2015 – Page 2 – Adaptiv

Year: 2015

Striking Oil

March 22, 2015April 13, 2022

It’s hard to go a day without hearing or reading about the recent collapse in oil prices. And why wouldn’t we? The 60% drop in price over the past nine months is one of the greatest in history. In fact, the entire commodities complex has been hit hard during this time. But really, it should come as no surprise to investors that these price declines have taken place while the U.S. dollar has rapidly increased in value during this timeframe. Make sense, doesn’t it? Those items priced in U.S. dollars will decrease in price as the value of the U.S. dollar increases.

(Source: charliebilello.tumblr.com)

Everything from agricultural and soft commodities to industrial and precious metals have suffered significant price declines as the dollar has rocketed upward. Even though this price correction should not be a surprise, investors have become exceedingly pessimistic towards commodities. Such pessimism in the commodities space has not been this strong since the 2008-2009 financial collapse.

(Source: Shortsideoflong and SentimenTrader)

With such negativity prevalent in this space, we sit up, take notice, and look for opportunities. We think we’ve identified a well defined opportunity in oil, the focus of today’s article. Our oil investment tool of choice is USO, the United States Oil Fund – an ETF that tracks light, sweet crude oil. Looking at the two year chart of oil’s daily price below, we can see its impressive decline. And, we can see that it has developed a nice divergence between price and momentum (as measured by Wilder’s RSI).

Zooming in, we can see the divergence up close and note the potential for a false breakdown if 16.75 is reclaimed. With the amount of investors shorting oil, the aforementioned set-up is ripe for a sharp reversal. If 16.75 can be reclaimed and the downward green trendline broken, price could move rapidly upward towards February’s highs (+19%) and even a 38.2% retracement of this epic collapse, which would be a 45% gain from these levels.

We like USO above 16.75. There is no reason to own it below that level, which lines up with the January lows. Our risk is defined. We don’t care if we own it above 16.75 and quickly turns back down and we get stopped out. Getting stopped out means we did something right – proper risk management. And if it doesn’t breakout above 16.75, no worries. We’ll wait some more. With this opportunity, our risk is well defined and the reward is heavily skewed in our favor. We’ll own it above 16.75. Below that, we’re not interested.

Disclosure: the author will consider a long position in USO based on the criteria provided in the article.

Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions.

Breakout

Fear Hits Target

March 12, 2015April 13, 2022

About a week ago, we let you know about a bullish breakout in the Volatility Index (VIX) from a downward wedge formation. As anticipated, VIX continued its breakout and has hit our target. In addition, we pointed out that:

At minimum, we’ll see a retest of previous highs in the S&P 500. If those previous highs are taken out, a false move will be in play and we could see a rapid downward move in the market.

As expected, the breakout in volatility coincided with weakness in US markets, including the S&P 500, which is down 3% in 5 days and has broken down through previous highs.

We indicated back in February that in regards to the S&P500, we would be long above 2088.48, short below it. Investors could have taken advantage of this situation by shorting the S&P 500 using an ETF such as SH and/or (we like doing both) going long VIX using ETFs such as TVIX and UVXY (both up 20% since the breakout). At this point, when you look at the chart above, the S&P 500 is right at the edge of our shaded resistance and up against a 61.8% Fibonacci retracement (in purple). In addition, VIX is up near several points of resistance (not shown), including the upper edge of a downward channel and at 38.2% retracement. Accordingly, we’re closing our long VIX trade and watching the S&P 500 price action closely. We expect the S&P 500 to bounce a bit here and we’d reestablish a long S&P 500 position if/when new highs are made with a close above 2117 on the index. On the other hand, if VIX breaks up from the downward channel, we’ll consider jumping back into the VIX long trade.

No matter the trade, we’ll let price be our guide.

