Faulty Base Pattern: Synchronoss Tech (SNCR)

Sometimes it can be easy to forget about the time component of basing patterns. A good example was the sharp pullback of SNCR last month. Naively, one might assume that because the price pattern of SNCR resembled a cup with handle, its basing pattern must also be considered a cup with handle. In reality, however, SNCR met none of the strict criteria defined by William O'Neil, most notably of which was that its basing time frame was much too short.

While I understand that many people seem to have many different definitions of the cup with handle, if we are to use the definition of the pattern's discoverer, William O'Neil, there can be little argument about whether or not SNCR was actually forming a cup with handle. Here are some of the cup with handle requirements from O'Neil's "How to Make Money in Stocks".

1. The cup pattern can be as long as 65 weeks, but must be a minimum of 7 weeks.
In the weekly chart (shown above), SNCR has only a 3 week cup formation.

2. The bottom of the cup should be rounded and give the appearance of a "U" rather than a very narrow "V". The reason given is that "this characteristic allows the stock time to proceed through a needed natural correction with two or three final little weak spells around the lows of the cup. The "U" area is important because it scares out or wears out the remaining weak holders and takes other speculators' attention away from the stock." I think it is pretty obvious that SNCR is more V-like than U-like.

3. Volume should dry up at the lows of the pattern. The lowest point of the V pattern in the daily chart of SNCR corresponds to the highest volume spike of the entire pattern, so the criterion fails as well.


I have been watching SNCR myself, but given that the recovery was much too quick, I have been waiting for another pullback to retest the lows on lighter volume. Such price action would undoubtedly form a double-bottom formation, which is another excellent basing pattern.

Paul Tudor Jones Quote

Sometimes I get blamed for being a little too "gloom and doom". Sometimes I think those people that say that are right.

While reading some old interviews I came across the following quote from Paul Tudor Jones that made me smile and feel that I wasn't alone.

"I think the financial community, particularly Wall Street, was dealt a life-threatening blow on October 19, but they are in shock and don't realize it.

Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build. If the economy starts to go with the kind of leverage that is in it, it will deteriorate so fast that people's heads will spin. I hate to believe it, but in my gut that is what I think is going to happen.

I know from study history that credit eventually kills all great societies. We have essentially taken out our American Express card and said we are going to have a great time. Reagan made sure that the economy would be great during his term in office by borrowing our way into prosperity. We borrowed against the future, and soon we will have to pay."

The moral of the story is that the USA did face a recession but we made it through without another great depression. Our great society wasn't killed by its excesses.

I find it interesting that Jones was worried about the use of leverage in 1987. Given the huge amounts of leverage used in today's markets, I wonder what he thinks now? He probably is quite bearish, but as he learned then, times will get tough but somehow we make it through.

Follow up on NCI Building Systems (NCI)

Wow, NCI made a nice showing on an ugly day. A couple of days ago I posted NCI as a TD Sequential play. I didn't buy any because of the underlying fundamental story about commercial construction and also because earnings were out today.

It just goes to show that technicals can trump fundamentals on the short time scale.

Snap-On Inc. (SNA): More TD Sequential Buys

I think my portfolio is delta neutral right about now. I stepped into another long TD Sequential play recently. Snap-On Inc has completed its countdown and is at TDST support. I'm targeting the next TDST line as a point to take profits.

Dodgers 6 Cubs 2

I was at Wrigley tonight watching the Dodgers beat the Cubs. It was my first visit since I moved to Chicago. Great place to see a game, but I was less than impressed with the baseball knowledge of the fans.

RTI International Metal Inc. (RTI): Perfected TD Sequential Countdown

Here is a TD Sequential countdown, with perfection, that I will step into tomorrow. The price is near a TDST support line and the upper line gives me my price target.

Although bearish, I just keep getting the feeling that everyone is a bear right now and I'm not feeling very comfortable with that. What is it that they say?

"The market tries to take the most money from the greatest number of people in the shortest amount of time."

NCI Building Systems (NCI)

I have been working hard all weekend and finally have been able to code up a working scan for charts that are nearing the 13th day buy signal of a TD Sequential countdown.

The chart above is NCS. They specialize in metal supply for non-res construction. (Not quite a hot sector in today's market) I'm not going to buy it but I just wanted to identify the signal before tomorrow's earnings announcement and see if the technicals trump fundamentals (in the short term) like so many technicians like to say.

Notice that the buy signal was perfected.

Broadening Tops in IBD 100

I was going over the IBD 100 yesterday and noticed quite a few broadening top patterns. Such patterns are difficult to time but are usually very bearish. We'll have to see what happens with these.

You'll notice Flotek Industries on the list. This is getting close to a major pullback. FTK has gone way too far too fast and with growth to moderate in the coming quarters I expect to see a 40% haircut. As you might know, I owned FTK last year and rode it from 7 to 15 (pre split). I would now like to make some money on the short side.

