I can see clearly now

When you mention the word acuity most people think of the definition of “sharpness of vision” or “the visual ability to resolve fine detail”. To me, on the other hand, I think of the lighting and controller company, AYI.  The company’s stock has performed impressively, tremendously outperforming the index by more than 40% over the last 15 months (most of that occurring in the first 6 months).

As you can see in the chart below, the stock topped out around $145/share in March of last year and has been consolidating since then. What developed during this consolidation period was a very nice, cup and handle pattern that had the $145 share price as the top of the cup, acting as strong resistance.  You can see that each time it attempted to move higher, the bears rejected it handily pushing prices lower. But what happened last week is a textbook bullish move that should make investors salivate.  Price gapped up above the $145 price on big volume, flipping the prior resistance now to support.  In addition, the RSI momentum indicator is firmly in the bullish range, the MACD histogram is positive and all 3 moving averages are bullishly stacked.

With the continued weakness of the general stock market, this stock is (and probably continue) treading water waiting to move higher when the overall selling pressure subsides.   An ideal entry point would be a back test and hold above the $145 level. The beauty of this entry is the risk/reward ratio is very compelling considering a stop loss would be placed just under the $145 level letting you know the bulls have relented and given controls back to the bears. 

Anyone watching the action in the Middle Kingdom stocks lately?

While we weren’t watching, the Chinese stock market ETF, FXI, has been quietly rising alongside and mirroring the rise in US equities.  This past week it broke above an important resistance line that goes back more than 3 ½ years.  You are probably wondering what makes this so interesting because as you can see in the very bottom pane of the chart the SP500/FXI ratio, Chinese stocks have not outperformed the US market but instead has just kept pace and been moving in lockstep. What makes this move in China so significant is it has been done with the backdrop of one of the most impressive rallies in the dollar we have seen since 2008.  Virtually all other foreign equities and non-dollar denominated assets have struggled mightily during this same period yet China stocks have been rising. 

From a chart standpoint and in addition to the breakout, price is well above the 30-week moving average, the MACD histogram is both rising and above the zero line and the RSI is above its mid-line and has been nicely respecting the range of movement one would expect during a strong bull move.  In spite of all the bullish arguments I just can’t get on the bandwagon right here. I realize I may regret this decision but the negative divergence (lower highs on the RSI while price has created higher highs in an overbought condition) is screaming at me.  You can see what happened the negative divergence raised its ugly head in Dec 2012-Feb 2013, the ETF fell ~20%. I have come to learn that unless the weight of the evidence is compellingly positive, it is best to move on to the next opportunity.  You may end up missing out on a few good ones but investments are like public transit, if you miss your bus, just be patient as the next one will be by in 20 minutes or so.

The Bulls are in control

As you can see in the 1-year chart below small cap stocks (IWM) have been ping-ponging between support and resistance (consolidating) while the broader market has gone on to make new all-time highs. This divergence had technicians on alert and concerned because we know that small caps typically lead the rest of the market into both new bull and bear markets.  If the small caps could not follow with the rest of the market it was possible, if they broke down out of consolidation, they would be signaling the end of the current bull and start of a new bear. This is exactly why we track the small cap index with great interest hoping it would provide some hint as to what may be ahead.

Less than two weeks before we ring the final bell for 2014 it appears as if we have gotten our signal as small cap stocks have come roaring back, breaking out of consolidation and on to new all-time highs as you can see in the long-term chart below. With the momentum oscillators unwound but still bullishly configured it is looking eerily similar to the early part of 2013 when small caps excelled. Not only are price and momentum aligned but they have broken their downtrend and started to outperform the broader index (as we would hope to see) as can be seen in the second to bottom relative strength pane.

Of course false breakouts are always a possibility but if this turns out to be the real deal, we may be in for the start of a new equity upleg with the small caps leading the charge into the first half of 2015.  Now this is what I call a New Year’s rockin’ Eve.

The FED plays Santa to the markets

In last week’s post I mentioned the market was close to a short term bottom and our VIX buy indicator was close to triggering. It was clear that the market heard exactly what it wanted to from the FED on Wednesday and we were off to the races.. Not only does it look like the FED provided the impetus to kick off the year end (Santa) rally we have been waiting for but it looks strong enough that it will likely push it on to new all-time highs. Since a rising tide lifts all boats I am seeing a plenty of excellent setups and I thought I would post a couple of opportunities that came up on my radar.

The first is FireEye (FEYE) the internet security company. It went public in September of last year and jumped more than 300% from its IPO price and peaked at $95 in March. The 2 months following the peak were disastrous for shareholders as price plummeted 70% bottoming in May to gust above its IPO price. Since then it has been consolidating with each attempt to move higher being rejected, as you can see in the chart below constrained by the blue down-trending resistance line.  This week it broke above that line on strong volume and a turn up in momentum on both the RSI and MACD.  You should also notice it is approaching a very important (gray) horizontal resistance just above. If it is able to push through and it looks like it will, the upside target is 43-45 which would present a very nice 30% gain from here.

The second idea is Organovo (ONVO).  This company has a really interesting business (3d printing of human tissue) and if you haven’t heard of them I would encourage you to dig a little deeper as they present the very interesting and potentially compelling long-term opportunity based upon their technology.  Technically the chart for ONVO is similar to FEYE in that it peaked, has been in a long-term downtrend consolidation and broke out (from both down-trending and horizontal resistance) this past week.  While momentum is bullishly configured we have yet to see a volume spike I like as it provides confirmation that the rest of the market is in agreement with you. What I am expecting is a small push higher and then a back-test to the breakout level. If that occurs and holds that would provide what I believe would be an excellent entry.  ONVO, like FEYE has big upside potential with the first stop being just above 9.

Is it Time to Buy the Dip?

It was a tough week for investors as fears from the ongoing oil price meltdown have pushed beyond just the energy sector and into broader market. Corrections are a normal part of every bull market and should be looked as opportunities to deploy un-invested capital. Of course the $64,000 question for investors looking to do so is when will the bottom of this correction be in?  

During this multi-year bull market I have found something that works very well. In the bottom pane of the chart below is a plot of VIX (blue lines) with Bollinger bands (gold) overlaid on top. The upper pane is a plot of the SP500 stock market index.  For those not familiar the VIX is commonly referred to as the “fear index” by the financial news talking heads. But that is a misnomer as there are times based on the price of this index that it construes fear, but other times it reflects complacency.  Without spending more time on the VIX as I will leave that to the reader, in very simple and general terms, it tends to rise when the market falls and falls when the market rises.  You can see that in the chart below.  Peaks in the VIX tend to mark bottoms in the market and vice versa. What you can also see is that every time that 1) the VIX closes above 17 and 2) outside the Bollinger band and then back in, it has been excellent at identifying those times to “buy-the-dip”.

Looking ahead to next week – Since the VIX is still outside the Bollinger bands and has NOT moved back inside, we have yet to see the bottom and as such “dip” buyers should continue to be patient and wait for confirmation.