In a classic B&R pattern, we’d see the shares re-test the original trend line, which now sits right at the 200 DMA. On a break below the 50 DMA, we’d go short the name.

YELP


Updating Our Views on Apple and the Markets

October 11, 2013 (9:30 am)

AAPL ASCENDING TRIANGLE. After the introduction of the new pair of iPhone’s, Apple shares quickly dropped from the $500 level to $450. It rebounded just as quickly as it fell, and has been consolidating in the $480’s for over two weeks. That consolidation period is beginning to look a lot like an ascending triangle. The shares have now touched the top and bottom trend lines three times each. A breakout from this pattern has a target of $511, right next to its recent high of $513. We believe this consolidation period (whether or not the triangle comes through to fruition) is very bullish for the shares. It’s important to note, however, that the October option expiry (next Friday) has a massive number of $500 call options. Don’t be surprised if the shares run into a brick wall at that $500 level, which we’ve seen happen countless times in the past.

AAPL Triangle

AAPL COMPARISON TO 2011. In our previous post (A Complete Look at Apple and the Markets), we compared the recent price action and technical indicators to an extremely similar pattern in July-Sept 2011. We updated the chart below only slightly. We noticed two more similarities over the last few days: (1) the MACD consolidated for two weeks after reaching point 6 on the price chart, and (2) during the same time frame, the share price consolidated in a slightly rising fashion right along the 50 DMA. Every aspect of these charts is eerily similar, from the RSI to the MACD to the price action and its relation to the moving averages. After the third touch of the 50 DMA during the consolidation period, the shares broke out in a strong move. With strong indications that Apple will host an iPad/Mac/Apple TV event in under two weeks, and earnings coming right afterwards, we believe a strong move up could come very soon. Keep in mind what we mentioned previously about October option expiry next week, though. It may hold back from breaking $500 until after those options expire.

AAPL Comp

AAPL DOUBLE BOTTOM. Interestingly, the near-term ascending triangle has a target of $511, very near the recent highs of $513. A breach of that recent high brings new highs into the picture, which is further evidenced by the similarity to the July-Sept 2011 price action. Additional evidence of a strong potential for an upside breakout is the double bottom formed through the summer of 2013. It has a price target of $545, which fits in well with our other analyses above.

AAPL DB

AAPL CUP & HANDLE. Further, shares of Apple have also formed a Cup & Handle pattern over the course of the year. The recent consolidation has slightly changed the shape of the handle, but has by no means diminished the possibility of this pattern achieving its target. We haven’t provided a fundamental analysis on Apple in quite some time, but based on our recent analysis (which we plan to provide in the coming weeks), we expect that the cup and handle price target of $640 is fully achievable by the middle of next year.

AAPL C&H

SPY TREND LINES. In our prior post, we provided the chart below. The price acted almost exactly as we had expected, with a re-test of the $170.25 level before dropping to the $167.50 level and consolidating there. These trend lines remain very important to follow. You can see that yesterday’s monster rally began right at the strong support/resistance level of $167.50 and ended on top of the $169 support/resistance level.

SPY Near-Term

SPY WARNING SIGNALS. This is simply one possibility. We’re not forecasting the end of the world, but want to provide the following possibility since it so closely resembles previous price action. In early August 2011, just as Congress and the President were going to battle over rasing the debt ceiling (or lack thereof). After forming a very similar rising channel that included three push’s up, the shares failed to re-test the third high price. This happened after an extremely overbought NYMO on the third push up and, most significantly, occured with negative divergence with BPSPX (the bullish percent of S&P500). When share price increases on decreasing momentum, it’s a strong warning sign.

Based on the previous occurrence, after a quick drop toward the bottom trend line (which equates to the same price action earlier this week), the shares quickly re-traced much of the decline to re-test the highs. Only after a failed re-test of the highs did the shares completely roll over. The worry here is that we’re seeing a carbon copy of the price and technical indicators. Yesterday’s monster rally could very well be a re-test of the highs. If it fails to re-take that high, we could see a dramatic sell-off.

SPY Re-Test

A completely different take on the recent price action, we should point out, is that the small breakdown from the rising wedge pattern we’re in was a “bear trap”. Others who are watching the same pattern as we, got into large short positions as the shares broke down from the pattern. After yesterday’s rally, they’re now “trapped” in their shorts before continuing the year-long rally. So, again… these are both important viewpoints to watch and keep in mind.

