Are Ag Stocks Ready to Pop?

After a good move on Friday, the market seems prepped for a possible further push up on agriculture stocks like POT.to. The bullish case being made is that people need to eat under any economic circumstances and therefore stocks like this are safe bets.

As a technical trader, I'm not concerned with bullish fundamentals unless there are technical factors suggesting the same.  Fortunately, I see several on POT.to, Saskatchewan’s giant potash company, that suggest possible upside in the near future.

First, Friday's breakout up-move easily pushed through two pivot resistance levels--55.97 and 56.58. This alone is a bullish sign to be sure, but please note that the push up also brought the price above a crucial inverse head and shoulders neckline. What this tells me is that any retrace back down to the neckline (currently just below 55.50) is a good buy. However, a close back below the neckline negates the trade.

If POT.to keeps going up, there is no major resistance until 59.67 and 60.50.  And if it is able to show this much strength, re-testing February’s highs might not be an unrealistic expectation.  But, like always in tech analysis, this pattern has its caveats.

For starters, the left shoulder is not ideal as it is considerably smaller than the right shoulder. I like this pattern best when each shoulder is roughly the same size. This coupled with an overall market that is very extended makes me cautious about jumping on board just yet.

Also of relevance, check out AGU.to, another agriculture stock with a similar inverse head and shoulders pattern. The same rules apply to this trade--a re-test of the neckline is a buy and a close below it is a stop out. AGU.to will have resistance at the 88 and 93 pivot highs.

On either of these trades, please mind your stops. Both stocks will not have significant support until their moving averages several dollars below the necklines.

I may take either POT.to or AGU.to for a long swing on a re-test of the necklines, as outlined in the charts above. If you're already in these trades for any reason, just be sure to use a stop to protect your profits. Also, just to reiterate, please be aware that the market is incredibly extended. Any and all stocks are due for a pullback at any time, including these. This doesn't mean that a bullish pattern can't play out, it just means be careful.

American readers should note that POT.to and AGU.to trade interchangeably with their NYSE counterparts POT and AGU.

New Sections: S&P 500 and TSX 60 Charts

I've added two new sections to this site: a daily chart analysis for both the S&P 500 and the TSX 60.

Each day I'll update these pages with a newly annotated chart and the major support and resistance levels. I'll also post a short commentary on where the charts stand and what I'm looking for going forward.

This will be in addition to the daily market summaries, trade setups and other articles I post on a regular basis. I'm adding these pages for ease of reference and gearing them for those who just want the most basic information at a glance. I plan to add other market indices soon.

You can find links to these sections on the menu bar at the top of every page.

Friday Market Summary

Today the markets had their first significant down move in eight days. The drop came in the form of a gap down in the morning after an absolutely abysmal Nonfarm Payrolls report was released pre-market. Expectations were for an increase of 100,000 jobs while the data came in at a pathetic 18,000.

When the data was released, the futures dropped sharply and once the market opened the SPY gapped down by $1.53. The SPY then briefly flirted with the 200MA on the 10 min chart and ultimately floated back up upwards for the rest of the day closing at 134.40. This float up is not unexpected on a Friday and in a market with light volume.

SPY 10 Min gaps down then floats up

Technically speaking today was significant as this massive rally finally took a hit. But while the market is down, it isn't out--yet. I'd like to see the SPY trade lower for at least one more day before I consider this anything more than a retrace with choppy consolidation of an up-move. With this said, yesterday's doji candle followed by today's sharply lower prices does suggest a top is in place for the time being.

SPY daily pops on a bull flag then gaps back down

Next week is a wildcard. It's the start of options expiration week and a slew of earnings reports are set to be released. There's also the ever-looming potential of bad news coming out of Europe regarding one or more of the debt issues that region is facing. The combination of all these factors means that there's a real possibility for volatile trading if anything catches the markets by surprise. And at such lofty levels on the charts, any volatility will likely equate to a move down.

Options expiration typically involves the market moving away from the most popular put and call strike prices. For example, if traders are weighted heavily in calls of a particular stock, it's not uncommon for the stock to move in the opposite direction so that those calls expire as cheaply as possible. This minimizes the amount that financial institutions would have to pay out in losses and makes it undesirable for the average trader to hold calls or puts long-term.

With this in mind, it's normally easy to gauge how bullish or bearish the market is and then assume that stocks will make a counter-move while options expire. However, this week things are different. The market is horrendously extended, but I wouldn't call it bullish. Many traders, including myself, have been calling for a down move since last week. I wouldn't be surprised if there are still a lot of puts out there and if that's the case the market may float higher for at least the beginning of next week. But if most of these puts have already been sold or exercised, a move down is likely in order.

I'm still holding half positions short from last week and will continue to do so unless we close above Thursday's highs next week. I plan to scan the charts this weekend for both short and long setups depending on which direction the market takes.

Check back here and follow me on Twitter for my latest thoughts.

TSX60: Possible Pivot formed

The TSX 60 may have formed a pivot top, as suggested by today's move down in prices. Confirmation  of this top assumes that the index does not recover before the end of the day. A move back up would be considered a consolidation pattern and not a pivot top.