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Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions. 🙂

Equity

EBAY: It’s All About That Base

March 9, 2015April 13, 2022

For the past two and a half years, eBay (EBAY) has traded within a sideways range, between $48 and $59. Price corrections take place either through time or price (decline). Of the two, a correction over time carries the most power. This is what makes eBay’s most recent breakout so important. It’s all about that base. See the first EBAY weekly chart below. The 2.5 year base can be clearly seen. Last week, eBay broke out to new highs while also breaking out of a ratio we like to use to compare the underlying security against a benchmark – in this case, the S&P 500. Who doesn’t like to outperform the S&P 500? When the ratio falls, the S&P 500 is outperforming EBAY. When it rises, EBAY is outperforming the S&P 500. We like that EBAY is both breaking out of consolidation and breaking out in comparison to the S&P 500.

See the second chart below. If eBay can hold onto this breakout, the upward reward is about 17%. In addition, the well defined base also does a great job defining our risk. Our stop loss is at $59, which lines up with previous important closes and the top of the base. A possible upward resistance point can also be seen. The green tramlines have done a good job outlining the upward price movement since 2009. Right now, price is at the mid-tramline. We could see some resistance here. But if it breaks above that, the price could move quickly towards our identified upward target. Our risk is defined. Our reward is defined. The risk/reward ratio (2%/17%) is skewed in our favor. If we get stopped out, we don’t mind. That’s proper risk management. We’ll own it above $59. Below that, we’re not interested.

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Disclosure: the author is long EBAY, and will change positions on this trade based on the criteria provided in the article. The author may initiate a short position if the 59.00 stop loss is triggered.

Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions. 🙂

Equity

Fear Breaks Out. Market Highs To Be Tested.

March 4, 2015April 13, 2022

Since mid-February, the S&P 500 has broken out to new all-time-highs. As anticipated, during this breakout, market volatility (as measured by the VIX) has subsided. That is until today. The fear index (VIX) has broken out of a bullish falling wedge that took a little over a month to form. Not coincidentally, this breakout is taking place right near an expected resistance point, an upward trendline connecting previous VIX lows of July and December 2014 (marked with a green trendline on the chart below). As you might recall, we pointed out back in January that the VIX has been rising along with the S&P 500. With this new breakout in the VIX, this concerning market condition still exists. At minimum, we’ll see a retest of previous highs in the S&P 500. If those previous highs are taken out, a false move will be in play and we could see a rapid downward move in the market. From false moves, come fast moves. We’ll know we’re in that environment if the S&P 500 takes out the support area highlighted in gray below. This area marks where previous supply should turn into new demand. Those long this market want to see that area of demand hold. If it doesn’t, market participants will need to be nimble. Remember, “the market moves up the escalator, down the elevator.” Downward price movements are almost always more rapid and violent than any upward move. We need to be ready for this scenario. On the other hand, it would be extremely healthy for this market to test previous highs and move on to exceeding the February highs. If that takes place, we should see smooth sailing in the market for the intermediate future.

Trade safe. Don’t trade what you think. Trade what you see.

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click chart to enlarge

Bonds

Yields Retreat As Bonds Bounce Off Logical Resistance

February 25, 2015April 13, 2022

Technical analysis allows us to identify logical points of increased supply or demand for any liquid security. We can find places where a change in the direction of price is likely. As previously mentioned, this applies to any liquid security we can chart, including bonds. Over the past week, the financial media has been quick to point out the “spike in bond yields.” While true, bond yields have moved quickly upward since the beginning of February, the bigger trend (yields decreasing) remains intact. And as of the past few days, we find that bonds and yields are reacting to logical points of resistance. Let’s take a look at the 10 Year Treasury Note Yield ($TNX) and the 20+ Year Bond Fund ETF from Barclays (TLT) so you can see what we see. But before we get too far, it should be remembered that the relationship of bond yield to bond price is simply this: when the bond price goes up, its yield goes down and vice versa. Technically said, a bond’s price and its yield are inversely related. Ok, on to the charts.

First, the weekly chart of the 10 Year Treasury Note. Notice that for 20 years now, the yield on the 10 Year has been steadily declining within a well defined trend as marked by the green channel. Annotated in orange is the incredible “spike in yields” being reported. As you can see, this is minor in relation to the overall trend. We do concede that someday, yields will breakout of this channel and begin a new upward trend, bringing many financial ramifications with it. We’ll make sure to let you know when that happens. But for the time being, the overall trend in yields is down.