Their last 10K report little progress with their petrovalve products. Most growth is still coming from their specialty chemicals and I would expect some of the big names to begin offering their own "green" chemicals.

Politics and the markets don't mix

Fade this rally. I did.

New short on the bounce: EZCorp (EZPW)

One thing that I'm learning about bear markets is to never worry about missing an entry point because there will always be a bounce. I've been watching EZCorp because it looks to be entering its mark down phase. EZPW used to be #1 on the IBD 100 and is now showing signs that it is finishing off a rounded top pattern. It is also consistently below the 10 week moving average. Fundamentals might say that a pawn shop company might be coming into its sweet spot with all of this sub prime crap, but the chart certainly says something different. I think EZPW might be a victim of being over owned by the fund managers. I think 90% of the float is owned by institutions.

When the market looked like it was bouncing this morning, I put in a order to short EZPW at 12.16. My target for now is 10.50 and depending how the volume looks, I might hold longer. Notice the weak volume on the bounce and how it stalls inside the swing point of 7/25/07. There are also some nice TDST lines to guide the resistance and support areas.

CNBC Sucks!

I'm up a little early today and I made the mistake of listening to CNBC's Squawk Box. They are hammering two points that I find unbelievable! First, they keep saying that insider stock buying are at record levels, emphasizing the financial sector in particular. What they fail to tell us is that there is no buying going on at the big broker/dealers like Goldman Sachs and Bear Stearns.

Second, and certainly more irritating to me is that they keep saying that volume was very light during yesterday's sell off so the loss shouldn't be taken seriously. Where was this concern about volume when the S&P was climbing on progressively lighter volume last week? The reality is that volume was higher yesterday than what we saw on the counter trend bounce. I don't care about their bullish bias, but don't mislead people.

Major Index TD Sequential Count

Index	Setup	Countdown	Perfection?
S&P 500	8/01	8	No
Nasdaq	8/01	8	No
Dow 30	8/01	7	No
Rus 2K	7/30	5	No

Worst Chart Nominee

You can find this "double bottom" or "bullish W" post on the Resource Stock Guide. You can also find it at SafeHaven.com.

Just looking at the chart, does this look like a bottom or a top? If this is a bottom, like Boris Sobolev says, why is the whole pattern above the rest of the price movement? It is garbage like this that gives technical analysis a bad name. Obviously a pattern has to be identified within the context of the larger picture. You CAN'T have a bottom at the TOP of a price pattern no matter how nice a W is drawn on it.

If anything, this chart looks to be forming right shoulder of a head-and-shoulders pattern, which is definately NOT bullish.

Go check out the previous post and there you will find a "bullish W".

I wonder if Boris is related to Miss South Carolina?

Update to Fast Money

I made a stink about Fast Money the other day when they claimed that rising price on weak volume is bullish.

Here is a quote from Bill O'Neil regarding rally attempts off of market bottoms.

"You'll know the initial bounce is feeble (after a correction begins) if the index advances in price on the third, fourth, or fifth rally day but on volume lower than the day before. "

I'll take O'Neil's advice over the "Fast Money Five" any day.

V-Shaped vs. Double Bottom

I have watched Fast Money for the last time. On Friday they declared that the bottom is in and that a retest of the lows is not needed. They also stated that rising on lower volume is a bullish sign.

Wow, how crazy is that? Volume confirming price is a general rule for technical analysis.

I looked back at some recent corrections and the mild bear market of 2004. While it is true that volume can be light while coming out of a correction, if that correction comes in the midst of a bull market, a retest of the high volume lows almost always takes place. Anytime you see a V-shaped base that is usually a bad sign for the medium to long term. William O'Neil has studied many bases of many stocks and he always says to avoid the V-shaped base. They work sometimes, but have a high failure rate.

I'm showing the correction of 2005, 2006 and the bear market of 2004. Notice the 3 V-shaped bases during the bear market. You will also find many V-shaped bases during the 2000-2003 bear market. Notice also how well the TD-Sequential worked for the two corrections I show below.

Must read post at The Big Picture

If you haven't had a chance, go check out this post on "The Big Picture". It is a collection of letters written by quant funds "explaining" why they have lost so much money recently.

Thank you Barry Ritholtz for providing such valuable and fascinating information to the rest of us.

Low risk entry point for Metalink (MTLK)

I mentioned that MTLK is coming into strong support and, despite my bearish outlook, I'm looking to buy.

I like to use Tom O'Brien's methods as well as Tom DeMark's. I especially like it when they both line up together. MTLK is coming into a TDST support line, which matches up nicely with a Tom O'Brien swing point. Check out the charts.

Ok, well not today.

The bounce looks to continue higher. I'm still shocked by low volume and will be ready to enter more short positions as we move higher.

On the long side, I might add to my Metalink position soon.

This Bounce is OVER!

