Nesting

When looking for investment opportunities, some of the most interesting setups can only be found when looking across multiple time frames and is why I find it a critical step. If something looks interesting short term but is in a long term downtrend, it is likely that opportunity will only be a winner if managed as a short term trade.  But when something develops in a short term view and is in alignment with the longer term, it not only increases the probability of success but also the expectation of large gains. These are borne out when a short term pattern is nested inside a much larger pattern.  A good example is what is occurring right now with Jazz Pharma, JAZZ.

The daily chart below shows price is ready to breakout above the neckline of this almost 10 month inverse head and shoulders pattern. Notice how price has held above the 200 day moving average, when its support was tested twice in April and May. When combined with the fact that RSI momentum is rising and is within the bullish zone, the weight of the evidence says a break above the blue horizontal neckline provides a compelling upside target in the 191 area above, some 19% higher.  This looks like a great set up.

When looking at the same investment on a weekly time frame something very interesting stands out as you can see below. Nesting. The inverse head and shoulders pattern that I showed above (blue) is actually the right shoulder of the same but much bigger inverse head and shoulders (green) pattern. Notice how the blue (daily time frame) target just so happens to be at the prior 2015 high. This is not unusual. That is where resistance exists. Those that purchased at or near that level in the past and are still holding will provide a huge amount of share supply which will likely either slow or stop a quick move above that level. They are currently underwater and as such, the normal desire to “break even” will induce many to sell, even though now seems like a time to accumulate.

The upside target for the larger (green) pattern has an even more attractive target near 225, doubling the smaller pattern’s return. When nesting occurs like it has here, it sets up the possibility not only for greater returns for the opportunity but also extending its holding period, a benefit for those wanting to be less active. 

Uncharted Territory

Almost every prior stock market crash was caused, or at least exacerbated, by market illiquidity.

As you can see in the chart below, the FED’s recent activity of unwinding their balance sheet by selling a small fraction of their QE accumulated holdings coincided with the most recent 12% stock market consolidation (not the sole reason for the correction mind you).  It is important stock investors understand the correlation between the FED removing liquidity and lower stock prices. When you combine this balance sheet activity with a simultaneous push higher in interest rates we are entering into uncharted territory knowing just how the market will react.  

Regardless, the current consolidation in the SP500 has a clearly defined upper and lower boundary, 2670 & 2530 respectively, making it a much easier task to manage whatever happens.  Above I add exposure, below I decrease.

May 2018 Charts on the Move

The sideways chop continues but for how long? No one knows for sure but i think it will be months before we escape. What about you?

My latest Charts on the Move video which talks about this and a lot more can be viewed here ...

https://youtu.be/ntXq6MnE9rY

The Trouble with Stocks

It should be no surprise to investors that stocks have been struggling since the short term parabolic rise completed back in late January. The subsequent 12% correction followed by extremely choppy, sideways action is not at all unexpected and is unfortunately far from being complete.  Besides this being “normal” action after a double digit decline and an “easy-peasy” 2017 market, investors should look no further for additional explanation than what is happening in the bond market.

As you can see in the above chart of the 10-year treasury yield, it finally tagged the psychologically important 3% handle yesterday (although it actually closed a whisker below), a full 50 months since its last visit. Round numbers, whether they happen in stock indexes, bond yields or other investments are important as they act as magnets for potential future moves. The fact we hit that level yesterday is not a surprise as the setup unfolded in late January (I blogged about this possibility here). Breaking out of it box and moving higher could be a real impediment for the advancement of stocks. Stock investors need to keep a close eye on the bond market right here because as rates rise, eventually yields become attractive enough that  stock owners throw in the towel shunning the wild volatility involved with owning stocks and instead opting for a more steady, fixed return that bonds have historically provided. As more and more investors switch out of stocks and into bonds, stock prices tend to fall as sellers eventually outnumber buyers.

Morals or Money

For the most part I try to be agnostic to a specific investment for my own portfolio but attempt to be a bit more discriminating for clients. Don’t get me wrong, I am not devoid of investment morals but rather my driving force is to make money. Doing so allows me to use that money to promote and support the companies I believe in. Clearly, no one wants to invest in a “bad” company but the problem is there is no one definition of what a “bad” company is. For me, names like Monsanto and Wells Fargo are a few that are on my list of companies to avoid as they have a history of consistent “bad” behavior. I have learned over the years, everyone’s list of what is “bad” is different. The reason I bring this up is because the topic of this post is about a company that, for me, is on the edge of being “bad”. They are either evil, poorly managed or very, very unlucky. I am not sure which.

Regardless of where Pacific Gas and Electric falls, their chart (PCG), caught my attention. Because of a series of missteps (read ineptitude), their stock has fallen almost 50% since peaking in September of last year. It bottomed in early February while forming positive RSI momentum divergence, the sign of a potential bottom. Since that time price has pushed higher and broken out from a textbook, symmetrical inverse head and shoulders reversal pattern. The pattern’s upside target points to T1, a very close proximity to the falling 200 day moving average and ~20% above the pattern’s neckline (breakout level). Notice in the bottom pane of volume, the breakout was confirmed with an increase of more than 70% higher than its average and also provided a pocket pivot buy signal yesterday. In addition, it gapped higher at the open right in to the unfilled open gap (that will likely be filled) created on December 21-22. When looking at the entirety of the signals, they seem to be screaming “buy me” or better yet, trade me. Any purchase should be considered for now as a short term trade, a reversion to the mean opportunity. What tells me that? Price sits below a falling 200 day moving average. Until it is pointing north and price is situated comfortably above it, this is only a trade. That, of course, could all come to work itself out over time but for now, it should be viewed as only a short-intermediate term opportunity

No one should take the intent of any of my posts as recommendations or promotions to buy or sell a security they are nothing more than ideas to make money. Not only do I not know your risk tolerance but just as importantly, your moral tolerance.