VOLATILITY. The last chart we want to provide is the $VIX volatility indicator. As we’ve mentioned many times, the 70 RSI level (red line near the top) indicates an overbought $VIX. This has historically been a nearly perfect time to buy into the market. The indicator hit that 70 RSI on Tuesday, and we got into large SPY and QQQ option positions, which we were able to capitalize on during the huge rally yesterday (although we sold early in the trading session… too early). But our motto continues to guide our investing decisions: “I made all my money by selling too early.”

$VIX


A Complete Look at Apple and the Markets

Sunday, September 29, 2013 (5:30 pm)

We wanted to provide an updated outlook for both Apple and the broader markets. While our medium-term outlook remains fully in tact, we’re seeing a number of conflicting signals in the near-term.

APPLE OUTLOOK

APPLE: A REPEAT OF 2011? As we reviewed our charts, we came across a very similar price and technical pattern to the current price action. Look at the July-Sept time frame in 2011 versus 2013 below:

AAPL 2011 vs 2013

Let’s take a look at the similarities. The numbers refer to the points on the price chart within the purple boxes, while the letters refer to the RSI/MACD technical indicators.

  1. The bottom. Negative 5-10 MACD (a) and 25-30 RSI (A);
  2. Consolidation at 50 DMA;
  3. Consolidation at previous 6-month high price;
  4. Sharp rally to high price. 15-20 MACD (b) and 80-85 RSI (B);
  5. Sharp pullback to near 50 DMA and Point 3. 40 RSI (C);
  6. Rebound, which forms on a gap up. 55 RSI (D).

Now that we’ve looked at all the similarities between the two time periods… where do we go from here? Let’s look back to 2011. After the shares performed in an extremely similar manner to the current price action, the shares dropped to create a double bottom at the 50 DMA. In the current case, there is a lot of support in the $474-$476 range, with the 50 DMA, 10 DMA and long-term trend line all within that $2 range. Below that price, additional strong support rests at $465. After an initial drop, the shares saw a strong rally over the ensuing four weeks to create a new high print.

Conclusion: While the near-term presents some uncertainty, this is additional evidence pointing toward our longer-term bullish outlook for the shares.

APPLE: DESCENDING TRIANGLE. If there is near-term downside, it will likely come in the form of a breakdown from the descending triangle below. The 100% measured move is roughly $15 with a target near $465 – right at the point of very significant support that has formed with multiple touches over the past 10 months.

AAPL Triangle

The real disappointing aspect of this potential would be the invalidation of the island bottom reversal. The island reversal is a very bullish longer-term pattern if it remains in effect. It’s important to note here, though, that while descending triangles typically have a bearish tilt, all triangle formations (ascending, symmetrical, descending) are known as continuation patterns. Continuation, in this case, would be to the upside. On the other hand, this $465 target does seem to fit fairly well with the July-Aug 2011 comparison above.

Conclusion: The descending triangle, while technically bearish in bias, can also be viewed as a bullish continuation pattern. No real conclusion – we need to see which way it breaks.

APPLE: BULL FLAG. Another viewpoint of the current price action, looked at from the lens of a longer time frame, is that this could very well be a bull flag in the forming. A bull flag takes place after a significant rally, when the shares consolidate downward for a period of time before resuming their bullish climb. It is typically combined with declining volume throughout the pattern. We’re seeing that exact situation here: a downward consolidation after a strong rally that is taking place with dramatically declining volume. Furthermore, the MACD just turned bullish (which we’ll discuss more below).

Conclusion: The clear-cut bull flag on declining volume, in combination with the bullish MACD is a very bullish sign for near-term price action.

AAPL BF

APPLE: MACD TURNING BULLISH. Apple’s MACD has begun to turn up in the daily chart. We’ve indicated those instances in the past where the MACD has very clearly turned up (bullish) or down (bearish). We did not include those cases where it didn’t make a strong move. The MACD has been a fairly reliable indicator over the past year as to the near- to intermediate-term price action. Most of the buy signals (blue) have led to 50+ rallies in a short amount of time. Similarly, the sell signals (red) typically led to fairly strong pullbacks. This is an important one to keep an eye on.

AAPL MACD

Conclusion: Combined with the other technical indicators discussed, this is a bullish signal.

APPLE: DOUBLE BOTTOM BREAKOUT. Don’t lose track of this chart. The price action, in the intermediate-term should be viewed as bullish as long as Apple holds the $465 price level (double bottom breakout point).

