A Look at AIG

I always found AIG to be an interesting stock ever since it fell from over $1500.00 a share to under $10.00 a share in 2008. I took a look at it recently and it was showing interesting technical properties that I would like to share.

AIG:

Head & Shoulders: Near the end of Spring AIG topped out about a month after S&P 500. The topping point in May also seems to be the "head" of a head & shoulders pattern it was making. Shortly after there was a big sell off on high volume, and a small right shoulder was barely formed.

Inverse Head & Shoulders: From its peak in May, AIG eventually fell over 28% bottoming in June. By mid  June it was clear that an inverse Head and shoulders was forming. The breakout from this bottoming process was suspect since it was done on low volume, and there was a false break out a couple of days later.

Sideways Range: Straight out of the inverse head & shoulders AIG went right into a sideways range. At this point I was thinking of putting a trade on the stock if it showed confirmation out of the range. What stopped me though was on August 6th AIG showed unusual high volume, more than double its volume moving average 50, and did not break out of its range. Consolidation patterns characteristically show gradually decreasing volume.

Post Range: When it broke out of this range, it was again done on insignificant volume. The gap down from May also seemed to slow it down. Whether the breakout from the sideways range turns into a sustained rally is yet to be seen. The recent pullout does not bother me though since it is not uncommon for stocks to pullback to the top of its consolidation range shortly after it breaks out.

Final thoughts: This stock seems difficult to trade since it is subject to poorly formed patterns and false breakouts. I  personally plan on to keep watching it since the financial sector in general seems to be rallying. Moreover, AIG is showing good relative strength within its sector.

Many REITs Look Bearish

Today I was looking at sectors of the market I generally do not look at, and REIT's caught my attention. Looking through several of them, most seem to be currently completing the right shoulder of the head & shoulder pattern. This indicates that this sector has a high chance of falling significantly.

BPO

 BPO shows a classic head and shoulders with a southeast pointing neck-line. Southeast pointing neck-lines generally have a higher probability of  being a successful topping pattern, compared to head & shoulders with horizontal and northeast pointing neck-lines. As a refresher, target zones of head & shoulders are found by measuring the distance from the top of the head to the neckline, then adding that difference under the neckline.



VNO

VNO shows an interesting variation of the head & shoulders pattern, a complex head & shoulders. This is a more rare variation that shows two left and two right shoulders.


CLP

CLP looks like it could be in the middle of forming a double top or possibly in the middle of forming a head & shoulders pattern.



Final Thoughts: There are several REIT's still showing good relative strength, but other REIT's seem to be forming topping patterns, making it a dynamic sector to keep track of. A lot are in the midst of head & shoulder patterns, others possibly in double tops. As with any trade one must wait for confirmation to be successful.

A Look at BRIC

The BRIC countries receive a lot of hype for being top international investments. I want to take a technical look to see how they are currently doing.



S&P 500 (for reference)

Brazil:

Firstly, none of these four countries have been performing anywhere near as well as the United States market. Currently Brazil is more than 50% below its 2010 highs. Long term it has been trending downwards, but seems to have found support around the $49.00 level, the 2011 lows. If its current rally continues, I would look at the moving average 200 and the downward sloping trend line I drew as resistance.



Russia:

 Russia has a pretty similar pattern as Brazil, except it peaked in 2011. It found support at about the $23.30 level. It has short term resistance at the moving average 200, and if it can get through that I would look at the $33.85 level for the next significant level of resistance. From the two lines I drew, Russia can possibly be in a long term sideways trading pattern.


India:

India is also currently in a long term downtrend. It found support at the $15.50 level, and its short term resistance is the moving average 200. Like Russia it can possibly be in a long term sideways trading range with resistance at $21.70.


China:

China is the country whose pattern deviates the most from the rest of the BRIC countries. It is the only one that did not fall to its 2011 lows this year, but instead showed better relative strength compared to the other three. While China's GDP is at a much better rate compared to the United States, its market performance is lagging like everyone else's. China's short term resistance is at the moving average 200 then after that faces significant resistance at $40.50.


