Curious Minds Want to Know

There should be no question as to why people need to invest. The cost of everything you need continues to rise and your savings need to keep pace. In the chart of US Price and wage changes below, I wonder if the #2 biggest riser, college tuition, includes the cost of paying bribes, proctor assistance, photoshop training and crew lessons? If not, can you imagine how much further ahead of hospital services it will be in the next update?

Curious minds want to know.

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From the Ashes?

I haven’t written about the Millennial savior, bitcoin, in well, it seems like forever. Not because I don’t like it but rather its was in a horrendous long-term downtrend, losing more than 90% of its value in 15 short months. What’s there to talk about? But, of late its price has taken a much more constructive look as it has been trading sideways (instead of falling further) and looks as it may have found a short-term bottom while trying to clear out the remaining sellers. This, of course, is an ideal setup for a bullish trading opportunity. While it may turn out to be a long-term investment (not my belief), until it proves itself it must be viewed only as a trade.

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As you can see, price has been contained within the rectangular box, is now above a rising 50-day moving average while volume (bottom pane) has been shifting from large red candles (selling) to green (buyers). In spite of its potential short-term holding period, the first upside target is ~25% above the upper boundary of the rectangle. Two ways to trade this setup using this pink sheet bitcoin proxy, GBTC, is to buy the breakout of the rectangle, with a stop placed 3% below the breakout level after purchase. The second, which has a much higher upside target (>50%) but has less chance of getting filled, is to place a limit order down at the bottom of the rectangle. If the order gets filled, your stop would be placed 3% below the bottom of the rectangle.  In either case, the risk is well contained (likely less than 5% depending upon the price of GBTC gets filled at) and provides either a 25% or 50% potential pattern target reward. A minimum 5:1 or best 10:1 reward to risk is a setup any investor/trader would love to have as they don’t come along that often.

Your Turn

Those long-term followers know I use ratio charts as a part of my process, mostly to help determine where best to allocate investment capital. As with investment prices, trends persist when it comes to outperformance (ratios). The chart below I call “Risk On” is a ratio of the US SP500 stock index performance to US 30-year treasury bonds and its message helps define current risk levels. If the ratio is rising, risk is low and you have achieved (and will likely continue due to trend persistence) the best return by investing in US stocks only. If the ratio is falling, risk is elevated and bonds are out-performing.

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With a quick glance, what should be immediately noticeable is the ratio broke below its rising uptrend support line in November of last year. This occurred at the same time when RSI momentum (upper pane) diverged (both short term and longer term) with the ratio warning of an increase in risk and possible trend change. From that point the ratio was crushed with the strong year-end selloff in stocks.

With stocks rebounding strongly from their massively oversold condition the ratio has, as you would expect, mirrored its move higher. Uninspiringly, the ratio closed out yesterday still below its falling 200-day moving average and has yet to make its first higher low. Looking left we see that the ratio is about the same place it was 12 months ago telling us that stocks and bonds have had a comparative return. Now what?

Closing out this post right here intentionally not providing a summarization or point to the post, I am wondering how you would interpret the charts message? Pile in to stocks gunz a blazin’? Stay on the sidelines in the safety of bonds and let the dust settle? or something in between?  I’d love to hear your thoughts and opinions.

The Art of Knife Catching

Was talking to a great friend the other day and they asked if they should buy bitcoin. I said before you do let’s play a game. I will get on the roof, with you on the ground and I will throw some knives to you. Depending upon how many you catch will determine how much you buy. She laughed and got my point. I have nothing against bitcoin, in fact almost any vehicle is on the table as an investment but any purchase comes with a major condition, only buy if its price is rising. Let’s take a look at the bitcoin chart to see why I don’t believe now is the time to be acquiring this cryptocurrency.

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Long-term readers should easily recognize the ominous parabolic arc pattern. Parabolic Arc chart patterns are generated when steep rise in prices are caused by irrational buying and intense speculation. Parabolic Arcs are fairly rare but they are reliable that when they finally end, the result will be a steep and swift decline. The pattern typically terminates its uptrend and reverses direction upon a price break below the arc. If you are lucky enough to get in early, they are a way to immense riches … or devastation if you don’t have an investment plan (buy and hold)

As you can see after bitcoin broke the arc, it continued to fall, making lower highs and in the process forming a descending triangle pattern. These are typically continuation patterns, meaning there is a higher probability the break of the pattern will be in the direction of the prior trend (lower).  In this case, the break of the pattern that occurred 4 weeks ago points to a target in the area of $2900.  If that doesn’t hold, look out below as support doesn’t really show up until you get to $1000.

Because this is a logarithmic chart, it hides the magnitude of the decline. Put into perspective since peaking in December of last year, bitcoin has lost more than 80% of its value. Unfortunately for the millennials, they are the latest to be schooled by the markets and their early retirement dreams put on hold. It happens to everyone at some point which is being able to recognize irrational human behavior (parabolic arcs), confirmed by repeating patterns, helps to keep knowledgeable investors out of big trouble.

At some point BC will find a bottom and will be something worthy of your investment consideration. Until then, be happy you weren’t a part of the delusional crowd falling for the “hype” and “story” as they always precede parabolic arcs.