AAPL Double Bottom

Conclusion: The $465 price point is clearly important here. Even if the shares break down from the descending triangle described above and hit the $465 trend line, we believe that price level will hold. While the near-term is cloudy, again, the longer-term should be viewed as bullish. If the bull flag scenario comes through to fruition, we believe the $515 level will be a magnet. If that level is exceed, $545 should likely come next before or around October earnings.

APPLE: CUP & HANDLE. As discussed last week, shares of Apple have created a much larger pattern known as the cup and handle. If Apple can take out the $515 level, the 100% measured move of this pattern is $640, which happens to be the high set last February and again re-tested (after the all-time high was put in) before last October’s earnings announcement.

Conclusion: To remain valid, the price should remain above the $465 level, and relatively quickly retrace back to the $515 neckline.

AAPL C&H

FINAL APPLE CONCLUSIONS. In the near-term (days and next couple of weeks), there are two factors working against Apple. One is the descending triangle and the other is the comparison to 2011. Both point to a test of the $465-$470 level (which, don’t forget, is only $10-$15 below the current price). However, it’s important to look at the contradictory bullish indicators. The bull flag with declining volume, the bullish turn in MACD, the triangle (yes it’s descending, but all triangles are continuation patterns), and the double bottom breakout. The path of least resistance, in our view, is up in the near-term.

In the longer-term, we have very high expectations that shares of Apple will provide strong returns due to the much larger chart patterns: double bottom breakout, which formed over five months, and the cup and handle, which formed over ten months.

BROADER MARKETS

SPY: SIGNIFICANT DIVERGENCE. As we mentioned last week, the SPY has formed significant negative divergence with BPSPX (the bullish percent index). It created a three-push pattern, with each successive high price occurring on a lower high in the BPSPX. We also saw the third push up occur on an extremely overbought NYMO. The last time we saw this formation was in July 2011. We saw a 25 point drop in the SPY within the next month.

SPY NYMO

SPY: SUPPORT & RESISTANCE. SPY has strong support at the $167.50 level, which coincides with the 50 DMA. We fully expect a test of this level in the coming days. The SPY has also formed a head and shoulders pattern. A strong break below the $169 support line equates to a breakdown in the H&S pattern, which has a $3.50 100% measured move target of $165.50.

The last time we posted this chart, the SPY was testing the $169 support level. We provided an expectation (blue dotted lines) that had the SPY re-testing the $170.25 level before pulling back to our near-term target of $167.50. That has come to fruition thus far.

SPY NT

INDU: NEGATIVE DIVERGENCE. The Dow Jones has also created negative divergence with its MACD. Below, you can see the last three times we’ve seen significant negative divergence, which lasted many months. Each led to a significant pullback in the markets. This is additional evidence that the broader market is setting up for a pullback this fall.

INDU Divergence

VIX: THE BOUNCE, AS EXPECTED. As we projected last week, the VIX bounced off its long-term support line. There is no clear direction in the VIX from here.

VIX

FINAL MARKET CONCLUSIONS. Taken as a whole, we expect a significant decline in the markets to take place in October or November. With the Fed continuing with its $85 billion monthly asset purchase, against all expectations, we expect the market to begin rationalizing this decision. The economy is in a weak state – weak enough that the Fed is unwilling to back off (even slightly) from its massive asset purchases. It’s interesting that all of these technical indicators are flashing “potential crash ahead” just as the government is set for a shutdown AND may be unable to avoid a national debt “default” (while it wouldn’t technically be a real default, in this market perception is reality).

Now, doesn’t this conflict with our outlook on Apple? While – we’ll be honest – it is hard to fathom the largest stock in the world could swim upstream while the market experiences a correction, we have seen the opposite occur for most of the year. With the stock at an extremely low PE multiple (almost half that of the broader markets – 12x vs 19x), we believe the downside is extremely limited, and investors may actually re-allocate capital from the broader markets to the name. It’s large cash position, low valuation and upcoming EPS resurgence will make this stock outperform during any correction.


A Review of Our June Expectations

September 24, 2013 (6:15 pm)

After writing a post on June 20 (see the post here), we took a three-month break from updating this site. We continued to provide charts to our Twitter followers, but largely strayed from the larger, more complex analysis that is impossible to conduct in 140 characters. So we wanted to review our last comprehensive analysis on Apple and the broader markets.

***FROM JUNE 20*** Heading into its WWDC, we laid out three charts with explanations as to why we believed shares of Apple would rise during and after the conference. The rising MACD and bounce off the 50DMA: wrong. The potential inverse head and shoulders: wrong. A bullish triangle on the weekly chart: wrong. Clearly, we were wrong on all fronts here, as the shares continued lower and reached as low as $408 this morning.