Taking a closer look at the 10 Year Yield below, we find that its yield has reversed course upon reaching 4 different levels of significant resistance:

The mid-channel line dating back 20 years
Demand/supply dating back to 2009
38.2% Fibonacci retracement from 2013 highs
Former support turned resistance dating back to 2012

This is a logical move and one that indicates a high probability of resuming the downward pressure on yields.

The resumption in downward yield pressure and upward bond price movement can also be seen by taking a look at the 20+ Year Bond ETF, TLT. Looking at the chart below, it’s easy to see that prices dropped from January highs and have so far found demand around the 126 level, which used to be a prior supply/resistance level. In addition, this bond ETF continues to move within an upward slopping series of tram lines. Until the 126 level and lower boundary tram line is broken, the trend in bond prices remains up. With bonds finding support here and major stock markets breaking out across the globe, it’s our opinion that we’re likely headed into an environment of rising bonds and stocks. In the end, however, that is our opinion. We don’t trade on our opinion. We trade on price, the only opinion that matters.

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Breakout

Sangamo BioSciences Provides Well Defined Opportunity

February 22, 2015April 13, 2022

On Tuesday, February 10th, Sangamo BioSciences (SGMO) announced its earnings results. The clinical stage biopharmaceutical company reported ($0.06) EPS for the quarter, beating consensus estimates of ($0.09) by $0.03. Revenue was 15 million for the quarter, which is up 117% on a year-over-year basis. Sangamo focuses on the research, development, and commercialization of zinc finger DNA-binding proteins for gene regulation and gene modification as regulated in the United States. Their main driver of revenue is collaboration, the most prominent being co-development deals with Biogen Idec (treatment of beta-thalassemia) and Shire Plc (treatment of hemophilia). The most advanced drugs in SGMO’s pipeline are two significant treatment drugs, both in mid-stage Phase 2 clinical trials: SB-728 for the treatment of HIV/AIDS and CERE-110 for the treatment of Alzheimer’s.

Since releasing earnings, the stock has moved 32%, from 12.74 to 16.94. This move has brought SGMO to a well-defined inflection point. Looking at the weekly chart below, it’s easy to see how important this current price level is, marking historical points of supply over the past year. It should also be noted that the price action over the past year is the result of breaking out of a 4.5 year long base. We heart long bases!

When zooming into the daily chart, the important price levels are easily identifiable. If the $17 level is broken, it will likely play the role of future demand (resistance). The price pattern over the past year has created a classic Inverse Head and Shoulders pattern. This pattern provides upward reward targets of 20.00 (18%) and 23.50 (38%). Frequent readers know that we like trade positioning that provides well defined risk, as well as significant reward in relation to that risk. This set-up fits our criteria for high reward / low risk entry point. With a stop loss at 16.50, our risk is well defined. Our reward targets are identified. Price will tell us which side of the trade to be on. We like this opportunity.

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Disclosure: the author is long SGMO, and will change positions on this trade based on the criteria provided in the article. The author may initiate a short position if the 16.50 stop loss is triggered.

Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based based on your own decisions.

Breakout

Stay Calm And Break Out? London Financial Times Index…

February 17, 2015April 13, 2022

If you initiated positions in the London Financial Times Index back in the year 2000, you would now be back to even. This index, representing the 100 largest publicly traded companies in the United Kingdom, just reached 6898.13, its highest close since 1999 (6950.60). That’s 15 years ago if you need to do the maths like me! After a decade and a half, and two steep price corrections, the FTSE is at par. Some investors might call the past 15 years exhausting. Others might call it consolidation. If the latter, then we may be on the verge of an opportunity. From a big picture perspective, you can see the magnitude of this price action in the first chart below, which holds the monthly price candlesticks from 1990 through today.

When we zoom in to the weekly chart (see below), we find that the British index has been battling the 6800-6890 level for about 2 years. This level is overhead resistance – where sellers show up and cause the price to stagnate, retrace, and find demand. As a reminder, price is the work of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. For nearly 24 months, the 6800-6890 level has provided plenty of supply.

