FAS Blowoff?

FAS has exceeded the longer-term channel shown on the hourly graph (right). This may well indicate a pending blow off, where prices peak, then plummet, on tremendous volume. Point & Figure target is at 76, but that is now within a day's movement.

If one was already holding FAS, handling the blowoff is best done by setting a stop loss immediately under the previous day's low, thus taking advantage of continued upward momentum, yet not participating in the inevitable collapse. Moving the stop loss up during intraday trading could improve one's profits, but admittedly does increase the chance of getting stopped out early.

Keep in mind, that should FAS turn down, FAZ, its mirror, will go up.

FAS On Target

Yesterday, FAS achieved its target of 61 (60 per the July 23rd post). This was projected from the sideways, rectangular movement between July 15-22, commonly known as a flag. Using the adage "the flag flies at half-mast," the target was projected. The Point & Figure target from the July 23rd breakout remains at 76.

Daily chart shows FAS is completing a cup, but has yet to form a handle. As it approaches the previous 66 high, the cup will probably start. This formation supports the 76 target from Point & Figure charting.

FAS Trading Range

FAS is in a trading range between 52.00 and 53.70. It allows an entry at the bottom for the expected resumption of climb, or as a short-term profit since it seems to touch both levels daily. The beauty of it is an entry at a known point, i.e., 52.00, with a nearby stop-loss point, thus generating an excellent reward-risk ratio. For example, if entry is 52.00, the stop loss is at 51.90, and the target at 53.70, the reward:risk ratio becomes (53.70-52.00):(52.00-51.90), or 1.70:0.10, or 17:1. Outstanding, considering an acceptable minimum is 3:1.

Here is another presentation dramatically illustrating the trading range of FAS--and its mirror twin, FAZ. One can more than imagine trading one, then switching to the other, as each peak and bottom alternately.
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07/30/09; 08:45: Pre-market action on FAS shows a breakout above the previous resistance line at 53.70. The short correction apparently lasted only four days rather than the expected week. This is bullish, as is the gap up in pre-market this morning. It should try to close the gap by retesting even down to the previous resistance 53.70, now support. That's the entry point. If the gap holds, support would be 54.14, which becomes the entry point. Stop loss would be under whichever becomes the bottom.

FAS and a Market Correction

The market has entered a correction of the last two weeks of upward movement. It should be mild, last only a week or so, then upward movement will resume. Look at it as an opportunity for better position.

FAS Up and Away

FAS broke out of a flag in the form of a rectangle, today. Note the excursion to the bottom of the flag two days ago showing a divergence between the price making a lower low and stochastics making a higher low (see green lines). Until this downward excursion, prices were making a pennant, also a flag formation.

The rectangle also being a flag means the flag formation is still intact, allowing application of the adage "the flag flies at half-mast." Using the hourly graph on the right, the target calculates as (50-35)+45=60. That is the high point of the flag minus the start of the initial trend upward plus the low of the flag. Using the daily graph on the left, the target calculates as (66-12)+36=90. Point & figure target remains as 76 since July 23.

Any one or all should make one happy.

The End of FAS'ing Around

FAS is in a pennant after a 15-point move up. It has now pushed sideways until up against the lower channel line, and must now breakout or breakdown. Should it breakout of the pennant,the target calculates as 61 {(50-35)+46}. The Point & Figure target is 76.

The delightful characteristic of this pennant is the nearly flat top. It provides close positioning for a stop loss even should the price pull back to retest the top of the pennant after a breakout, and triangles usually breakout towards the flat side.

Pre-market Position

The Standard & Poor's 500 Large-Cap Index (SPX) nears the top of its channel, indicating an end to pause days. It may take a half-day excursion up to its longer-term, upper, darker channel line, but then the shorter-term channel runs out of room within the longer-term channel. SPX then should turn down. It is now below its 50-day and 200-day moving averages, and it would appear entering the long-awaited 10-15% correction.

This indicates the bear-market 3X ETFs (FAZ, TZA, ERY) should resume running, and the solars, who have enjoyed this pause, to correct some more. Many of the solars are near their bottom channel line, and, market permitting, would turn upward. LDK seems to be leading the others by a day, so is shown here.

