For us, when we are looking at a potential “long-term” trade (long-term meaning a few weeks to a few months) we tend to advocate doing it in two steps. The first is a more speculative gambit when the market conditions are signalling a high probability of a move in one direction or the other. And then you add on when it is clear that things are going in the expected direction.
In a setup we have been following with NUGT, the triple-leveraged ETF of gold mining stocks, the second step requires two closes above the 20-day average. The chart of NUGT is a textbook example of why we do that, rather than jumping on the first breach of the average.
On the chart above, you see that the shares fell beneath their 20-day average in early October and have mostly stayed below that line ever since. On two separate occasions, NUGT closed above the average only to get hammered back down the next day. Those two points are highlighted on the chart, although our own internal methods had us making a first buy in early December.
Of course, there are times when waiting one more day means a missed opportunity. But that’s ok. Situations such as this one will make you glad to have waited.
On a side note, yesterday’s price action formed a beautiful looking “hammer”. This might well put a stop to the decline in prices. If we did not already have a small position in NUGT, we would be looking to initiate one now.
Unless you bought shares of Netflix (NFLX) during August or September of this year, you probably consider watching the stock price as something like a horror movie. Will you dare to look at the weekly chart below?
The shares are down by two-thirds since last summer. A trendline had formed, repelling prices twice previously. But on Monday of this week, NFLX jumped above that long term trendline dating back to those highs of a year ago. Conventional wisdom says that breaking a trendline in this manner should lead to a powerful move in the opposite direction. Finally, it seemed that the long nightmare was over.
Oh, but in films of this genre, there is usually a time when the protagonist feels safe only to be attacked anew. Was the price action in NFLX on Monday only a trick to lure investors out into the open? Looking at a daily chart, it is clear that the shares formed an “abandoned baby top” pattern. Monday’s range of prices was completely severed from those the day before and day after. Very bearish. And evil. This chart pattern is also known as an “island reversal”. Not surprisingly, the attempted rally yesterday morning was eliminated by the afternoon. In fact, we should expect more lower prices to come.
Remembering that the downtrend line is now providing support can provide some comfort. However, when comparing a trendline with what the daily candlestick pattern is telling us about the condition of the market, we put more importance on the abandoned baby. Expect the near-term direction to be down.
There is no law of technical analysis which says that charts must be full of wiggly lines. Often times simpler is better. Today we have two simple charts of Johnson & Johnson (JNJ). First up is a daily chart of nothing but prices. Yesterday marked the stock’s third attempt at definitively pushing through the $69 mark. In our view, this will not turn into a “triple top”. In those situations you are likely to see deeper, more jagged, corrections between tops. But here we are coming out of an orderly basing pattern. The smiley face usually results in higher prices.
Next, we will put the xattascope into reverse mode and zoom out to look at three years of prices. It is clear that long-term investors have been happy with JNJ. It is also clear that there is strong resistance coming from an uptrend line overhead. We are only $1 away from it now. It is not likely that we will see JNJ break above that trendline but it is possible that the shares could walk along it for a while. we see any rally from here as being muted and/or slow to develop.
When we last wrote about Arrowhead Research (ARWR) three months ago, we noted a long-term asteroid belt of resistance around the $7 area. The key to watch for, we thought, would be how the shares behaved as they reached this region. As you can see on the chart above, the first push through $7 was turned back, quickly sending the shares below $6.50. The next try was destined for failure. The low volume told us there was no energy behind the second attempt.
That was the end. But we didn’t forsee the catastrophe that followed. ARWR lost half its value in two months.
A week ago, ARWR blasted out of its downtrend and has held above its 20-day moving average. The shares have not made much progress since the initial surge, but that is to be expected. Surely, there are some eager sellers out there. The fact that ARWR did not get hammered back down to its lows, however, provides some reason for optimism here. The shares won’t see $7 anytime soon, but we think it is likely that they go up from the current $3.62 price. Just be careful with it — this is only for the more speculative types.
Today, many of the U.S. market indexes are falling through their 20-day moving averages for the first time in a long, long time. The Russell 2000 is a notable exception, having cracked last week and is now even below its lower Bollinger band.
If you are like us – and you probably are, given the recent state of VIX futures – then you might be expecting a significant reversal of the long. steady climb that began in mid-December. So we decided to look at some historical data to get a sense of how much of a correction to expect. For this study, we focused on the NASDAQ market.
Our rules for this exercise were pretty simple:
1) The NASDAQ Composite had to hold above its 20-day moving average for at least 40 consecutive days. It means even the session low had to be above the moving average.
2) We would enter the market at the close on the first day that it fell below the 20-day moving average. Even a brief, intraday encroachment would suffice.
We found nine instances since 1990 when the NASDAQ held completely above its 20-day average for at least 40 days. And what do you think happened next? We expected to see alot of sharp declines.
The data, however, said otherwise. Eight times out of nine, the market actually continued higher. The only negative outcome was from the market action in the spring of 2010. If you exclude the best performance and the worst performance, looking only at the 7 in the middle, the market was higher a month later and not just a little higher. Returns range from 4.24% to 12.71%!
Now that the NASDAQ has gapped below the 20-day average, we have to wonder: is this a buying opportunity or the exception that ends badly?
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.