3SOF

OK so for example, one that I have been looking at just recently is Sony Corp (SNE).  To me it looks like it has spent most of the last year building a falling wedge, and while that wedge has had a couple of spikes below support, it looks pretty valid.  What is clear is descending resistance from the late april high of 52.15.  I put that resistance to come in at about 41.10 right now (unfortunately, I only use stockcharts, which makes it very hard to identify exact trendline gradients like you can in metastock  )  The October low was 37.24.  From this I would calculate that a breakout of this pattern would put a target of (52.15-37.24 = 14.91, + 41.10) $56.01 IN PLAY, approximately a 36% move from these levels.  A secondary target would be the 52.15 high, and the fibonaccie retracement levels also suggest intermediary target levels where the stock may encounter resistance on its way.

Actually, I like the look of the SNE chart right now, and think this could have significant upside potential in the next year (especially if PS3 sales go better than forecast), but I will post my comments about it in another thread.  This was just for illustrative purposes here.

Scotsman,

That's a very nice job on SNE.  Applause.

Your  down trendline TWICE has been validated as resistance.  After we connect the first two data points on the down trendline, the next tag of it, and failure right there, says, "Yes, that's resistance, alright!"  There's your first validation of resistance.

That trendline just got tagged again for a SECOND validation of it as resistance, which says, "YES, I already told you that it's resistance, now LISTEN UP: That's resistance!"

What's nice about getting a validation, and especially more than one validation, is that "usually," a move above it (or below it, if it's support) has some significance.  Yes, you could get a false breakout, but that's why we use stops.

In the short-term, SNE could get "Cramerized" on Monday, as our cumulina puts it so charmingly. 

Cramer did an interesting piece on MRVL of Friday night, which likely will pop higher on Monday, as a result.  He began by comparing it to NTAP and RACK, two stocks that had a pretty good selloff this summer, but both guided higher, and both have enjoyed a nice rally as a result.

MRVL just guided higher, so Cramer thinks that it will respond like NTAP and RACK did, and have a nice rally.  He prefers it to SNE, which he feels "has its hand in too many pots" (my words...I forget how he put it).

Cramer gets some right and some wrong, like the rest of us, so he very well could have it wrong about SNE, but as we know, short-term, SNE could get "Cramerized" a bit. 

Your SNE chart puts me in mind of the big six-month Falling Wedge in APPL, prior to its July 28 breakout.  The pullback to the top of the pattern was a PERFECT entry (if there is such a thing as "perfect."). 

I simply didn't see it.  I had it labeled as the H&S Top...then an Inverse H&S...then the big drop into July threw me off...the gap up parabolic rally threw me off...

Curses! 

It all morphed into this BIG Falling Wedge!  The high was 86.40.  Thursday's high was 86.30, so that target MADE within ten cents.  Cramer has a $100 target on it, by Christmas, FWIW.

Funny how these things can look like a "no brainer," in retrospect, isn't it? 

Here's Cramer's comments on MRVL and SNE from Friday night, if you're interested:


"Cramer told viewers "there's nothing more heartbreaking" than missing a 12-point run like people did if they listened to his recommendation to sell Network Appliance (NTAP - news - Cramer's Take - Rating) at its bottom. However, in Rackable Systems' (RACK - news - Cramer's Take - Rating) similar case, Cramer stuck by this stock and told people not to sell even though it was going down. If market players sold Rackable Systems at the bottom, they missed an "awesome 15-point run," he said.

Therefore, Cramer said he's devoting his whole game plan to one stock -- Marvell Technology (MRVL - news - Cramer's Take - Rating), which he owns for his charitable trust, Action Alerts PLUS. "I am not getting this one wrong," he said. "It has been a real stinker like Network Appliance and Rack."    

But on Thursday, the company reported "decent revenue and gave great guidance" like the other two tech companies, Cramer said.

The company is all about product cycles, meaning it should be poised to make a lot of money, he went on to say. Cramer does not believe that Nintendo and Sony (SNE - news - Cramer's Take - Rating) are the console plays people should go with. But he does believe Marvell is in a good spot to see an upswing.

