Tom’s Weekly Newsletter January 19, 2023

Originally published via our newsletter previously. Subscribe for early access!

Economic Data and Earnings Season Could Make or Break the Market

Core CPI (Consumer Price Index) numbers were reported today.

The numbers reported shows the CPI fell 0.01% in December.  This is what was expected and it’s the biggest drop since April 2020.

This gives an indication inflation may be slowing down and that helped the markets for the early part of the day.

What’s being given as the biggest reason for the easing in inflation is the sharp drop in gas prices.  The info I see is gas prices lower than they were a year ago.

Earnings season kicks off tomorrow and where the CPI report helped the market for most of the day, earnings and forward looking statements from companies will make or break how investors feel about the stocks they own and which ones they have their eye on.  Bank stocks like Bank of America, JP Morgan Chase, and Citibank all report tomorrow.

Corners of the Market

SPY – SPDR S&P 500

TLT – iShares 20+ Year Treasury Bond ETF

UUP – Invesco DB US Dollar Index Bullish Fund

USO – United States Oil Fund, LP

GLD – SPDR Gold Shares

From the Desk of a CMT – COST Symmetrical Triangle Case Study

This case study uses a bit of a hybrid approach to a potential symmetrical triangle for COST. With price recently moving back into the pattern we have some time before implementing a strategy. I was going to map something out but there’s simply no rush. If this pattern holds, the price projections are sufficient for us to wait. 

Last week we had a break down out of the pattern; however, we need to once again look at volume and momentum to see if things still favor a bearish move. Please go to the end of this article if you’d like to review the symmetrical triangle pattern recap from last week. 

Hybrid Approach

I’m referring to this case study as a hybrid approach because it is a sizable pattern that allows us to consider monthly or weekly charts. We’ll use both. The monthly chart provides a more conservative price projection while still allowing a profit opportunity if a true breakout takes hold.

The potential symmetrical triangle forming for COST on the weekly chart has more aggressive price projections.

My preference is to use this pattern for entry and exit signals since the notion of waiting for monthly data just doesn’t fit my style. If we have to exit, waiting three weeks for that seems painful. 

The risk to this approach is that shorter-term charts have more noise, or choppy price action.

As a result, we may receive an exit signal on a weekly pattern that never occurs on the monthly one.

If the trend resumes, we could get whipsawed out of a good position. In this case, I’m accepting that risk in favor of a timeframe that better suits my style and am good with that.

Consider the same thing for yourself. Are you willing to risk an early entry or exit to better align a case study with your personal style?

One way we can help mitigate the risk from noise is to require a 2nd consecutive weekly close to confirm entries and exits (see filters in the pattern recap at the end).

Potential Symmetrical Triangle for COST

Figures 1 and 2 provide the monthly and weekly charts for COST (in TradingView) with the narrower solid lines serving as the pattern boundaries for the monthly chart (less noise) and the wider dashed lines serving as boundaries for the weekly chart (more noise).

Note the closer we get to the apex, the less successful the pattern is expected to be. With a move back to the pattern, we’re pretty close to that point.

The potential pattern was initiated with an April price peak which served as the first touch of the pattern boundaries.

By October, a fourth touch of the boundary makes the possibility of this formation worth monitoring.

 Throughout the remainder of this article, I’ll drop the “potential” from pattern, but do recognize this can ultimately be a failed pattern. There are no guarantees in the markets.

Since price is back in both patterns the close as of 1/10/2023 is being used. Do take a look at the close as of 1/6/2023.

Focusing on the weekly chart

• Volume strengthened with the bullish move back into the pattern (after a holiday week)
• ROC appears to have come into resistance at the zero level and is confirming bearish price action
• RSI is moving between the 20 level and falling short of the midpoint at 50 (for now)
• Price may be encountering resistance at the 10-week (~ 50-day) & 40-week (~200-day) SMAs

It seems a bearish resolution remains more likely, but we have to wait for another break down and out of the pattern. Requiring a consecutive two-week break should reduce whipsaws from false breaks.

I don’t love where price is relative to the apex; however, last week’s close could ultimately be that price retracement/retest back to the pattern before we see a sustained bearish move.

Since support and resistance lines are subjective, it’s possible the ones I’ve drawn are slightly off from how a pattern eventually plays out. 

If COST closes outside of the pattern with Friday’s close, evaluate current conditions for implied volatility for the stock to start assessing some strategies. Successful patterns of this size can take months to reach their price target, so keep that in mind as you explore those strategies.

Pattern Recap

A symmetrical triangle is a price pattern with the following characteristics:

• Bounded above by a downward trending resistance line
• Bounded below by an upward trending support line.

A minimum of five touches of support and resistance is required for asymmetrical triangle. This longer-term formation includes a price target out of the pattern and can experience false breakouts and pattern throwbacks. 

• Measured Move: 1st Resistance point – 1st Support point at pattern opening
• Breakout Direction Expected: May continue or reverse price

Volume is a critical component of pattern definition. For a symmetrical triangle, expect volume to decrease as you continue into the pattern then accelerate with a pattern break. Tracking volume behavior at the boundaries can provide clues about the direction of the eventual break.

Consolidation patterns, which include symmetrical triangles, can experience false breakouts or pattern throwbacks making it a challenge to determine if price will continue or reverse once it begins trending again. One solution to improve trading performance for such patterns is the addition of a price and/or time filter. 

• Price Filter: Requires a breakout carry price some minimum distance away (for instance, 2-3% of breakout price).
• Time Filter: Requires the closing price to remain outside of the pattern or support/resistance line for a consecutive number of periods, (for instance, 2 weekly closes).

Momentum tools may also be used to gain insight on the potential break.

Regards,
Clare White, CMT

Thanks again, Clare!