Before I comment on the markets and SBH, I just wanted to mention that the posts will continue to be on the light side this week as I continue to work on some technological issues on several fronts, both with programming on the back-end of the site as well as my primary computer. I have a new power supply unit being shipped out today which hopefully should resolve the issues that I’ve been experiencing & I should be able to restore my focus on the markets, updating the existing trade ideas as well as adding some new ones.
In looking through some of the existing trades listing on the site, many of which have already hit one or more profits targets and/or exceeded their suggested stops, I am noticing a common theme amongst many of the short trades that were initiated a while back. SBH illustrates this theme well so I’ve mocked up a few charts share. This first chart is the weekly chart of SBH which simply shows a very well-defined uptrend line that started at the Nov ’08 lows and finally broke down when SBH was added as a short-trade back in Sept ’12. Since then, prices have moved up to make a marginal new high but still remain below that primary uptrend line and more importantly, there is significant negative divergence forming as the MACD & RSI are both rolling over and as they put in a lower high (i.e.- Negative divergence). Solid confirmation of this divergence will come on a weekly MACD bearish crossover (fast line crosses below the signal line).
Zooming down to a daily time frame, I’ve labeled three significant technical events on this stock. First (#1) was that breakdown and backtest of the nearly 5 year uptrend line. When that breakdown happened, we had solid negative divergences in place on three key indicators that I often watch on the daily time frame; the MACD, RSI 14 and the CMF. From there, SBH dropped about 20% but as this trade was predicated largely based on the breakdown of the nearly 5 year bull market uptrend line, my targets were commensurate with where the stock is likely to eventually fall before moving substantially higher. As with all the distractions and sheer number of trade ideas on the site over the last several months, SBH fell off my radar but should have been updated when event #2 occurred.
Just to share for future reference, as I try to avoid hindsight analysis unless there is an educational component in doing so, event #2 should have been a clear buy signal and stop area for the short trade (which would have still been profitable at the time). This was a clearly bullish technical event as SBH not only took out the intermediate-term downtrend line that had been in place since the highs back on Aug 28th but that breakout in price was also confirmed by not one, but all three indicators below moving above their respective downtrend lines as well. Fast forward to today and as #3 illustrates, SBH has come full circle on the daily time frame an now looks to be on the precipice of breaking down from a bearish rising wedge pattern, confirmed with divergences in place below.
Bottom line is that SBH reflects a current theme that I’m seeing on a lot of stocks at this point in time: Many of these stocks broke below their multi-year bull market uptrend lines either in late 2012 or early 2013 and were dragged higher with the broad market over the last few months, quite a few putting in a marginal new high on suspect volume with most key indicators and oscillators failing to confirm the higher high in price (i.e.- daily and/or weekly negative divergences). View from a bigger-picture context (weekly & monthly charts), these stock have the potential to fall much further than the patterns on the daily time frames would suggest as the weekly patterns take precedence when forecasting the longer-term (months+) direction. As always, a case can be made for both sides (bearish & bullish) as there are also a substantial number of stocks making new highs while taking out any recent divergences that were in place.
We all know that a pullback is coming soon. How these stocks and the broad markets act on the first significant pullback should offer some insight as to whether that pullback will prove to be just another buying opportunity in an ongoing bull market that has more life left in it or whether it might be the start of a much deeper and prolonged correction as the longer-term charts still indicate is possible. Most of the major indices remain stretched to the very limits with what can be viewed as long-term bearish technicals (e.g.- Prices on major indexes at or near multi-year or all time highs, many making marginal new highs with many indicators and/or oscillators failing to do the same). In other words, these divergences and potentially bearish technical patterns will be negated should prices move much higher.
From a fundamental perspective, there’s also a clear trend of decelerating growth in the majority of key macro-economic indicators not to mention valuations and sentiment approaching the red zone as well. All in all, this market does not offer an attractive risk to reward profile for entering new long positions or remaining fully invested on the long-side at this point nor does the current momentum warrant aggressively shorting this market. Regardless of market conditions, good technical setups always exist somewhere and as soon as I get these tech issues resolved, I’ll refocus my efforts on finding and sharing some of the better looking trading & investing opportunities out there.