Plus, it is entirely possible that the estimates coming from analysts are "way to low," Cramer said. "When you set the bar low, it becomes easy for the stock to jump."

Listen to Marvell's guidance and buy into its bottom, he advised. It is repeating Network Appliance and Rackable's history."

   

Topic: Leading Indicators: MACD

1. Leading Indicators can be useful in telegraphing in advance, a rally or a pattern breakout in a stock.  Or, a breakdown, if it's bearish.  MACD is an example.

2. Coincident Indicators move right with the stock.  Many ocsillators would fit this bill.

3. Lagging Indicators confirm what we already know, like a Bullish or Bearish Cross of Moving Averages.  Those signals can be issued long after a stock has rallied, or has broken down, and also are known as "Confirming Indicators."  In that example, the "Cross" is confirming what we already know.

The first example that we'll look at, is the Bullish Inverse H&S breakout in the MACD of ISV, a stock that Holygrale currently is playing.

For easier chart viewing, we'll look at the MACD chart first, then the stock chart itself.

1. We can see that the first clue of an impending Inverse H&S breakout in the MACD came when it "banged off the signal line," coming out of the Right Shoulder.

The way that we would use that signal, is to look at the high of the day prior to that "bang off the signal line."  The high was 1.43, so that's our "Buy Pivot," meaning that if the stock trades one penny above that, a "Buy Signal" is issued, so "Buy a print of 1.44."

At Friday's 1.89 close, that's a paper gain of 31.2%.

2. We also can use a breakout above the neckline as our Buy Signal. which occurred on November 17.  The "Buy Pivot" was 1.50, so the "Buy Signal" was a print of 1.51.

3. Finally, we can use MACD crossing above the zero line as the Buy Signal, which is the more traditional use of this indicator, independent of using the Bullish Inverse H&S pattern.  That signal was given at 1.61.

Next, we'll look at the chart, with those three entries marked.

The 3 Signals mentioned in the last post are marked with a green arrow, and a green "M."

Notice that when the first signal was given when the MACD "banged off its signal line" coming out of the Right Shoulder of the Inverse H&S, the 8-day (solid green line) already had made a Bullish Cross above the 22-day (solid red line), and that ISV was finding support there, prior to rallying to 1.65, establishing the neckline of the Inverse H&S pattern in the chart itself.

Notice also that when MACD finally crossed above the zero line, ISV was almost at the 1.67-1.65 neckline, so that traditional use of the MACD lagged a little.

Getting in on the first signal, coming out of the Right Shoulder, or on the second signal, the breakout of the Inverse H&S pattern in the MACD, would have us in the stock at a much lower price, and well ahead of the Inverse H&S pattern breakout above 1.67-1.65, which occurred on December 5.

The Inverse H&S breakout in the MACD was a leading indicator, telegraphing the breakout in the stock.  It lead the breakout by almost 3 weeks.

Next, we'll look at a different "leading indicator" signal from the MACD, using Southern Peru Copper (PCU).

Topic: Leading Indicators: MACD - "The 1-2-3 Go Signal" and "The 1-2-3 Bang, Bounce, and Go Signal"

At green #2, there is a Positive Divergence in the MACD Histogram (vertical black lines).  That sometimes is enough to give a stock a pop to the upside.  Much depends on what the chart itself looks like, and we always want to view indicators in that context: what does the chart look like?

At green #3, MACD crosses the zero line.  That's the "Go" of "The 1-2-3 Go" Signal.  Again, much depends on the quality of the chart itself.  Is there a base?  Is there a pattern that has formed, that is about to break out?

At green #4, MACD has come back to the signal line AT ZERO, and has kicked higher from there .  That's the "bang and bounce" of the "1-2-3 Bang, Bounce and Go" signal and it often is a little stronger signal the "1-2-3 Go" Signal.

I coined that name for lack of coming up with something better.  "Bump And Run" already has been taken, or I would have called it that.  It's a good description of what occurs.

Next, we'll see how those signals played out in the price chart of PCU.

