Supply and Demand

Category: Supply and Demand

This Is How To Navigate Amazon

September 28, 2017April 13, 2022

Much like its namesake, Amazon stock (ticker: AMZN) is difficult, yet rewarding, to navigate. Over the past two decades, this well-known retail (not technology) company has risen over 48,455%. That’s not a typo. $1,000 invested in AMZN back in 1997 would be worth $484,558 today. That same $1000 invested in the S&P 500 would be worth $1,999 today. Making money in the stock market is easy, right? Wrong. As much as we’d like to think we’re rational individuals, we’re our own worst enemy. When involved with markets, we tend to respond to gains and losses emotionally. Loss aversion is a real and present danger to many portfolios. Read more “This Is How To Navigate Amazon” →

Breakout

Get Intel Inside Your Portfolio

September 20, 2017April 13, 2022

Get Intel in your portfolio. Sometimes market participants forget we’re in the market to make money. Contrary to the cacophonous media echo chambers, we’re not in the market to be right or wrong. Media may love opinions, but markets couldn’t care less about what we think. Markets are not our friends. They don’t care if we’re right or wrong, so we better be in the business of getting on the right side of the trade, managing risk, and capturing reward. With this in mind, it makes sense to own things moving up in both absolute and relative terms. Read more “Get Intel Inside Your Portfolio” →

Equity

Simple Market Secret: Just Look Left

September 18, 2017April 13, 2022

Breakdown

Forget Bitcoin. This Major Asset Is About To Impact…

August 21, 2017April 13, 2022

Back in February, we highlighted some important developments which could impact the months ahead. One of those developments was the consolidation of the U.S. Dollar. Back then, we wrote:

Another important development is the consolidation of the U.S. Dollar… the US Dollar broke out above previous resistance in the 4th quarter of 2016. On the daily chart of the U.S. Dollar, we’re compressing between $99 and $101. A break above the upper green trendline would signify a resumption of the uptrend started in 2014. And if price moves below $100, there is no reason to own the greenback. If the Dollar moves down through this important level, we could have a false move on our hands…

Education

The Correction In Tech Everyone Was Hoping For, But…

June 13, 2017April 13, 2022

Fear and greed are as old as the Garden of Eden. For many market participants, these are crippling emotions, often causing individuals to sell and buy at the wrong time. The market is extremely good at triggering these emotions, which can be valuable for survival, but detrimental when trying to make money in the market. Over the past two trading sessions, the U.S. Tech Sector has dropped in price. Some would call this price discovery, while others, such as our friends in the financial media, have dubbed it, “the tech tumble.” Alliteration always amuses (See what I did there?). It’s almost as if the financial media was in the business of entertainment. For sure, they’re not here to help us.

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” ~Jason Zweig

If the financial media is not interested in helping us but prefers to trigger emotions just to increase viewership, then it’s likely in our best interest to turn off the TV and stop getting hooked by click-bait headlines. But what can we use to fill the void? Where can we get unsensational, fact-based, and objective information? It’s called PRICE. We know… that’s not a very sexy answer. But it’s the truth. Price is factual data which reflects the interaction of supply and demand based on economic law (not theory). Price is objective and doesn’t care about your opinion nor mine. Even if you disagree with it, price doesn’t lie (some really hate this and fight with the market). The fact-based nature of price is exactly why we use it to identify opportunity in the marketplace. Let’s take a look at the price of Technology, using ETF XLK, to help us.

As you may recall, we use a simple technique to helps us make better trade decisions. When we look left on the daily chart of technology above, even after the recent price correction, price is still making a series of higher highs and higher lows, which is indicative of an ongoing uptrend. In fact, we notice sideways movement and drawdowns ranging from -2% to -4% are a natural part of trend progression. However, this is difficult to handle if we respond to gains and losses emotionally. Loss aversion is a real and present danger to many portfolios. Here’s a visual of this common emotional experience.

Many market participants experiencing twice as much pain during drawdowns than the joy experienced during equivalent gains. Not helping matters, and many times feeding the negative response, is the inundation of sensational media opinions during times of drawdown. TV Networks and Financials websites are touting “Tech Tumble” even though price is working well within the characteristics of an ongoing uptrend. This sensationalism is extremely unhelpful to market participants who need to manage (or better yet, remove) emotions during the investment decision making process.

