Seeing The Wood For The Trees

Our analysis relies on a variety of tools. Most are technical, but we also spend a lot of time ensuring they make sense in context of what is actually happening in the markets and the real world.

Facebook provides a good example as it has had a clear narrative running alongside the price action.

On March 26th, prices fell over 7% from the morning high as the FTC confirmed it would launch a non-public investigation into its handling of data. Bad news, you’d think, but the huge reversal to close back near the open was a clear sign the stock had sold off enough. Reversals on bad news usually stick.

But there were still many doubts. We didn’t expect price to fall more immediately, but we weren’t sure of an imminent rally either. The triangle consolidation which then formed perfectly matched the indecision and mixed sentiment. This pattern only invalidated the day of Mark Zuckerberg’s testimony in front of Congress. Again, the price action matched the narrative as many concerns lifted as Zuckerberg donned a suit and it became clear Capitol Hill would go easy.

Google had traded in a similar manner to Facebook over March as it was facing the same questions over security and data use. It had also traded in what looked like a triangle near the lows. But if Facebook broke its bearish consolidation, why would Google go the other direction? Actually it took Google a further three days to finally invalidate the bearish triangle, but we were pretty sure it was coming.

Amazon had its own problems, mostly coming from the direction of President Trump. It gapped down to new lows on April 4th after Trump directed another tweet at it the previous day.

But then look what happened.

The lower low immediately failed and reversed, leading to a strong recovery. This was another bad news reversal, and a potentially significant one.

Reversal patterns were also present in many other stocks we follow. Apple was more subtle, but we often mention looking for a failed lower low after a weekly close at the lows, and this soon came. This was more related to positioning, but could be significant nonetheless.

The week ahead will be interesting as we continue to track how the reversals develop alongside the news flow.

Good luck and good trading.

Andrew McElroy
Chief Stocks Analyst

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