Before we do, though, take a look at the Negative Divergence in the MACD  that occurred in November.  "Sometimes," that's a sell when the MACD goes below its signal line.  Again, much depends on what the price chart itself is doing.

We'll also look at that Negative Divergence in the next post.

We can see from the price chart that taking any one of MACD signals at Green #2, 3 or 4 would have worked out very nicely.  All three of the signals served very well as "Leading Indicators" of the impending Rectangle breakout in PCU.

Quote from: Melf Elf on December 10, 2006, 04:52:53 PM
... look at the Negative Divergence in the MACD  that occurred in November.  "Sometimes," that's a sell when the MACD goes below its signal line.  Again, much depends on what the price chart itself is doing.

We'll also look at that Negative Divergence in the next post.

The actual "Sell Signal" off that Negative Divergence was issued on November 14, when the MACD crossed below its signal line.  PCU closed at 50.91 that day, but the low of the selloff was put in the very next day at 49.64, a successful re-test of the 49.67 high of the Rectangle.

Great example of how we often see or hear, "There's a Negative Divergence in MACD and it crossed below its signal line, so it 'said' SELL."

No, it didn't.

MACD still is above the zero line, and the stock itself hadn't done anything wrong.  In fact, the stock had done "everything right" by finding support at the Rectangle pattern breakout, both on November 15 (low was 49.64) and on November 17 (low as 49.66).

That's bullish.

Shorting the MACD "Sell Signal" at 50.91 would have us in trouble at the moment.  PCU closed Friday at 55.83, so we'd be squeezed for a paper loss of 9.7%.

Topic:  H&S Patterns

Sub-Topic: "Got Game?"

I'd not only like to write a book on Technical Analysis, I'd also like to invent a computer game to go along with it that, hopefully, would be as wildly popular among the stock market crowd as Texas Hold 'Em is among the gambling crowd.

Dream on, Melf Elf! 

It would go something like this...

You're presented with this chart, and you decide whether to Buy, Sell (Sell Short), or HOLD.

You see that it's a H&S Top, in fact, it looks like a DOUBLE H&S Top!

We know that those can be terribly bearish, so we refer to the book, "Melf Elf's Guide to Financial Healf and Wealf" to see about it.

At the end of the chapter, there are TIPS, like:

Tip #1: You want confirmation of the breakdown, by the stock closing below the pattern and below the "lowest low" of the formation.

In this chart, the 10.65 low hasn't been taken out yet.

Tip: #2: Observe the high of the Right Shoulder (s).  That "shouldn't" get taken out to the upside.  If it does get taken out to the upisde, it might not be as bearish as it seemed.

In this chart, the highs of the TWO Right Shoulders are circled in blue.

Okay, "Place your bets!" 

Next chart coming up in just a minute. 

By the way, I might get an opportunity next week to play this game in real time, so I'm practicing a bit.

In my fantasy computer game, as each day's candle is presented to you, you must decide what you want to do with your position, just as in the real market.  Buy, Buy To Cover, Sell, Sell Short or Hold.

And, just as in the real market, you can reverse your position. 

At the close in this chart, Mystery Stock has taken out the highs of BOTH Right Shouders.

Remember:

Quote from: Melf Elf on January 28, 2007, 12:00:22 PM
Tip: #2: Observe the high of the Right Shoulder (s).  That "shouldn't" get taken out to the upside.  If it does get taken out to the upisde, it might not be as bearish as it seemed.

In this chart, the highs of the TWO Right Shoulders are circled in blue.

Tip #3: If the Right Shoulder is taken out to upside, you want confirmation of that by the stock CLOSING above the Right Shoulder.

Mystery Stock closed above 12.12, but didn't close above 12.78.

Tip #4: If the Right Shoulder(s) of a H&S Top pattern get taken out to the upside, you then want to see a close above the high of the Head of the pattern.

The high of the Head in Mystery stock is 14.00.

Okay, place your bets!

In the computer game, each day's candle is presented, and play continues.  We fast forward to this candle, in which the high of the Head, has been taken out on a print basis, but NOT on a closing basis.

