Friday, February 10, 2012

Apple (AAPL) in a capitulation rally

The S&P 500 index is continuing its low-volatility consolidation just below significant resistance around 1157. Today’s intra-day high of 1154.3 came quite close. But a bigger story in today’s markets concerned one of the index’s banner components: Apple (AAPL).

Today’s price action brought Apple into resistance from well-formed price channels on the daily- and hourly- bars charts. While remarkable in and of itself, the arrival of the bellwether stock at sturdy resistance provides compelling support to the higher-order thesis that the broad market might face an imminent volatility breakout, probably to the downside.

AAPL, 4 y 1d

AAPL, 180 d 1h

The stock’s approach of resistance is additionally notable for occurring on an acceleration of upward momentum, best illustrated in the upward breakout of AAPL from its price channel on the five minute -bars chart. Such price action is the mirror image of a capitulation sell-off, in which price craters amid an onslaught of volatility, and reveals a similarly unsustainable build-up of emotion.

AAPL, 20 d 5m

Further evidence of capitulatory buying is offered by the price oscillator index on the daily- and hourly- bars charts, which is at maxima for the respective charts. The price oscillator index measures the difference between current price and the 200-period simple moving average, and very high values indicate an overbought market.

In short, the combination of Apple’s accelerating appreciation in value and arrival at resistance from long-term price channels suggests a local maximum is imminent.

Wednesday, February 8, 2012

S&P 500 index approaches resistance at 1157

Volatility and volume on the U.S. markets is depressed, the indices are finishing many days after a marginal grind higher, and negative headlines seem to have lost their bite (increasingly likely Greek default next month, with contagion spreading to Portugal and Italy, anyone?).

My conclusion based on the above premises is thus: markets are setting themselves up for a volatility breakout, in all likelihood to the downside. The tricky matter is predicting where and when.

The level of 1157 on the S&P 500 index (SPX) is a worthy candidate for such a turning point. Across long-, medium- and near-term perspectives – i.e. on the daily-, hourly- and five minute- bars charts – this point coincides with resistance from well-defined price channels.

In addition, 1156.48 is the 8.5-month high for the SPX, set on July 7, 2011, and may be reasonably expected to act as a horizontal resistance level.

Charts of the S&P 500 index follow below. Worth noting is that charts of the other principal indices (the DJIA, NASDAQ Composite, and Russell 2000) also show resistance about 0.5 percent above today’s closing levels, points that might be reached simultaneously with an SPX print at 1157.

SPX, 4 y 1d

SPX, 180 d 1h

SPX, 20 d 5m

Tuesday, February 7, 2012

Bank of America (BAC) reaches 200-day moving average

Bank of America finds itself susceptible to a short-term bearish move, already begun today, having come within $.14 of its 200-day simple moving average. The four-year chart below (4 y 1d) demonstrates that the security has, over the short term, consistently reacted away from its 200d-SMA.

BAC, 4 y 1d

Today’s high of $7.99 has other characteristics of a short-term maximum. Not only is it a horizontal resistance point by virtue of being a full integer on a low-value security, but $8 was also an important reversal point in early 2009 and in August 2011.

Switching to the hourly-bars chart (50 d 1h), the past three days’ price action has brought BAC into the resistance side of two steeply-sloping price channels – further evidence of $8 being a local maximum. These price channels are marked below in green and purple.

BAC, 50 d 1h

Fedex Corp (FDX), a component of the S&P-100 index, is likewise at a resistance point on its daily chart. Yesterday’s intra-day high of $95.6 brought the security squarely into the resistance of a well-defined price channel extending to September 2009. Additionally, price is about $10 over the 200-day SMA, a level of bullish sentiment unsurpassed in the last 20 months and a contrarian indicator of a possible bearish reversal.

FDX, 4 y 1d

Moving away from blue-chips – perhaps a laughable designation for BAC which, despite being a DJIA component, is trading at a price/book of 0.38 (per Yahoo Finance) – let’s look at Coinstar Inc (CSTR), a favourite of one of my readers.

The stock exploded today on favourable earnings, but the slightly longer-term, 20-day picture (20 d 5m) is more interesting still. Price halted with today’s closing bell right at support from a modestly-defined price channel.

Moreover, eventual continuation of the rally appears relatively probable due to an abnormally elevated level of short interest in CSTR. Per the most recent available data on Yahoo Finance (from Jan. 13, 2012, so admittedly quite dated), Coinstar has a short ratio – defined as short interest divided by average daily trading volume – of 14. In comparison, other recently-maligned stocks register much lower levels in their short ratio: Netflix, Research in Motion, Green Mountain Coffee Roasters, and Sears Holding Corp. stand, respectively, at 1.3, 1.4, 4.6, and 6.2. Of course, an elevated short ratio can subsequently fuel a parabolic, short-covering-driven advance.

CSTR, 20 d 5m

Monday, February 6, 2012

The elegant beauty of price channels

If it's not utterly obvious, I do hereby make an admission: I don't believe in the efficient market hypothesis (EMH), at least with regard to its ability to explain market behaviour outside the long-term. Were the EMH binding, the market price of securities would not trend; instead, they would move in a random walk. With EMH a reality, models exclusively analyzing past price behaviour of a security would struggle -- indeed, fail -- to predict future movement.

And so, it is always a revelation when I stumble upon a chart whose depicted price behaviour so cleanly conforms to the simple model of a line or a set of parallel lines (a price channel).

This evening's charts of continuous front-month silver futures (/SI) and light sweet crude oil futures (/CL), the former with hourly bars (180 d 1h) and the latter with 20-minute bars (20 d 20m), exhibit particularly striking adherence to the simple model of a price channel.

Take a look:

Front-month silver futures (/SI), 180 d 1h

Front-month light sweet crude oil futures (/CL), 20 d 20m

The elegant beauty of the price channels on these charts rests with their striking explanatory power with regard to support and resistance.

On the silver chart, the red dashed price channel neatly contains the extrema of bullish and bearish movements over the entirety of 12/29/11 to the present (2/6/12).

How could a trader use this simple model to make money? The price channel was already defined by the time price reached a local maximum of ~$34.5 on 2/2/12; thus, when price subsequently (and, incidentally, in today's trade) touched a local minimum of $33.0, a trader acting on this price channel model could have opened a profitable long position at the exact price nadir, which matched the price channel's lower support line.

It's a similar story with regard to the chart of crude oil. A trader following that chart's price channel model would also have realized a profitable long trade, entered exactly at the one-month price action low of $95.44.

Indeed, the price channel models in these charts are not only elegant in their simplicity and striking explanatory power, but downright beautiful in how cleanly and boldly they take a stand against the ivory towers' EMH.