$BKX - Banks - Topping or popping?

The significance of the banking sector in the stock market cannot be understated for several reasons. First, the banking sector offers important clues regarding the overall health of the economy. Secondly, a strong banking sector is one of the cornerstones of a robust capital market. Finally, the financial services sector is a significant portion of the U.S. equity market due to its weighting within the S&P 500, 16%. Making it the second-largest within the S&P 500 behind technology. For these reasons I watch the movement of the banking index for stock market directional hints but most importantly as a health scorecard of the overall stock market.  If bank stocks are rising and strongly bullish, the broad market should follow.  The opposite, as you would expect, holds true too.

The chart below is that of the bank index. After making post 2009 highs in March, the index had a minor correction in May falling 9% down to 66.91.  Since then I have been watching closely to see if new highs were going to be made. If not, that would raise a cautionary flag because if we print a lower high, this COULD be the start of a downside reversal. Three other reasons for concern are 1) as of today price broke down out of the bear flag which I have highlighted in brown; 2) if early July’s high holds, we have potentially formed an inverse head and shoulders (IH&S) reversal pattern and 3) we have negative divergence on both oscillators which tells us upside momentum is waning.

In the natural ebb and flow of the stock market, prices rise and fall and after the May-July rally I would expect the banking index to come under some weakness whereby price could understandably fall back to the blue support rail.  If downside momentum persists and support does not hold, the next logical target would be ~61, (the target for the IH&S pattern). Interestingly, this level coincides exactly with the prior low printed last October.

Of course, all of these warning flags get negated if the bulls can pop prices higher, closing above 72.91 thereby making new highs. Either way it goes, I expect this summer-fall season will be more exciting than the past 2 years and may present us with some wonderful investment opportunities, including maybe even the banking sector.

Pall - Wont you be my friend?

Ever since palladium broke out of its multi-year triangle pattern at the start of March (see chart below) I was an interested buyer.

The naysayers and fundamentalists were presenting a plethora of reasons why it was not going to work out or only be fleeting, but price told us it was worth taking a shot. Interestingly enough for the first half of 2014, it is the best performing precious metal (if you consider it precious) and third best performing base metal (if you consider it base). It goes without saying its 20% return crushed that of stocks and bonds.

As with other commodities it is hard to invest outside of futures contracts. Palladium does have an ETF which tracks the price reasonably well (PALL) but is pretty thinly traded so be careful. Looking ahead, I see further upside as the moving averages are all bullishly configured and we are in a strong uptrend as price is making higher highs and higher lows.  While all looks very good at this juncture we have the possibility of a double top being formed so vigilance is required.

For those that missed the boat, I would not chase it here. For those who caught it, congratulations and watch the lower blue trend line and open gap for areas for support or change in direction inflection point as a place to take profits.

TAN - Pass the Sunscreen, please

As a part of the momentum stock selloff that occurred in May, solar stocks were severely punished, most losing 30% or more. The long term prospect for alternative energy, especially solar I believe is quite compelling.  Being the tightwad I am, when I see an overreaction pushing prices unnecessarily low in an investment that has excellent long term fundamentals, I start to salivate as I smell an opportunity to make money.

TAN, the solar stock  ETF, lost in excess of 30% during the March selloff, while the broader market index, the SP500, was able to eek out a tiny gain.  That is quite a divergence. Solar stocks, like many other names had gone too far too fast, became overbought, overstretched and warranted a correction. The market faithfully provided just what was needed.

You can see in the TAN chart below the March to May 30% decline. It subsequently broke out above the blue, dotted down trend line and marched nicely higher, up more than 25% from the bottom. Right now you can see we are sitting just under a (solid gold) resistance line where price stalled and fell back. The bulls didn't have enough in the tank to get it above  resistance. Those who are long have to wonder if this it or does it have more legs for another push higher?

As a long-term investor, success comes from investing with positions that are trending higher and avoiding those that are not.  Once that trend changes, it’s time to find another sandbox to play in. We can see that from the bottom, at 36.93, we have made higher highs and higher lows which is the definition of an uptrend. That combined with a MACD that is above zero, above its signal line and an RSI trending upwards and above its moving average provides strong technical reasoning to be long this stock. As long as the stock market continues to want to push higher, the first upside target is 10-12% higher with the potential for much more.

