After running up sharply a couple of weeks ago,
the indices had what appeared to be some good looking low-volume consolidations
last week. The daily chart of the S&P looks like a Cup & Handle formation (or
double-bottom with handle). The handle was broken through today as the market
moved higher. Unfortunately, volume was low and price didn’t quite hold the
breakout.
So does the fact that the S&P is attempting to break out of a Cup & Handle
formation excite me? Unfortunately, no. I trade the Cup & Handle formation a
lot. It is a formation that can lead to explosive gains and can provide very
favorable risk/reward scenarios when looking to buy a breakout. Unfortunately,
it is not what I would call a high-percentage pattern. Very few of them work as
advertised. Those that do can be incredible winners, but there aren’t that many
of them. So when I see the S&P 500 set up in a Cup & Handle formation, I look at
some other factors to determine its chance of success. I’ll discuss several of
these factors in my month-end report on Wednesday, but today I want to focus on
the action I’m seeing in individual stocks.
One indicator I depend greatly on is my weekend review letting me know how many
and what stocks are setting up to break out of basing formations. After the
consolidation by the indices last week, I was expecting to find a deluge of new
setups this weekend. Didn’t happen. In fact, I came up with less new prospects
for my watch list than I did either of the two previous weekends. Unfortunately,
there aren’t a whole lot of individual stocks setting up in bases like the S&P
500. This is not a good sign.
An even bigger problem in my eyes is the lack of enthusiasm I am seeing for
those that do break out. Even the “good ones” aren’t that good. Below are a few
examples:
NewMarket’s (NEU | Quote | Chart | News | PowerRating) breakout last week got a lot of people excited.
Nice formation. Good breakout on high volume. So far – no follow through. It
took two days to dip back below the top of its handle and although it’s try to
move higher now, it’s certainly nothing to get excited about.
Hittite Microwave (HITT | Quote | Chart | News | PowerRating) attempted to break out on a gap today.
Breakouts that gap can be some of the most powerful. This one ran up for about
15 minutes before losing steam.
Sotheby’s (BID | Quote | Chart | News | PowerRating). After breaking above a low handle on 8-15, this one
tried to form another handle. A break above that would have been very bullish.
Instead, it collapsed.
When I give my month-end report on Wednesday, I will refer to the action in
individual stocks. The examples above are the kind of things I’m seeing. A
strong market advance requires some buying enthusiasm. In a healthy market there
are oodles of breakouts that quickly run up 10% or more. I’m not seeing any of
that currently. I don’t believe this bodes well for the market.
Best of luck with your trading,
Rob
Rob@HannaCapital.com
For those who may be looking to expand their
knowledge beyond just market timing, my
Hanna ETF Money Flow System utilizes the VIX in generating trading
signals for spread trades.
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.
