Bullish Setups

By Chris Ciovacco

ODDS MORE FAVORABLE FOR BREAKOUT ATTEMPT

The term setup speaks to probabilities.  There are several positive setups on the chart of the Vanguard Total Stock Market ETF below, telling us patience over the past 124 calendar days may be on the verge of being rewarded with higher highs and higher profits.  The annotations are described in more detail below the chart.

short-takes-ciovacco-capital-management-stock-blog-vti-3.png

The annotations are described in more detail below:

From a price perspective, VTI traded inside the orange box for 124 calendar days; it is currently attempting to break above the box.

When black ADX drops to low levels and sits below both red and green, it indicates a trendless, sleepy market.  When ADX black starts to rise from below both red and green, it can indicate the start of a new trend.  The setup is in place; now ADX black needs to complete the turn, which falls into the TDB category.

According to stockcharts.com, “As a coincident indicator, CCI surges above +100 reflect strong price action that can signal the start of an uptrend… the majority of CCI movement occurs between -100 and +100. A move that exceeds this range shows unusual strength or weakness that can foreshadow an extended move.”

A May 7 Short Takes post highlighted “bearish momentum failures” that told us to be open to a push higher in stocks.  Similar bearish momentum failures are present in Wm %R on the VTI chart above.  According to StockCharts.com, “The failure to move back into overbought or oversold territory signals a change in momentum that can foreshadow a significant price move.”  In short, the bears have been unable to establish much downside momentum over the past eight weeks, which is in stark contrast to the previous eight weeks.

RSI also shows waning bearish momentum via a series of higher lows.  According to stockcharts.com, “RSI tends to fluctuate between 40 and 90 in an uptrend with the 40-50 zones acting as support.”  Thus, bullish odds improve when RSI can recapture the 40-50 range and hold above the 40-50 range, which is exactly what has transpired over the past four weeks.

MORAL OF THE STORY

The terms odds and probabilities are significantly different from the terms certainty and forecast.  The chart and indicators above tell us it is possible we are moving from a harder market to what could be an easier market.

Since we have held our winning positions during the recent correction, the developments outlined above do not change much from a game-planning perspective, other than it may be prudent to invest small pockets of cash, which also falls into the TBD category.

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Published by

Gary

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