As market participants, we don’t need to predict (media pundits will play this game, we don’t have to). We need a plan. We need to know when we’re wrong, which is the beauty of studying supply and demand via price. Using the daily chart above, we can see price moving in a sequence of equivalent higher highs and higher lows. These levels give us important clues on where previous battles between supply and demand have taken place. And this particular sequence has established a nice upward momentum channel (annotated in green). The first clue this trend in Technology is changing would be a breach of the lower green trendline on a daily closing basis. If/when price would close and hold below the lower momentum trendline, it would indicate a shift in the demand/supply dynamic with sellers able to change the trajectory of price. Secondly, and more importantly, a closing price below 54.30 would likely usher in price discovery towards the 52-53.50 level. And if that can’t hold, a much larger correction is upon us and the media aggrandizement would be at a fevered pitch, providing another excellent opportunity down the road.

For us, this one is pretty simple. A breach of the lower green trendline would be a warning and a close below 54.30 would indicate we’re wrong on XLK. Someone else can have it. Above these levels, the trend remains your friend.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to a time-saving tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

Breakout

Check Out This Major Sector Returning To Health (And…

June 5, 2017April 13, 2022

If you bring up the topic of Health Care for discussion in the United States, it’s likely to generate a wide variety of opinions that invariably revolve around one’s political or world view. Thankfully, we don’t need to let politics into our portfolio. After all, the market doesn’t care about our political views. The market is going to do what the market is going to do. It’s going to reflect the balance between supply and demand of all market participants. It’s based purely on the economic law of supply and demand: more supply than demand, price goes down; more demand than supply, price goes up. This is a simple market reality often lost by the daily noise factories of financial media and academia. We can argue with price all we want, but it is the final arbiter of value. And for the past two years, it’s a fact that the U.S. Health Care sector, from a price standpoint, has gone absolutely nowhere. That is, until last week. Take a look:

Since July 2015, Health Care has gone nowhere. For 2 years, this important U.S. sector has been correcting through time. During this time frame, Health Care (represented by ETF XLV here), experienced a 16% drawdown. But when we look at it from a long-term perspective, the sideways price consolidation is most prevalent. And when we look at it compared to the overall market (using the S&P 500 as our proxy), we can see market participants had no business owning Health Care during the past 2 years:

Health Care represents approximately 14% of the S&P 500. When we look left, we see that from 2011 through mid-2015, Health Care was a major factor in leading the S&P 500 higher. Of the major market sectors during this time frame, Health Care was one of the best. That changed in 2015 as the Health Care selloff affected the broad market overall. Since mid-2015, Health Care has not been a sector worth owning. With the recent breakout of Health Care on an absolute basis, this relative underperformance could be changing and would be an important development in leading the overall market higher.

We can make money in Health Care (using XLV) with proper entry and risk management. Using the daily chart below, we can tactically identify risk, our number one priority as market participants.

The $73.50-74.50 level is an important one. In 2015, and again in 2016, sellers showed up at this level to drive price back down. The recent break above this level is important, as polarity is now in play. Meaning, once an area of former supply is broken, it should now serve as an area of support. Of course, nothing is guaranteed, which is why every market participant needs an exit plan prior to entry. When is this trade wrong? If price moves below 73.50-74.50, it no longer makes sense to own XLV. A sustained amount of time above this level will signify buyers are in control and an initial target of $90 is on the table. That’s a 16% gain and represents a reward:risk ratio of 5:1. We like that.

In the end, it’s quite simple. It makes sense to own XLV above 73.50-74.50 (depending on your risk tolerance). Below that, it can be someone else’s problem. As always, trade at your own risk. It’s our responsibility to stay on the right side of the trade regardless of our opinions.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to a time-saving tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

Currency

This Important Piece Of The Market Puzzle Will Impact…

May 22, 2017April 13, 2022

Back in February, we highlighted some important developments which could impact the months ahead. One of those developments was the consolidation of the U.S. Dollar. Back then, we wrote:

Here’s the U.S. Dollar back on February 27th:

The power of using price charts is we can identify where demand and supply dynamics change and use these levels to manage risk, the most important part of being a market participant. We identified the $99-100 level as important support. Here’s the updated chart:

