This Amazing Stock Seems Incapable of a Trend Reversal
AutoZone (AZO) is a stock I’ve been watching – and amazed by – for a while, mainly because it just doesn’t seem capable of a full trend reversal!
Let’s take a look at the strongly trending price action from 2010 to present, and note the change in “angular momentum” or “angles of ascension” (trendlines) and how the stock has behaved along the way.
Here’s the “pure price” angle of ascension chart:
I’ve mentioned the chart concept of “Angular Momentum” in the past, as seen in the previous posts (for some background reading):
S&P 500 and Angular Momentum April 29, 2011
Short Term Angular Trendlines in Gold and Crude Oil April 12, 2010
SPY Trendline and Angular Momentum Bull/Bear Psychology (good introduction post)
The main idea is that in ‘climax’ situations, trends accelerate as emotions (and positions) run high, traveling through a progression of stages until the “angle of ascent” becomes unsustainable and the trend ends in a violent ‘climax’ reversal instead of the more common ‘divergence’ (clear signal) reversals.
#-ad_banner-#You can chart this simply by hand-drawing trendlines that show a progression of “stages” of momentum – starting with a stable stage (a reasonable trendline) and progressing through stages where the “angle of ascent” in the trendline gets steeper.
In AutoZone, price travels the middle part of 2010 from $160 to $220 in a ‘relatively stable’ or at least consistent rise until the trendline angle increased steeply from October 2010 to January 2011, at which point price ‘collapsed’ in a steep retracement.
That wasn’t the end of the trend, however. Price created ANOTHER relatively stable (steeper than normal) rising trendline that gave-way to another steep/sudden retracement in July.
But wait! There’s more!
Instead of reversing/collapsing to a bear market (think Netflix NFLX in August 2011, Crocs CROX in late 2008, and many other examples), AutoZone dusted itself off and created the steepest angular trendline yet, moving from $260 to $330 at break-neck chart speed.
Technically, price broke under the ‘impossibly steep’ trendline angle on September 21, 2011 but price made it back to the upper resistance high at $330 where price stands currently.
Let’s look at the Weekly Chart of AZO for a better picture of what’s happened so far:
I’m not intending to give a big analysis of the stock, but mainly to focus the lesson on the strength/progression of the trend over time in terms of progressively steep angles of ascension over time.
To oversimplify the structure, price has continually rallied off the support of the 20 week EMA, with the exception of August 2011 when price supported strongly off the rising 50 week EMA.
Moving Averages are usually ideal reference points over time to judge trend progression, along with spots to enter a retracement buy-in trade.
Now, let’s add some classic indicators to the Daily Chart structure and note some interesting lessons:
When we’re assessing trend strength – on any timeframe – we’re wanting to know:
*HOW LONG the trend has been in place (as trends can’t last forever)
*HOW STRONG the trend is (based on momentum and volume, and other ‘internals’)
As a general rule, it’s best NOT to buy-into a rising trend when negative divergences are present, particularly when price is overextended into or beyond its upper Bollinger Band.
That’s a lesson learned numerous times in the Daily Chart above with all the highlighted areas – these were steep pullbacks that snapped the bulls after clear/lengthy negative dual volume and momentum divergences.
Here’s another lesson – those who tried to call tops in AutoZone were thwarted as the trend continued after each steep pullback.
It’s another reminder of “Trading 101″ where we do best to trade IN the direction of a prevailing trend instead of fighting it (something about… “The Trend is Your Friend…”)
Anyway, Angles of Ascension, Dual Divergences and “snap” retracements, Trend Continuity against all odds, AutoZone has it all.
Use this stock as a reference example of these chart concepts.