Click chart to enlargeAfter breaking out of their downtrends in mid January, the homebuilders have been forming large ascending triangles. The chart above is of Pulte Homes (PHM). The charts of Hovnanian (HOV), and Lennar (LEN) are very similar. They have been rejected multiple times at their resistance lines, yet are making higher lows. The more horizontal a resistance or support line is, the more significant a break of it is. We are not watching these charts for a break of support, but rather for a break of resistance. Considering the lines are converging, they will have to make a move soon enough.
The longer these stocks stay within their triangles, the more significant (and more explosive) their eventual breaks will be. Considering how large these triangles are, their lines don't fully converge for another 6 weeks. The breakout (or breakdown) will happen sooner.
4 comments:
Snot,
truly appreciate your posts.
Btw, I bought some NM thursday morning, considering most of the dry shipping sector is on the verge of breaking out. EXM broke out on wednesday with a 20% run. I caught a decent run.
I agree the homebuilders are looking to breakout too. 6 weeks (convergence time of the two lines) is way too much time, imo.
I bought SEED a few days back considering it had the same triangle pattern going. The top line has a small downward tilt. I wish it breaks out soon.
--clarke
When we started this blog, we figured we'd be able to help people understand the basics of technical analysis and the basic stages of a stock chart's cycle. We did not expect to benefit from it so much ourselves. With posts like yours, clearly this blog has become a two-way street. Thanks for all of your input, hopefully you'll keep it up!
We agree that 6 weeks is too long for the homebuilders to make a move. Charts usually break out long before they reach the very ends of their triangles.
As for SEED, that triangle is pretty small, and symmetrical (neither ascending nor descending), so the odds of a significant upside breakout are not as high as a chart with a larger triangle, particularly an ascending one. We hope the trade works out for you either way. The beauty of these triangles is that you can get out quickly if they do the opposite of what you think.
The most interesting part of your post is your comments about the drybulk sector. We had not noticed that these stocks were indicating a potential breakout, but indeed they are. Although they don't fall under our general guidelines for core positions (long uptrending stocks, short donwtrending stocks), we also enter other trades in order to diversify and add spice to our normally bland portfolio.
We're going to do a post on the drybulk sector because it really looks like it has the potential to begin a new run. Thanks for the heads up!
my pleasure Snot. Btw, I still have a bag of fxp. I am looking to dump it for a loss. The retracement doesn't seem to be happening. I am contemplating holding fxp as a hedge versus dumping it. I am pretty sure 12750 is not going to hold for more than a week. It may probably hold today.
My hunch is :-
http://img26.picoodle.com/img/img26/4/4/17/f_DJIm_e484053.jpg
http://img34.picoodle.com/img/img34/4/4/17/f_DJILtermm_cbbf598.jpg
--clarke
Wow, you should start a blog, you've got this stuff down! Your idea of the Dow breaking resistance near term, then getting rejected at the 200dma is awesome.
The 200dma is really the dividing line between bull and bear markets. Everything below the 200dma is just short term noise. Considering the discrepecny between the bond and stock market, it's very possible that the stock market drops to make up the differential. If it is going to hit a wall, the 200dma is exactly where that would happen. We aren't ready to sign on to a drop the size you've drawn on your chart, but we agree that the economy will remain weak for quite a while. Inflation (oil and food), and a lack of speculation in the building industry points towards a continued sluggish economy. Once the stock market really heats up, it will be the one part of the economy that is out of whack, and will be brought back to reality. We can sign on to a return to January's lows, but breaking them would take further weakness in the financial names, which we're now being told have already reported kitchen sink quarters. Of course, we were told that in October, and their charts are still downtrending. We've dumped our Ultrashorts, too, (except for SMN) because we're going to let the stampede play out and then reload them later on. This whole "break of 1400" thing is being widely followed, so it may make investors think the market's worries are over. While we don't agree, we do not want to be trampled by the herd. We'd feel better in DSX than FXP right now... never thought it would come to that:)
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