It has been night and day action recently for the Dow Jones Industrial Average and theS&P 500 Index, with large range-up days followed by large range-down days, and a bearish reversal eveningstar pattern forming 10 trading days ago, only to be followed by a bullish morningstar pattern forming in the last session.
DJIA Chart
Source: StockCharts.com
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This schizophrenic market behavior is a good reason to pull back on your trading time horizon, and utilize the weekly chart time frame to smooth out the volatility. It requires a smaller position size to accommodate deeper stop loss levels, but it prevents whipsaws and trading trauma. Here are a long and short trade based on their weekly charts.
Packaging Corp of America (PKG) has been forming a large ascending triangle for most of this year. During this time, moving average convergence/divergence has been trending lower and is now crossing its centerline, and the Chaikin Money Flow indicator is reflecting distribution during the consolidation. Meanwhile, the Bollinger bandwidth indicator is at a level that represents tight band contraction and the potential for volatile price action. This month, triangle support was breached and the 50-day moving average crossed below the 200-day average, the dreaded "death cross." The stock is a short at its current level, with a percentage buy-to-cover stop table the 50-day average.
PKG Chart
Source: StockCharts.com
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Fresh Market (TFM) has also been doing some consolidation this year, but in the form of a large basing pattern that resembles an inverse head-and-shoulders formation or a "W" bottom. Moving average convergence/divergence and the relative strength index have been moving higher during this consolidation and the Chaikin indicator reflects accumulation. The 50-day moving average is crossing above the 200-day average, the much beloved "golden cross." Fresh Market is a buy after a break above pattern resistance at $37.50, with an initial position size that allows for a percentage stop under the 50-day average.
TFM Chart
Source: StockCharts.com
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At the time of publication, Moreno was short PKG.