December 2012 – Page 2 – Andrew Thrasher

Dollar Creating a Head and Shoulders Pattern

Posted on December 19, 2012 by Andrew Thrasher, CMT

No, the U.S. dollar doesn’t have a dandruff problem (sorry, bad joke). There seems to be a lot of discussion, at least by those I follow on Twitter and in the blogs I read about the bearishness of the dollar. There has been a head and shoulders chart pattern that’s setup in the PowerShares US Dollar Index Bullish ETF ($UUP) that gives credence to those negative on the dollar.

This pattern gets discussed pretty often as it lurks it’s bearish head. One of things that frustrates me when I see it mentioned is the lack of analysis given to volume. With price action creating the necessary chart pattern, this only gives us half the equation. What many people leave out is the necessary volume requirements associated with a head and shoulders pattern (H&S). Like many setups, volume typically trails off during the patterns completion. H&S is no different.

The largest amount of volume should be observed during the top of the left shoulder, when the head is created volume should be slightly lower and then even lower when we get the right shoulder. By each rally attempt being accompanied by weaker volume we can see the bears stepping in and whacking down any attempt at an advance. This is part of what makes the pattern bearish.

When looking at the above chart of $UUP we can see that volume does in fact confirm the H&S pattern that price is showing us. From here we are looking to see if price falls below the trend line, completing the pattern. It’s important to remember that oftentimes when price breaks the ‘neck line’ of a H&S pattern it will bounce and re-test. This can act as a confirmation of further weakness if what once was support becomes resistance.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

Will Natural Gas Bounce?

Posted on December 18, 2012 by Andrew Thrasher, CMT

Natural gas is the lone wolf of the commodity world, setting out on its own course while for the most part ignoring what the rest of the capital markets are doing. Short-term traders are often drawn to the high volatility of the nat gas market, rising and falling by greater degrees than just about any other commodity.

From the low in April, natural gas has risen nearly 70%, even taking into account the recent bout of weakness that’s forced the commodity to fall nearly 15% since mid-November. But recently we’ve seen the United State Natural Gas Fund ETF ($UNG) fall to a support line that’s been created off the April and June lows. Ideally we’d like to see a trend line tested at least three times in order to gain greater confidence in its ability to hold, but so far we’ve seen a slight bullish bounce in $UNG off the trend line that sits near $18.50.

Turning our focus to momentum we have one of my favorite indicators, the Money Flow Index (MFI) breaking down to a historically oversold condition. From a break below 20 we look for one of two things to occur. 1. a bounce from being oversold as buyers step in immediately and 2. price gives us a false break of the trend line and puts in a positive divergence in momentum that takes $UNG higher. These of course are not the only possibilities that could play out, but one of these are what natural gas bulls will likely be hoping to happen.

As I mentioned in the second option for the MFI indicator, we could see a break of the trend line. If this happens we obviously won’t be able to tell if it’s a false break until price action plays out and $UNG rises back above support. On a break we can look at volume and tell if it occurs on a heavily selling which would give a credence to further weakness or on light volume which would support the notion of a false break.

Apple Stumble Weighs on Nasdaq

Posted on December 17, 2012 by Andrew Thrasher, CMT

For my weekly article I wrote for TraderPlanet I decided to take a a look at the support and resistance levels that could be important going forward for the Nasdaq Composite ($QQQ).

Here’s a blurb:

As you can see in the chart below, the 38.2% Fibonacci retracement level from the June low to the September high has been an area of trouble for the Nasdaq ETF to get through. When we see a security falter at a level of resistance we can look at momentum to see if it is trailing off or if it was just as strong as the first attempt to break through resistance.

Go read the rest: Apple Stumble Weighs on Nasdaq (TraderPlanet)

Treasury Yield Channel

Posted on December 14, 2012 by Andrew Thrasher, CMT

Yesterday we saw some fairly heavy selling as equity bears were able to get the S&P 500 to close below the 1420 level that’s been fairly important this year. Equity price action also made us bounce off of the 50-day moving average. But the selling might have been enough to give us the bearish confirmation that the candle formation we discussed yesterday was looking for. Overnight we got some decent flash PMI data out of China and a few bright spots in Europe. However, futures are about flat so we don’t have any clear direction for where things will be headed when the morning bell rings.

Today I want to take a look at the 10-year Treasury Yield ($TNX). While equities were selling off yesterday, we did not see the same action play out in the Treasury market. In fact, yield actually put in a nice gain which indicates that bonds also were being sold alongside equities yesterday.

While bonds continue to drop we’ve been able to see the yield on the 10-year create a channel as the chart below shows. The previous three touches of the top trend line has also been associated with the 200-day moving average stepping in to knock yield back down. Yesterday’s advance has taken $TNX a be just a hair away from its 200-MA and a few basis points from the top of the channel. We’ll see if Treasury’s continue to sell off and if the 10-year yield will be able to get past the moving average to make it back to the top trend line.

Bearish Candles in Large and Small Cap Equities

Posted on December 13, 2012 by Andrew Thrasher, CMT

It’s always makes for an interested day when we get an FOMC announcement. Yesterday, as I’m sure you already know, the Fed essentially dropped its dual mandate and said their concern is squarely set on unemployment.

The market rallied on the announcement, but after Bernanke’s press conference and Q&A was underway traders began to sell, causing the major indices to be nearly flat for the day. This price action caused two interesting candlestick formations to appear in the S&P 500 and Russell 2000.

First up is the iShares Russell 2000 ETF ($IWM). We started the day with a gap higher only to retreat with a close below the day prior’s low. This creates a bearish engulfing pattern as yesterday’s price fully ‘engulfed’ Tuesday’s candlestick. This type of pattern typically occurs at the top of a trend due to the shift in sentiment occurring after a morning gap higher only to be stamped out by bears.

Next we have the S&P 500 ($SPX). Equity bulls were able to take us higher as described above after the FOMC announcement, only to close just slight above the open. This price action created a large wick for the day’s candle (sometimes called a tail or shadow). While the bears weren’t able to get the close to be under the open, a mild version of the shooting star formation was still created.

Both of these patterns are in favor of the bears on a very short time frame. Single candle patterns are unlikely to sway intermediate or long-term traders/investors but are still interesting and should be observed nonetheless. We’ll see if today’s action is able to confirm these setups by pushing down large and small caps further or if equity bulls will recover and retake the reins.