Supply and Demand

Category: Supply and Demand

Tesla (TSLA) Running Out Of Battery

February 4, 2016April 13, 2022

When considering a clever title for this article, it didn’t seem prudent to use my favorite choice: “Elon Musk Needs That New Car Smell”. So alas, you get a clever title and reference to a snarky title that didn’t get used. See what was done there? We used a funny title while saying we didn’t use it, when in fact, we did. And secretly, you kinda like it.

One of the more anticipated earnings releases is less than a week away for one of investors’ most favorite transformative car makers, Tesla (TSLA), run by multi-faceted business magnate, Elon Musk. While appreciating Elon’s business intellect and execution prowess, we see potential trouble for Tesla’s stock price.

Let’s jump right into it with a look at TSLA’s weekly chart. By visualizing and studying price, we can identify areas where logical changes in supply and demand should occur. And when logical areas of demand fail, we sit up and take notice. Here’s the chart:

02-04-2016 TSLA Weekly

It is quickly apparent that during the past two years, buyers stepped in and bought TSLA in the 180-190 price range. Similarly, when demand drove price up to the 270-280 price level, sellers quickly unloaded the stock, driving price back down. Two days ago, TSLA reached the 180 level again and something changed: Not enough buyers! Where’s the demand? Accordingly, price quickly fell through 180 and on to a new two year low for the car maker. This is known as a breakdown and makes further price declines much more likely. Frankly, there is no reason for us to own this stock below 180.

Zooming in, let’s take a look at TSLA on a daily chart and understand the power of breakouts, breakdowns, and false moves.

02-04-2016 TSLA Daily

When breakouts (through supply) or breakdowns (through demand) take place, further price moves in the prevailing direction are likely. In this case, TSLA is most likely headed to lower prices – targeting 120 and 100. However, there are times when breakouts and breakdowns fail. These are called false moves. And from false moves come fast moves in the opposite direction. Case in point, twice price broke through supply near 270, only to fail and quickly move in the opposite direction (down). Though not likely, TSLA can do the same here. A move back up through 180 would indicate a false breakdown occurred and price would move quickly upward. Accordingly, we like TSLA above 180. Below that level and we’re not interested.

Until next time, trade safe.

You can follow me on Twitter here: @360Research

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

Equity

October 11, 2015April 13, 2022

Back on September 28th, we took a look at the S&P 500 (SPY) and shared the following with our readers:

We anticipate buyers should step in right here and provide a relief rally. If that takes place, any ownership should be sold until new highs are made.

9 trading days and +7% later, here we are with another update. And again, we are at an important juncture. After anticipating this rip-your-face-off rally, we’ve reached a level of resistance that is worth watching. As you might remember, price is simply the interaction of supply and demand. More demand than supply, price goes up. More supply than demand, price goes down. This is economic law. Price moves to equilibrium — where there is a balance between supply and demand — until one outbalances the other and a new equilibrium must be discovered. In liquid markets, such as the S&P 500, this is an ongoing and fluid process.

As we study price (aka technical analysis), we can identify those areas where supply (selling) and demand (buying) are greatest just by watching price itself. As of Friday’s closing price, the S&P 500 (using ETF SPY as our proxy), has hit an area of resistance we find significant. In the past, the 201-203 area was an area of support, where buyers would step in and send price upward. This characteristic changed on August 21st, when SPY dropped through this important level without buyers stepping in. Using the chart from September 28, let’s zoom in a bit so you can see what we’re referring to:

We see price is currently up against an area of resistance. Looking left , we find this area of resistance was previously an area of support, where buyers stepped in to create demand. But on August 21st, this changed. On that date, there were not enough buyers to keep price from descending through this level. Accordingly, this area of support became an area of resistance, which was confirmed on September 17th, when increasing prices were met with significant supply (selling) at the 202 level, sending price downward in search of new demand.

Because of the aforementioned, we will be watching price closely. Those long SPY want to see buyers increase and drive price through this level and on to new highs. Those short want to see resistance hold and price turn downward again. We anticipate that sellers will step in at this level. However, we’ll let price determine our next step.

Trade safe.

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

Want to Make Great Investment Decisions? Just Look Left.…

December 2, 2014April 13, 2022

Using a weight-of-evidence approach is valuable for making quality decisions on desired or current investment positions. As technicians, we have a wide variety of tools at our disposal to anticipate potential rough spots, corrections, or buying opportunities. But that is all they are – tools of warning or anticipation. They give us an edge in identifying when and where to take on risk with limited downside. Finding asymmetric risk/reward opportunities is the epitome of what we do at 360 Investment Research. We don’t care about being right. We only care about being on the right side of the trade.

