I Pledge Allegiance

When I was growing up every morning in school, actually before class started we were required to stand up, pledge allegiance and give respect to the US flag. I think schools have since moved away from this practice for whatever reason.  In technical analysis flags are patterns we have similarly high esteem for.  Flags are usually continuation patterns that occur after price has moved up strongly over a short period of time (creating a “pole”) and then takes a breather by consolidating (creating the flag) either sideways or down.

The reason they are revered from a technical analysis standpoint is:

1.       Once the consolidation is over there is a high probability they continue in the direction of the trend prior to the consolidation.

2.       Their price objective from the breakout of the pattern is easily identified allowing you to have a more accurate assessment of your risk / reward ratio before you invest.  The upside target is calculated by adding the length of the pole to the breakout price.  The longer the pole, the more attractive the opportunity.

3.       Because there are no guarantees, if you are wrong and price reverses course after a breakout,  a stop order can be placed back inside the consolidation zone, allowing you to exit the investment with a very small loss (remember the key to long term success is keeping losses small and letting your winners run)

4.       These patterns are easy to manage as you can just place a buy stop above the breakout high not having to commit or risk investment capital until the breakout occurs.

Below are a couple of examples I have been stalking, waiting patiently to potentially enter.

The first is Costco (COST) a stock which I wrote about in July of last year when I warned it was ready to breakout at $118/share. It did that and has run up nicely to near $150, a nice 27% gain thus outperforming the SP500 which has risen less than 6% during that same time period.  As you can see in the chart below, price moved up quickly from ~135 to ~$150 where it has been consolidating sideways over the past month creating a bull flag pattern.  If/when this eventually breaks out to the upside the target will be ~$165.

The second opportunity we are stalking is Linkedin (LNKD) which has a better upside target of about $55.  It, too, has been consolidating for about a month preparing for its next move.

One thing that is common in these types of opportunities that needs to be mentioned is during their initial quick moves up which create the “pole”, most often they will also create an overbought condition on their momentum indicators. It’s hard for price to move higher without relieving this condition, which is why it consolidates allowing the bulls a breather in order to prepare for the next move up.  In both charts you can see (in the upper pane) RSI becomes initially overbought and then as price moves sideways, the overbought condition moves back into the normal bullish range. What makes these two examples unusually compelling is the fact price is moving sideways during the consolidation period. As we know consolidations can be either sideways or down and sideways is reflective of strength and the potential for a bigger move up, if/once it begins.

Higher or lower? - What to expect from stocks for the remainder of 2015

If longstanding seasonality patterns unfold as they have over the past 65 years we should expect 2015 to be another good hear for stocks because pre-election years are typically the strongest of the 4-year presidential cycle. That doesn’t mean it is going to be smooth sailing the whole way, though. I expect some bumpy times. Through the end of Feb 2015, the performance of the US equity market, as measured by the SP500, was slightly better than the seasonal average but performance to historical pre-election years lagged. The average return for the S&P 500 at the end of February during pre-election years is 5.1%, almost 3% greater than the 2015 year-to-date return. As you can see below, stock strength during pre-election years historically continues to climb into July where it flattens out after which the pre-arranged Wall Street bonus errr I mean Santa Claus rally routinely closes out the year.

Black Gold

Today I wanted to look at oil chart via the ETN proxy, USO (the United States oil fund), since we all are impacted daily on its price and see if it can hold any clues on what to expect ahead.

If you were bullish on oil, this chart should immediately change your mind.

1.    Price has been in a steep downtrend and has failed to even test its resistance (blue) line since November of last year.

2.    We created an interim bottom the end of January and price has moved higher, rising almost 20% from trough to peak. Price failed to advance above the red resistance line in its 3 attempts and has now fallen back to the bottom (red) support line.

3.    The MACD (bottom pane) failed to move above the zero line and its signal line is close to crossing under the indicator line which is signaling a potential change in direction to the downside.

