Morgan Stanley (MS) treads water, may drown

Equity markets closed with slight losses today (April 30, 2012). The S&P500 settled down 0.4 percent, the NASDAQ declined 0.7% and the DJIA edged down a marginal 0.1%.

Morgan Stanley (MS) shares have recently displayed interesting price action, with price compressing in a support zone and setting up for increased volatility. Compression at notable support is in evidence on charts with daily bars, hourly bars, and five-minute bars.

MS, 4 y 1d

On the four year chart above, daily bars representing the last several days all appear supported by a nine-month price channel. Ordinarily, a bounce from a price channel would portend further bullish price action; however, Morgan Stanley’s consolidation just above support increases the probability of a bearish pierce.

MS, 180 d 1h

The same nine-month price channel described above is rendered in greater detail on the hourly bars chart of MS. This vantage point confirms that price action is receiving little boost from the support line of the price channel. The hourly chart also shows that the last week of price action has MS bumping against horizontal resistance at $17.3, a price level that had been a support level from mid-January through April 23^rd.

MS, 20 d 5m

On the five-minute bars chart, MS remains somewhat defined by a modestly downward-sloping, 2-week price channel – hardly the bullish behaviour that one might expect for a stock at the support level of a 9-month price channel.  Horizontal support at $16.77 has held for the past 6 sessions.

In sum, Morgan Stanley has consolidated at support from a 9-month price channel. A volatility contraction, particularly at such an important support level, often begets pronounced volatility expansion. A bearish move would not be unexpected given the past week’s weakness, but a delayed rally may be in the cards instead.

Broad-market financial index futures (/ES, /YM, /NQ) are short-term bullish

The markets advanced during trade today (April 26, 2012), particularly in the afternoon hours. By the close, the S&P500 and the NASDAQ each advanced 0.7%, while the DJIA was a relative outperformer with a 0.9 percent rise.

/ES, 20 d 15m

E-mini S&P500 Index Futures (/ES) have a somewhat interesting 15-minute bars chart over the past fortnight. Through the end of yesterday’s session, the contract’s behaviour was strongly influenced by two horizontal price channels: 1389 as resistance and 1354 as support.

Today’s rally over the 1389 resistance point confirmed an upward-sloping price channel that had been forming since Monday (4/23).

/YM, 20 d 15m

Price action of the past fortnight in E-mini Dow Jones Industrial Average Futures (/YM) has likewise been neatly contained by a price channel. The channel is moderately upward-sloping, and current price behaviour may threaten an upward break.

/NQ, 20 d 15m

 

The E-mini Nasdaq 100 Index Futures contract (/NQ) appears somewhat weaker than its brethren. Only this week has it broken from a downward-sloping price channel, and today’s rally was contained by a two-week old horizontal resistance line. The /ES contract, in contrast, broke through a horizontal resistance line of similar age during today’s trade.

The sum of these short-term perspectives, nonetheless, shows that the principal index futures are bullish relative to their past two weeks of price action.

Conoco Phillips (COP) finds price channel support

Markets traded within a relatively narrow band today (April 25, 2012), but prices were far from unchanged; indeed, the major indices held firm to significant but variable pre-market gains.

The S&P500 rose 1.4%, the NASDAQ jumped 2.3%, and the DJIA bumped up 0.7%. Headlines attribute today’s tech-led advance to a very positive Apple earnings report that was released after yesterday’s market close. Indeed, Apple (AAPL) rose 8.9 percent today.

Interesting price action occurred today in Conoco Phillips (COP) shares. The stock has been sliding over the past fortnight, and selling pressure was particularly intense during today’s morning trade before the stock pared losses in the afternoon to close down 1.2%.

Of note is that today’s intraday low in COP occurred at significant price channel support on charts of the security across various time frames, including representations with daily (1d), hourly (1h), and five-minute (5m) bars.

COP, 4 y 1d

On the daily bars chart, COP pierced and then closed exactly at price channel support that extends back to February 2011. This price channel support, which approximately coincides with today’s close of $71.02, is also the 200-day simple moving average (SMA) price.

Given that the 200 SMA is a default indicator of many market technicians, its significance is more likely to be self-fulfilling. Looking at previous encounters of COP with the 200 SMA reveals that the line does not have much explanatory power, however; price has often sliced through easily.

COP, 180 d 1h

The hourly bars chart shows that today’s intra-day low was quite near significant price channel support. While this channel is not ideally defined – some waves of market action overtake the price channel or fail to reach it – the lower line of the channel does nonetheless connect the two principal local minima since October 2011. That carries significant weight.