The left-hand, daily graph shows LDK approaching its lower channel boundary, thus good to rise, again, market permitting. The right-hand, hourly graph shows a breakout, with the stock, again, at a low position in the shorter-term channel. If the market meanders sideways for the half-day left before its short-term channel runs out of room within the longer-term channel, LDK may rise, but when the market turns down in earnest, it will, too.

With the market in downtrend and near its upper channel, it is looking for excuse to turn down. It will find it. Be careful out there.
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Somewhere around 11:20, the market overcame the old longer-term trend line, and went higher in the short-term channel. So much for predictions.... [sheepish grin]

Pause Day 2

As far as I know, there is no rule against two pause days in a row. If so, we broke it today. Market rose early then reversed when the Fed's Open Market Committee broke up. Guess they said what was expected, but disappointed what was hoped for. Anyway, markets are meandering, not knowing which way they want to go. Buyers and sellers are waiting. Traders longer than day traders don't much care which way the markets go, as long as they go. So we wait.

Pause Day

As predicted, after yesterday's market drop, today would be a pause day, or a day with little if any movement. It was. Indices were mixed, with Russell 2000 ($RUT.X) down.

Since the Russell 2000 continued down, TZA mirrored and amplified that move, closing slightly up. A rise of over 2% is nice for a pause day. Note, the left-hand daily graph, TZA continues to walk the upper Bollinger band, indicating the trend upward remains in force. The right-hand TZA 60-minute graph has had the latest channels redrawn to include today's movement. Today's drift sideways has left it near the lower channel line, close to an entry point.

ERY, in the left-hand daily graph, also continues to walk the upper Bollinger band, plus paused today on its 50-day moving average. On the right-hand 60-minute graph, the redrawn channel is parallel and overlaps the previous channel. The pause of today and much of yesterday is becoming a Bollinger squeeze. It is also nearing the lower channel line, but the On Balance Volume is not showing any enthusiasm. ERY moves more from the decrease in oil prices rather than the general market indices, so that may pause another day or three before moving.

FAZ in the right-hand daily graph also continues walking the upper Bollinger band, indicating an intact trend upwards. FAZ's 50-day moving average is above, currently t 6.25, and an attractor, if one allows fractal terms. The right-hand 60-minute graph has had the latest channel redrawn to includes today's pause, and shows price challenged the 38% Fibonacci retracement level twice. It held. FAZ has closed directly on the lower channel line, indicating we will know immediately in tomorrow's market whether FAZ will resume upward movement or breakdown. FAZ also has a resistance level at 5.37 which contained the upper movement after testing the 38% level.

Ten Percenters

Hunting ten "percenters," or stocks that rise ten percent in a day, is fun, and often lucrative. Rare are the days when one gets 3 for 3.

The obvious one is ERY, written up this morning before pre-market. It broke out Friday and carried through this morning. It reached its 50-day moving average and tarried there for the balance of the day. Reaching its target of 24.50 was thought to take three days, but it nearly achieved it today.

TZA reflected and amplified a drop of nearly 4% in the Russell 2000. The market has entered into the long-expected first bull-market correction. TZA gapped outside its previous channel on opening, and finished the day on a second leg up. Note it is still within its new channel. Its 50-day moving average is at 27.42, within reach of another day like today.

FAZ was the late star of the day, after closing well down in the channel Friday, then popping out this morning, and running some more in the afternoon. Its 50-day moving average is at 6.33, within another day's effort. FAZ also closed in mid-channel, indicating a desire to continue.

Tomorrow may be a pause day in the market's decline. Many of the indices are closing at their 200-day and 50-day moving averages simultaneously. These three will reflect that pause. Then, again, the indices may not pause, but accelerate, which will reflect in these.

FAZ'zling On Down

FAZ never turned up but continued trading down within the channel, and closing within the channel. The last candle downward was after market, and most probably those who wish to not hold the stock over the weekend. It appears to have paused most of the day at the 50% retracement level.

FAS mirrored the same in-channel action with the exception of the after-market action. Price action just before closing reached the 50% retracement of the previous corrective action. It touched that point at the same time the upper channel lined passed through that level, then backed down to the upper Bollinger line.

Because of the continuation within the channels, there were no trade opportunities in either during the day, unless one was daytrading. Monday, perhaps, will provide a turn.

