Topping patterns and a Fruit Company

My observations below should be viewed as general advice and may not be right for you

It is almost impossible to ignore the importance of everyone’s favourite company, Apple, when analysing the market. This company is now some 20% of the Nasdaq and also a huge chunk of the S&P500.

  

Recently I have received a lot of comments from clients in regards topping patterns in Apple as well as the global indices such as the S&P500 and the Eurostoxx. These are very valid points raised indeed and I can’t refute what looks to be like clear Head and Shoulders patterns.

However, I have also often said in the past that some of my favourite trading setups are “failed” patterns.  What this really means is that when a market fails to follow through in the direction of a chart signal, it very strongly suggests the possibility of a significant move in the opposite direction! The crowd is positioned in anticipation of the trading pattern and when this fails to play out, they are forced to unwind on mass leading to a sharp move. It could be argued that this happens more frequently, in a perverse way, as Technical analysis has gained increasing popularity thus more traders are piling into the same positions.

I wrote about this in a previous blog post here: http://fpmarkets.blogspot.com.au/2012/08/the-most-important-rule-in-chart.html.

Apple has triggered a valid Head and Shoulder pattern but will we see follow through? I thought this move would serve as an interesting example and experiment. Here is the chart:

Apple Daily:

Confirmed breakdown through the head and shoulder neckline. 

Note that the neckline is at the 650/655 level and thus I believe a number of traders would have used a close below here as a trigger. Thus where do you think their stop losses are likely to be? My bet is around 655/660.

Thus what I am suggesting is that any move back above 655 would be a powerful signal that the stock has bottomed and a powerful short covering rally may ensue. Short term traders could look to short the 650 level on this first retest and if it fails to sell off, quickly cover and go long if the stocks breaks back above 655. That’s just how I view things.

Here is the potential bullish setup I am looking at:

Apple Daily 2:

Price has sold off into the upward trendline and a strong support zone at 630/640. There was a bullish reversal candle out of here which implies a selling capitulation with buyers coming out on top. This could be the first sign of more follow through to the upside.

APPLE 60mins:
Nice bounce out of the low end of this channel. A retest of the recent lows could offer an interesting long entry. The key resistance level and breakout level is 650/55 as shown. 

So what does this mean for the broader market given Apples weighting? Well if Apple doesnt breakdown, then I doubt the market will. 

Here are the other charts of concern but ask yourself what would happen if they failed to play out? What would be the pain level for shorts if there was no follow through? I am not suggesting this will happen but just anticipating.

Eurostoxx Daily:

Double top and Head and Shoulders

S&P500 Daily:

A topping pattern forming?

Interesting times no doubt. For me, I think this is a potential buying area into a confluence of support. If it fails to hold then so be it. I would prefer to buy dips into the uptrend into key support areas than fight it for now. 

S&P500 Daily:

This is my support zone and buy zone coming into tonight 

Thanks

Austin

New Research Section

Very exciting developments going on at FP Markets. We have just launched a new Research section on the website and this will be free to all existing clients. There is also a 1 month free trial to non-clients so please do not miss out. You can register here: http://www.fpmarkets.com.au/research/register

In this Research section you will find first rate daily analysis and market commentary from yours truly :). There are reports that cover the broad spectrum of our products and include a Morning & Afternoon ASX Report, FX Majors, International Index CFDs, as well as Commodities. I believe this analysis will be of great value in identifying leading trade setups and enhancing your trading performance. I hope you will find a wealth of timely information inside this Research portal and it is a must for those seeking that “edge” in the marketplace.

I will continue to post on this blog and will try to keep the material educational in nature.

Thanks for all your support and hope you enjoy the work
Austin

What's The Setup Ahead Of The RBA?

My observations below should be viewed as general advice and may not be right for you.

The big event today will obviously be the RBA interest rate decision today at 2.30pm. The futures market is pricing in a 68% probability of a 25bps cut but no doubt this is not an easy call. Gun to my head, I would actually say that I don't think they will cut this afternoon. This is because the Central Bank has been given some breathing space due to the huge stimulus packages announced overseas, and they may want to see what short term effect this has on the economy, especially given the upcoming CPI and PMI numbers. Commodity prices and in particular Iron Ore have recovered strongly recently, and this was an expressed concern at the last meeting.

Whatever the decision, as a trader it is always important to have a plan and a set of scenarios or "what-if" statements. Obviously we just don't know how much the market has already priced in, and thus one must gauge the underlying price action relative to the news and the levels. To me, the Aussie has been correcting lower off the recent 1.06 highs and this implies a breakout to the upside in coming days. Furthermore, when I look across currency pairs, I see a number of bullish daily charts against the USD such as NZD and EUR. These imply continued USD weakness which should benefit the Aussie. The major levels and charts are shown below. A key risk to this scenario would be a solid break below 1.03 to 1.033.

AUDUSD Daily:
Restest of this key upward trendline. Thus this presents an interesting low risk area to look for bullish reversals. Any failure to hold here could be used as a potential breakdown trigger for traders in time.

AUDUSD 60mins:
The Aussie continues to grind lower in choppy fashion and into strong support at the 1.030 to 1.033 area. Note that this sell off from the recent highs has not been strong despite the market pricing in continued rate cuts. This is a sign of underlying demand I believe. The short term range is 1.030 to 1.045/1.047 and swing traders will need to see breakout ABOVE the latter zone for confirmation.

AUDUSD 15mins:
These are the short term levels I am looking at. A move above 1.040 could be used as a breakout trigger to the upside for short term traders. On the downside, traders could look for spikes into 1.03 for low risk long setups with tight stops, and look for shorts should the RBA cut rates and support fails.

NZDUSD Daily:
The Kiwi is in a strong Daily uptrend and has broken out above the recent highs. A Daily close above 0.836 is needed to confirm the next leg higher.

NZDUSD 60mins:
Price made a meaningful low at 0.8180 right on the ABC target. The move off the recent low has been strong and this could be the prelude to a bigger picture breakout in coming days.

In sum, today's RBA interest rate decision will be a key catalyst for the Aussie going forth and will provide some great moves for FX traders. A 25bps cut would be deemed bearish for the Battler but it is very tough to know how much of this has been priced in. Thus traders need to heed the underlying price action in relation to both the announcement and the levels. The setups here imply we could see breakouts to the upside should 1.040 lift. Bears need to see breaks of 1.03. It will be very interesting indeed.

Thanks
Austin