While recording new highs in early January, the U.S. Dollar Index was also logging lower highs in 14-Period RSI (our favorite momentum indicator). New highs and lagging momentum can sometimes signal limited upside continuation. In this case, the divergence in momentum was an important tell for the demand of U.S. Dollars. This was confirmed when buyers could not keep the Greenback from breaking $99, a significant level over the past 2.5 years. You can see this important level better when we step back to a bigger picture timeframe. It’s always important to look at the bigger picture. Here’s the weekly chart of the U.S. Dollar Index dating back to 2010:

The importance of the $99-100 level can be clearly seen. Sellers showed up twice at that level in 2015 making the breakout at the end of 2016 notable. However, since the highs in January, selling pressure has returned. The increase in supply has created a false move. From false moves come fast moves in the opposite direction. The fast move in the opposite direction is taking place right now. We don’t need to predict. Price shows us there’s no need to be a buyer of U.S. Dollars right now.

In conclusion, the Almighty Dollar, an important piece of the market puzzle, needs to prove itself before we’d consider a long position. If the selling continues, we’d expect buyers to show up near the $92-93 handle, an area where they showed up in the past (see green annotated arrows in the chart above). Since many market pieces are priced in Dollars, this current move could have an impact across a variety of assets, including commodities and foreign equity markets.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

Breakout

This Is How South Korea Could Lead Emerging Markets…

May 15, 2017April 13, 2022

Before we get too far into today’s research, I want to acknowledge all those amazing Moms out there. We celebrated Mother’s Day yesterday here in the United States. It’s a special day where we recognize those special Moms who have impacted us and those around us. For me personally, I’ve been blessed to be around some amazing Moms, including my wife, my mom, my mother-in-law, my sister and sister-in-laws, and each of my grandmothers. These are some of the strongest and most compassionate people I know. For many, this is a time to reflect on Moms from today and yesterday. Some are no longer with us, but their impact is still felt. What would our world look like without Moms? I have no idea, but we’d all agree it wouldn’t be good. Who would care and nurture like they do? Who would unconditionally love the next generation? Who would bring empathy and thoughtfulness into our everyday lives? Moms are so important to our families and society. If you’re one of them, thank you! Here’s to the Moms. We appreciate everything you do.

*****

With that important acknowledgment concluded, let’s dig into today’s findings: South Korea. And right away, I know what you’re thinking. How could South Korean stocks possibly be a good place to invest? They’ve had major corporate and political corruption scandals, including the impeachment of ex-President Park Geun-hye this past March. On their northern border sits a nuclear saber rattling regime lead by enigmatic “supreme leader” Kim Jong-un. And South Korean stocks have gone nowhere for eight years. So how can anyone consider a position in South Korean equities? Well, as you know we’re fond of pointing out: price leads news, not the other way around. Case in point, remember our research in March 2016 regarding Brazil? No one wanted to touch Brazilian stocks and the negative financial “news” surrounding them was palpable. Since that article, Brazilian equities have rallied 65%. Price first. News second. Just recently, YahooFinance reported, “Brazil’s Economic Activity Hits Fastest Pace in 8 Years.” We need to keep in mind that financial news reports on the past. Price is from today. And markets are future discounting mechanisms. Brazilian markets saw the economic improvement before the financial media. Accordingly, we should use price, not news, to participate in markets. Even though the news surrounding South Korean equities is negative, we don’t need to listen. It’s noise. Price is all that matters.

Let’s take a look at what’s really happening in South Korean equities. Below, is a weekly chart of the South Korean Composite Index ($KOSPI) dating back to 1999. Quickly, we can see South Korean stocks have gone nowhere since the selloff in 2007. That’s 10 years of zero to negative returns!

More recently, since 2011, the $KOSPI has been in a narrow range between approximately 1700 and 2200. This battle between buyers and sellers has created a base six years long. If you’ve followed our work long enough, you know we’re fans of long bases as they can lead to high spaces. Here’s our Tweet from March as we’ve been watching this base for a long time.

No doubt about it, six years is a long base. This battle of supply and demand was worth keeping an eye on. Here’s a closer look. For six years, we had no business owning South Korean stocks as a group. But that’s changed as we can clearly see the recent breakout to new 10-year highs.

