Round Number Restfulness: As many recognizable names are coming into contact with the round numbers, they are pausing to catch their breath. Looking at COUP, it kissed the round par figure on 3/12, the 200 number on 5/27 and is now touching 300. Once it penetrates that number decisively, or should better say if, will it find a rocket launch off it if tested again? DDOG broke fractionally above the very round 90 number (as stocks do that for the initial time they are likely to reach par and beyond), Tuesday and powered higher Wednesday above a bull flag formation. It attempted to CLOSE above 90 multiple times between 6/23-7/6, as it was above the number intraday SIX times, but ZERO finished above. Below is the chart of NFLX, and it should be interesting to see how it reacts, if it can firmly climb above the 500 figure. It is about 10% above its rising 50 day SMA, a line it came into contact with 4 separate times between 5/27-6/29. It may need to take a recess and revisit the line, but by the time that occurs PRICE will likely be near the 500 number. This uptrend shows no signs of letting up.
David Versus Goliath: We have spoke in the past about the more concentrated XLY compared to that of the much more diverse XRT. Being in the right names can really give an investors a strong return if concentrated. The phrase comes to mind, "concentration builds wealth, while diversification preserves it". Half of the XLY is represented by just its FOUR top components in AMZN, HD, MCD and NKE. In the XRT AMZN is the fifth largest holding at just more than 2%, while in the XLY it is one quarter of the fund. The XRT is home to some of the smaller cap names too, and perhaps it could benefit from the recent robust move in the Russell 2000. Below is the WEEKLY chart of the XRT, and it is back into a long tight range it traded prior to March. From long consolidations often come sharp moves and this one was certainly to the downside. I wonder how the XRT chart would look if its top 3 holdings, say STMP CHWY and ETSY (all 3 are in top 5 holdings at about 2.5%) had the same weighting as the XLY.
Gap fills are a widely known strategy in the market that can be applied on both the upside and downside. The strategy is basically self explanatory, and gaps that fill to the downside after a very strong move gives investors good risk/reward to open a position. A gap is simply a pocket of air, in between two different time periods on a stock chart. It is very likely to be following an earnings release, potential takeover news, etc. Often after a gap fill, one will see a powerful intraday reversal, so one should be ready to pounce with a limit order to take advantage of the situation.
Round number theory is one that is under followed, and not given the credit it deserves. It is a simple, yet effective tool that can help investors trim or add to core positions. The round figures often will serve as support, or a roadblock. Some round figures are more important than others. First time trading above 10 can give a stock a boost, as some mutual funds are not permitted to own single digit names. The 90 number is very important, as many studies have shown that the first time a stock trades through that level it very often trades to par and beyond. Whether the reason that round number theory works is psychological or not, it does not matter. Follow PRICE action first and foremost. Below let us take a look at some more examples.
The bull flag formation is a continuation pattern, that forms during an uptrend. Keep in mind leading stocks, will offer investors a chance to add to them on the way UP. The pattern forms after a sustained move higher, and then the stock digests the strong advance, with very taut sideways action. Generally one does not want to see the flag last more than 3 weeks. It is considered very bullish as the stock is stubborn to not give anything back following a powerful rise. The breakout occurs when the stock breaks above the top of the flag, preferably in firm volume. The measured move would be the length of the flag "pole", added to the breakout PRICE. What better way is there to learn than to look at a few recent examples.
The bullish ascending triangle is just as it sounds as a triangle takes shape with a horizontal line on top that acts as resistance, and the bottom line is sloping upward, making higher lows along the way. This could form in either uptrends, or as a bottoming pattern. The entry would be a decisive breakout above the top horizontal line which will normally come into contact at least 2 to 3 times. There is a debate in technical analysis, about whether the more times a line of support or resistance is touched, does that support or resistance become stronger or weaker? I say the latter. In this pattern we get an implied move by taking the depth of the formation and its greatest distance and add it to the breakout. Lets take a look at a few recent examples.