Last week the bulls regained control of the 50-day simple moving averages in the major market indices. A fast move pushed the indices through minor resistance. Previous patterns’ boundary lines are being approached, which may initially provide resistance. In the past weeks, confirmed bearish patterns have triggered, although many are failing.
When a confirmed pattern fails, it has the potential to make a strong move in the opposite direction. Several shorts were squeezed last week with stops triggering, which may be a bullish signal.
The intermediate uptrend in the major market indices recently ended, therefore, any direction of trend, including sideways, is possible. Patience is key at these levels as one should wait for signs of a new confirmed trend while continuing to trade and monitor the patterns and signals of individual names.
Individual names and sectors, such as refiners, have constructive bullish chart patterns forming. Outlined below is McMoRan Exploration Co. (MMR), an oil and natural gas name that broke out last week. On February 15th, I highlighted MMR as a candidate for a potential upside breakout above $18.
The pattern did not trigger and has changed slightly since then, but the implications are the same. Additionally, an example of a confirmed pattern in Con-Way Inc. (CNW) that failed is illustrated below. This failed pattern ignited into a powerful move in the opposite direction.
Chart 1: Illustrates the comparative relative strength of MMR versus SPY.
Chart 2: MMR broke out of a rectangle (basing) pattern on Friday after having a large up-move over the last several sessions. A throw back to the upper boundary line at $18, which is now support, will provide an excellent low-risk entry opportunity if the level holds. Target: minimum expected objective is between $21 and $22, obtained by measuring the height of the pattern and expanding from the breakout, by the same distance. Protective Stops: may trigger on a confirmed move back below the upper boundary line, at $18.
Chart 3: Outlined in the chart below is a bearish head and shoulders pattern in CNW that failed. After the failure a strong upside reversal followed. The same scenario is possible for confirmed bearish patterns that recently failed.
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Disclaimer: The information contained herein is not guaranteed. This is not a solicitation of any order to buy or sell. This material is based upon information that I consider to be reliable, but I do not guarantee its completeness or accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and I am not obligated to update the information contained herein. I have positions in MMR and SPY. This communication, including any attachments, is for the exclusive use of the intended recipient(s) and/or the intended recipient’s designees. Any use, retention or dissemination by a person other than the intended recipient is strictly prohibited. If you are not the intended recipient or designee, please notify the sender immediately by return e-mail and delete/destroy all copies of this communication.