Top Advisors Corner

David Keller: Discovering Downtrends

As part of my regular screen for stocks that are oversold, I came across Discovery Communications, LLC (DISCA).  This chart reminds me that it is incredibly unwise to follow RSI as a standalone indicator.

The stock has underperformed the S&P 500 index by over 37% since the beginning of the year.  DISCA was up slightly through the end of April, then began a steady downtrend since May with a series of lower lows and lower highs.

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Tom McClellan: Treasury-Bund Spread Says Dollar Has More Room to Fall

 In Dec. 2016, the monthly closing spread between yields on U.S. 10-year Treasury Notes and the equivalent debt instrument from Germany was 2.24 percentage points, the highest reading we have seen since the 1980s.  As the spread has started to contract, we have watched the US Dollar Index make its biggest drop since 2011. 

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Tom McClellan: Coppock Curve for DJIA Getting Up to High Level

Years ago, a technical analyst and money manager named E.S.C. (Sedge) Coppock created an indicator that has since come to be known as the “Coppock Curve”.  Coppock never called it that himself, instead calling it his Very Long Term (VLT) Momentum Index.  That indicator is now getting up to a high level, which says that the uptrend is getting stretched.

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Mary Ellen McGonagle: FACEBOOK HAS HEMORRHAGE WITH WEDGE PATTERN - Will The Stock Make a Quick Recovery?

Facebook’s stock dropped sharply last Monday following news that Zuckerberg will be selling up to 75 million shares over the next 18 months.  The 4.5% decline caused the stock to negatively break below its 50-day moving average on the most volume the stock has seen in over a month.   

This type of heavy one day selling followed by the stair step type of trading we’ve seen in Facebook during the rest of the week is forming a little-known pattern called a Hemorrhage With a Wedge.  While the hemorrhage part or selloff can be one day or take place over one week (and you can use a weekly chart), the time frame and direction of the wedging part of the pattern will vary.  

The most important piece of information about this type of pattern is that 80% of the time, it will fail – meaning the stock will drop further.

That said, the direction of the “wedging” part of the price action will provide clues as an upward wedge is quite a bit more positive than a downward or sideways move.  

In this example, we are seeing a sideways wedge in price after the large 1 week drop in price. As you can see, it’s followed by another leg down which can be very typical.

At this time, the wedging action following the 1 day drop in Facebook is upward which is encouraging however, there are other things to consider when evaluating any stock such as current price position vs key moving averages as well as other indicators.

In the chart below, I’ve highlighted the breakdown that Facebook had last fall using a daily chart with simple moving averages (MAV), RSI and MACD. As you’ll see, the first negative signal was a break below the 50-day moving average which is similar to FB’s current position.  The next negative signal from last fall was the 10 day MAV breaking below the 50 day MAV and for now, the recent uptick in FB has held this possible event off.

While Facebook has had a negative breakdown and is forming a potentially negative hemorrhage with wedge pattern, until that 10-day moving average crosses below the 50 day MAV, there is always a chance that the stock will resume its recent uptrend by heavy buying that will push the stock back above its 50-day moving average.  

Of course, you’ll want to see other signals as well and using the marked-up chart, you can see what you need to watch for over the next couple of days for either a further breakdown or that positive break back into its uptrend.

For more information about my work, please visit my website MEM Investment Research

Mary Ellen McGonagle
MEM Investment Research