Is Singapore Ready to Breakout?

As an adjunct to last week’s post on the emerging markets breakout my screens highlight a number of foreign regional markets that have either already broken out or on the threshold including the topic of this post, Singapore. Like EEM, the emerging market equity proxy, EWS Singapore’s stock market index ETF has formed a an inverse head and shoulders reversal pattern signaling the bottom of this particular downtrend is potentially in. You can see the right shoulder formed with positive divergence on the RSI momentum indicator and has formed a higher low and higher high. Price closing above the neckline will validate the uptrend by making a second higher high. Further upside could be expect on a break above the pattern’s neckline which has yet to occur and will not be valid until it confirms. A minor but important difference in the EWS chart is the pattern has a preferred horizontal neckline versus the slanted one seen on EEM.

Price currently sits above the 200 day moving average which has just recently begun to point higher. Like EEM, the upside potential if this pattern were to play out is beyond 20% testing the 2014 and 2015 double top highs of $13.2. I think this setup is very attractive but have learned buying in advance of a patterns confirmation, like what exists here, is not conducive to portfolio out-performance. As such, I sit in cash waiting patiently for EWS to confirm the pattern

Did Anyone Else Notice?

Going sideways for more than 5 years the emerging markets gapped up this week breaking above the neckline of an inverse head and shoulders pattern. The move higher was not unexpected as the bullish positive divergence that formed on the RSI momentum back in early January gave us a heads up to expect a bounce. What is interesting is the strength and ongoing conviction of the move as it looks like maybe a reversal rather than just a counter-trend, oversold bounce. A confirmed breakout of this pattern has an upside target near last year’s highs some 20%+ higher with the potential for much more.

It is still a bit early on calling this a breakout (and opportunity) since the confirmation comes on a weekly close which won’t actually occur until this Friday. Because I usually post after-the-fact examples and would normally wait until confirmation has occurred, I wanted to give readers an early, real-time heads up on this opportunity. Whether this turns out to be a fake out and quickly reverses or peters out before hitting its target only time will tell but the setup is compelling. Anyone following along please make sure you have a position management plan in place before entering as that is specific to your risk tolerance, not mine.  

Cause and Effect

According to Citi, if you were to buy, at random, any developed market government bond around the world, there is a one in three chance you’d lose money if you held onto it until it matured. That is, about a third of all developed-country government debt—or more than $7 trillion, in terms of market value—is now trading at negative yields. Quite simply it means that investors are paying Governments to lend them money. Seems like another form of taxation to me or bad investing. Let me see, give ‘em $100 and a few years later getting back $99.  Sounds good? It has been estimated in the euro zone, more than half of all outstanding bonds are priced as such.  Am I the only one who finds this more than weird or that people are actually even considering handing over their money?

At least here in the US, our entire yield curve is positive (for now). It makes sense that smart, sensible foreign savers who would prefer not to pay to lend money, will move (at least some of) their investment capital to places that provide favorable returns. As such is there any doubt that some of that money will find a home here in US bonds? A small return with (perceived) small risk is way better than paying for a similar risk. We learned in Econ 101 that as more money chases after a good or service (in this case positive yielding bonds) you should expect a rise in prices.  How many of you think this has had an effect on our US 30-year treasury bond?  Take a look at the chart below as it affirms this thesis as it sits at all time highs

Because one of the only arrows left in Central Bankers quiver to (attempt to) stimulate growth and fight deflation is manipulating interest rate (more negative), they have boxed themseleves into a corner. And unless they can regain their sanity (yah right! me of little faith) and unwind this foolish experiment I expect the foreign inflows to grow, pushing our rates even lower and our currency higher.

This underlying theme is one reason why the stock market COULD move contrary to all fundamental logic and reason higher.  The cause and effect.

June's Charts on the Move Video

My latest video recapping notable activity in last month's markets is posted at the link below.

The summer grind continues. Still waiting for the impetus to push US stocks out of their longstanding trading range. European and Japanese equities are in serious need of a lifeline.  

https://youtu.be/0qQDRhNMfCo

Betting on Biotech Breakdown

After a spectacular bull run of almost 375% from the 2011 bottom, the Biotech index (IBB) ran out of gas topping in July of last year. You can see price created a bear flag (#1) immediately after registering its last negative RSI momentum divergence.  The flag occurred around the 200 day moving average which was flattening but still in an uptrend and had provided important support in the past. The break out of flag #1 to the downside not only created the biggest and fastest decline of any week since the 2011 bottom, but also another bear flag (#2). Patterns on top of or within patterns occur in strongly trending markets (both bull and bear). At the top of flag #2 price tried to retake the 200day moving average but was rejected and began its next leg down, settling near the $250 mark.  Since then, Biotech’s have tried to reverse the downtrend but could only muster a couple of counter trend rallies each time petering out and falling back to retest that same $250 level which tells us its hot.  Not unexpectedly as with many corrective consolidation zones, this level marks the 50% fib retracement of the 2011-2015 bull run.

As with almost all stocks, Biotech’s took it on the chin last week and have once again settled back to the $250 … for the 4th time. We know the more price tests a level (from above or below) the greater the chance it will not hold. If the Brexit scare has more downside in store for stocks, I would expect IBB to fall in sympathy and the next level of support comes in the @212.5 range some 15% lower. Again, not so coincidentally, this turns out to be the 61.8% fib extension of the ’11-’15 bull market.

Stepping back and reviewing Biotechs from 50ft, it's (now) obvious we are in a bear market with lower highs and lower lows being formed. Until we see a confirmed reversal formed from a recognizable bottoming pattern this is one investment that is on the AVOID list. That is, unless you are able to short as a breakdown below current support creates a very nice risk/reward entry.