Blog

Falling Knives

August 25, 2015April 13, 2022

A Technical Analyst and a Fundamental Analyst are chatting about the markets in the kitchen. Accidentally, one of them bumps a kitchen knife off the counter, landing right in the Fundamental Analyst’s foot! The Fundamental Analyst screams in pain at the Technician, asking him why he didn’t catch the knife. “You know Technicians don’t catch falling knives!,” the Technician responded. He then asks the Fundamental Analyst why he didn’t move his foot out of the way? The Fundamental Analyst responds, “I didn’t think it could go that low.”

By now, we’ve all read about, watched, or heard about the most recent market action. Or if you’re like me, you see it in the charts as you game plan future trades and exits. As the joke above illustrates, the power of technical analysis is that it helps us identify when to be in or out of any liquid, chartable security. Our whole goal is identifying low risk / high reward trades. We don’t care about being right. We only care about making money in the market so we appreciate knowing when we’re wrong.

For example, when we look at the price action of the S&P 500 on the chart above, we can see that the U.S. equity market had been moving sideways for quite a while. And recently, it broke its lowest upward trend line. Once this trend line broke, there was too much risk inherent in this index. In fact, I would argue that this was a great low risk / high reward scenario to short the S&P 500 using an instrument such as SH or SPXU.

We have an intermediate time bias when we look for opportunities – our time horizon is weeks to months. Our approach does not necessarily match the approach of day traders or long term investors. However, one would think it is beneficial for all investors to know when a 10% loss outweighs the probability of any short term gains. As a reminder, it takes a 11.1% gain to recoup a 10% loss. We think it makes sense for all investors to avoid a 10% loss, even if your time horizon is 10 years.

Trade safe.

Disclosure: The author is long SH.

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.

Commodity

Silver: It’s Time

May 14, 2015April 13, 2022

When we look for low risk / high reward entries in any investment, we need to be patient, waiting for those times where our risk and reward are well defined. Way back in November, we told you about an upcoming opportunity in Silver. Using cycles, we were looking for a low sometime between November and February along with a downside target near 14.00. Here’s the chart from back in November.

(click to enlarge)

How do we look today?

Price didn’t quite reach 14.00, but we’re not picky. We’re seeing a nice base with lows near our expected cycle low. In addition, we’re seeing price breakout from a 2.5 year downward trendline (dashed green line) and overhead resistance (supply) near 16.50. Adding evidence to our low risk entry is the beautiful divergence in momentum, making higher lows while price makes even lows. This is a significant move with well defined risk. Let’s zoom in and get tactical.

As you can see, the breakout breaches two significant areas of resistance. From a risk management standpoint, we have no reason to own it below 16.20. Our initial upward target is 18ish, but we will be watching price action closely if/when it reaches the solid green downward trendline, which has been significant resistance dating back to the 2011 top in this industrial metal. If that trendline is broken, we could have a rip-your-face-off rally. But let’s not get ahead of price. Let’s let it show us what to do. Trade safe.

Disclosure: The author is long SLV.

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

Internal Weakness Means Caution Is Warranted

March 31, 2015April 13, 2022

As curious investors, we need to know that the performance of stocks within an index is just as important as the performance of the index itself. And when the two aren’t confirming each other, it is time to sit up and take notice. For the past six months, if not longer, we’ve been witness to that scenario. While the S&P 500 (a major U.S. Stock barometer) has been gaining ground since July 2014, the individual stocks within this index are not participating at the same pace. This is called a thinning (or stock pickers) market and could be a harbinger of a change in direction for the overall market. This is just a warning sign. Something to be aware of. We don’t need to take action… yet. We just need to be aware that things are not as they seem. This symptom can resolve itself with an increase in stock participation. If that happens, it means great things for the upward trajectory of the market. However, if this symptom does not resolve itself, any downturn in the market could be significant (a 10 to 30+% correction).

Let’s take a look at what’s happening. The chart below is pretty simple. The line above is the percent of S&P 500 stocks that are above their 200 day moving average. Notice that a less and less percentage of stocks are above their 200 DMA. The line below is the S&P 500 itself. Price is near new highs, but fading. I’ve annotated (in 360 green) where past divergences have taken place. Notice the eventual reaction of the market. It doesn’t tell us when, but simply, that a resolution must take place. As you can see, the current divergence has been in place for a significant amount of time when compared to similar occurrences in the past eight years. We’re taking notice as we weigh the evidence. Do we think a major correction is upon us? Maybe. We don’t trade on maybe, but caution is warranted. We trade on price and we’ll be watching it closely to see what our next move should be.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security.

Commodity

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.

To receive great insight like this in your in-box, click here: Free Email Notification Sign-up

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.

To receive great insight like this in your in-box, click here: Free Email Notification Sign-up

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.

To receive great insight in your in-box, click here: Free Email Notification Sign-up

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.

Click here to receive insight like this in your in-box: Free Email Notification Sign-up

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.

Click here to receive opportunities like this in your in-box: Free Email Notification Sign-up

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.

Click here to receive great opportunities like this in your in-box: Free Email Notification Sign-up