Sunday, August 28, 2011

Technical Picture - Bulls and Bears Battle for Domination - Symmetrical Triangle

Big Picture - After breaking the H&S top on high volume, bears pushed prices lower, beyond the full measured move of the pattern. Now the SPY chart has carved out a textbook symmetrical continuation pattern.

Drilling down to the 60 minute chart, we note that after filling the gap on Thursday morning, bears stepped in to push prices lower. Following the Bernanke speech, bulls stepped in for another relief rally.

The upper blue dotted lines are areas where I expect that bears to add pressure, and the lower blue dotted lines are areas where the bulls will play defense. This pattern could play out for quite some time before one side becomes victorious. In fact, it may not look like a perfect symmetrical triangle when the breakout finally occurs.

How to play the reversals within the bigger pattern. Prior to Jackson Hole, Bernanke tanked the markets on August 9th with his FOMC release. I didn't want to get in front of freight train on Friday, as the markets swooned on the lack of relief measures in his speech, but I did want to participate on any relief rally following the dip. The best way for me to do this is to wait for confirmation of a counter-trend.

I look for the RSI to move quickly from the lower range to above 60 then dip under. When it crosses back above 60, if momentum is above 0, I go long. Negative divergence of the RSI to higher prices signals a short term top and time to take profits. An orderly consolidation such as the symmetrical continuation triangle below, can allow for a second entry.

The same counter-trend setup works after a rally. Look for the RSI to quickly move from higher readings to below 40. If RSI moves back above 40 and crosses below on negative momentum, it sets up a short. It's important that the inital move in the RSI is quite fluid as is the move in price, otherwise, it could be signalling a minor move within a larger consolidation pattern, which is fine if you're nimble, but if you're not, stay on the sidelines.

Click on chart for larger view

As I noted in my last post, GLD had the potential for a 62% Fib. retracement. That target was reached EOD on Friday. Now that hurricane Irene is on its way out with less damage than forecast, the bears might come in and ambush GLD in the ambush zone.


Ashish said...

Hi Jamie,

How do u know when its time to boot a stock from the watchlist?

Currently, many stocks on my watchlist like CAT and BA are hitting their upper limits but not sure whether to keep them on the watchlist for reversal plays or boot them.


Jamie said...

Hi Ash,

I'm not sure what your overall objective with the WL is. I wouldn't want to get rid of the charts if you've already mapped them all up.

CAT, for example, trades much like the SPY and can set up good reversal short. BA, I don't follow. You want to have a few stocks like POT on your WL. POT didn't break with the market, so it is much stronger than herd stocks that closely mirror the markets. When the market is in rally mode, strong names usually run faster and farther.

Hope this answers your question.