One Chart, One Question

Now that we've conducted an unbiased overview, I can reveal the mystery stock.

Just for fun, let's look at one chart and ask one question: is this stock continuing its downtrend or is it in the process of reversing? To avoid any bias, I've removed any clues to its identity.

Glancing at three common indicators, MACD, stochastic and RSI (relative strength), we note they have all turned up or are starting to turn up.

We also notice that what looks like a key line of support/resistance was broken sharply to the downside, and price has reverted equally sharply back up to that line.

So far, this could be interpreted as a bounce back to resistance, a move that will be followed by a resumption of the downtrend, or it could be interpreted as a classic Bear Trap, a sharp move below support that sucks in all the Bears who are anticipating a further collapse in price.

Which interpretation is most likely to be correct? It's too early to say, but the possibility that price has traced out a falling wedge suggests that the Bear Trap/reversal scenario might well be in play, as falling wedges are classic reversal patterns.

Now that we've conducted an unbiased overview, I can reveal the mystery stock: it's actually not a stock, it's a commodity: bat guano, a highly valued natural product.

Like many of the commodities, bat guano has been in a free-fall, and the majority of financial pundits have been calling for further declines. Even bat guano Bulls have reluctantly conceded the inevitability of further large declines.

Very few bat guano analysts are calling for a reversal here.

The sentiment, in other words, is uniformly negative--everybody's on one side the boat in the bat guano trade.

Add the overwhelmingly negative sentiment to the falling wedge/Bear-Trap spike down/recovery, and it seems the majority (Bears) might be surprised by a major reversal here.

OK, the chart isn't actually bat guano. That was another way of maintaining an unbiased view. As far as I know, there is no bat guano index.

So what's this chart of? Everybody's favorite emotional trade: Gold.

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