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Point & Go Figure: Shakeout to Bull Trap, ACI, CRK, HNP, MHK



Short-term Overview:
The short-term conditions remain negative with the Percent Above 50-day Indicator for the NYSE, Nasdaq Composite, S&P 500, Russell 2000 and Dow Jones Industrial Average all negative and showing continued deterioration. Perhaps surprisingly, the Nasdaq-100 50-day MA indicator reversed up with yesterday's action.

Meanwhile, the High-Low Index for the NYSE reversed down yesterday, while the Nasdaq Composite High-Low Index declined, but remains in Xs, though showing declining tops from the 2004 high.

Market Overview:
As noted, the 50-day MS indicator for the NDX reversed up yesterday, but more importantly, the bullish percent indicator for the NDX remains negative and actually declined yesterday. This is a negative divergence, deteriorating participation on 50-day MA crossovers. The Bullish Percent for the NYSE and Nasdaq Composite remain positive, but continue to pattern of decreased participation and lower highs dating back to their 2003 and 2004 peaks.

Shakeout Failure:
Back in 2003, I first wrote about the Shakeout pattern for Minyanville (see the full article here). One of the advantages I find in using the point & figure charts for context is that chart patterns produced on point & figure charts are, for the most part, very clear and easy to distinguish. In the most basic sense a stock is either on a buy signal or a sell signal.

Of course, there are other considerations, such as relative strength, the overall context of the pattern within the identifiable trends of the stock, etc. But, reduced to its essence, point & figure charts at any given time show either a buy or sell signal. There is no in-between… most of the time.

There is one pattern, however, that isn't what it seems. When is a sell signal not a sell signal? When the sell signal occurs in a pattern called a Shakeout pattern.

ACI began a classic shakeout formation with the double bottom break 84. This is what the pattern initiation looked like.

The double bottom break, shaded in red, is where that column of Os exceeded a previous column of Os, initiating a shakeout pattern.

Ok, so the shakeout pattern has begun, what next? For some traders an entry point is keyed from something else, such as DeMark indicators. For others, it can be a PnF reversal up to Xs, which looks like this:

The reversal to Xs creates a potential double bottom break at the lowest O on the prior column. In this case, should the stock reverse back down and fall to 80, that would create a new sell signal and void the pattern. Also, note the resistance at the two columns of Xs that reached 87. Clearly, there were sellers at that level that forced the stock back down. A short-term trader could use that as a target for sales on the way back up.

Now, what really happened with ACI? A classic bull trap formation which, as the name suggests, traps bulls. A bull trap is a triple top break by one box, followed by a reversal down right away. Here is what the bull trap looks like in the case of ACI.

Arch Coal (ACI)

Here are some other recent bull trap formations:

Comstock Resources, Inc. (CRK)

Huaneng Power Intl, Inc. (HNP)

Mohawk Inds, Inc. (MHK)

(Charts courtesy

No positions in stocks mentioned.

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