By Dr. Alexander Elder and Kerry Lovvorn
There are two persons behind every tick on your screen — a buyer and a seller. Both are convinced they are right, but one will end up a loser. The actions of thousands of buyers and sellers coalesce into patterns that we see on our charts.
Much of the time those charts reflect chaotic movement, but a patient and mature trader stands aside until a familiar clear pattern emerges — and then he pounces. We saw such patterns last week on the charts of crude oil and several related stocks. Please note that, as a friendly gesture, we include a link underneath our charts that'll take you to a page where you can view each chart in full size and color.
One of the patterns we track is a "false breakout." Our focus on it has been sharpened by classes we took years ago with David Weis, a trader in Boston who likes to say "Buy at the point of maximum danger." Such a point was reached when crude broke below its 2011 lows. When it rejected those lows by closing above the breakout line it flashed a buy signal.
A similar pattern occurred on the daily chart of Schlumberger Ltd /zigman2/quotes/201012972/composite SLB -1.81% . When a stock breaks to a new low, you know that stops are being triggered. If, instead of accelerating down, the trend reverses and closes above the breakout line, it shows that the volume of selling was limited, and the next swing is likely to go in the opposite direction. The bullish message of a false downside breakout was reinforced by a bullish divergence of MACD — perhaps the most powerful combo in technical analysis.
Whenever you like a stock, it makes sense to pull up other stocks in its industry group or subgroup. Positive or negative fundamentals are likely to be industrywide. Among the stocks in SLB's group, oil and gas equipment and services, Halliburton /zigman2/quotes/210488727/composite HAL -1.97% looked most attractive. It not only had a false downside breakout but a trifecta of bullish divergences — of MACD Lines, MACD-Histogram, and Force Index.
The key question is this: Are we seeing the start of a major new uptrend in oil and oil stocks? If we answer yes, then we should expect a resumption of a bull market in stocks that began in March 2009 and topped out in spring of 2012.
We think the answer to that is no. Those severe bearish patterns we've described in recent months are still in place. What we expect is a bear market rally, which can be quite good to traders — if you hop off in time.
In conclusion, a quick update on our recent posts. Our weather vane Caterpillar ( /zigman2/quotes/203434128/composite CAT -0.82% still has its claws on the ledge, suspended between a rally and a free-fall. The euro, on which we were short-term bullish, is up 200 basis points since our post and still has some life left in it.
We hope you find this review helpful. We publish daily updates on our website www.spiketrade.com .