OUTSIDE REVERSAL DAYS INCREASE CHANCES FOR PULLBACK -- USING ELDER IMPULSE AND STOCHRSI TO TIME A PULLBACK -- COAL, STEEL AND METALS-MINING ETFS STALL AT RESISTANCE -- SILVER ETF BREAKS CONSOLIDATION RESISTANCE
OUTSIDE REVERSAL DAYS INCREASE CHANCES FOR PULLBACK... Link for todays video. Stocks reversed course during the day on Tuesday with many stocks and ETFs forming reversal days, which go by various names. In candlestick lingo, the charts were littered with bearish engulfing patterns. In bar chart lingo, there were several key reversals or outside reversal days as prices surged on the open, peaked within the first hour and moved lower in the afternoon. Chart 1 shows the Dow Industrials SPDR (DIA) forming a bearish engulfing and key outside reversal day. These are short-term bearish patterns, but chartists should keep in mind that the medium-term uptrends remain unscathed and stocks were overbought to start the week. Chart 2 shows the performance for the major index ETFs since August 2nd, which marked a recent low. The Russell 2000 ETF (IWM) and the Nasdaq 100 ETF (QQQ) led the pack with 6+ percent gains by the end of last week. The S&P MidCap 400 SPDR (MDY) was not far behind. Sharp gains in short periods (less than three weeks) create overbought conditions. Chartists do not always need a momentum oscillator to make such an assessment.
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Chart 1
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Chart 2
USING ELDER IMPULSE AND STOCHRSI TO TIME A PULLBACK... With stocks looking ripe for a pullback or correction, chartists can start looking for potential support levels and employ indicators to catch a short-term reversal should a pullback occur. Chart 3 shows the Russell 2000 ETF (IWM) with the Elder Impulse system and StochRSI. First, lets cover the basics on the price chart. IWM broke falling channel resistance in early August, consolidated around 80 and then continued higher. This consolidation around 80 marks the first support level to watch on a pullback. There is also potential support here from the 50-61.80% retracement zone. Taken together, a close below 78.50 would jeopardize the breakout and call for a reassessment.
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Chart 3
The Elder Impulse System is a fast-pace trading system designed to catch a momentum upturn within an uptrend. Red bars signal a short-term downturn in momentum, green bars signal an upturn and blue bars are neutral. The trend since June is up and this means bullish signals are favored over bearish signals. I like to further refine bullish signals by waiting for an oversold reading in a momentum oscillator. Enter StochRSI. A move below .20 signals a short-term oversold condition. Once StochRSI becomes oversold, chartists can look for a green Elder Impulse bar to signal an upturn in momentum. Chart 4 shows the S&P MidCap 400 SPDR (MDY) with similar characteristics. You can read most on the Elder Impulse and StochRSI in our ChartSchool.
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Chart 4
COAL, STEEL AND METALS-MINING ETFS STALL AT RESISTANCE... The Coal Vectors ETF (KOL), Steel ETF (SLX) and Metals & Mining SPDR (XME) recorded fresh 52-week lows in late July and then surged over the last four weeks. The percentage gain since late July is impressive, but these three ETFs remain short of trend reversing breakouts. It aint reversed until its reversed. Chart 5 shows the Coal Vectors ETF (KOL) with a possible inverse head-and-shoulders pattern working. Working is the key word because it remains a work in progress. There is stiff resistance around 26 from the July-August highs. A break above these highs is needed to reverse the overall downtrend. The feeble bounce over the last six days looks like a bear flag and a break below 24 would target a test of the July low.
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Chart 5
Chart 6 shows the Metals & Mining SPDR (XME) with a bear trap in late July and a surge to resistance in August. A bear trap occurs when a security breaks support, but immediately recovers with a move back above the support break. Traders going short on the support break are now trapped with losses. The August surge is certainly impressive (+16%), but XME remains short of a breakout that would actually reverse the long-term downtrend. Chartists may want to keep an eye on the Shanghai Composite ($SSEC) for clues.
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Chart 6
Chart 7 shows the Steel ETF (SLX) with a potential double bottom taking shape. Again, potential is the key word because a double bottom requires a breakout for confirmation. The ETF surged to the early July high and then consolidated. A breakout at 46.5 would signal a continuation of this surge and confirm the double bottom. Failure to breakout and a move below 44 would keep the bigger downtrend alive.
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Chart 7
SILVER ETF BREAKS CONSOLIDATION RESISTANCE... In the August 9th market message, I wrote about the Silver Trust (SLV) consolidating and the Bollinger Bands contracting. Chart 8 shows SLV breaking above consolidation resistance with a big move on Monday. The ETF also exceeded the upper Bollinger Band for a bullish signal. As noted above, this bullish signal remains in place until proven otherwise. Traders and chartists must now draw a line in the sand that will negate this breakout. In my humble opinion, a strong breakout should hold and a move back below the mid August lows would make this breakout a failure. I would also add a little buffer to include the late June trend line and set my line in the sand at 26.50.
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Chart 8
Chart 9 shows the Silver Miners ETF (SIL) challenging its June high with a surge the last six days. A double bottom is taking shape here and a breakout would confirm the pattern. The height of the pattern (3.5) is added to the breakout for an upside target (24). Despite this bullish pattern, note that the reward-to-risk ratio for a new long position is often not very good at the breakout point. The indicator window shows the Silver Miners ETF relative to the Silver Trust. With a higher low in July, the Silver Miners ETF is outperforming the Silver Trust and this is positive.
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Chart 9
PALLADIUM AND PLATINUM JOIN THE PRECIOUS METALS RALLY... In addition to recent breakouts in gold and silver, the Palladium ETF (PALL) and the Platinum ETN (PGM) surged and broke resistance. Chart 10 shows PALL finding support near its November low and breaking above its July high with a five day surge. The indicator window shows the Spot Palladium ($PALL) for reference. Chart 11 shows the Platinum ETN breaking above its June high with a surge above 34. The indicator window shows Spot Platinum ($PLAT) for reference.
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Chart 10