If this pivot is confirmed today, the next support level will be at the 50% retrace/20MA/previous pivot level at approximately 832. If we consolidate above these levels for any amount of time, I'll assume a move to the double bottom or lower is in order.
 

I'll be keeping an eye on this pattern throughout the day and post an update later tonight.

Thursday Market Summary

We saw another surprise up-move in the major market indices today. The SPX ended the day up sharply by 1.05%.

This move wasn't so much of a surprise though--at least not if you follow the charts. Yesterday I mentioned that because of the bullish consolidation in the form of two doji candles after a big up move there was a chance we could move higher. I also said that because of being so extended to the upside, the chances of this happening were diminished.

Defying the odds, the market staged another huge rally to the upside. The SPY ETF gapped up by over a dollar and pushed higher throughout the rest of the day--all the way to 135.70--before closing at 135.36. All of this presumably came on the back of a positive ADP jobs report this morning which the market took in extremely positively.

SPY gaps up and pushes throughout the day

Regardless of the cause, the charts pointed to a move higher yesterday and that's exactly what happened. I guess a bull flag is a bull flag even if the extension move higher reduced the probabilities of it playing out. A combination of light volume and a fundamentals-charged environment also helped the S&P along, to be sure.

A classic bull flag on the SPY

As of now the markets are back in no-man's-land. The best major support is back down at 1340 while the next resistance isn't until the double top at 1370. I have to assume at this point that the market will at least attempt to hit the double top. With that being said, I'm ruling no scenario out at this point. We are so over-extended right now that a retrace back down is highly likely to occur at any time.

Tomorrow the Nonfarm Payrolls report is released pre-market. The market has obviously priced in a good number so a poor one could send the markets back down, though by how is anyone's guess. If we get a good number, the double top on the market is surely the next target.

Finding the Key to the Market

In any given market there is an over-arching concept or chart that can sway it one way or the other. For example, in a market driven by FX, the breakdown or breakout of a particular currency will have a direct, lockstep effect on stock and commodity prices.

Earlier this week I spoke about what I called the "FX-factor", or the affect of the Euro/US dollar coupling on the US stock market. The charts I posted showed clearly that the dollar would bounce and the Euro would fall, and that's exactly what happened. However, the market didn't react as it normally would. The USD and the SPY essentially rallied together.

There are an infinite number of reasons why this may have been the case. In my opinion, the combination of low volume and a market consumed with fundamentals like European debt and US jobs data let the major stock indices float as if in a vacuum.

The question now is what sort of catalyst will cause the markets to finally correct to a sustainable price in the short term. The S&P 500 is very close to a double top on the daily chart, but that's still another 30 points away. It's possible that we get there, but it's increasingly unlikely without first pulling back to consolidate.

SPX still far away from 1370 double top

While I was watching this chart today, I was reminded of early June when we were wondering where the market would bottom. If you followed me on Twitter then, you'll remember that we were looking for either a hit of the 200 daily MA or the pivot low just below it. Due to the precipitous fall we were experiencing at the time, I chose to wait for the pivot low as it had a higher risk/reward ratio of playing out in my favour.

SPX bounces sharply before hitting key pivot

Of course you'll also remember the SPX just barely hit the 200MA and never hit the bottom pivot before sharply reversing to the upside. The Nasdaq was a different story; it broke its 200MA and went all the way to the pivot below it. After hitting this level, the SPX, Dow, etc. all bounced sharply to the upside and the rest is history.

Nasdaq gets huge bounce from key pivot

With this in mind consider that we're in a similar situation right now. The SPX has just broken a major pivot level and seems to be on its way further up to the double top at 1370. The Nasdaq on the other hand is very close to its double top from early May and it will only take a slight push up for it to reach this level. Following the logic that the Nasdaq led the markets up, it stands to reason that it could lead the retrace back down. This could suggest that the SPX retraces before hitting 1370.

Nasdaq double top is extremely close

Right now, this is all just a theory based on an observation. We'll have to wait and see how the market reacts to this level either tomorrow or the next day before concluding that it's the key to the market. I may take an additional short should the Nasdaq hit the double top target, but if we close above it I'll most likely cover the entire position and wait on the sidelines for the next trading signal.

Check back here for updates on this topic and follow me on twitter for my latest thoughts on the market.

Head and Shoulders on the SPX? Not yet.

The S&P 500 has the potential to create a bearish head and shoulders pattern sometime in the near future. This pattern remains valid as long the SPX does not close above the double top at 1370. Once the right shoulder forms, I will take this trade on a close below the black neckline which right now is just above 1260.

Please note that as of right now this is just a potential pattern; it's not a head and shoulders yet. I've heard a lot of chatter online suggesting that this pattern is already in play--it isn't. This short is in play only on a close below the black neckline and not before. It will also cease to be even a potential pattern if it should close above the double top. In this event the chart may still remain bearish, just not a head and shoulders pattern.

This pattern will not be actionable for a while--likely a week or more--but I will be watching it closely and provide any updates here and on twitter as I see them.