Digging deeper into the index on the daily chart (see below), the significance of this level can be clearly seen. We are on the tenth attempt to break this level. The more times price attempts to break through resistance, the weaker that area of supply becomes. Today, we may have witnessed the breakthrough. If that’s the case, the opportunity ramifications are large. The longer the base (2 years -or- 15 years!), the higher the space. If this breakout holds and does not prove to be a false breakout (closing below 6800), then the initial price target is 7700, 12% above current levels. The risk is well defined as we don’t want any exposure below 6800. A risk of 1% for a gain of 12%. Not bad.

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Market Outlook

All-Time-High S&P 500 Provides Well Defined Opportunity

February 13, 2015April 13, 2022

[Note: this article was edited at 13:23 CST on 02/15/15 to correct our if/then line. Our if/then line is the daily close on 02/12/15, not the daily close on 02/13/15. This is an important distinction that we find imperative to clarify. We will swiftly change to a short position with a daily close below 2088.48.]

Over the past three months, the S&P 500 has gone sideways. That is until today, when this major U.S. equity index closed at a new all-time-high. With new highs, comes new opportunity. Those readers familiar with our approach understand that we preach price. Price is the manifestation of opinion and final arbiter of value. You can have the all the strong opinions and indicators you want, but the only thing that matters is price. And since 2011, the S&P 500 has moved upward in a well-defined channel (see green trendlines in chart below). Moving in a series of higher highs and higher lows, price has guided our investment approach. As long as price behaves this way, we remain long this market. The exception being back in mid-October 2014 when we backed away from the market until price proved we could be long again on October 21st.

If price is the most important piece of evidence in identifying opportunities, then risk management is the most important part of taking advantage of those opportunities. From a risk management perspective, technical analysis is ideal for identifying when any trade thesis is wrong. Knowing when you’re wrong or knowing when to exit is crucial to successful trading. Every trade we enter has to have an entry and exit plan. In the chart below, we’ve identified some important levels. If we are going to establish a long position in the S&P 500 using the ETF, SPY, we need to know where to enter, when we’re wrong, and when to exit. The same is true for taking a short position (using ETF, SH). Today’s new all-time-high provides a well defined opportunity. We remain long this market, but will swiftly change to a short position with a close below yesterday’s ~~today’s~~ close of 2088.48 ~~2096.99~~. That is our if/then line. Long above 2088.48 ~~2096.99~~. Short below it. As time moves forward, we’ll reassess our game plan to minimize loss and maximize gain. This game plan is not for everyone. We’re not saying being long or going short is right for you.

We like this breakout in the S&P 500, but we will be watching price action closely as none of the concerns we’ve identified over the past 3 months (see our seven part series) have been alleviated. More coming on that soon.

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Breakout

PAYX: The Trade That Was Wrong In All The…

February 4, 2015April 13, 2022

[Note: as of 02/11/15, a long position has been established in the subject stock based on the parameters outlined at the end of this article. We have initial targets of 51.60 and 55.00 identified.]

Ten days ago, we wrote about a stock we thought was going higher based on its breakout from 11 weeks of consolidation. We were wrong. And we like it. At 360 Investment Research, we aren’t concerned about being right. We’re concerned about being on the right side of the trade. In this instance, our methodology was solid:

Price was breaking out to new highs
The breakout was occurring after 11 weeks of sideways price action
The sideways consolidation took place after a large cup consolidation
All the aforementioned was taking place within a well-defined weekly uptrend
We could identify when we were wrong (stops of 47.50 and 47.00)
We had a target based on the pattern (55.00) that held an asymmetric risk/reward ratio

With the aforementioned parameters, we would make that trade again and still could (more on that in a bit). In this case, we were stopped out at 47.50, which eliminated our exposure to the 5 day, 5% drop in price. Such an event will school you quickly on investment psychology. Our risk management was solid.