Remember:

Quote from: Melf Elf on January 28, 2007, 12:15:59 PM
Tip #4: If the Right Shoulder(s) of a H&S Top pattern get taken out to the upside, you then want to see a close above the high of the Head of the pattern.

Tip #5: If there is a CLOSE above the high of a H&S Top, instead of subtracting the distance from the high of the Head to the neckline, and then subtracting that from the neckline on a bearish break of the neckline, you ADD the distance to the top of the Head.

In the case of Mystery Stock, you would ADD about 3.34 points to the 14.00 high of the Head.

Tip #6: If a H&S Top is taken out to the upside, there "could be" some Shock and Awe to the upside, because the expectation of most players is that the pattern is bearish, and will be resolved to the downside.

Tip #7: Unless there is a clear takeout of the high of the Head, be prepared that it "could be" just a Double Top, and that it still is bearish.

Place your bets!

Quote from: Melf Elf on January 28, 2007, 12:46:12 PM
Next post, we'll look at a somewhat similar pattern that currently is playing out.

Before we do that, let's do a little more of the fantasy computer game for practice, so that the pattern

Quote from: Melf Elf on January 28, 2007, 12:00:22 PM
Topic:  H&S Patterns
Tip: #2: Observe the high of the Right Shoulder (s).  That "shouldn't" get taken out to the upside.  If it does get taken out to the upisde, it might not be as bearish as it seemed.

There aren't many things in trading about which I'm unyielding, but that's one of them, as many of you know!

If ever I'm short a H&S Top and The Right Shoulder gets taken out to the UPSIDE, I "Buy To Cover" in a nanosecond, because the market is telling me that I am at risk for a UPSIDE explosion ("Shock And Awe").

In NTRI, we can see that, not only was the high of the Right Shoulder taken out to the upside, NTRI then came back down to it, closed below for one day, but then ripped higher, and CLOSED above the high of the Head.

Uh-oh....Shorts Beware!

We know what's coming, don't we? (We need a "Terrified Face" on the toolbar).

Yep...SHOCK AND AWE.

In addition to the pattern itself being so deadly for the shorts, I would suggest a few other things that also are just as deadly in a stock like NTRI.

NTRI already had rallied probably 1,000% in about a year's time, so we tend to say things like:

1. "That's way-y overextended.  What a great short!"

2. "It's too 'overbought,'" not realizing that the MOST BULLISH thing that a stock can do, is to get overbought, and remain overbought.

3. "It isn't 'worth' this much, based on P/E, etc."

Many other examples could be given, but in all of those three, aren't we imposing our opinions on the market when we step in and unilaterally decide to short something like this?

Yes, of course, we "could be" right when we do it, but when we're getting the kind of BULLISH signals that NTRI was giving ahead of this "shock and awe," we're begging, at least a little, to have our heads handed to us.

We need a "Decapitated Head" on the the toolbar.

Actually, though, they all look decapitated, don't they? 

In the winter of 2006, GIGM appeared to be putting in a DOUBLE H&S Top.

The first day of spring, however, it took out the high of the Right Shoulder (WARNING), and then very quickly took out the 5.63 high of The Head.

Shorts Beware!

GIGM did far more than just the 7.36 target getting MADE.  It went on to a high of 10.78 in the Bearish Rising Wedge, at May earnings, prior to selling off to 6.18, still above the 5.63 high of The Head.

A couple of very good lessons about the takeout of a Right Shoulder, and then the takeout of the HEAD of a H&S Top, from NVEC:

Quote from: Melf Elf on January 28, 2007, 01:13:54 PM
If ever I'm short a H&S Top and The Right Shoulder gets taken out to the UPSIDE, I "Buy To Cover" in a nanosecond, because the market is telling me that I am at risk for a UPSIDE explosion ("Shock And Awe").

1. In NVEC, anyone who didn't respect the upside takeout of the high of the Right Shoulder, at 31.66, got punished fairly swiftly.  NVEC took it out, used the high of the Right Shoulder as support for two days...

.... then ..."shock and awe" to the upside.

