The previously posted FISV (Fiserv Inc) short trade setup broke down below the daily uptrend line last Tuesday & went on to print a weekly close below the ascending price channel on the weekly chart last week, a more powerful, longer-term sell signal. With prices still in close proximity to the breakdown, this trade still has plenty of meat on the bone & still offers an objective short entry around current levels. I’ve added one additional price target at 59.34 (actual support around 59.30) & have re-sequenced the previous two targets as T2 & T3. Suggested stops would be based on a 3:1 R/R to one’s preferred targets or slightly above the recent highs if targeting the final target, T3 at 47.77.
FRC (First Republic Back) was added as an Active Short Trade back on July 31 at a price of 46.88 with a relatively tight suggested stop of 48.10. The stock bounce a little further than I had anticipated (in sympathy with the broad market) and went on to slightly exceed that suggest stop level for a relatively minor loss of 2.6%. Therefore, that previous trade on FRC will be considered stopped out for a loss and that previous short-entry post will be re-assigned to the Completed Trades category where it will be archived indefinitely for future reference.
FRC will also be added directly as a new Active Short Trade here around the 47.42 on this break below the bear flag pattern which follows the breakdown below the 3-year primary uptrend line. T2 (40.50) is the current final & preferred target with a suggested stop above 49.50 or lower, if only targeting T1.
Here’s a couple of questions that I received over the weekend regarding when to act on a buy/sell signal and how to recognize divergences on a chart:
Q: I have found your comments and advice to be extremely helpful. While reading your column this weekend, I noticed you talked about 6/10 monthly EMA long term signal for SPX. Do you have to wait till the end of the month for this signal to be valid or can one act on it any time when 6 ema crosses 10 ema, say in the middle of a month. Or does it even matter. I am always confused on this. Thanks for your help.
A: I’ve found that waiting for a print on a close of the period of the chart of whatever signal I am using will greatly reduce the chance of a whipsaw or false signal. On that 6/10 monthly ema, yes, waiting for the 6 ema to close below the 10 ema on the last trading day of the month would be best. The same holds true for breakouts and breakdowns using candlesticks. E.g.- On my weekly charts, I’ll usually wait for a candlestick close on the end of day Friday since intraweek breakdowns are fairly common, only to see prices move back up above the support level by the end of the week. Waiting for prices to print a close above support/resistance on the time frame you are trading even works well with breakouts on intraday charts such as 15 or 60 minute charts (wait for a 15 or 60 minute close above/below the pattern that you are watching). Also keep in that the 6/10 monthly ema pair defines bull & bear markets and those signals typically last over a year once triggered. Therefore, it’s more of a confirmation of the primary trend than a timing signal, more useful for helping to align your trades with the primary trend than a “time to get short” signal as the market will already be well off the highs by the time that it triggers.
Sometimes I will jump the gun and take a breakout before we get a closing print above the pattern. I’ll do that if I have a lot of supporting technical evidence that it will play out and I feel strong about the trade. Right now might be a good time to get an early jump on short trades with most short & intermediate-term signals in the broad market currently bearish. Really it’s just a matter of preference: Aggressive traders might opt to position on any break of support/resistance or on the first crossover of a moving average pair while more conservative or conventional traders, typically those with longer-term time frames, might opt to wait for a solid close below/above the pattern on the time frame that they are trading.
Q: Nice job on the short call. Just curious to whether or not you think a short position should be initiated on FISV. Also, do you use a specific set of rules when drawing Divergence lines? It seems when I’m drawing my own Divergence lines, sometimes I can draw the lines to suite the trade I’m entering(if that makes sense).
A: Absolutely. I’m personally short FISV and plan to highlight it as one of the more promising short trade ideas at this time. FISV just recently broke below the daily uptrend which also defined the weekly ascending channel so it still offers a very nice R/R if shorted around current levels. With that being said, even the most promising trades don’t always play out so always use stops & never get married to any trade.
