I was flipping through some charts, looking for examples for a presentation, and came across CM. CM’s weekly chart is a classic example of a symmetrical triangle formed by volatility contraction, then being resolved with volatility expansion. Symmetrical triangles–weekly ones are rare and usually powerful–are continuation patterns. They usually break out across the 2-4 line, not the 1-5. Generally, they form about mid-way through a move, so CM may top 120 eventually. Right now, it is short-term overbought on the daily. It may slip back to the rising 50-day EMA around 70, which would be a logical support level.

Doug Kass is a high profile hedge-fund manager who recently declared that “short bonds is the trade of the decade”. Since I trade bonds, I thought I would take a look, and darn if I don’t think he’s on to something–maybe not the “trade of the decade” but at least something with profit potential. I choose TBT, the inverse bond ETF for my trade. If we get a close above 32.12 it will complete a 1,2,3 Bottom on the weekly chart and give us notice that the trend as reversed. The daily chart has completed a 1,2,3 B with a higher low, so the game has started.

I like to use patterns to provide insight into the markets. They often give me a heads-up to trend reversals and other profit-generating behaviors. Today’s market as represented by the SPY offers a very interesting pattern. Let me start by noting that the SPY weekly chart has retraced about 62% from the 6/25 low of 107 to the 4/23 high of 122. This is a classic Fibonacci reversal zone, which adds probability to the idea that we’re entering resistance. The daily chart shows a broadening pattern (RST) cumulating with a 1,2,3 Top. We also have an inside day, which is usually a sign of exhaustion or indecision at tops. Now, I’m not saying we’re reversing–just pointing out some of the market structure now in play. If anything, caution may be prudent until/if we push through 115 on volume.

Boy, are things about to get interesting! The SPY has formed a rare

Typically a ‘Diamond’ Pattern signals nasty reversals of tops and is very bearish. However, it can also signal a bullish continuation pattern, as described below by Trending 1.2.3.A Continuation Diamond (Bullish) is considered a bullish signal, indicating that the current uptrend may continue.topDescriptionDiamond patterns usually form over several months in very active markets. Volume will remain high during the formation of this pattern. The Continuation Diamond (Bullish) pattern forms because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. The Technical Analysis occurs when prices break upward out of the diamond formation to continue the prior uptrend.No one is considering this to be the case with our current market, but look at the pattern similarities of the S&P 500 weekly chart below.Perhaps this market will continue to surge and burn September bears, challenge the top then burn the new bulls in October?Stephen M

Since we don’t trade bonds in Spike, I thought I would post a potential long bond trade via TLT, the 20-year bond ETF. TLT has formed a high level RST bottom pattern on the daily. As can be seen on the weekly chart, this is taking place after a 4-week decline. Some support should form here at the bottom of a gap and rising long-term MAs. Probably good for a swing trade back to the declining 20-day EMA. There are also leveraged ETFs–TMF–available, or the futures if you lean that way.

Awhile back, I mentioned that DELL had formed an RST on the daily chart. At the same time, it has formed an RST on the weekly chart, which is extremely rare. DELL has now reversed its trend, and we should be looking to go long on pullbacks on the daily chart. Look to buy around the rising 20 EMA; note the up crossing 8 EMA and the indications of a squeeze.

ONE WAY TO TRADE EARNINGSENER, (Energy Conversion Devices, Inc.) could potentially set up for a good long trade this week. They announce on Tuesday and I’m expecting a knee jerk sell off by diehard longs – a reaction which will provide a cover opportunity for long term bears who have hung on to their shorts. If this were to happen, it would post a false breakout of a new low accompanied by a weekly bullish MACD divergence that is missing the right shoulder. This would also trace a beautiful double bottom. If the guidance is good, it will be also offer a low risk profitable opportunity for new longs. Other factors that might influence this scenario:

1. dollar looks to have weakened,
2. Oil appears to have put in a short term bottom.
3. General market and the Solar sector look like they want to rally for now.

ENER trades in a similar fashion to SPWRA which recorded these exact footsteps last week.This is definitely a trade on the edge of extreme, with many fingers on hair triggers – both on the heavy short side as well as the bag holder long side. But if it comes together accordingly, it could be a nice catch.All too often, we hear how we absolutely shouldn’t trade prior to, thru or just after earnings. While this is good advice the majority of the time, there are situations that bring exceptions into play. This stock and its current stance might be one of those times.The stock has been manipulated down way below its book value and more than reflects a horrible earnings report.So if they miss, I would expect the news to be bought but not before a new low is put in from an over reaction by weak hands to the announcement. Subsequent to that, a nice leg up (fueled by a squeeze) should ensue.I would wait for the false breakout to materialize (post earnings) and get long when it reclaims a position above resistance.

Awhile back I pointed out SMG, a stock that formed numerous squeeze set-ups on the weekly chart. Since the stock bottomed in July 2008 around 17, it marched to 50 in 4 distinct weekly squeezes, and now is laboring on the 5th. Frankly, I’ve never seen this behavior before, and I’m fascinated. I keep coming back and trading SMG based on the daily chart, waiting to see when this remarkable series ends.My trading tactic has been to use the daily charts for short-term buys, using the 2-day RSI and 2-day FI to define short-term oversold conditions. Exists have been when price pierced the upper volatility band. While I’m long now, I think the stock is about finished. Maybe we get a retest of 50, but I’m cautious and looking to get out.

Hershy, or HSY, has formed a very unusual U shaped bottom on the daily chart. However, in reality, it’s actually a U shaped base as you can see on the weekly chart. Instead of correcting its long bull run with the usual decline, HSY is trading sideways. Buyers, or a large buyer, are contend to buy on mid-day weakness and push the price up a touch around the close. The U shape and the multiple Hammer candles forming the bottom are telltale signs of accumulation. As we moved up the right side, early buyers around the 46 area sold to lock in profits around 48. Volume has not been heavy in the last two sell-off days, and if it doesn’t increase and the price forms a couple of narrow-range bars, then the run to the upside is on. However, this is a potentially strong stock in a low-volume/news driven market so caution is a must.For market historians, this U-shaped base was very common and popular during the great Info/Tech bull run in the 1990s. William O’Neil built the Daily Investor newspaper empire on it. And for awhile there, all we had to do was see one developing, take a position as millions of other traders jumped in to create a self-fulfilling prophecy. Now, in this hedge fund dominated market with its short-term bursts and craters, you don’t find it much. In fact, this is the first one I’ve seen, or traded in the last two years, so I’m curious as to how it unfolds. As a point of transparency, I sold it a couple of days back, but I’m looking to test the pattern again shortly.