Final Thoughts: I would not say any of these countries are currently in sustained up trends. All of them firstly need to break their moving average 200's and get through the other resistance I outlined. I think there is a strong chance that all of them are basing out, after being in a downtrend for a while now.

A Look at Gold and Silver

Gold and Silver have been in a secular bull market for around 10 years now. Last year both metals topped out, since then they have both been struggling. Technical analysis of commodities are more difficult compared to stocks for the following reasons:

1. Future deliveries have limited lifetimes compared to the theoretically infinite life of stocks
2. A lot of commodities are subject to hedging which makes support and resistance levels less reliable
3. Stocks have a finite volume, whereas future contracts can be theoretically infinite

Despite this technical analysis can still be useful.

As you can see gold topped out in September of last year. Since then it has been lagging and formed a declining triangle with support at $1525.00.

Silver on the other hand topped out last year in April. Since then it has acted almost identical to gold, forming a declining triangle with support at $26.00.

A descending triangle is a bearish formation. On one side gold broke out of a descending triangle in 2006. Moreover, with uncertainty concerning dollar inflation gold can break to the upside. The dollar index does seem to have paused from its recent strengthening.

What makes me think Gold and Silver can go down another level is when you look at other miner indexes and stocks, they seem to be in bearish trends as well. 

These examples like gold and silver cannot be said to be bullish. Of course, all of what has been shown can just be basing out. Either way to trade in any direction one must wait for confirmation.

On a side note a friend of mine pointed this out to me:

These two charts above with many other stocks in the same industry are experiencing multi-year head and shoulders patterns. Large multi-patterns such as this are usually unreliable, but should be watched nonetheless. 

A Look at Europe

I want to take a look at a couple key countries within Europe. From the news it's no secret that most of these countries are not doing well, displaying ominous fundamental factors such as high bond yields, high debts, and tough Austerity measures. I want to technically put this in perspective with the US markets.

S&P 500 (for reference):

Germany:

Considered the powerhouse of Europe, Germany put in a big peak in May of 2011 and proceeded to fall over 70%.  For reference I consider anything more than a 25% drop to be a bear market. It followed the American markets into the beginning of 2012 with a rally, but obviously just from eyeballing the charts this rally had none of the strength the American markets had. Moreover, it did not follow the recent American rally that started in June. I cautiously think Germany is basing out, but recognize it can face more downside due to the fragility of Europe.


Italy:

Above you can see a weekly chart of Italy going back eight years. I purposely chose this chart to illustrate that Italy is currently at the lows from the 2008 financial crisis. This point seems to be acting as support, with Italy getting a recent bounce off that point. If this level breaks it can spell real trouble for the Italian markets.


Spain:

Here is Spain with the same time frame as the Italy chart. Here you can see Spain has already broken its 2009 low and is finding support at a level from the early 2000's. An important principle is the farther away the support or resistance level is from the current price, the weaker that level becomes. Indicating that Spain has the weakest markets of the three charts so far.

Greece:

Here is a chart of the National Bank of Greece. The only ETF of Greece I found, GREK (Global X FTSE Greece 20 ETF), I find not to be useful with its short time frame. Obviously you do not need me to tell you Greece is in bad shape though. This chart above shows that the Greek bank is hitting multi-year lows, a massive decline from over $70.00 to barely over one dollar.

Turkey:

One European country doing well is Turkey (Wikipedia says it's part of Eurasia). It is experiencing a nicer smoother rally compared to the choppy American rally. Moreover, it is above all its moving averages, so one cannot be bearish on it.


Final thoughts: Keep in mind many of the other important European countries such as Ireland, Portugal, France etc... These countries must also be carefully watched to have a full analysis of Europe. The American Federal Reserve and European Central Bank's recent promise to do whatever it takes to keep their respective economies doing well can probably be pointed to as the reason for the recent bounce in the markets, especially Spain and Italy. Please leave any comments or questions!

