I’ve highlighted a time symmetrical H&S pattern based on 68 days between the left shoulder and head, and the head and the right shoulder. See: Stock Charts: Stock Market Trending for Time Symmetrical Head and Shoulders Pattern with Fibonacci Support. That ending time frame is this Monday, maybe Tuesday.
Should the right shoulder be off roughly one week we have another Fibonacci time frame. 144 days from the left shoulder to a potential right shoulder is August the 9th. I raise this view because the price structure so far might need more time to finish the leg higher, if it’s a right shoulder.
$INDU: The daily chart looks like it has more work higher. The price structure down from the recent high looks like a little consolidation. If we are to go higher, there's a cluster zone of resistance just above us. The blue line is the 62% retracement level. The upper black trend line is in the same vicinity. And just about both is the upper Bollinger Band. From the July low it's been 8 days up, 5 days down, 5 days up, and 3 days down. 2 or 3 days higher would seem to fit the Fibonacci rhythm. That's next Tuesday for two days up. Pure theory, but something to watch for at this point.
Mr. Market does what it always does, which is move price into a position of maximum stress for all participants. There are a lot of money managers waiting for the market to show a more definitive direction. The daily, weekly, and monthly times frames show this stress of uncertainty quite easily.
The daily chart above looks like a weak move higher, but has yet to finish a potential right shoulder and the MACD has yet to roll over. All of which leaves the door open for more work higher.
The weekly chart reflects the H&S pattern and the MACD has yet to turn higher, which leaves the door open for push lower and the MACD moving lower just like it did in late 2007. But it's close enough to turn up and support higher prices.
The monthly chart reflects a trending channel higher, which is bullish until it’s not.
And that's Time Frame Uncertainty. The daily, weekly, and monthly tell a conflicting story. Technically the market has pushed price into No Man’s land and anything is possible from here until more price defines the market.
The Bearish View: If this is a head and Shoulders Top, I want to discuss the concept of Bulls and Bears Standing Hand-in-Hand at Lovers Leap. If this is a top, it’s likely the bearish Elliott Wave count so many have highlighted is the end of Wave 2 higher and thus Wave 3 lower is about to begin. This is usually the most impulsive wave and will move swift and fast to the downside. It has everything to do with the bulls and bears in unity.
1) If the market trades lower from here, the bulls will get very nervous and begin to exit long side trades, or buy protection. That will drive stocks lower. And since the mutual fund complex has used up cash to buy stocks the past 15 months, it’s very easy for them to be big net sellersThe Bullish View: If the markets are to continue higher or base and go higher, the market has 11,700 as a target. That’s price support and middle trend line support. It’s also the Point and Figure target of 11,600.
2) Now let’s consider the bears, please see: Stock Charts: Dow Puts in Doji Near Resistance
Investors are exiting bearish bets on global equities, pushing bullish wagers on stocks to a two- year high versus short sales, according to Data Explorers.
The firm’s long-short ratio has risen to 9.5, having surged from 5.75 in September 2008 when Lehman Brothers Holdings Inc.’s collapse intensified the financial crisis, the London- and New York-based securities-research company said. The reading is the highest of the data that goes as far back as July 2008.
The collective market short position is at a two year low. There are few bears to squeeze out of the market currently.
If the market begins to decline the bears will come out of the woods of hibernation and begin to short this market.
It’s possible, that Bulls and Bears will both become sellers holding hands while jumping off Lover’s Leap that is the potential head and shoulders pattern.
My Market Health Indicators:
IBM: We have big blue stuck in this narrowing wedge structure. Looks weak the past few days. If the market is going to finish moving higher in the next couple days, maybe big blue takes a weak stab at the top down rend line. Have no idea what the MACD is doing.
JNK: Dead sideways for a few days. That suggests a little more upside. Still looking for price to push higher with a weak test of the RSI overbought level.
$VIX: The $VIX still looks like it has a little more down side work. The lower trend line and bottom Bollinger Band are both reasonable near term targets.
IBM, JNK, and $VIX could all finish their near term price work in conjunction with the market moving higher the next 2-3 days for a potential right shoulder.
My Watch List: Thursday, I highlighted potential bearish trades to watch, which look like they have more work higher before they are worthy of a trade and nothing has changed. For the list See: Stock Charts: Market stalls again, $INDU, $COMPQ, $SPX, $VIX, IBM and AAPL We need to be mindful of the market at current prices because it really could go do anything.
From My Trading Desk: We made no trades Friday. It’s definitely a time to keep it very light and we have moved closer to home all last week. Next week, especially Monday and Tuesday, I might not make any trades.
Summary of July Trades:
Long VSEC 1/3 Position Loss
Short CDE ½ Position Loss
Short BA ½ Position Loss
Short BIDU 2/3 Position Loss
Long NEM ½ Positions Gain
Long QCOM Full Position Gain
Long KO Full Position Gain
Long WMT Full Position Gain
Short NEM Full Position Gain
Long KO Full Position Gain
Long IBM Full Position Gain
Short BA Full Position Gain
Short MCK Full Position Gain
Long UPS Full Position Gain
Long WMT ½ Position Gain
Short RGLD ½ Position Gain
Short ABX ½ position Gain
Short ABX Full Position Gain
Short DAL ½ Position Gain
Inverse ETF SRS Full Position Gain
Trading Summary: We had 20 trades for the month, which is a very typical month. We had 16 gainers and 4 losers, or an 80% win rate, which is about our historical norm. We had a nice net dollar gain for the month, which again was about typical for our trading. July turned out to be a standard month.
It’s obvious the 80% win rate has a lot to do with our success, but if you look at position sizing you'll see another important factor. In the 4 losses we had not one full position. We never really got caught heavily on the wrong side. We did have one short I had to hang onto for about a month before it turned into a gain, and sometimes we do that if I'm confident in the pattern and feels like squeeze.
You’ll notice on the gainers we had many full positions. Often this stems from starting with a fractional position and then filling it to full at a later date. We only had one big loss on BIDU. We had one big gain on SRS. The rest was a lot more nice gains versus a few minor losses.
Overall, I'm very happy with July because it was a great month with good risk management using position sizing and good pattern recognition.
J.D. Rosendahl, Rosey