I'm entering short positions again tomorrow. I posted my bounce targets a few days ago and we are getting close. I especially like the fact that we are nearing the 20 day moving average on both the Dow and S&P, which acted as resistance on the first bounce, and volume is totally nonexistent. The Nasdaq seems to be the strongest index and is not offering any clear signals.

Wild price swings?

It seems that no matter where I look people are talking about how volatile the markets are. Whether it is on TV or on someones blog, they usually say the same thing. It usually goes something like this, "I don't know about you guys, but these daily price swings are the largest that I've ever seen in my career". Such statements always struck me as strange so I decided to check the charts.

What I have plotted below are the daily percentage differences between the high and low of each major index. Low and behold, I found that the recent daily price swings are not even close to the days of the late 90's and most recent bear market. I have a yellow line pointing out the recent swings.

So are these people as new to the market as I am or do they have extremely short memories?

Karl Rove: The Great Uniter?

I avoid politics on my blog, but I just can't resist this post. I was watching Bloomberg and saw this headline pass by.

"Karl Rove says he built coalitions and Democrats divided country"

Thank for the good hard laugh Karl and good riddance to you sir!

TD Sequential Buy using Blocks 2.0

Ok, it took some work but I had to rewrite the TD Sequential indicator for Blocks after my old hard drive crashed. If you don't know what the indicator is you can click here for a brief description.

The first thing to do is to write the code for the setup. Use a bar to T/F custom block.

Now, use that custom block in the following block diagram. This will show you when you have a completed TD Sequential countdown.

Next, I show the simple TD countdown and the TD Perfection code. The block diagram is also shown.

Here is the final result. A chart that gives the TD Setup, Countdown, and Perfection buy signal.

To intervene or to benignly neglect, that is the question

It will purge the rottenness out of the system. High costs of living
and high living will come down. People will work harder, live a moral
life. Values will be adjusted, and enterprising people will pickup the
wrecks from less competent people.

Secretary of the Treasury Andrew Mellon, commenting on the panic of
1929.

Wow, that worked out well. I've been hearing a lot of the same sentiment recently, but mostly from the other side of the isle (Mellon was a Republican). The argument goes, why should the government bail out all of these hedge funds for taking on too much risk? While such arguments appeal to my sense of justice, they seem to forget the fact that many more people will be hurt if the Federal Reserve doesn't step up and provide some help.

Quoting Kindleberger in "Manias, Panics and Crashes":

...while it is desirable to purge the system of bubbles and manic
investments there is the risk that a deflationary panic would spread and wipe out sound investments by the non-speculators who would not be able to obtain the credit they need to survive.

All I can say is that I wouldn't want to be in Ben Bernanke's shoes right now.

On a related note, there is one critical advantage that a Fed policy of benign neglect might bring that I think most people have forgotten. It goes nicely with the arguments of Mr. Mellon. With a little pain and suffering comes excellent rock and roll! Just think of it. What was the last band that mattered? We have to go back to the last housing market downturn in the early 90's when grunge took over the world. While there have been some good bands since then, no band has struck a chord with the country's state of mind as did Nirvana. A recession would probably purge the country's obsession with celebrities as well.

Dead Cat Bounce

I was watching Fastmoney and I was thoroughly disgusted and amused by the "Bulls and Bears" argument. It wasn't really an argument given that Doug Kaas (the bear case) totally outclassed his competition on all levels. To sum up Najarian's arguments (the bull case), "the market went up today, so this is a bull market". After such violent selling, you would think that a professional would not say such reckless things. Hasn't he ever seen a dead-cat-bounce?

I'm amused by Fastmoney at times but it is quickly going downhill. I don't like the Najarian brothers and wish that the "risk doctor" would return to the show.

For the bulls out there, check out the above chart. It shows the earnings of the lower 10% of the S&P 500. Look what happened when earnings turned down in 2000. Looks to me like the same thing is happening right now.

We got the bounce...now what?

The charts below show where I think the markets are headed. I'm going to short the hell out of them when they get there. Notice the huge volume today, which means that we will be back down there to test the lows. I think we will go lower.

Good luck!

US Gold Corp (UXG)

What a wild ride today. From down 20% to up 3%. Check out the sweet inverted head and shoulders pattern on the 2 day 10 minute chart. All done on low volume. I'm glad I didn't get shaken out today.

Run for the hills!

Now today there is real panic!!!

I bought some Goldcorp call options today. I'm looking for that bounce.

Bounce coming?

I'm looking for a bounce in the next few days. If you are long, I would suggest that you get the hell out when the markets get back up to their 20 day moving averages. These markets are sick.

Here are some charts and their TDST support lines.

I can smell the fear!

Today was the first day people started to really sound worried. Looks like it is time to run in all those panicky shorts in the next few days.

Incredibly, MIND has held up pretty well. I plan on riding this out with GBN and UXG, both of which got hammered today.

I'll be looking for a long play on one of the indexes if we open down tomorrow. If we get that bounce, I'll dump MIND and load up short again.

I'll publish some index charts soon.