Regarding divergence, the rules are pretty straight-forward: Using negative divergence, the price of the securities needs to have made a higher high against the indicators or oscillators that you are using (MACD, RSI, CMF, etc..) making a lower low. I will say that although I’ve never read this anywhere, when using the MACD, I consider divergence as only “potential” until we get a bearish cross-over on the MACD while prices made a higher high. In other words, if prices are making a higher high and the MACD has yet to move above its previous reaction high and is still below it, the potential for divergence does exist but it is also possible that the stock keeps moving higher as does the MACD with the MACD eventually moving above the previous reaction high & thereby, negating or eliminating the potential divergence (which tends to happen in strong uptrends). From my experience, if you wait to see the bearish crossover on the MACD (fast line moving below the slow line) at a point that is below the previous reaction high, then the odds of a correction are very high at that point. As far as positive (bullish) divergences, everything that I said above holds true but in reverse (prices making a lower low against the indicators making a higher low).
The SPY closed right on the bottom of my 3rd & final near-term target zone which was based off of the short-entry from the partial rise into the broadening wedge pattern on the 60 minute chart. In a vacuum, I would have covered all or most of my short positions as the SPY has positive divergences in place on the 60 minute chart on the initial tag of this support level (ideal ingredients for a bounce). However, as discussed recently, the bigger picture has the S&P 500 printing the first weekly close below this primary bull market uptrend line generated off of the March 2009 lows. Therefore, we have a mixed picture in the charts right now with potentially short-term bullish developments against a cross-current of longer-term bearish developments.
I say potentially short-term bullish developments because although prices are at support with bullish divergences in place on the 60-minute time frame, the near-term trend, by all accounts, is clearly bearish at this time with no signs of a reversal yet. With that being said, until this support (the Aug 7th reaction low) is clearly taken out and the bullish divergences are negated (i.e.- burned thru), the potential for a bounce is elevated. On the flip-side, the longer-term (weekly charts) take precedence over the shorter-term charts and today’s weekly close below the bull market uptrend line in the $SPX has the potential to open the door to a much deeper correction or more. It is also worth noting that we printed a weekly close below the Wilshire 5000 Composite Index bull market uptrend line as well as a solid close below the base on the double-top pattern on the Russell 2000 Small Cap Index. However, keep in mind that this market has been plagued with false breakdowns & whipsaw sell signals for years now so it might be prudent to wait for some downside follow-through before making any substantial positioning changes. Also keep in mind that although the 20/50-day ema intermediate-term trend indicator went bearish earlier this week, both the 43/17-week ema pair as well as the 10/6-monthly ema pair on the $SPX are still very solidly entrenched in buy signals (these two pairs do a great job of defining cyclical & secular bull & bear market trends). More on those later.
The bottom line is that we are still most likely in the early stages of a much deeper correction although we do have some conflicting signals in place at this time. If I had to venture a guess, I’d say that we are likely to see a pop (rise) in the market on Monday, maybe moving higher to backtest the weekly uptrend line from below (even moving above it intraday, possible even a couple of days), only to turn back down with some impulsive selling to kick in next week. That’s just my best guess but I wouldn’t be surprised to see the markets gap down & continue to move down sharply next week either. With the near-term picture somewhat obscure at this time, my plan is to wait to see how we trade early next week before making any considerable changes to my positioning. With the trade ideas now updated, I will turn my efforts into finding new trade ideas as well as highlight many of the existing active trades that still look compelling. Have a great weekend.
The following short trades will be moved to the Completed Trades (Short) category as they have either exceed the previous suggested stop (or any reasonable stop, if none suggested) or the technicals no longer warrant remaining short at this time. Several of the Active Short trades still look to offer objective entries or add-ons at this time with others trading right at or just above key support level, which may offer another objective entry or add-0n once those levels are taken out. I plan to highlight some of the more promising short trades soon in addition to adding some new trade setups over the weekend & into next week.
BWS- Stopped out as per the previously suggested stop criteria (SOAPSC)
COST- Exceeded the suggest stop of 127 if targeting T1. No stop listed for T2 but COST will be removed as the charts just don’t clearly warrant being short at this time.
GS- Exceeded the original stop of 170 a while ago as well as the 181.13 level which was most recently mentioned as a level that GS needed to remain below to keep the bearish case intact. GS will most likely fall inline with the financial sector but GS will be removed to make room for more attractive short candidates.
HAIN- The previous breakdown proved to be a false sell signal as the stock quickly reversed & move higher to exceed any reasonable stop. HAIN does still look ripe for a major correction from on the weekly time frame and may be added back as a new short setup soon.