We believe the tide is turning, however. We’ll lay out a series of charts and historical comparisons as to why we remain bullish on the shares. Three28Capital does not recommend very near-term options plays – it’s simply gambling. But for those with an intermediate- to longer-term timeframe, we believe it’s a great opportunity to pick up shares or options in Apple at these levels. Here’s why:

1. Daily Chart: Bollinger Bands and RSI. The chart below is, in our opinion, the most powerful and meaningful of the charts we’ll explore. First, the daily RSI support (horizontal blue line) has been an extremely accurate indicator. The RSI is now sitting firmly at that support. Second, a meaningful drop (not just a few cents, but multiple dollars) below the lower Bollinger Band has proven to be a very useful data point. Shares of Apple have traded well below the lower Bollinger Band for the past three days. You can see the reaction to either of these “buy” indicators on the chart below. Notice that when both indicators flash “buy” at the same time (which is the case today), we’ve seen the following rallies:

  • Jun 2011: $90 (one month)
  • May 2012: $55 (two weeks)
  • Jan 2013: $50 (two weeks)
  • Mar 2013: $50 (three weeks)
  • Apr 2013: $90 (three weeks)

AAPL BBands RSI

***SEPTEMBER 24 UPDATE***: Here is what the chart looks like today. Clearly, for those with “an intermediate- to longer-term timeframe”, our $408 recommendation price was a fantastic time to buy.

AAPL BB Update

***FROM JUNE 20*** 2. Hourly Chart: RSI. Since the September top in shares of Apple, the green and red horizontal RSI lines below have acted as very accurate buy and sell indicators. Shares are now trading below that important 20 RSI level. We expect a retracement of this pull-back over the coming days and weeks.

AAPL Hourly

3. Bollinger Band Compression: A Historical Comparison. We’d classify this one under the “interesting” category (and not necessarily, but potentially, meaningful). The last time the Bollinger Bands were as compressed as they got in early June (which was a width of $22.50) was – coincidentally – in early June 2011… just two days apart between the years. What’s interesting is to compare the subsequent price action. In June 2011, with the BBand width at just $21, the shares dropped nearly 6% over the coming 7 trading days, with capitulation selling to a level well below the lower BBand.

Contrast that action to today (note that the chart below was as of yesterday’s close). With the shares trading as low as $408 today, that denotes a 6% drop over the past 7 trading days. And don’t forget the capitulation selling we’ve seen today to a level well below the lower BBand. After that capitulation in June 2011, there was a dramatic rally of 30% over the following four weeks.

BB Comparison

***SEPTEMBER 24 UPDATE*** See an updated chart of the aftermath of the Bollinger Band compression below. Although there was some remaining downside pressure, the shares bounced over $100 from our recommendation price over the following 7 weeks.

AAPL BB Compression Update

***FROM JUNE 20*** 4. QQQ (NASDAQ) Long-Term Support. Another important data point when analyzing Apple is to consider the NASDAQ index (QQQ). The chart below is extremely important. With this (what feels like) capitulatory selling, the QQQ saw quick and intense selling almost in a vertical decline. It stopped right at the long-term support level that had marked two previous (and important) peaks over the past year. That support firmly held, and the QQQ’s have since held above that support. This is meaningful price action, and we expect a retracement of the pull-back to begin shortly.

QQQ

***SEPTEMBER 24 UPDATE*** Our thesis proved 100% correct. The QQQ held exactly at the long-term support line and a full retracement quickly ensued. See below for the updated chart. The index has gained 13% since our call of an imminent bottom.

QQQ Update

***FROM JUNE 20*** 5. VIX Buy Indicator. We’ve discussed this one multiple times. When the RSI on the VIX (general market volatility indicator) get up to the red horizontal line, it has historically acted as a very accurate “buy” indicator. It signals that the volatility and fear is reaching a peak, and that the market is likely to turn soon.

VIX

6. NYMO Extreme Low. When the NYMO hits the very overextended -80 level, we consider the “buy” signal to be met. With the continuation of the sell-off late this morning, we have no doubt that the already oversold NYMO is continuing lower (chart below from yesterday’s close). This is another important and accurate market “tell” that we watch on a weekly basis.

NYMO2

***SEPTEMBER 24 UPDATE*** As we had expected, since the NYMO has been such a reliable indicator, the broader market saw a strong rally after the oversold NYMO indicator.

NYMO