Shares of Target (TGT) recently reached 5-year highs, but in our opinion shareholders will have a long wait ahead of them before seeing any further advances. To understand why, we need to back up to the beginning of 2011. The highs seen at that time formed the left edge of a cup-and-handle pattern. The right hand side of the cup was formed in March 2012 and the “handle” took prices down to their 20-week moving average. As is often the case with this pattern, the shares went higher before topping out in August.
Of concern to us is the fact that trading volume dried up throughout 2012 even as the shares marched higher.
And now TGT has tagged the lower Bollinger band on the weekly chart for the first time since the beginning of the year. Sometimes, this event can provide support for prices. But, based on the trend of volume during the advance, we suspect the shares will “walk” along that lower band for a while.
Let’s now turn on the xattascope and see if we can find any more information on a daily chart. On this chart, we first see that the shares twice found support this autumn at $61. On Wednesday of last week, TGT closed decisively below that level and now sits at $60.50.
As on the weekly chart, prices are scraping along the lower Bollinger band. We would note also the information provided by the 2-period RSI. Traders sometimes use extremely low values of this indicator to find opportunities for a snap-back rally. In the case of Target, each of the last three rebounds was weaker than the one before it. That is a trend which cannot go on forever but we are not eager to anticipate a stronger rally.
There is a bit of an air pocket between here and the $57-58 range. Our best guess is that the shares continue lower into that range before any tradable rally presents itself.
The chart above is of the last half-year or so of the S&P 500, along with one of our homegrown proprietary indicators. The reason we are showing it today is to demonstrate that you do not need a PhD. in physics to do it (although you do need to be somewhat numerate). And also we have not found anything else worth writing about this week.
This particular indicator is a cousin of the Relative Strength Index, or RSI. Compared to RSI, however, this one uses a different “look back” period, a different weighting scheme, and different data. So it is really only a distant relative of RSI. Interpretation is quite simple. Pay no attention to the wiggly line until it goes below 10. When we get a number in single digits, there is likely to be a profitable swing trading opportunity. No indicator is perfect – one of the seven signals on this chart resulted in a loss.
Markets often behave differently at tops compared to bottoms. On this chart, our indicator happened to do a good job of marking short-term tops. But we do not use it for that. Historically, this “mystery indicator” has proven to be less reliable in those situations. So we use it only for finding low points.
When practicing technical analysis, you do not need to restrict yourself to a handful of popular indicators. All you need is some sense of how markets (people) function, some basic math skills, and some creativity.
In the market selloff this week, XOMA has behaved reasonably well. The stock’s 20-day moving average has supported prices throughout the week and, in fact, the price is now higher than it was at the beginning of this week. But don’t get overconfident with this one. A look under the hood tells us this stock may have only one last gasp left in it.
1) Volume on successive pushes higher has dried up. There are simply not enough buyers coming in to the market.
2) RSI, always to be taken with a grain of salt, has nonetheless been trending lower as the market for XOMA shares has become more uncertain.
3) On the most recent push up, XOMA found it difficult to reach for that upper Bollinger band. In a more healthy environment, the shares would have been bumping along that band. Prices may finally reach the upper band, but only because the band is now falling.
Our advice is to sell into any rally.
Until recently, Open Table (OPEN) has been terribly bearish, dropping from 118 in April to a recent low of 31. In 9 months, it lost three-quarters of its value. It fell quite hard, finding temporary support at its 20-week average and then tumbling along the ever-decreasing lower Bollinger band.
Last friday, OPEN closed at $40.15. Could the bulls finally be taking control of this one? You will notice that during the first half of the decline the prices were scraping along that Bollinger band. Later, whenever prices would hit the band they would quickly reverse. And finally at the apparent bottom we see that prices never even touched the lower band. It all adds up to a weakening of selling pressure.
Is it time to jump in? More aggressive types might want to start buying here, but we want to see two things before we can recommend it as a long-term trade:
- Prices should reclaim the 20-week average and stay there for more than a couple of days
- The 4-week RSI should get to at least 80
In specific situations, we like to include a 4-period RSI with our charts. The current weekly chart of gold fits the conditions.
Notice how RSI(4) dipped below 30 last month. It hasn’t done that since January 2010, or 20 months ago. What we are looking for is whether RSI(4) will make a second thrust below 30 or if it will cross convincingly above 50.
A cross above 50 would be a signal that the trend remains intact. However, another break below 30 would turn us bearish in the short-to-intermediate term.
And look where we are on the chart. A $100 drop in gold would put us back at the bottom of the price channel and also at our modified lower Bollinger band. A break of that support would almost certainly push RSI(4) well below 30. Those three signals, together, would be a big negative for the direction of gold prices.
Of course, gold could simply turn higher from here. But if it does reach the mid-$1500 area we will be watching intently.