Thursday, March 5, 2015

CNX, ISIS: Channel rules

The coal and natural gas producer CONSOL Energy Inc. (CNX), headquartered in Cecil Township, Pennsylvania, and the drug development company Isis Pharmaceuticals Inc. (ISIS), headquartered in Carlsbad, California, both broke beyond their 20-day price channels on Wednesday, March 4.

CNX gave a bear signal and ISIS gave a bull signal.
[CNX in Wikipedia, ISIS corporate]


A trade based on a price-channel breakout is an exercise in momentum. The underlying assumption is that if a stock price has moved beyond its previous extreme of the past 20 days, then something is going on here.

In many ways it is a substitute for a price breakout beyond support or resistance. There's no reasonably easy way for the program I run each night to identify all true breakouts that appear on the charts of the 2,444 stocks and exchange-traded funds that I'm analyzing this week.

The problem lies in the definition of a breakout. At what level on the chart is the analysis to work, what Elliott wave practitioners call the "degree". Elliott wave analysis sees the markets as fractal -- trends within trends -- and so a breakout at one degree is a simple continuation at a higher degree.

Identifying closing prices beyond the boundaries of a 20-day price channel is easy and quick. The definition of a breakout is clear.

Click on chart to enlarge.
CNX (left) and ISIS (right), one year daily bars
But it's also a one-size-fits all definition, and a break beyond the price channel is not necessarily a breakout on the chart.

And that's the issue with CNX and ISIS. Both price trails on the one-year chart take the form of a hook, where the price has set an extreme, withdrawn, and now is approaching the extreme again without yet having moved beyond it.

Any retracement from an extreme that takes more than 20 days will produce a hook. They're not rare. And it's up to the human analysts, with our brains' marvelous built-in capacity for pattern recognition, to separate the wheat from the chafe.

CNX and ISIS are chafe, not wheat.

A counter-argument would be that the momentum of the 20-day price channel breakout gives the trader a head start and the chart to breakout to come. But I've seen far too many channel breakouts falter when confronted with resistance on the chart.

That is unsurprising. A price channel, after all, is a theoretical construction, a mathematical tool that helps the trader figure out what's important.

Chart resistance represents real people with real money who got left behind by the reversal and just can't wait to sell out once their losses have been erased. That's what resistance is, by definition -- a point where selling pressure, in the case of a bull signal, or buying pressure, in the case of a bear signal, are almost certain to increase.

At this point, I can break off the analysis and go to the decision.

Decision for My Account

I'm passing on these two trades. I've been scratched often by hooks, and simply don't like to trade them.

-- Tim Bovee, Portland, Oregon, March 5, 2015


My price channel trading rules can be read here. My long-term share trading rules can be read here.  My volatility trading rules can be read here. The channel rules are based on
 the classic Turtle Trading rules, which can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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