So what happened? Why didn’t our higher probability scenario of more new highs play out? Simple. Buyers disappeared. Price discovery (the determination of price) is rooted in the simple economic law of supply and demand. More demand than supply, the price goes up. More supply than demand, the price goes down. In this particular instance, price rose to new highs and demand disappeared. When breakouts like this one fail, it carries significance and means demand was exhausted. When this happens, price can experience quick downward pressure. Hence the phrase, “from false moves come fast moves.” This was confirmed in PAYX by observing the swift downward price action over five days. With technical analysis helping us identify a proper exit, we were able to avoid this rapid decline. In addition, it should be noted that it also allows us to change our trade to short. Knowing the aforementioned – that a failure of the breakout would likely mean rapid price decline, we’re able to jump on the other side of the trade quickly. A current month, in the money put option (near our exit point), gained over 60% in five days. That is the power of technical analysis – knowing when you’re wrong, which can put you on the right side of the trade.

As for the future plans on PAYX, we like that it held within the green upward price channel and found new buyers near its most logical point of demand (44-44.50). We’ll own it above 48.00. Below that price level, we’re not interested.

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Currency

Proof That Cash Is A Position Too

January 29, 2015April 13, 2022

Those who check out our work often, know that we are advocates of patience, risk management, and high probability asymmetric risk/reward scenarios. This is a fancy way of saying we like to minimize loss while maximizing gain. Isn’t that what every investor wants? Related to our approach, we have been known to tell our readers that “cash is a position too.” In this article, we’ll show you just how valuable cash is as a position. At this point, it needs to be made clear that there are many opinions about the functionality and validity of fiat currency. That is not what this article is about. We are not here to debate whether the U.S. dollar is worth the paper it’s printed on. We are writing to show you that holding U.S. dollars is a valid investment position and one that can protect your capital.

To show you this, we’re going to use ratio analysis, a valuable instrument in our tool box. This approach of comparing the price of two securities against each other as a ratio is valuable in identifying opportunities. Today, we’re using a ratio of the U.S. Dollar Index (USDX) versus the S&P 500 (SPX). The U.S. Dollar Index is our proxy for the value of (you guessed it) the U.S. dollar. This index uses a weighted mean of the dollar’s value relative to other select currencies. When USDX rises, it indicates U.S. dollar strength and when it falls, U.S. dollar weakness.

In the weekly chart below, we’ve divided the USDX by SPX (the S&P 500). Our ratio (dollar/S&P 500) is in the upper panel and the S&P 500 is by itself in the lower panel.

When this ratio moves upward, the dollar is outperforming the S&P 500. When the ratio moves downward, the S&P 500 is outperforming the dollar. For the majority of the time, as you would expect, the ratio travels downward because the S&P 500 is outperforming the dollar. But when the ratio turns upward, investors should take notice. Based on this simple ratio, we know when holding the dollar is more valuable than owning U.S. stocks. Take a look at the chart (click it to enlarge). What do we see? We see that this ratio moves in relatively predictable trends. Notice the price trends identified within green channels (1995-2000) and descending triangles (see 2002-2005, 2002-2007, 2009-2011, and again during 2012-2014). These downward patterns are highlighted in green and when the downward trend has been broken, and the ratio moves up, we’ve annotated the chart with vertical black and orange dashed lines. The orange dashed lines indicate times when this ratio broke upward and the S&P saw a major correction or bear market. The black dashed line indicates a minor correction within the market when the ratio broke upwards. As you can see, starting back in October 2014, the ratio broke its upper trendline. From that point forward, investors have been better off holding U.S. dollars than owning the S&P 500. This is significant. With the dollar outperforming the S&P 500, it tells us that major money managers are seeking safety. Now is a time to pay close attention to U.S. stock markets. Will the dollar continue to outperform the S&P 500? Could this be the start of a minor correction or a major trend change for the S&P 500? No one knows for sure, but the warning signs are abundant [1]. In the end, we’ll let price guide us.

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[1] You can read more about the warning signs we’ve identified via our seven part series:

[the following chart was added on 02-04-2015 to show USDX next to the S&P 500, no ratio, dashed lines in same exact locations as the chart above]