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.

Watching for bottoms

One of the most desirable investments from a risk reward standpoint are those stocks which have fallen precipitously and then finds a bottom.  The attractiveness is obvious because the downside is small and the upside can be huge (depending upon how far it has fallen).  An example of why I like these setups can be seen in ULTA below.  The company announced some bad news in late 2013 and the market took the stock out to the woodshed pushing price down 38% from its high.  Following the low, the stock consolidated for about 8 months before it once again found its mojo and gapped higher. From that breakout it has come all the way back and made new highs gaining more than 60% in four months.  There are, of course, no guarantees on stocks that have had a big fall but if you are patient and get a confirmed change in direction their allure cannot be mistaken.

I do regular screens for these types of setups and am finding a number of nice looking opportunities, some ready right now and some not quite ready (energy sector). Two of the more attractive ones are below.

Fossil, FOSL, a watch and accessory store has fallen 38% from its last high in November of 2013. After bottoming in October, rather than consolidating as I would expect, it has started to move higher and appears to have put in a new uptrend reversal creating higher highs and higher lows. The RSI momentum indicator is bullishly aligned and in December we got a golden cross on the moving averages.  Following a path like ULTA above, a share price recovery back to prior highs would provide a nice, 20% gain from Friday’s closing price

This week’s second idea is Invensense, INVN, a tech company located right here in my backyard. They make gyroscopic sensors that go into tablets, cell phones and a technology that has a ton of current and future uses. From its high in mid-2014 the stock had lost almost 50% of its value when it bottomed in October of last year.   It has since formed a nice double bottom and has broken out above a major prior resistance level clearing the way for a move higher. One of the most attractive parts of this chart is the gap just above. I expect the stock to rise quickly rise and fill the gap. Above that is additional resistance it will need to overcome in the 22.5 area. If that is successful, I expect a retest of old highs to be in store. If so, that would be a very nice 50% upside from here.

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.

For all you bargain hunters - A post-Christmas stock sale

In case you were like me and found a lump of coal in your stocking I wanted to offer up a couple of investment “presents” that are very attractively setup and ready to pop higher as long as the markets want to continue their push northward.  The first is Consolidated Communications Holdings, CNSL.  For the first ¾ of the year it has had a very, very nice 2014 as it rose more than 60%. But since October it has taken a breather and been consolidating sideways.  This consolidation has done exactly what investors would like to see as it has allowed its momentum oscillators to unwind their overbought conditions while at the same time stay bullishly configured.  The MACD has moved above zero and its signal line has crossed above.  A break and hold above 28 would be the confirmation investors would like to see that it has likely resumed its trek higher.

The second opportunity is Blue Nile an internet diamond/jewelry provider. Unlike CNSL above,  2014 has not been good to NILE shareholders as it lost almost half its value as the company struggled finding its niche with the very fickle online shopper.  It appears as if investors believe the turn around it working as they have bid up share price almost 50% from its bottom. This reversal has formed a very nice, symmetrical inverse head and shoulders pattern that, if plays out, says its only halfway complete and can add another 30+% more to its share price. A break and hold  above the 37 neckline would be what bullish investors would be looking for as an attractive entry point.

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.