Volume and Bottom Formation

Notice that volume during the second leg of the "W" formation is less than that of the first leg. If a bottom formation is in the works, this is a good sign.

QID Pattern

We've got a nice bottoming formation forming in QID, which is short the Nasdaq. I took a small position on the pullback (Nasdaq strength) today, and may take a bigger position on either more of a pullback or break over resistance.

I am using this as a hedge on any long positions I may take. However, it's not time to take a big position, since stochastics are overbought.

Homebuilders are Hard to Ignore

It's tough to ignore the strong move in residential construction, aka, homebuilders. While my head tells me to stay away, the charts tell me otherwise. For months I have been using bounces in the sector to reload shorts, but not this time. There is something different about this bounce.

Take a look at the chart of Toll Brothers. A few things jump out at me:

1. The stock is no longer trending down. Rather, we see a range bound price movements with resistance around 24.

2. RSI is improved. The mid level is acting as support, which is what happens in strong stocks.

3. OBV is improving. Volume patterns seem to be shifting from sell to buy.



I would not buy here. In a range bound market, I like to make buys at the bottom of the range or on breakout. A patient well timed entry could lead to nice profits in TOL.

Chart: TOL

As noted in the previous post, I took a position in TOL today. Those familiar with my trading style know I don't tend to buy downtrending stocks. However, I noticed some mean looking divergences that lead me to believe their might be some institutional buying at the current levels. At the least, I'd expect a small bounce that's good for 2 points.

Take a look at the vertical box I placed on the chart. This area highlights the bottoming formation. Note that both RSI and OBV show positive divergence. Now compare volume in the vertical box to that in the horizontal box that highlights volume from March to July. Notice that during the downtrend, volume was typically higher on down days than up days. Now we are seeing the opposite volume trend. Volume is higher on up days.

While I've made a pretty good short term bullish argument, it's still tough trying to pick a bottom. The fact that we are talking about the housing sector, where negative news can come on a moments notice, only increases the degree of difficulty.

The great thing about this trade is we have a clear support zone at $20. If this zone is pierced, we'll likely see another leg down. By placing a stop under $20, I am only risking a little over $1.00. My target is the 50 day moving average, which makes my potential gain almost $3.00. This gives me an acceptable 3:1 reward to risk ratio.

The Housing Stock Conundrum: Analyzing TOL

Housing stocks have made a windfall for those bright minded speculators who have traded the obvious short entry signals over the past year (I am not in that prestigious group). While the trend is still negative, there are signs that we may see a bottom forming. Today I analyze Toll Brothers, one of the "go to" housing plays that has been on my short watchlist for what seems like ages.

First, let's dissect the weekly chart:



The first thing I always take note of is the major support and resistance levels. Here, we see support where the bottom seems to be forming, in the $22 range. Overhead resistance is in the $27-28 range. If I were to play the bounce, I would buy right now at support, and sell once the stock nears resistance. Also take note of the RSI and stochastic ranges. I would not buy at the top of the range.

Now let's move to the daily chart:

The first thing I notice on the daily chart is the "double bottom" that looks to be forming. Accompanying the double bottom is a positive volume pattern showing strong buying. This type of volume behavior is a must for buying a bottom.

While the double bottom pattern is a positive, TOL is a tough buy with the 50 day moving average looming under 2 points away. I would probably wait for a breakout over the moving average, with a target of $27-28.

It is clear that, in the near term, I am looking to play the long side of this stock. If I play the short side, it will only be on strength, using either the 50 day or price-by volume ranges as resistance. I will not short the current level.

Breakout Chart: XOM

Exxon Mobil Corp. (XOM) broke out to new highs on above average volume. A low volume pullback to the prior highs, just under $79, would normally provide a good entry point.

While the breakout is bullish, there are some concerns for this stock. Notice the negative divergences in both RSI and stochastics. One would expect new highs in RSI and stochastics when price hits new highs, but here the two indicators are trending down. While this is not bullish, I would not short until confirmation of the divergence. If price pulls back below the old high, we might see a quick short opportunity.

Playing armchair quarterback, it's easy to see a missed opportunity for entry at $76. Here we had atextbook breakout from a "W" bottom formation.