Over the past 5 posts, we’ve identified some warning signs for the overall U.S. equity markets. All of the posts carry weight as we analyze our long exposure to U.S. stocks. But none is more important than what we write about today – price. Price is the most important evidence. It carries the most weight. We can have all the common and proprietary indicators in the world and they mean nothing without the confirmation of price. Below is a diagram so you can visualize what we’re saying.

As you can see, we like to look for evidence to support our investment decisions. The best piece of evidence is price. What is it doing? What’s its direction? If price is making higher highs and higher lows, the trend is up. If price is making lower highs and lower lows, the trend is down. By analyzing price itself, we can determine the general trend and the potential change thereof. Using the diagram above, which shows the current status of the market, we can see that price moving to the right side of the scale would cause it to tip dramatically to the right into a new and potentially strong downtrend. In the same light, if the evidence on the right shifted to the left side of the scale, the swiftness of the uptrend would increase. So at this point in time, we are watching price like a hawk. How do we do this in reality? Simple. Just look left. When we analyze price using charts, we find the current price and look left. See the daily price chart of the S&P 500 below. Notice that price has been steadily making higher highs and higher lows. It is a beautiful staircase upwards, hallmarking an uptrending market. The exceptions are back in early February (SPX made a lower low and tested the trendline from the 2007 top) and back in mid-October (SPX made a lower low and tested previous highs/lows near 1825). Each time, the market recovered by subsequently making new higher highs without recording a lower high. When we consider this most important piece of evidence, the scale is easily tipped towards an uptrending market. All the other evidence only provides perspective in the event price changes and makes lower lows and lower highs. All the other evidence indicates caution is warranted. But, that doesn’t mean we need to short or be out of the market. Right now, price is telling us to remain long this market. As for the future, we’ll let price dictate what we should do next.

Look for our series finale on game planning and risk management soon.

Equity

The Curious Case of Elevated Volatility [Weight of Evidence,…

November 13, 2014April 13, 2022

“Fear tends to manifest itself much quicker than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline.” ~ Philip Roth

The CBOE Volatility Index is often referred to as the FEAR Index. This forward looking index is calculated from option activity, and reflects the market’s expectation of 30-day volatility. We like to look for divergences between the VIX and the US Market. We look for odd behavior. Normally, as would be expected, when fear/volatility increase, stocks decrease in price – and vice versa. However, sometimes a change in market sentiment from greed to fear (and the opposite also applies) can tip its hand. When we see fear/volatility increase along with market prices, we take notice. This is odd behavior and could be a warning sign that market participants (big money managers) are changing their mood.

Below are two charts: one from 2007 and one from today (2014). Both show that while the US Market (in this case, the S&P 500) is making higher highs, the VIX is making higher lows. They are moving together. Odd behavior. In 2007, this was a clue that a change in trend was approaching. And as you can see, the same is taking place now. Does it mean that this is the top of the market for the foreseeable future? No. But, it means we’re going to keep close eye on the price action from here until this odd behavior resolves itself. Those who are looking for the bull market to continue want to see lower lows in the VIX and the market to hold onto these highs.

Stay curious, investor. Check back again tomorrow as we’ll have more to add. And if you find this information useful, make sure to share the wealth using the share buttons at the bottom of this article.

Equity

Levels Recaptured. Now What?

October 28, 2014April 13, 2022

Back on October 17th, we found reasons for an immediate bottom (which turned out to be an accurate assessment). And on October 19th, we identified some levels in common indexes that would allow us to hold long positions. Those levels have been recaptured. Now what? Our head is on a swivel, identifying if/then scenarios in an incremental risk environment. There is still overhead resistance at downward trend lines off the highs from September. We’d like to see new highs made, and kept. Anything below the levels identified on the 19th, and we are out of our long positions. Yes, tomorrow is FOMC day. Don’t trade what you think the market should do. FOMC days are notoriously counter intuitive (what ever the market does tomorrow, be ready for the opposite to take place in the following days). Trade what you see. Price holds the final say.

Must stay above 1905 and make new highs.

Must stay above 16600 and make new highs.

Must stay above 1100 and make new highs. Right at downward resistance and Fib 62.8% — Must stay above 1100 and make new highs. Daily close at downward resistance and Fib 61.8%.

Dow Jones Industrials

Attention Slow Money (IRAs / 401ks) – Risk Ahead!

October 19, 2014April 13, 2022

Investing is all about risk management. Preventing loss is just as important as realizing gain. There are periods in the market where Return of Capital is the more appropriate approach than Return on Capital. Now is one of those times. Those retirement vehicles (401ks, IRAs, etc.) that have exposure to the US equity markets would be prudent to reduce that exposure at this time. You are an adult. You make your own decisions. You do not make investment decisions based on what you read here. You know the drill.