2. These patterns are by no means a "piece of cake."  Nothing in the stock market is, as we know.  The target of 52.96 IN PLAY missed getting MADE by a very wide margin. 

The high only was 46.38, but that's still plenty of pain from the the takeout of the Right Shoulder, at 31.66.  That's a gain of  46.5% for The Bulls, and very painful for anyone holding it short beyond the Right Shoulder upside takeout.

The breakdown of the Bear Flag, for anyone long, was a very good clue that the upside target wouldn't get MADE, by the way, and the failed re-test of the breakdown about two weeks later gave a very strong suggestion to give it up, as far as anymore upside for awhile.

Quote from: Melf Elf on January 28, 2007, 12:46:12 PM
Next post, we'll look at a somewhat similar pattern that currently is playing out.

Sorry it took so long to get here. 

The pattern that we've examined currently is playing out in HLIT, which will report earnings after the bell on Wednesday, January 31 (always check me on those, but that's what I read awhile back, and I wrote it on the chart).

1. The "Perfect Buy" (if there is such a thing  ) was the January 11 gap up opening to 7.52, exactly one penny above the 7.51 high of The Right Shoulder.

WARNING  to The Bears.

Quote from: Melf Elf on January 28, 2007, 12:00:22 PM
Tip #4: If the Right Shoulder(s) of a H&S Top pattern get taken out to the upside, you then want to see a close above the high of the Head of the pattern.

Michael pointed out to us in the HLIT folder on The Previous Picks Board that HLIT was trading at a new high (applauded...those "Heads Ups" can be so helpful).  It had CLOSED at 8.68 on January 23, exactly one penny above the 8.67 high of the Head.

Another WARNING to The Bears.

3. The Bears managed to close it back below the 8.67 high of the pattern on Thursday January 25, putting the target of 10.29 ON HOLD, and also tried to hold it under water on Friday morning, pushing it down to 8.33, but as I mentioned in the HLIT folder on Friday, it looked like The Bears tried to hold a beachball under water...

BOING!

HLIT bounced right back above the PIVOTAL 8.67.

Pivotal because The Bulls control the boards, above 8.67, and 10.29 is IN PLAY; Bears control the boards below 8.67, and the target goes ON HOLD.

My core entry is 8.91, higher than I would like it, so I jockeyed around a bit intraday on Friday, so that my "net" entry now is right at 8.68.

That's immaterial to all of you, of course, but I want to point out that there certainly is risk entering here, ahead of earnings.

If the market doesn't like HLIT's numbers (it doesn't matter what they actually are...it's the response to earnings that matters), HLIT could gap down, below recent support at 8.06.

My stop is 8.05, a penny below that, which I'll sell if that gets printed before earnings, and I also will sell any gap down below that AT THE MARKET, no questions asked.

I'd really like to hold this for the "shock and awe" potential at earnings, but I'm disadvantaged with my entry, which now is reduced to 8.68, so I might sell half, to lay off some the risk.

If I had caught that "perfect entry" of 7.52, on the takeout of the Right Shoulder, I would hold through earnings for sure.  I'd have plenty of cushion (an 18% paper gain, at this point)  to absorb any hit from a gap down opening off earnings.

What I'd like to see this week:

1. Another selloff to 8.67, only this time, for the Bulls to establish that as support, like NVEC used the high of the Right Shoulder as support, prior to "shock and awe."

2. HLIT blow away earnings expectatations to the upside.

3. Or, HLIT simply meet earnings expectations, which "should" bring in buyers who don't like to hold long ahead of earnings, but who like the H&S Top pattern breakout that we've gotten, above 8.67.

There is more risk than usual, buying HLIT at this high level "pivotal juncture," ahead of earnings, so I want to make it clear that the point of this series of posts isn't a recommendation to buy.

Just wanted to point out the pattern, and it's characteristics, mainly so that those of you learning can understand how these things evolve in the market, and watch how it plays out in real time.

Also, to learn things like:

1. Where's a good entry?

2. Where's the stop?

3. What's the anticipated risk?

4. What's the expectation of reward?

Hope that some of this helped to explain those things.