FAZ'zled

FAZ corrected to its 38.2% Fibonacci point yesterday, and held. The 38.2% retracement calculated at 4.94, and FAZ bottomed at 4.90, but call it close enough. The important point is that it held, even though the price action has not broken out of the short-term channel created by the retracement move. The action so far seems a flag formation of either a rectangle or pennant, but a flag. If the flag-flies-at-half-mast adage applies, a resumed upward movement should carry to the 6.10 area. Note, too, yesterday's retracement was on lower than average volume.

FAS, FAZ's mirror, also corrected, but did not reach its 38.2% level, stopping instead at the old, long-term trendline (heavy blue). Its correction also was on light volume, and appears to be forming a flag.

Both FAS and FAZ are coming out of a daily Bollinger squeeze formation. That formation is susceptible to head fakes, where price breaks out in one direction, but quickly reverses and goes in the opposite direction. Point&Figure (P&F) charting target for FAS is 5.50, a significant retracement of the movement off the FAS bottom of 2.32 to its subsequent peak of 13.27. This retracement closely matches the Fibonacci level of 70.7%, and is not unusual since first retracements off a long-term bottom tend to be deep, or a significant percentage of the upward movement. FAZ's P&F target has not recalculated, yet.

Tactic for the day is to watch for action indicating a resumption of upward movement in FAZ, taking a position when it breaks out of the flag formation. Set a stop loss thereafter below a possible pullback to the upper boundary of the flag. It could well be, the hesitation at 4.90 is a pause midway in a further decline to a deeper retracement, say, 50% or 61%, before price will continue its upward movement. Should the Bollinger squeeze prove to be a head fake, trade FAS as it resumes its climb.

Do keep in mind that trading FAZ is a counter-trend trade since the long-term trend of FAS is up, and this downturn is a correction r retracement of that longer-term trend. That means, be light of foot, quickly exiting should conditions go adverse, but that is good trading advise in any situation--just more so in counter-trend.

FAZ Day

This combines the daily, hourly and 3-minute graphs on the same screen. The daily (upper left) shows FAZ breaking upwards from a Bollinger squeeze. Although it doesn't show clearly on this graph, volume was up considerably over its average.

The hourly, or 60-minute graph shows it moved upwards, out of the channel of the first two days. The upward channel will be redrawn to contain today's action. Often, early channels need such adjustment because they were drawn with so few data points. The redrawn channel having a higher slope reflects the strength of this movement.

Finally, the 3-minute graph shows the day's action well-defined by simple trendlines, allowing one to easily daytrade FAZ, should that be one's inclination. It also allows one to gain entry at a lower turning point, allowing increased profit while limiting risk.

Overall, FAZ was up 6.53% for the day. Tomorrow looks like it will continue. Note, too, the upper Bollinger band and its centering moving average contain FAZ's excursions very nicely. It provides an excellent indication of position, along with the 3-minute graph, showing where one should enter FAZ, then set a nearby stop-loss point to hold loss from an unexpected adverse movement to a mere nibble, while maximizing upward potential.

Using this technique today, one could have entered at 5.00 around 14:30, set a stop loss at 4.95, with an expected target of 5.30, so the reward:risk ratio would have been (5.30-5.00):(5.00-4.95) or 6:1, well above a minimally acceptable 3:1. End of day would have one up 0.25 per share, already five times one's risk upon entry. Tomorrow, the stop loss could be raised to match the Bollinger centering moving average which closed at 5.00.

TZA, FAZ and the Markets

The Russell 2000 Index approaches its lower channel line challenging it and its 200-day moving average. It has been a long run since the early March bottom, and it's probably time for some retracement. If so, this would be the first correction of the new bull market, and they are often deep.

TZA, the bear-market 3X ETF representing the Russell 2000 index has already broken out of its trading range and is heading upwards for a second day. It has already established a new channel, although that may succumb to a correction in a day or so.

FAZ has also broken out and established an upward channel. FAZ seems a little steeper than TZA, but they are very similar (FAZ up 5.13%; TZA up 4.68%, today).

FAS Lags, TNA Excels

The market had an excellent day with indices up more than 2%. At one time during the day, the Russell 2000 ($RUT.X), the small cap index, was up over 4%, then faded a bit at closing. It closed up 3.94%. Small caps usually lead others off the bottom during a new bull market, and can be used as one indicator this is a new bull, not a bear market correction.