The last couple weeks have done some structural damage to the market. We identified the need to watch the S&P 500 closely back on October 8th. Those levels broke down and were a sign to look for lower prices. We got lower prices and even broke significant support at 1900 on the S&P (by the way, breaking significant support levels are a hallmark of a directionally shifting market – in this instance, from an up trending market to a down trending market). What did this breakdown mean? Something has changed. Specifically, the likelihood of lower prices ahead has increased. That means risk has increased. We don’t like to lose money if we don’t have to… So when the market tells us something has changed, we listen. You should too.

After a good deal of studying many markets and charts, I’ve identified some levels on three US major markets (Dow, S&P 500, and Russell 2000) that would need to be recaptured in order for any equity exposure to be increased or reestablished. Right now, the risk of loss is too high to consider hanging around to see what happens. If these levels are not recaptured soon, then lower prices are likely. If these levels are not recaptured, the best case scenario is sideways price action for a few weeks. One thing is for sure, the next few weeks have a high likelihood of volatility (large price swings), which is also a hallmark of trend change.

In summary, the current potential for reward it too low compared to the current exposure to downside risk. The body of evidence (including Intermarket behavior, cycles, internal breadth, seasonality) point to a dangerous week ahead. We even noticed that today marks the 27th anniversary of the 1987 stock market crash. Does that mean it will again this week? Absolutely not. But volatility and risk are upon us. Buyers beware. Risk ahead!

Here are our levels as annotated on the charts. Hopefully, we can recapture these levels and evaluate the next move. Be careful, curious investor.

10-19-2014 Important level on SPX — Need to recapture 1905

Breakout

Nike Revisited: Did you JUST DO IT?

September 28, 2014April 13, 2022

That was quick. Last week, our technical analysis pointed to a good probability of higher prices in NKE after identifying an ascending triangle on a weekly time frame. Maybe you got stopped out at 79.50. Or, maybe you enjoyed the 10% gain! One of the first questions I got from individuals who saw this analysis and subsequent gain was… Why? What happened? My answer: does it matter? Does the 10% gain not count if we don’t know exactly why. You see, every ounce of our body is programmed to ask this question. It could be curiosity. It could be our rebellious nature. We want to know why. In investing, this desire to know why is looming in the deep recesses of our analytical minds. But guess what? We cannot know everything. Do you want to know why NKE went to $89? Because that is what it’s worth. Price is the final arbiter of value. Why is NKE worth $89? Because enough money believes such that it created demand that outstripped supply to the tune of $89/share. That’s really what happened. Sure, fundamentalists will point to earnings. Ok, that’s fine. But how many times have you seen great earnings and see the price drop? That’s right. It happens a lot. Could it be that price forecast the earnings would be that good? Absolutely. We can think what we think, but we must trade what we see. What did we see? That the likelihood of higher prices in NKE were pretty good. Now what? Move your stops up to $84.50 (which is equal to 50% of this original move).

If you benefited from this information, you’re welcome. Share the wealth. Share 360 Investment Research with your friends. Trade safe, curious investor.

Equity

Keep Calm and Carry On?

July 9, 2014April 13, 2022

Of late, the FTSE (London Times Stock Exchange) has been struggling to make new highs. When looking to the left on the daily chart, we see that lower highs and lower lows (even though minimal) are beginning to accumulate. In addition, this level appears to bring out plenty of supply (sellers). The overall trend is up, but tightening within an ascending triangle. This price action makes us sit up and take notice. A substantial move could be in the works within the next three months. The FTSE has struggled since early 2013 to clear the 2008 highs. We’d like to see this index break upward (or at minimum, hold this level) to confirm all other current global equity bull markets. If FTSE breaks down, it will cause us to watch all other global equity markets (most notably, the US) with more scrutiny. Keep calm, curious investor.

Bonds

Bonds (TLT) must hold the line

July 3, 2014April 13, 2022

One of my favorite trades of the year has been bonds. Up 10% YTD, our bond proxy, TLT (an ETF), is now at an important inflection point. Recently, it made a lower low and a lower high. Today, it bounced off an upward trendline that runs parallel to the dominant trendline for the past 6 months. It must stay above this trendline and continue daily closes above the line in the sand (dashed line at 110.67), in order to remain long. If it complies, and can clear the last two recent highs, I would consider adding to this position (let’s worry about that later). If it does not hold here, we’ll take our 10% and find something else that likes to increase our portfolio.

Have a safe 4th of July. Remember our independence!