Friday, November 1, 2013

The Fed stays the course as S+P 500 price targets are reached (Apple, Tesla and Facebook price chart updates)

On Wednesday of this week the Federal Reserve announced it will continue it's bond buying program called QE 3 in full. This really didn't come as a surprise to anyone as the consensus view for tapering now seems to be March/April of 2014 at the earliest.

However more important to me was the fact that this Wednesday morning just before the FOMC statement was announced, the S+P 500 reached some major upside price targets. The chart above shows the third completed 150 point rally since April. The previous two swing highs eventually produced corrections of 80 and 120 points before proceeding.

Perhaps more important was a longer term upside target that was also reached this week. We have now effectively rallied as much as we did from 2009 to 2011 before the S+P 500 dropped 19% and the Dow dropped 21% during a US debt downgrade and Eurozone instability.

Now we must remember that these are upside targets first and foremost, or an area to take profits on long positions. And not an area to blindly get short 100% with all the leverage one can acquire. As with all things in investing it is all about managing risk. The prudent thing to do is take profits at upside targets and be cautious of any weakness shown after an upside target is reached.

This is exactly what I would recommend to all, any signs of continued weakness at these price levels now must be taken very seriously. I do not believe this is the time to have the "buy the dip" mentality unless you are skilled at short term trading and can have the discipline to use tight stops.

This chart above shows the short term trend of the S+P 500 to spot any potential signs of weakness. So far I do not see anything unusual, this week we had a 22pt or slightly above 1% correction which generally falls in line with the pattern since the low at 1646 was formed. I would advise using this week's low of 1752 as a measuring stick for next week. I believe any daily close below that would likely mean a drop back to the May highs at 1709 would proceed.

And if I saw continued weakness after that I believe that would signal that the 20-30% correction is indeed underway. The targets would be the QE 3 announcement high of 1474 and the 2011 high of 1370, at that point I believe it would be safe to get back in the water for the long term once again.

However like I said, until we see some selling pressure these are just hypothetical situations. But knowing where we are, in terms of being at or near the upper end of the trading range is crucial to making good investment decisions. You want to put yourself in the best positions to succeed in life and in the markets.

Let's wrap up by taking a look at a few price charts of popular stocks that also reported earnings this week. Facebook's chart is shown above, this chart goes all the way back to it's IPO in May of 2012. FB has really had a stellar year, after dropping roughly 50% after it's IPO, it has gained almost 100% year to date. I have highlighted the $45 dollar level as being key going forward, as it is both the high of it's IPO day and from current all time highs, would match the $10 correction that was seen earlier this year from the January highs to the June lows. This is crucial to hold going forward, as long as it can hold the stock should be poised to reach $60 and above.

On the flipside, $52 now looks like resistance for a potential head and shoulders pattern. Bulls really need to push prices above $52 in the near term along with defending $45. If they are unable to do that the result would be a drop down to $39 to follow. This still looks like a very good stock fundamentally and it may very well come down to what happens in the broader market that decides the near term fate.

Taking a look at Apple next in the chart above, we can see that after a tremendous rally of almost 1000% from 2009 to 2012, the stock spent the end of 2012 and into 2013 retracing back into it's midpoint of it's amazing bull market. This is still a very bullish technical setup and the fact that so many have quickly given up on this stock makes me think that the run is not quite over yet.

However in the near term AAPL is running up into some key areas of resistance that deserve attention. The midpoint of this current correction stands at $545, an area that was nearly reached this week. Support not stands around $495 and $465 respectively. The next upside target would take us just above the major swing high just shy of $600. If this were to occur I would believe it's very likely that the drop in AAPL is over and over time new bull market highs would be achieved. But time will tell.

The last stock I want to look at is Tesla (TSLA). This happens to be a very popular stock for obvious reasons and it has had a tremendous run this year. As you know I like to follow patterns in the price charts to tell me if/when trends are broken or will continue. So looking at the corrections this stock has endured during the run up I see nothing out of the ordinary just yet that would make me want to sell all my Tesla stock anytime soon.

As you can see in the chart above the major corrections have come in at 22-23% before making new highs. So far we have a 21% correction since the swing high at $194.50 was formed. So as is I think the trend is still intact but I would not give it much room below $150 or the odds favor a drop to it's 200 day moving average at roughly $100.

Taking a short term look at this current correction in TSLA, I see a classic A-B-C correction pattern. Basically we have a 33 point drop from all time highs ($194.50 to $161.50). A retracement rally of roughly 26-27 points and then another equal sized drop to the swing low at $153.

This now puts short term resistance at approximately $180, strength above puts a price target of around $210. This level is computed by measuring the size of the rallies of each swing low which happens to be $55-60 each ($88 - $133, $104-$158 and $135-$194).

In reality, when analyzing all of these momentum stocks it may all come down to the direction of the broader market. As long as the S+P 500 maintains it's uptrend it's likely all three of these stocks will follow along. But it's always prudent to have a plan for the upside and the downside and be prepared for both.