Recent Head & Shoulders Bottom

In mid May and June an important reversal pattern occurred, the "head and shoulders bottom" or "kilroy bottom." 

Lead up: A significant 9% decline in the S&P 500 with increasing volume.

Formation: Left shoulder formed as a minor recovery from the initial decline with volume tapering off. This was followed by a second decline that carried prices below the bottom of the left shoulder, coinciding with volume picking up again. Next, another recovery brought the price above the bottom of the left shoulder, with volume increasing slightly. Lastly, a small decline where the right shoulder is formed. This was done on slightly less volume then the proceeding step.

Entry/Exit Point: The confirmation candle happened on June 15, 2012. The candle burst conspicuously through the "neckline" accompanied by an 80% increase in volume compared to the daily volume moving average 50.  The exit point calculated by adding the difference of the neckline and bottom of the reversal pattern to the top of the neckline, which gives you approximately 1390 (obviously as I am posting this that target has already been met).

Final Thoughts: On June 25, 2012 you can see a retest of the upper limits of the reversal pattern which is not uncommon. This is followed by a slow and rocky uptrend to reach the target zone. It is important to note that the 1390 area does not mean the end to the uptrend, but as one can see from the chart this area does provide strong resistance.

Distribution Day of the Spring 2012 Rally

Identifying tops and positioning your portfolio to maximize your profits are a challenging skill in trading. I want to analyze a key warning sign in the spring 2012 rally, which would have helped traders prepare for the top.

On March 16th, 2012 you see a 97% increase in volume from the daily volume moving average 50 coinciding with a very small increase in price compared to the day before. This signifies a "stall" or "distribution" day. These days are crucial to identify in long up-trends because they display funds and other investors dumping their stocks, meaning the rally will end soon. If one sold on the distribution day they would have confirmed their profits before the market topped a couple weeks later on April 2nd, 2012.

Analysis of recent winning trade

I am going analyze a recent winning trade I completed. This was my first time using the "cup and handle" pattern and would like to discuss the technical aspects of it. As you can see below is a weekly chart of   Western Refinery (WNR)

Lead up: A large run up from a strong base that ended at the end of 2010. It can also be argued to start the run up from June 2011. Either way you measure it you get a 40%+ increase in price coinciding with an  increase in volume while showing strong relative strength.

Formation: Cup formed beginning in August of 2011 and ended in March 2012. Volume spiked at bottom of cup, a strong indicator. The handle began March 2012 and ended June 2012. Stayed consistently above weekly moving average 50 and showed a decrease in volume. Moreover, stayed nicely in the upper half of the cup. The high point of the handle was $20.95, signifying the pivot point.

Entry/Exit Point: I defined an entry point when as $20.95, where a candlestick meets and surpasses the high point of the handle. This occurred on a day with an 80% spike in volume from the daily volume moving average 50 further confirming the break out. Still not use to trading this pattern I took the advice from others and went for a 20% increase in price, making the exit point $25.14.

Warning Signs: Three things troubled me about this pattern. Firstly, the cup formation was not very smooth and round, but rather spiky and more volatile then I would have liked. Next from peak of cup to the bottom was nearly and 80% decline, much greater then a favorable 12%-33% decline. Lastly, the market had considerable volatility at the time, but WNR did mitigate this with considerable relative strength.

Final Thoughts: This trade turned out to be very successful., with me taking my 20% profits soundly. At the beginning of July, I thought a potential bull flag had formed in the rally and was tempted to extend my exit point. Fortunately, I stayed disciplined to my rules and got out right before what looks like a distribution day. Fundamentally Western Refinery is a downstream oil company which benefits from low oil prices, which can be attributed to why it did well. During this same time frame oil (WTI) had fallen from above $100 a barrel to under $80.