The Bullish Case

Strongly trending markets don’t care about P/E ratios, inverted yield curves, the Presidents latest tweet or most everything else for that matter. Which is why it pays to watch price movement only and put everything else on "ignore". The semiconductor index, SMH, has always been my canary in the coal mine. It tends to lead stocks both up and down which is why it is a critical reticle into the US stock market and investors willingness towards risk. If its price is in an uptrend, risk is on and investors should be long stocks, very long. Of course, the opposite is also true. With that in mind let’s take a look at a price of SMH and see what it may be telling us.

san ramon cfp NAPFA invstment advisor smh 4-17-19.png

After falling, like the rest of the market to its Dec 24th lows, price rallied impulsively higher, with only a few small, minor pullbacks before testing the prior high (resistance/overhead supply) made in June of last year (red horizontal line). After pulling back 4 days, price resumed its move higher eventually gapping above that prior level of resistance on high volume (~40% greater than average daily volume). The gap was the first sign and when confirmed with high volume let us know institutions (almost $1B traded on that breakout day) were buying. I don’t need to repeat it but higher probability profitable investments come in the direction of the current trend and when institutions are accumulating. Both of which the current chart of SMH is signaling. For those already in this ETF, the good news is you now have a very clear, simple and well-defined exit plan. If price in the short term cannot hold above the recent breakout, that would be an ominously bearish signal warning it’s time to take profits and watch from the sidelines.

Sure, the market is richly valued, sure it is overbought on virtually every level but the semis are telling us buyers are in control. Don’t fight the trend.

My Favorite

Back about a month ago I wrote this blog post about the developing setup in bitcoin. At the time it had changed character from a steep downtrend to a long extended, rectangular base. This type of price movement reflects the waning of selling pressure and an equilibrium between buyers and sellers. All that is needed for this to be a tradeable investment opportunity is for buyers to begin to step in and take control. Control is borne out by higher prices and confirmed with volume during the break out to the upside out of the rectangle. That is exactly what eventually happened in bitcoin as you can see in the chart below

bay area financial advisor and napfa fee only cfp - gbtc 2 4-9-19'.png

Rectangles are my favorite pattern because they are, in my experience, the most reliable and profitable patterns to invest from. Because they are so well defined, it makes the management easy and their upside targets very clear. In the case of bitcoin, its upside target was met and exceeded yesterday … a very nice 35% in 5 short days. Congrats to those that followed along and it is time to seriously consider locking in profits for some or all of your position if you have not already done so.

Q1 2019 Charts on the Move Video

Impressive moves from Christmas eve lows have the worlds stock markets very extended.. Typcially, prior highs act as formidable resistance, will they again? Or, will this be the mother of all rallies that ignore those levels and slice right through? Something to ponder as you listen to my most recent charts on the move video.

Sideways, Up or Down?

When the US stock market is in consolidation and the trend is in question, I like to pay particularly close attention to the message small cap stocks, IWM, are sending. The main reason is because small caps tend to lead the overall market and can provide an early warning both in/out of consolidation and at beginning a new trend. As you can see in the chart of IWM below (bottom pane of ratio of sp500 index to small cap stock index), the small cap index started to decline first at September’s stock market peak and rallied greater than the broad market from December’s low.

san ramon napfa investment advisor fee only cfp IWM - 3-27-19.png

The market loves symmetry and as you can see in the middle pane of IWM price movement, the rally from December’s low, the index stopped rising at the same point it failed in the past (look left). At that point, small caps have not only lagged the overall market but started to consolidate (red shaded area) in an attempt to digest December 24 oversold rally’s gains. Notice also, how the falling 200-day moving average acted as resistance as the index failed in its two most recent attempts to move above it. This is normal behavior of stocks in a downtrend. Because of symmetry, I would expect the index to chop around in the consolidation zone for at least a week or more before we know which way we are ultimately headed.

Bulls want to see the consolidation zone hold and the small cap index rally back above the blue horizontal, preferably on larger volume. This would allow the 200 day-moving average to catch up and turn higher. A break higher the first upper target is back at last August’s highs. Beyond that, a much higher target, based upon the inverse head and shoulders pattern, is some 40 points above where we closed yesterday. Bears want just the opposite … a flush down to the bottom of consolidation, followed by a rug pull on greater volume. That downside target would be a retest of last December’s low.

Either way and whichever way it resolves, the overall US stock market will likely soon follow suit.

Pocket Pivots

Pocket Pivots

The pocket pivot concept is, in essence, a favorable early-entry buy point in a stock. Buying pocket pivots are advantageous because the signal attempts to get investors into stock early and often times before it has broken out of consolidation. Stocks alternate between trending and consolidation and an area of consolidation provides an investor an excellent time to enter a stock early in preparation for the next move higher. It also allows investors to add to existing positions in a winning stock, if they so choose, as trending stocks often have multiple pocket pivot points as they move higher.

The basic premise of the Pocket Pivot:

  • Institutional buying creates new-high base breakouts, but we also know that institutional buying occurs within consolidations and during uptrends. 

  • This buying within consolidations and uptrends in most cases leaves price/volume "footprints".  These footprints are big volume spikes, typically 50% or higher than the normal average daily volume.

  • The pocket pivot describes that "footprint," and provides a clear, buyable "pivot point," or "pocket pivot buy point."

  • Pocket pivots also provide a tool for buying leading stocks as they progress higher within uptrends, extended from a prior base or price consolidation.

Prices of stocks cannot trend (higher or lower) unless there is institutional activity. The average investor does not have a pile of capital large enough to move the markets, only institutions do. As such, it can be profitable mirroring their movement, which is visible via big volume. No different than tracking elephants. Just look for the big footprints and big piles of ….

Pocket pivots can occur at any time but not all are a buy signal. To increase the probabilities of a profitable outcome, I have found that buying only during (or a breakout of) consolidations provide the highest winning probability.

A good example of pocket pivots can be seen in the AMD chart below. Those that I have annotated were the only ones that met my criteria. Notice that today, AMD registered a pocket pivot buy signal yesterday (note the big volume and break out of the area of consolidation), moving higher by more than 11% on the day.  152M shares traded vs the 10day average of 49M which is a confirmation of accumulation by institutional investors. The good news for is that our core+ accounts purchased AMD earlier in the year during the first pivot breakout. Its been a frustrating few months during this sideways consolidation but our patience has been rewarded. Upside targets are above at T1, T2.

san ramon fee only napfa certified financial planner cfp advisor - AMD 3-19-19.png

As always when it comes to investing in anything, YMMV.