FAS gaped up on opening, then ran up, but began to lag. It closed only 4.40% up, hardly beating the indices, and volume was less than average although higher than Friday's anemic amount. Today's price rise disappoints compared to expectations.

TNA, in comparison, demonstrates dramatically what could have been had FAS performed. TNA is the 3X ETF representing the Russell 2000, and closed up 11.56% today. It closed on the 20-day upper Bollinger band, indicating that a beginning market run that may "walk the band" for several days of uptrend. Also, note it gaped up, a very bullish sign. Other bullish indicators are 1) it broke out of a double bottom formation, exceeding the center peak (point B), 2) it has already exceeded the previous peak (point 5), 3) it had a mild correction since point 5, never dipping below the 38.2% retracement level, and 4) broke out of a Bollinger squeeze on higher than average volume, with price appreciating three times its index.

With FAS lagging and TNA performing dramatically, trading attention shifts to TNA and FAS will no longer be reported unless it resumes performance. Henceforth, this series will be labeled TNA, not FAS.

FAS Friday

FAS continued it sideways movement on greatly reduced volume. The entire market seemed quiet, perhaps in anticipation of GM going into bankruptcy. It is indeed a somber happening.

The 60-minute chart shows that it also broke through a short-term downtrend line in the last hour of the day. Had it followed the pattern of the previous days, it should have drifted down to the support line around 8.75, closing near that amount. Instead it hovered near the upper end of the trading range the entire day. Often before breaking out, price will retrace only a small portion of a range before turning to assault whatever constraint it is facing. It did this today.

The 3-minute chart shows FAS remaining within the day's narrow support and resistance levels until a few minutes to three o'clock. It then turned up, taking a run at its resistance level. After hesitating at that level for a few minutes, it blew through on increased activity, closing at ten and near the high of the day.

The ten level is significant for a couple of reasons. First, just because it is ten. Stocks tend to treat round numbers as support and resistance levels, or more correctly, traders and investors do. Limit orders tend to bunch around round numbers, especially even multiples of ten. Second, the previous resistance level broken when FAS ran up to its recent high of 13.27, was 10.06. The high today was 10.09, close enough. It arrived at that level right at the closing bell, so had little time to challenge it.

The runup late and close at the high indicates traders want to have a position on Monday morning, expecting a gap opening. Traders tend not to want to hold positions overnight and especially over weekends because that leaves them vulnerable to surprises during periods they cannot trade. This last-minute action portends good things coming.

The price action today was not a breakout from the Bollinger squeeze. That requires a close outside the upper Bollinger band, which is 10.42 (13-day) and 10.73 (2-day), assuming a breakout upwards. It may happen Monday. The price pattern over the last week has put in three bottoms around 8.60, and today closed above the highest point in that pattern. A price target should be above 11. At 10.71, the pattern of a wider double or triple bottom confirms, extending the target to approximately 12.

Best of all, price closed today outside the pennant. That provides a target of (13.27-5.06)+8.28=16.47, based on the premise that "the flag flies at half mast." A more conservative target calculates at 13.19. The Point & Figure Price Target remains at 27.5.

Monday should be an interesting day.

FAS Squeeze

FAS continues it sideways move, each day decreasing in volatility, and each day's movement pretty well contained within the previous day. Volume was up, reaching average.

FAZ shows sideways movement, though volume is and has been above average.




As discussed last night, the length of the Bollinger bands is reduced from the normal 20-days to a quicker 13-days. The shorter length shows FAS entering a squeeze, Bollinger's term for a period of abnormally reduced volatility. The lower portion of the graph plots the Bollinger-band width, showing it diminished to a new low level. It is, in fact, as low as it has ever been during the entire history of FAS.

This graph shows both the 20-day (heavy blue) and 13-day (heavy light green) Bollinger bands to allow a comparison. The 20-day Bollingers show a steady narrowing, while the 13-day Bollinger shows an accelerated narrowing today. Notice, too, the 50-day moving average (heavy dark green) is progressing each day with a virtually identical slope and position as the lower trendline (black line) coming from the March 6th low. Even with continued sideways movement, price, 50-day moving average, and trendline should all meet no later than June 3.

The importance of the 50-day moving average: Many large investors, e.g., mutual funds, take on positions when price touches the 50-day moving average. A large accumulator of shares often starts another move upward.

The importance of the trendline: Traders take a position when price touches a trendline.

