LULU appears to be in cup and handle pattern

Lululemon, a populur stock, appears to be setting itself up for another leg up. Right now it is showing signs of being in a cup and handle consolidation formation.

Lead up: A large run up from a strong base that ended at the end of of April 2012. This run up measures over 50% in price coinciding with an  increase in volume while showing strong relative strength.

Formation: Cup formed beginning in April 2012 and ended in September 2012. The handle began in mid September 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 $78.97, signifying the pivot point.

Entry/Exit Point: I defined an entry point when as $78.97, where a candlestick meets and surpasses the high point of the handle. Still new to using this trading this pattern I took the advice from others and went for a 20% increase in price, making the exit point $94.69.

Warning Signs: The first thing that troubled me about this pattern was that there was not a spike in volume at the bottom of the cup, a sign I like to see. Next, from peak of cup to the bottom was nearly and 55% decline, much greater then a favorable 12%-33% decline. Remember one must wait for confirmation before placing a trade on a stock.

Bull Flag into QE3

Thursday was an exciting day in the markets with the fed announcing a third round of quantitative easing. I would like to take a technical look at this last weeks market actions.

S&P 500:

Formation: On September 6th, 2012 you can see a big impulsive move up in the market, the flag pole. The next couple of candles were smaller and were going sideways slightly downwards, the flag. Moreover, this was confirmed by analyzing the volume where it dried up during the flag portion, a text book setup.

Breakout: At this point I was waiting for confirmation which came Thursday with a big move up accompanied with high volume. This of course was the day of the FOMC meeting with the fed announcing a third round of quantitative easing (I should mention I did not expect a third round of easing before the election, but was looking for a big push up regardless).

Final Thoughts:  I expect the market in the short and intermediate term to continue to rally. After every significant fed action since 08 (QE1, QE2, Operation Twist) the market has experienced a strong rally. It should be mentioned though that each one is progressively weaker than the previous, so be cautious in the long term perspective. Moreover, the risk of inflation has dramatically increased again. Gold/silver has been rallying and the US dollar has weakened against many other currencies. Remember a big part of these QE's are to strengthen the United State's trade balances. Finally, the Russell 2000 and Nasdaq seem to be finally catching up the S&P 500, a good sign of a healthy rally, and experienced similar patterns as shown below.

Nasdaq:

Russell 2000:

The Low Volume

By this time it's not secret that the stock market is trading at abnormally low volumes.

S&P 500 All Time Monthly Chart

As you can see since the last financial crisis volume has been decreasing while the market has been rallying. Moreover, current volume about the same as it was in the late 90's. I see three reasons for the following:

1. Investors are still fearful of the stock market since the last financial crisis along with the current euro crisis.
2. Baby boomers are retiring shifting their money from stocks to fixed income and safer assets. 
3. Long term investors are frustrated with how the stock market has not gone anywhere in the last 12 years.

As you can see though from the lines I drew, since 09 the market has been rallying while volume has been decreasing. I would point to the federal reserves actions to explain this (QE1, QE2, Operation Twist). I personally think that this makes this current uptrend very fragile, and a red flag with the low volume. 

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.