Does this long base and subsequent breakout guarantee higher prices? Absolutely not. Yet, we know if there’s enough demand to push prices past areas where sellers have shown up before, it likely means a change in the demand/supply dynamic. Buyers have control. And the advantage of identifying important levels of supply and demand is we can use those levels to manage risk. You can’t invest in the $KOSPI directly, but it’s 2017 and ETFs allow us access to markets our parents only dreamed of. By the way, if you haven’t done so already, we’ve created a free resource for you – the Ultimate ETF Cheat Sheet. You can click here to get it => Ultimate ETF Cheat Sheet. It’s a great reference tool for ETFs of all types, including an ETF for South Korea: EWY. Let’s use it to participate. Here’s the weekly chart of EWY:

The $62 level is the line in the sand. We can use that level to manage risk. Own EWY above $62. Don’t own it below $62. Pretty simple. As long as EWY sustains trading above $62, the upside target remains $82, which is calculated using the range between lows and highs. In this case, buyers showed up at the $42 level and sellers previously showed up at the $62 level. Add the difference ($20) to the high of the range ($62) and we have a target of $82, or +24% from current levels. With defined risk of 6%, we have a reward:risk profile of 4:1. Not too shabby.

As always, we’ll let price dictate our involvement. To us, this is pretty simple. Own EWY above $62. If it’s below $62, someone else can have it. After all, our job is not to marry our positions. Our job is to be on the right side of the trade.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

Equity

Use This Simple Technique To Make Better Trade Decisions

April 24, 2017April 13, 2022

One of the most important jobs of a market participant is risk management. If you’re unable to identify when your position is wrong, then you shouldn’t be entering a position to begin with. Would we ever enter a crowded room without identifying where the exits are? I don’t think so. We have the same responsibility when entering a new position. At 360 Investment Research, when we enter a new position, we identify risk (and potential reward) by looking left. By looking left on a price chart, we can identify previous changes in supply and demand, which can give clues on where demand or support could appear. In a previous post, we used this simple technique to identify important levels on the S&P 500, one of the most watched indices and favorite proxy for discussing the U.S. stock market overall. By looking left, we can identify when buying momentum wanes and when selling pressure has entered the market. For example, if over a certain time period, price is making a series of lower highs and lower lows, we know sellers have more urgency than buyers for that time period. There is more supply than demand and price is trying to discover where the buyers live. So by looking left, we are using economic law (not opinion) to guide our investment decisions, entries, and exits. Using price removes mystery (and emotion) from our trade book. Let’s go through this exercise with the S&P 500 on daily and weekly time frames to identify where we are with the current market.

First, here’s the daily chart of the S&P 500:

When we look left, we can see price made of series of higher highs and higher lows from November through March. On March 1st, this important index recorded a new all-time-high. A series of higher highs and higher lows is indicative of a bull market. Since then, however, the characteristics have changed. They S&P 500 has recorded a series of lower lows and lower highs. Until this sequence is broken, the S&P 500 is in a downtrend on a daily timeframe. There’s no sugar coating it. Facts are facts and we’re not entitled to our own facts. Until the S&P 500 records a higher high and higher low, it’s in a downtrend on a daily timeframe. A good start towards this effort would be a close above the downward momentum trendline (in solid green). In addition, a close above 2368 would lock in a higher high with only a lower low needed to confirm an uptrend sequence.

Now for the weekly timeframe:

When looking left at the weekly data, it’s clear the S&P 500 is currently in a series of higher highs and higher lows. Can the market be in a downtrend on the daily timeframe and an uptrend on the weekly timeframe? Absolutely. In fact, that’s exactly what we have here. By looking left on both the daily and weekly timeframes, we can gain a better understanding of market trends. It’s not the only thing we look at, but it’s a big piece of evidence. And the current assessment has the S&P 500 in a daily downtrend within the friendly confines of a weekly uptrend. In essence, we’re in a correction within a larger uptrend. Price is moving downward in search of buyers. This is normal market behavior. Trees don’t grow to the moon and markets don’t go up every single week without periods of correction.

Where could this market potentially find buyers? Simple. Look left. We can quickly identify buyers have shown up near the 2330 level. On both the daily and weekly timeframes, that’s an important level to watch. Below 2330 and the next level of support for the S&P 500 resides somewhere between 2235 and 2265 (note: 2235 is also the value of the 200-day simple moving average, a common area of institutional support). Further correction into this area would still fall within the framework of a normal pullback in an uptrending market. On the other side of the equation, if buyers can provide enough demand here to break the sequence of lower lows on the daily timeframe (pushing the S&P 500 to a daily close above 2369), this makes an attempt at the weekly high of 2383 more likely.

