From the desk of Tom Bruni @BruniCharting
The Mystery Chart I posted Tuesday was a bit different because I told you what type of security it was and that it wasn’t inverted. My objective with this chart was similar to what it always is, but more nuanced in that I was trying to get a feel for people’s willingness to buy breakouts in stocks right now, or if there was any apprehension.
I received a ton of great responses via Twitter and email, so thank you for that. Let’s get into those answers and the actual chart.
Most said you’d be buying the breakout at Tuesday’s levels or a pullback to the former high (68), but a few skeptics were selling or staying away.
The reason I posted this chart is because I’m seeing a lot of setups in names that are testing, or have slightly exceeded, resistance after a very significant short-term advance. In many of these setups momentum is making a lower high and because prices haven’t consolidated, I though that a lot of them would prove to be failed moves that revert back into their range or at least pause at current levels and correct through time.
Ironically, in just two days a failed breakout is exactly what we’re seeing in this week’s chart, Black Hills Corporation. Prices are at the top of a great two-year base, but are extended from their 200-day moving average and did not consolidate at all before breaking through resistance near 72.
In this situation the strongest names will consolidate through time (above or below resistance) like Booz Allen Hamilton and eventually move higher.
Or break through resistance on the initial test and keep running like American Tower Corp.
The weaker names will confirm a failed breakout and either work that off through time or a further price correction like Dine Brands Global Inc.
Some other examples of these characteristics right now are: AVGO, CNP, EL, HOLX, LPLA, MDLZ, TFX, AIV, ALE, PNM, COKE, LNTH, and SCL.
If you’re taking these types of trades it’s important to be aware of the whipsaw risk and respect your risk management levels when they get hit. If you get stopped out and need to get back in, that’s a much better situation than staying in and wish you were out.
Also, you can flip this exact same type of concept on its head for shorts and use the same risk management practices. Extended moves are extended moves, it doesn’t matter what side of the tape they’re occurring on.
We’re still in the camp that the major indexes are still a “hot mess”, which means we’ll continue to look for opportunities in individual sectors/names both long and short. And remember that when conditions in Equities are not conducive to being aggressive, cash is a position and other asset classes can offer opportunities as well (like Bonds).
Thanks for reading and let us know if you have any questions!