The oscillator between the 200-period SMA and price, which is graphed at the bottom of the above (180 d 1h) screenshot, also suggests that the current price level might provide support.

This indicator shows that the current price of $71.02 is more than $4.00 below the current 200-period simple moving average. The graph of the oscillator shows that such a bearish occurrence has only happened thrice since late August 2011, and that after each such instance, price promptly rallied hard.

COP, 20 d 5m

Conoco Phillips’ five-minute bars chart shows that today’s intra-day low coincided perfectly with a remarkably clean price channel that stretches back to April 2, 2012.

The sum of these charts is that, when COP shares traded near $70.53 around 11:25a CST today, there was a preponderance of evidence across various time horizons that the stock would find support. (It’s a pity that the security was not then in this trader’s sights!)

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.

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

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

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.

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.

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.

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.

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.

Holiday wishes

This blog came to life on February 23rd of 2009 with a three-part mission: to help crystallize my thoughts on markets and travel, to share these ruminations with whomever might care to read them (caveat: such readers would surely be better served by investing their time elsewhere), and to archive these personal considerations and experiences for my own later review.

Some semblance of elegant symmetry exists between this 2/23 christening date and the 12/23 appellation of the present, perhaps rendering as auspicious this post’s design, which aims to be an overview of sorts, an essay for taking stock. Additionally, the elapsed time between incarnation and the present amounts to just a few weeks over the round number of 1000 days – 1033 to be precise, according to the calculator on timeanddate.com – further adding impetus to the idea of thoughtful review.

And yet, there’s precious little to comment upon. The blog has generated few posts (and yes, the author knows who is to blame!) – 37 in 2009 and again in 2010, then a mere 18 in the nearly-elapsed 2011, inclusive of these scribbles.

Limitation in quantity also extends to quality. As epitomized by this review, too much focus appears directed toward aimless verbosity, too little on impactful substance. At least breadth of content has proceeded according to original design, spanning the disparate realms of markets, aviation and travel, with unification indirectly attempted by tie-in to my own experiences. But whether such a collection of less than congruous topics carries any merit besides satisfaction of my own ego remains an open question.

This is where a promise of improved engagement would logically fit; indeed, a hollow allusion to the shortly upcoming season of New Year’s resolutions would beckon. But I’ll refrain from any such statement.

Instead, I’ll offer the comment that, should regular posting of markets-related analytics come to fruition, it would likely meet the original three-part mission of the blog, and quite emphatically at that. I’d better examine my own views, these would be shared with some semblance of a public, and my record would be open to subsequent self-examination. The same could be said of regular output of aviation and travel content.

Perhaps the most emotionally fulfilling motivation for true engagement with this at-once public and private pad is still altogether different. I savour the deliberately, elegantly, purposefully written word. And while I have never taken much interest in literature or composition, I do feel alluring and deeply emotional parallels in reading, say, an expertly edited article in the FT’s Arts section and, on the other hand, intensely experiencing an evocative piece of art or music. All potentially bring about an intense happiness, a flooding of the brain with some neurotransmitter, a sometimes subliminal experience akin even to that felt in romantic pursuits or significant personal accomplishments.

I’m not fooling myself; my own child’s play on this (cob-web filled) corner of the internet, when set against the kind of writing that I find inspiring, is even more inferior than is the painful screeching of nails on a chalkboard vis-à-vis brilliant calligraphy. Making matters worse is that I can’t devote the requisite time to polishing my attempts at a coherent essay. The blog has always been meant as an evening “wind-down” vehicle, a phase-of-day when neither time nor the perfection-seeking motivation is in relative abundance. In any event, my current professional goals center firmly on technical analysis and trading profitability (in that order), not on packaging bits of markets wisdom for wider dissemination.

Those disclaimers aside, I sincerely hope you’ll join me on this journey to more committed and substantive engagement with the markets, et al – and, moreover, that I take up the invitation, too!

Tomorrow is Christmas Eve, often the most joyful day of the year, individually and collectively, in the Polish community of which I am a part. In that spirit, I wish everyone a most restful and lovely holiday, that each might discover their most hopeful and selfless selves, that generosity and the spirit of communion with others, loved ones and friends and acquaintances alike, might flourish in each of your minds. May you re-evaluate and re-discover, re-think and re-commit.

I will certainly be treasuring the upcoming days’ re-orientation of mind and soul. But all the same, I will return with bubbling eagerness to my great love of the present, disciplined analytics of that bewitching social creature known as the financial markets, upon the resumption of business in the New Year.

Happy Holidays and Merry Christmas!