As part of our every-day process as market participants, we need to identify sequences of lows and highs. This exercise provides valuable information to help us remain on the right side of the trade.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

Bonds

Here’s Why You Should Be Long The Long Bond.…

April 17, 2017April 13, 2022

Disbelief is not an investment plan. I have yet to come across a successful investor or trader whose main investment philosophy is solely, “this won’t end well.” We can have all the strong opinions we want, but I’ll let you in on a little secret. Markets don’t care what we think. Markets are going to do what markets are going to do. We cannot bend them to our will. The faster we check our opinions (and pride) at the door and humble ourselves to the all-knowing market forces of supply and demand, the sooner we can begin to profit from objective facts and avoid losses generated by subjective opinions. Over the past few months, a very popular subjective opinion has reached a crescendo: higher rates/yields are all but certain going forward. As usual, this narrative became popular after the objective facts were already in motion. Beginning in July 2016, long bond yields (aka 20+ year U.S. Treasury yields) were rocketing upward as long duration bonds were selling off hard. Only after this move did the media begin touting lower bond prices and higher yields. Prices drive narratives, not the other way around. For example, with a solid bond sell-off already in motion, the financial media informed the investing public that higher yields were all but certain for the foreseeable future. Take a look at their helpful timing below. You can’t make this stuff up.

See how that works? Price first. “News” second. As soon as you realize how this sequential relationship works, the more you’ll be able to filter the “news” you consume. Is there a better way? Absolutely. Study objective facts instead. In other words, study price. It knows more than we do. In this case, the price of bonds knows more than we do. Conversely, yields know more than we do. As a refresher, yields work inversely to bonds. When bond prices rise, their corresponding yields drop.

What does supply and demand for 20+ year Treasuries look like right now? Here’s the weekly chart of TLT, an ETF that does a good job performing similarly to 20+ year Treasuries.

As you can see, after reaching all-time highs in July 2016, bonds began selling off in earnest. Because of the inverse relationship between bonds and their yields, this move caused yields to rise sharply. Only after this took place did financial news pundits begin pounding the table regarding higher yields and the consensus become rates would continue to move higher in 2017.

But after the rapid selloff in bonds, we’ve seen them stabilize sideways for several months. Meanwhile, consensus public opinion is loud: “higher rates during 2017 are a certainty!” This strong opinion has been matched with strong positioning. An especially high amount of investors are shorting long duration bonds. This means they are placing wagers that bond prices will continue to fall. With record short bond positions, this important credit instrument is sitting on upside jet fuel. What do we mean? Basically, if bonds rose enough in price it could trigger a short squeeze, a scenario in which shorts are forced to cover their losing position by buying bonds. This causes a feedback loop in which bond prices rise quickly while short-sellers continually scramble to cover their positions. Here’s the daily chart of TLT:

Three days ago, it broke above an area of supply, which acted as resistance four times before. This breakout is significant and is taking place when most are not expecting it. If this recent breakout requires short sellers to cover their positions, it’s going to throw jet fuel onto the demand fire. Above 122 on TLT, it makes sense to own long duration treasuries. Below that level, we’d be on the wrong side of the trade. The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Right now, chances are, if you asked your financial advisor, banker, friend, grandma, or typical TV pundit, they would all say they’re expecting higher rates going forward. Anecdotally, I have it on good authority during this year’s Market Technician Association’s Symposium in New York, they asked for a show of hands when asked: “do you think rates will be higher at the end of this year?” I was not there but the entire room raised their hand. This room is filled with incredibly smart people. And all of them raised their hand. All. Of. Them. Don’t take what I’m implying here as a slam on the consensus demonstrated or the intellect of those in the room. Rather, I’ll go out of my way to highlight the intellectual horsepower of any one of the individuals in attendance is multiple factors above of my two-cycle excuse for gray matter. These are extremely smart people and their collective opinion is higher yields are on their way. Are they right or are they wrong? I have no idea. It’s not about being right or wrong anyway. It’s about being on the right side of the trade. Price has the final say. Accordingly, we should be watching long duration treasuries with a simple game plan: own TLT above 122 (and watch the corresponding yield drop). Below that, it’s hands off while the rise in yields continues to fuel consensus.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.