Consolidations tend to resolve in the direction of the underlying trend. But when they don’t, that’s the signal!
An oldie but goodie from the past, that I always think about when this comes up, is the US Treasury Bond Fund back in the Fall of 2016. I remember chatting with Liz Claman at the time about it on FOX. The $TLT was consolidating in a classic, textbook continuation pattern above former resistance from the early 2015 highs:
The bet we were making (for many other factors as well at that time) was that this was not a continuation pattern, and instead a massive failed breakout.
We believed that the $TLT Bond Fund would fall, but the signal was when the “continuation pattern” confirmed that it was in fact, not that, and instead a failure. The signal was the pattern resolving down and breaking support:
Look at the implications of a “continuation pattern” not resolving in the direction of the underlying trend. This is classic behavior and a great example of just what happens.
So great, what does that have to do with now JC?
Well, consolidations in stocks are resolving higher all over the place, NOT lower.
The worst areas. Look at Latin America now back above its early 2016 lows:
Look at this “continuation pattern” in Brazil, resolving higher:
Look at Regional Banks, back above all those former lows in 2013 & 2016, again resolving its consolidation higher, not lower:
So the way I see it, if these stocks, sectors and indexes are resolving their ranges higher, what does that say about other consolidations out there?
Well my bet is that when we see consolidations in stocks, there is a higher likelihood that they break out vs breaking down. So we want to be betting in that direction.
But how about the more defensive areas? They’ve been consolidating as well. Should we expect them to resolve higher or lower?
For example, with stocks resolving their consolidations higher, what does that mean for rates?
Does this “continuation pattern” resolve in the direction of the underlying trend, which is lower here obviously? Or, like these beaten up stocks, will this resolve higher?
And what about Gold? Will this resolve in the direction of the underlying trend, higher? Or is this a “Bonds in 2016” type scenario like we summarized above?
I’ll say this, if we’re below 1680 in Gold, we cannot own it. The risk is very much to the downside in the short-term to intermediate-term if that’s the case.
And if US 30yr Yields are above 1.45%, I don’t think owning bonds is a good idea either.
Those are the things I’m currently observing.
Have you noticed how since early March, almost all the long ideas we put out have worked out really well? But the few times we put out a short idea, they’ve either stopped us out quickly, or never even got triggered at all in the first place!
That’s the market giving us information. Are we going to listen?
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