Please don’t take this as a recommendation to buy TAN. Momentum stocks are not for the uninitiated and should be respected for their volatility . If we do eventually see a market correction this summer/fall it is very likely this and momentum stocks in general will be in for a repeat pummeling, potentially even greater than what was seen in March. If that were to occur, that would be better time for us "value" (read tightwad) investors to leave the sunscreen at home and go get a TAN .

Invest safe!

SP500 - The Mona Lisa

This is the final in a series of 3 posts I have done on pattern targets and I have saved the best for last. The chart below is a 10 year look back at the SP500 (the proxy most use for the US stock market). From a target and pattern standpoint, it is a thing of beauty and one to behold since the 2009 bottom.

As it rose from the depths of its decline, making higher highs and higher lows, a series of 4 inverse head and shoulders patterns developed (labeled in red 1-4 within the price movement) along the way. From those patterns, targets were developed which I have identified and labeled by red, dotted horizontal lines. These patterns not only acted as a potential roadmap to the future confirming along the way which direction we were headed but also where we might stop along the way. These stopping points create significant support/resistance levels for future any declines.

As you are aware, the final target, #4 of 2132 has yet to be met. Since targets are only objectives if the market to continues higher but we got confirmation from another indicator in April (see RSI top pane) that at least one more high will be made. While 2132 is a ways away and may never be hit, one thing I am confident of and have said before is the market likes big, round numbers. SP500 = 2000 is a big, round number and we are only ~2% away. With quarter-end right around the corner and wall street bonuses paid on quarterly gains, I do expect to see a bullish close to this month and would not be surprised to see we close it out at or above 2000.

Whether or not we meet or exceed the final target #4 will only be known at some point in the future. Since it has been an extended period since we have had even a normal 10% pullback, the odds suggest we have one before the final target is hit or exceeded. My point being it most likely will not be a straight line there so patience is warranted.

To close out this discussion on pattern targets on an educational note, its compelling to note that prior targets act as magnets on any future pullbacks.  So, if/when we do finally get our long, overdue correction I would expect price to be drawn to 1820 (an immediate level of support/resistance) and if that doesn’t hold, target #3, 1775.

Oil - Double Bottom ... again

Last week I presented the concept of forecasting future price targets based upon patterns which develop within price movement.  To illustrate, I used a long term chart of the Nasdaq which had created a pattern in 2011 that projected a future price that came within 2% of the forecast.  While the accuracy was most excellent what I find very compelling is the chart identified this price 3 years before it happened.

This week I want to show not only a different pattern but also that price projections work across all investment types (since many don’t just invest in stocks and bonds).  The chart below is a 3 year look at the daily price of crude oil. You can see in the highlighted area on the left hand side of the chart a double, divergent bottom formed in 2011. I have included the pattern’s projected price target in a callout box, which forecasted a high of 103.82. Price topped out 5 months later in March at 109.45, exceeding the target by 5%.  While that is pretty good, it fell short of last week’s 2% miss on the Nasdaq

If you let your eyes drift to the right side of the chart you can see another highlighted area where the exact same divergent, double bottom has formed. This one started at the end of last year and has yet to complete.  The upside target of this pattern is just under $109/bbl. Experience tells me that I should expect this target to fall short of the actual high we eventually see. Why? Because oil is a highly geopolitical “tool”, sensitive to Middle East disorder. In addition, it is a relatively thinly traded market making it subject to price swings. So, while I stated above that patterns work across all investment types, I find price projection accuracy can be quite variable when using vehicles outside of those which are highly liquid such as stocks and bonds. This does not mean they should be ignored. Au contraire, like any technical analysis it should be used in conjunction with other tools to create the most profitable investment plan. 

In the meantime, keep oil on your radar and let’s circle back around and see how this pattern actually plays out. If I were a betting man, based upon the latest geopolitical cross-currents, I would put my money on a big miss to the upside as I expect price will exceed the target and maybe even by double digits.  Remember, news ALWAYS trumps the charts.