Sunday, January 22, 2012

BMC Software (BMC) nudges against price channel resistance

Friday’s trade saw BMC Software, a component of the NASDAQ-100 index, arrive at important price channel resistance on the hourly chart.

As usual, let’s begin the investigation with the big picture: the daily chart, covering 4 years of price action (4 y d). With a moment’s work, one can fit a price channel that relatively cleanly encapsulates price behaviour from September 2008 through September 2011, including all the local peaks of the rally; it’s shown below in dashed red lines. While the channel could be a better fit – for instance, by touching the local minimum of September 2010 – it nonetheless does suggest that BMC price action can be modeled by price channels to a relatively successful degree.

Moving on to the hourly chart (180 d 1h), BMC again reveals itself as behaving in accordance with the boundaries of a price channel; virtually all price action from July 28, 2011 to the present fits within a single set of parallel trendlines.

Moreover, the slope of channel boundary lines is a significant definition of support or resistance WITHIN the channel itself, namely in the period of November 22, 2011 to January 11, 2012, when price action continually bounced from a trendline of the same slope as the price channel. This trendline is shown as a dashed red line in the supplied screenshot above, just like the dashed red lines of the larger price channel.

In general, such behaviour is quite often in evidence; well-defined trendlines on a chart often have identical slopes (not merely similar ones). Indeed, a price channel is nothing but the coincidence of two trendlines with the same slope.

Back to the hourly chart, Friday’s price action brought BMC to exactly the upper bound of its 6-month price channel. If the channel is to not be breached, price action has only one way to go. Yet this certainly does not look like a sure bet. Friday’s rally advanced beyond BMC’s one-month high of $33.67, supporting the view that the current advance to the price channel resistance line will pierce that line and continue higher still.

The 5-minute chart (20 d 5m), finally, affirms the original thesis, namely that Friday’s close of $34.01 represents a point of significant resistance; on this zoomed-in perspective, price action has reached the resistance side of a relatively steep 2-week price channel. It’s shown below as a set of dashed yellow lines.

Still, a break upward in price would not be entirely unexpected; for instance, the Price Oscillator index, defined as the difference of current price to its 200-period moving average (with each period, in this case, marking one 5-minute bar) and shown in the lowest quarter of the screenshot above, is still some 30 cents below the past month’s global maximum.

Tuesday, January 17, 2012

Electronic Arts (EA) in a capitulation sell-off

Electronic Arts is one of very few components of the NASDAQ-100 that, on an hourly chart (180 d 1h), is currently experiencing a capitulation sell-off. Today’s price action may have brought the bearish move to a near-term conclusion.

Let’s first examine Electronic Arts from the perspective of the past few years. Prima facie, EA’s daily chart (4 y D) appears underwhelming; price has maintained a relatively narrow band from November 2008 to the present. That said, a well-defined (though relatively horizontal) price channel can be conjured up between April 2010 and the present; it appears below in red, and it indicates support a dime or two below today’s closing price of $17.74. A horizontal support level at ca. $17.60 is also in evidence.

On the hourly chart (180 d 1h), a different price channel – distinct from that in the daily chart, but similarly well-fitting – indicates support at about $17.60. I qualify this price channel – drawn below as dashed red lines – as robust or well-fitting because it is defined by several points in the data (in this case, 3 points for the upper line and 3 for the lower line) and because it encapsulates nearly all the price action in the period over which it is drawn. Generally, weaker price channels could be defined by as few as three points in total: 2 for one line, and 1 for its parallel opposite.

Confidence in the price channel on the hourly chart is further augmented by soundness of fit of the earlier price channel on the chart, extending over the period of 10.VIII.2011 through 16.XII.2011 and colored grey on the screenshot. A security’s tendency to form and sustain robust price channels tends to be an enduring quality.

The steep, yellow price channel on the far right of the hourly chart is another data point to consider. Formed only over the past fortnight, this channel is markedly steeper than the red channel of which it is a subset. And yet, despite the yellow channel’s steep slope, today’s price action managed to pierce through its lower support line on volume that measured over twice the three-month average.

The sum of these considerations – price action coming into long-term price channel support, price accelerating its downward trajectory (indicated here by breaking support on a steep, short-term price channel), and volume being heavy – strongly suggests the capitulatory end of a bearish move.

Finally, the five-minute chart (20 d 5m) confirms the observation of accelerating bearish price action.

Pursuing a contrarian strategy during capitulatory moves is risky and demands tight and disciplined stop loss orders. Although $17.60 is a logical terminus point for the bearish move, the capitulation may reveal itself to have yet another – still steeper – leg down. Caveat emptor.

Thursday, January 12, 2012

Abbott Labs (ABT) approaches support

Abbott Labs appears headed toward support on the hourly chart (180 d 1h). The $54.7-54.8 range represents support from a trendline defined by the lows of ABT price action since August 2011; it’s the red dashed line in the screenshot below.

Additionally, $54.8 is an exceptionally well-defined line of horizontal support, stretching back to October 21, 2011; it’s marked below as a solid blue line.

Zooming into the intra-day movement of the past month (20 d 5m), the $54.7-54.8 range also finds support. A price channel extending from 4.1.2012 currently has its lower line at approximately that price; it’s the dashed yellow line below.

Betting on a bounce in ABT from about $54.8, particularly if that price is reached in the midst of a broad market that is not in significant decline, appears to offer a relatively high probability of favourable resolution.

Wednesday, January 11, 2012

Home Depot (HD) positioned at resistance

As the New Year equities rally continues to grind marginally higher every day, a number of large-cap equities are at significant resistance levels – and, moreover, often across a variety of charting time frames.

Home improvement retailers Lowe’s and Home Depot are two such examples. In the case of the latter, today’s intra-day high of $43.60 touches price channel resistance on the daily, hourly and 5-minute charts.

On the daily chart (4 y D), the past days’ price action brings Home Depot into resistance from a significant price channel defined by the security’s five greatest price extremes from July 2009 to the present; it’s the yellow dashed line in the screenshot.

Also on the daily chart, the Price Oscillator indicator, defined here as the difference between price and the 200-day moving average, is only $0.95 below its 4-year high, indicating an over-bought market.

On the hourly chart (180 d 1h), the current rally brings HD price action to the resistance-edge of a price channel defined by the stock’s movement since August 2, 2011.

Price action looks particularly vulnerable due to the starkly decreased volatility between 20.12.2011 and the present. To be sure, seasonality (i.e. the holiday season) plays a significant part; yet, no matter the cause, such a lull and complacency very often precede a bearish turn of a market.

Finally, the five-minute chart (20 d 5m) confirms that, from an intra-day perspective on the last 2-3 weeks, today’s price action brought HD to the resistance-end of a price channel.

Of course, the extrapolation of such analysis of Home Depot is probabilistic, as is any attempt at prediction of the markets. Anything can happen at any time; tomorrow, price can pierce upward through the resistance lines on all three chart time frames.

Nonetheless, the positioning of HD’s price action into resistance on a variety of time frames strongly suggests that, false upward breakouts notwithstanding, the next month or two might see bearish sentiment take command, at least temporarily.