HSNI- The HSNI setup never triggered the conventional entry of a break below the neckline (support). However, the alternative, aggressive partial position entry was triggered but the charts no longer support a compelling bearish case and HSNI will be moved to the Completed Trades category as an un-triggered conventional trade setup and a stopped-out, partial (1/2 or less position) aggressive trade.
LNKD- Hit the 3rd target for a 26.5% gain & continued to fall about 2/3rd of the way to the 4th & final target before reversing & exceeding any reasonable stop.
TASR- Hit the 2nd target for a 30.5% gain & continued lower to reverse just shy of the 3rd & final target before exceeding any reasonable stop.
TJX- Hit the 2nd target for an 11.4% gain & then reversed to exceed any reasonable stop. As the charts no longer support a compelling case to be short, TJX will be removed from the Active Trades category as a Completed Trade.
Today I plan to update all of the trade ideas on the site in order to remove any stopped out trades or those trade that no longer offer look compelling to make room for some new trade setups which I plan to add over the weekend & into next week. As I still remain longer-term bullish on precious metals & the mining sector, GLD/$GOLD, SLV/$SILVER and all of the individual mining stock trade ideas will remain as Active Long-Term Trade ideas for now but we be remove from the Active Longs category (Active Long Trades are typical swing trade idea) in order to streamline the Long Trade Ideas category, which will likely focus on quick counter-trend trades (other than select commodities).
The following Long Trade ideas will be moved to the Completed Trades category:
ACI- Stopped out as per the suggested criteria (SOAPSC) shortly after the breakout (Failed to reach any price targets).
BTU- Hit the first profit target for a quick 3% gain before reversing & exceeding the suggested 3:1 R/R stop.
NSL- SOAPSC before reaching the first price target. However, this one may still have been profitable as NSL when factoring in the dividends paid as this was a high-yielding Growth & Income Trade idea.
ANR- Hit T1 for a 13.3% gain on Aug 19th & then reversed to be SOAPSC.
NLY- Technically, NLY should have been considered stopped out when it failed to close above the most recently highlight uptrend line last Friday (see previous notes). The stock is now trading back above that level and still looks ok from a long-term perspective for those who prefer to continue to hold this high-yielding mREIT. With that being said, this Growth & Income, Long-term Trade idea will be moved to the Completed Trades category at this time. NLY hit the first profit target back in February, so far falling just shy of T2 (the final target) and the total gains on this trade, if factoring in the 11-15% dividend yield over the last year, has more than exceeded 20% even to this point. Again, NLY will be considered completed at this time although any growth & income investors wanted to hold might consider a stop just below the recent (Oct) lows.
PWE- SOAPSC (close below 7.40) before reaching any profit target.
VHI- Hit T2 for a 40% gain on Aug 22nd & moved slightly higher before reversing an exceeded any reasonable stop.
WLT- Hit T1 for a quick 14.3% gain before reversing & exceeding the suggested stop of a 3:1 R/R.
In that past I’ve discussed using the 20/50 ema pair as a tool for helping to define intermediate-term trends in the stock market. On Tuesday of this week, that moving average pair triggered a death-cross (20-day ema crossing below the 50-day ema) on the S&P 500 Index, providing a relatively infrequent sell signal. As with any indicator, this moving average pair is not perfect but as this 7+ year chart of the $SPX illustrates, you’d be hard pressed to find a more simple, yet effective way of defining intermediate-term trends (i.e- trends typically lasting weeks or months).
Once again, this indicator, like all, is subject to occasional whipsaws (brief false buy & sell signals). In fact, the last time I pointed out a death-cross on the 20/50 ema pair was back in early February. That signal proved to be a false signal as it came just on the heels of the January correction with the 20-day ema only trading below the 50-day ema for 5 days before crossing back above. The only other whipsaw signal in the pair over the last several years occurred back in early Sept 2013 with the 20-day trading below the 50-day for just 4 days. Neither of those two previous whipsaw signal would have inflicted much damage to those who positioned short on the bearish cross, had they covered that short position on the bullish cross just a few days later. The 20/50 ema pair also works very well on other US stock indices such as the Nasdaq Composite & Nasdaq 100, both of which have yet to signal a bearish crossover but are poised to do so such the markets move much lower, as expected.