My mentor taught me not to search for specific patterns or situations; instead, be patient and allow patterns and situations to present themselves. As usual, this method yielded some fascinating and unexpected results:
It's no surprise that investors had a negative reaction to Wednesday's news that the Walt Disney Co. (DIS) plans to pull its titles from Netflix (NFLX) in favor of its own streaming service. What might come as a surprise is the two huge technical sell signals that preceded this news.
On July 27, Netflix's RSI (relative strength index) indicator flashed a sell signal (point A). This was confirmed on Aug. 3 by a sell signal from Netflix's MACD (moving average convergence divergence) indicator (point B).
Netflix has now formed an island top (shaded yellow). This bearish pattern occurs when a group of candles exists between a gap higher, which occurred on July 17 (point C) and a gap lower, which occurred this week (point D). Look for the stock to fill the gap by sliding down to $162.
What can you say about a stock that closes at an all-time high, and then two days later reaches a one-month low? That's exactly what happened to shares of online furniture retailer Wayfair Inc. (W) this week.
Wall Street initially liked Wayfair's second-quarter earnings report, which revealed skyrocketing revenues even as the company lost money. However, as optimism faded, the stock surrendered early gains and then plummeted.
The past five sessions, taken together as a whole, paint a bearish picture for Wayfair (circled). The activity that occurs within those five days engulfs the activity of the previous eight weeks.
In other words, nearly everyone who has taken a long position in Wayfair over the past eight weeks is losing money. Losing leads to selling, and selling drives the price even lower.
I'm looking for Wayfair to slide back to the mid $60s. That's where the stock broke out of an ascending triangle pattern (solid lines), and also where it bounced sharply on a pullback soon afterward (dotted line).
Tiffany (TIF) has had a rough couple of weeks, and shares of the specialty jeweler have fallen to a point where they are beginning to appear attractive. Despite a recent decline from $96 to $91, Tiffany's long-term weekly trendline is still unbroken -- at least for now (diagonal line).
Tiffany's daily chart shows that the stock has fallen into an area of horizontal support (dotted line) just above $90. Tiffany & Co. is scheduled to report earnings on the morning of August 24th.
Technically, Tiffany could see a bounce here, but it would be risky to take a full-sized position so close to earnings. I'm taking one-third of my normal sized position, and will add to it if appropriate.
This commentary originally appeared on Real Money Pro on Aug. 10. Click here to learn about this dynamic market information service for active traders.