Dictionary.com, which I find to be a useful site, defines a 'riff' as a "melodic phrase, often constantly repeated, forming an accompaniment or part of an accompaniment for a soloist". I picked up on something Linda Piazza said in her recent (11/13) Trader's Corner about Fibonacci retracements
, after she picked up on something I said in an earlier piece; so, it could be said that we're riffing
on each other.
The foregoing is amazingly true with technical analysis (TA) types and aficionados, as technicians are a band of folks who like to pick up on each others observations and experiences. The Market Technicians Association (MTA), which I belong to and which used to meet on the 72nd floor in the World Trade Center tower (so I could just take my 'local' elevator from 105 and 'drop down' to it), liked nothing better than to hear from various Technical Analysts on their insights and approaches to TA and I loved these meetings.
RETRACEMENTS, FUNDAMENTALS AND RESISTANCES
Linda mentioned my take on fibonacci retracements of 61.8% (often rounded off and referred to as the 62% retracement level). I find that the stock indexes often have powerful resistance (on rallies) and support (on pullbacks) at the 62 to 66 percent levels. Individual stocks and indexes will often find the same at the 50 percent retracement level. The 62 to 66 percent retracements are important in stocks also at times.
Just because I rely on technical inputs, I don't discount and also find analysis of the fundamentals of a stock or the economy in the case of indexes, to be unimportant.
Take Ford (F) stock, my money maker of the year. Linda can verify that I was recommending the stock (in a private e-mail exchange) around the time when it dipped to and under $2. Based on my knowledge of the company and, I've kept an eye on the autos since I grew up in Michigan, I liked Ford's current management and their strong focus on surviving the recession; e.g., by hoarding cash.
The company also did more with fuel efficient and hybrid models than GM, yet got painted with the same bearish brush. When it got to a buck, on a risk-to-reward basis, what was my risk in buying the stock?: 1$. Even if I bought a 1000 in the $2 area, I had a defined and relatively low risk; e.g., a $2000 risk is one I take fairly often, assuming I see upside of 3 times that or more. What was my upside on the stock? Even if it was $5-6, it offered a heck of a risk to reward.
By the way, it greatly helps you if you have been through bad recessions and panics BEFORE. Plus the study of technical analysis helps when you have studied the repeating patterns of, and the psychological nature of, fear-based panics. You don't have to have many years for this as there's an advantage offered in the study of charts from numerous past market cycles, both bull and bear ones. There's a key reason why Warren Buffet does so well. He doesn't lose sight of fundamental earnings prospects, even in bad times. He's been through or studied past economic cycles and knows value. Value perseveres through and past bad periods.
Getting back to Ford, the strictly technical picture provided by its first pullback after its first rally, wasn't real encouraging. However, the big prior decline had taken the form of a down-up-down move or an 'A-B-C' correction in Elliott wave terms. You don't have to know anything about 'wave' patterns to observe that bear market cycles or corrections often complete this type formation. Moreover, the two down legs ("A" and "C") were equal, which reflected a pattern that is all the more consistent with a bear market trend that that had run its course. Of course you may observe that the stock (at a buck) couldn't go much LOWER! But the pattern of EQUAL down legs in the aforementioned A-B-C bear pattern is what struck me. Don't listen to the media and focus on the pattern AND assume the stock price may have FULLY discounted terrible current fundamentals.
Below is the Ford chart and there is a point here I'll make on retracements along with some other technical aspects:
The corrective A-B-C wave structure or a common bearish down-up-down chart pattern formed in corrections is highlighted on the left. I thought that bear pattern looked 'complete'. On or investment strategy or even trade basis, I liked the limited downside risk relative to the rebound potential. I also liked the can-do forward thinking management and product line, hence F's earnings prospects, provided the world didn't come to an end, was good. Past study of many market cycles suggested that panics tend to END well ahead of an actual (economic and earnings) recovery.
Further points about the Ford chart below includes one about retracements, as well as not always relying overly much on a strictly mechanical approach to technical analysis principles. The corrective pullback to the first advance dipped below the 2/3rds/66% retracement level. There was the possibility of a round-turn 100% retracement to the prior lows. Keeping my focus on the fundamentals and discounting the substance of a 'panic', I still liked the stock and this correction probably offered another opportunity to accumulate the stock under $2.
The rally in Ford seen above that ensued after the down leg (corrective wave 2) that fell to more than a 62-66% retracement, has had some subsequent bullish patterns that formed, namely the two bullish highlighted triangles. As to the chart for the period shown above, it's not surprising that rallies to and above the prior tops in the 8.8 area are bringing in selling such as seen today. At 9, I'm happy to take much of my profit and run, although I still see decent longer range upside for Ford. By the way, triple tops are much less common than double tops; an apparent triple top may be just resistance waiting to be pierced.
There is another aspect to the long-range market outlook involving retracements that suggest that the S&P 500 (SPX) is approaching a 'natural' resistance area, representing the 50% retracement of SPX relative to the huge bear market decline of October 2007 to March of '09. The S&P 50% retracement seen on the weekly chart below is reached at 1120. The index reached 1114 earlier this week so has gotten quite close to an exact 50% retracement. This is not to say that this retracement level won't be pierced soon or at some point ahead. But for me, as in say in holding SPX calls and so close to an expiration, I'm going to take note of this potential (retracement) resistance and not hang around; for example, expecting 1150 as an immediate next objective.
A point I made in my recent (Sat, 11/14) Index Wrap about upcoming RESISTANCE in the Dow 30 (INDU), as being at or near the top of INDU's uptrend channel is highlighted in the chart below. My focus as usual was on the major index (currently INDU) that was LEADING the market higher. The trend channel technique is sometimes how you can 'find' potential resistance where there is NO prior top to look at. You'll note that the LAST rally peak in late-October in the INDU daily chart below wasn't quite to the upper channel line. On Monday (11/16) of this week, the intraday high got quite near resistance implied by this upper channel line. The Dow may get still higher near-term but overhead technical resistance may slow the rally down or imply the start of a pullback such as seen on several occasions on the way up over recent months.
Normally of course, an up trendline is drawn UNDER the trend and connects the various lows, not in this case one connecting various rally highs. This is the difference between the channel concept of two parallel up trendlines (or two parallel down trendlines in a decline). This kind of an upper channel line shows an area where the index or stock might be vulnerable to selling pressure and the start of a relatively minor correction. A break of a lower 'conventional' lower up trendline is one that would suggest a more serious reversal of the dominant up trend.
GOOD TRADING SUCCESS!