The importance of the Bollinger squeeze: It is a measure of the calm before the storm. Minimized volatility indicates a lack of buyers and sellers, so should one or the other come in, the price should dramatically start a new movement. It is not uncommon for the move out of a squeeze to be in the wrong direction, which quickly reverses and roars off in the other direction. John Bollinger calls this a head fake.

The combination of 50-day moving average test, the Bollinger squeeze, and the uptrend line, promises all the more potential for a dramatic move.

The correct play is to establish a position on breakout. If it reverses, cover quickly and reverse one's position. In this case, reversing one's position would mean moving from FAS to FAZ, or FAZ to FAS, as appropriate. FAS is the probable upward mover.

For the moment, we wait... A smug smile is appropriate.

FAS Day

FAS opened higher, then retreated back into the pennant when the market went negative around lunch. It closed near its low, so would expect more downward motion at opening tomorrow. This illustrates vividly the need for stop losses. One set just below the downward trendline would have taken one out of the position with a nibble loss. Volume continued light, below average.

Looking at FAZ, the mirror ETF for FAS, one observes an upward day as expected. Note the Stochastics (STO) indicator continued it already given buy signal through yesterday, and note, too, the tremendous divergence of the accumulation/distribution throughout this pattern. Volume was higher than yesterday and above average. The Bollinger bands have been shortened from their normal 20-days to 13-days, to see if it is going into a squeeze. It is.

From evidence from both, best action would be to await the breakout of the Bollinger squeeze or pennant, then trade accordingly. It would appear, FAZ will breakout going up, but let it prove it. The other alternative is that FAS will indeed finally test its 50-day moving average and even its lower Bollinger band. If so, that may be its bottom, which would provide a tremendously advantageous entry. One doesn't know which, but one does know that sooner or later, one of them will...

FAS Thoughts

FAS lifted very nicely today, but note the volume is less than average. It also failed to close outside the pennant formation in progress. Whether this is the beginning of a breakout and new movement up, remains unknown until at least tomorrow.

Today was the first day one could anticipate the end of the C movement of the ABC correction in progress. In the past, FAS has completed short-term downward moves at its opening, then went up dramatically the rest of that day. Should it do so this time, the formation could be a double bottom, but that formation isn't "official" or confirmed until it closes above the center peak (10.71), this time marked with the B, and is one point higher than today's close of 9.71. That would provide a known position that one could trade, but one hopes for one lower.

Should the pennant be broken tomorrow by price moving decisively outside the upper pennant line, it offers an immediate buy position, but there is a 47% chance price will retest the downward trendline that forms the upper boundary of the pennant. Depending on risk tolerance, one can take a partial position on breakout and increase it on retest, or take a total position on breakout, use a tight stop to get out with minimum loss, then take another total position at the retest point. Often a trend breakout will "peak" above the trendline, then run down another time before actually breaking out. The second graph shows such a peak.

Should the pennant breakout happen, price target would be basically (13.27 - 5.60) + 8.28, or 15.95, similar to the target thought valid for peak 4 of the FAS Cycle Counts entry. There is a 60% chance of making this target, and a 2% chance of failure to make breakeven. Stop losses should be initially set below the downward moving trendline that forms the upper boundary of the pennant. Reward:risk should be easily above the minimum 3:1. To be a valid breakout, the price should close above the upper pennant line, so buying on open is not waiting for pattern confirmation. Truly caveat emptor.

Also, a breakout from a pennant usually happens approximately 2/3rds of the way down the pennant, and if it doesn't, the price usually continues to meander sideways after moving past the end of the pennant. Should that happen here, and it appears it might, the Bollinger bands will probably go into a squeeze, which would be the next potential tradeable pattern. That would be a good thing, too. So, if the price meanders out of the pennant sideways, do not treat it as a pennant breakout.

Finally, the FAS pennant appears flat on the bottom. When a pennant is flat on one side, the breakout tends to happen in the direction of the flat, in this case down. Should this evolve, one could go with FAZ instead of FAS. Amusingly, its flat side also indictes down, but its close was outside the upper pennant line.

This is all to say, this formation can end by going up, down, or sideways. How wonderfully enlightening. Here again, successful trading is a matter of going with the odds at positions known favorable, then limiting the inevitable losses to small amounts compared to the inevitable gains.