4.    All the moving averages are pointing down. A sustainable rally will rarely occur without all the moving averages pointing higher, moving upward with price

5.    The recent volume profile is decidedly bearish as distribution is clearly taking place.

6.    The RSI (5) in the upper pane is showing negative divergence

7.    Lastly the RSI (14) in the second from the top pane has bearish hidden divergence.

Looking at the list I cannot see one positive for the price of USO in the short term and as such expect to see new lows in the next few months. This is not a place, unless you are the nimblest of traders, you should be looking to invest.  There are never any absolutes in life (except death and taxes) so there is a scenario (or two) which could change my thesis dramatically and quickly.  When markets are small it’s much easier for the strong hands to influence and even control the direction of price so if OPEC were to cut supply tomorrow, everything I have stated above would be wiped out.  I would expect to see oil prices start to head quickly higher under that scenario. As investors, we always have to be on the lookout for those “nasty” news-driven surprises.  But barring them, the current trend is down (and must be respected) so smart investors should be avoiding (or potentially shorting) this sector until we get confirmation the bottom is in.

Some of you may be thinking to yourself USO is just a proxy and does not reflect the real price of oil. In addition, with USO you have contango and other derivative-based issues associated with ETN’s that can make their price not track the price of oil.  You are absolutely correct but remember my blog posts are intended to educate and not be used as recommendations. The oil price chart is bearish no doubt, but not quite as compellingly bearish.

Beaming with Pride

After almost 3 years of intense study and enormous commitment of time I am incredibly thrilled to let you know I have just received acceptance by the MTA Board of Directors as a Member of the Market Technicians Association (MTA). Along with this acceptance came the award of the prestigious CMT (Chartered Market Technician) designation which is considered the gold standard for technical analysis. To put this in perspective I am one of less than 1900 people worldwide to have been issued this since its founding in 1989.

I do have to admit that without question that this was the most challenging, demanding and humbling educational/learning experiences I have been involved in. If you look at the list of my credentials this is saying a lot. As such, it is the one I am most proud of.  

The CMT is the only technical analysis training designed by professionals, for professionals. While there are countless technical analysis training programs available, only the CMT is designed to provide broad exposure to the classic literature in the field while emphasizing state-of-the-art analytical techniques. Over the past year while preparing for the final, level 3 exam, we have been working hard behind the scenes revamping both our investment methodology and process to incorporate the new found knowledge and expertise. In my opinion it could not come at a better time as the investment world is rapidly changing and advisers who don’t recognize it and adapt will likely be woefully unprepared for what I believe is likely ahead.

A Penny for your Thoughts

Come on, admit it. You’ve done it, maybe not as much as I have but you have done it.  What I am talking about is saying something and then regretting it later. Well, instead of actually saying it I am going to write about it and have to deal with the consequences later.

Today’s blog post is about the bullish setup on JC Penny’s (JCP).  Yah, I am speaking of that Penny’s. The company who can’t close their stores fast enough to stop the flow of red ink. The one who have tried to remake and modernize their stores so many times but without success. The one where your mothers (that includes me) took us as kids to shop for clothes for the new school year and they seem to have not changed their inventory since then.  Yah, that Penny’s.

It’s clear from the longer term chart Penny’s has been in a heap of trouble as it has declined almost 80% from its high in early 2012.  Since bottoming in January of last year it has been consolidating within the highlighted rectangle, bouncing from top to bottom. From this perspective, I would find it compelling as an investment only if it moved above the shaded rectangle on higher volume (and of course if I forgot which company it was).

The daily chart is definitely more compelling than the weekly vantage point. After peaking in September of last year, it was cut almost in half by the time it bottomed in December, 3 months later.  Since then it has clawed its way back and has formed an inverse head and shoulders pattern that, if plays out, projects back up more than $3 higher to the highs back in September.  While $3+ doesn’t sound like much, it is a very nice move on a percentage basis, ~40%.  Now, that is something that grabs my attention.  The only negative here is there is a gap just underneath the right shoulder that will eventually need to be filled. That may be now or much later but it too, grabs my attention and provides a cautionary splash of cold water to this setup.

I am sure if this does not work out (no, nothing is guaranteed), the haters will be sure to never let me forget this post.  The good thing about this blog is anything I present is just an idea and informational in nature and not a recommendation. Even the best investment idea can turn out badly if managed incorrectly. Remember, it’s your system that makes you successful, not the investment 

As with all my opportunity screens I try to be agnostic as to the company and look only at price.  I have found that biases or predetermined beliefs about a company or industry can have a negative impact on returns.  So while I have attempted to remember that with this idea all I need to close this post with is ... “yah, that Penny’s”.