You Can Observe a lot by Just Watching

Normally I post investment opportunities after-the-fact as those charts tend to hold a lot more information and are much better learning tools. Everything else up to that point of confirmation is just a “potential” opportunity that holds some level of interest. My level of interest grows or falls depending upon a number of factors, one of the highest being the development of high probability patterns. 

So it goes with today’s post, oil has formed an almost perfect bullish inverse head and shoulders reversal pattern from an oversold divergent low. There are, of course, no guarantees but my experience is this setup has produced some of the biggest returns. The first of its two targets is just above at the 60 area and if that level is breached, I see a potential retest of the 75-77 area. Notice how the (red) 200 day moving average contained price on the way down and how it is now acting as support on the way up.  This is symmetry in action. Price bounced right off the moving average on its first pullback after gapping above it in April. RSI momentum is rising and has a lot more room to the upside if price wants to push higher. An investor couldn’t ask for a better setup. And yet I am hugely skeptical and a non-believer.

This is not because a confirmation break above the blue horizontal neckline has yet to occur but rather because oil’s fundamentals, quite simply, suck! Too much supply, stagnating demand and world economies that have flat-lined (at best). This is NOT the sort of backdrop that we want to see if we are betting on higher oil prices.   So I should pass on the investment, right?

This is a great example of a bias. Everyone has them, even those who are not supposed to, including me. Based upon the fundamental backdrop, I have formed a belief (justified or not) that oil prices can’t move higher. The fact is anything can happen and if I pass on this investment I am committing to make one of the cardinal sins of successful investing. This is exactly how retail investors act and why they consistently under-perform the market.  A better approach might be to take the investment opportunity (once confirmed) but manage your risk (biases) by reducing position size. Instead of committing say 5% of your investment capital, reduce it to say ½ or 2/3rds of normal. You never know this single investment could be the difference between this year’s portfolio performance being a winner or loser. My mentors, some of the most successful market traders/investors all agree in that typically in any given year just 10-20% of their investment ideas make up 90% of their annual gains. The rest are either no impact or turn out to be losers. This is why a good investor cannot let their biases enter into their investing process.

In case I have done a poor job, this post is not really about oil and the potential big move to the upside (well, maybe just a little) but rather about accepting our natural human biases/beliefs and managing the biggest obstacle to investment success, that person in the mirror. To take liberty on one of my favorite Yogi-isms …. Investing is 50% process and the other 90% is mental.    

As an aside, as I get ready to submit this post, oil inventory data is being released in a couple of hours which can move the price oil dramatically in both directions. So it’s a good time to remind everyone that news always trumps the charts. ALWAYS

Gold – Is it Time for a Breather?

The rally off the January bottom has been exciting for the precious metals bulls (if there are any left) as it has climbed some 30% and confirmed its uptrend forming a series of higher highs and higher lows.  Combine that with price being above a rising 200 day moving average and momentum in the bullish zone.

Some may be asking why the reference to a breather?  While I don’t put an excess amount of validity into rising or falling trend lines when they come together in a confluence with other indicators, they I find them compelling. In this case gold is running into resistance provided by the falling (red) trend line right at the same time important overhead, horizontal resistance is coming into play.  Using the weight of evidence approach, this area is warning we should expect a consolidation at best or pullback at worst.

There is nothing for the bulls to be concerned with here (yet) as we are in a strong uptrend but to take a breather and unwind some of its newly formed overbought condition and refuel for the next leg up. Looking to the left this area has the potential to bring a very large amount of (“I want to get out of this position so I can break even”) sellers so it would not surprise me to the price of gold chop around for weeks and maybe months. On the flip side of that investments that are trending strongly have shown the ability to slice right through resistance zones so what it actually does will only be known in hindsight. In the meantime, and to set the expectation of potential upcoming weakness, gold bulls need to take a chill pill. Because once this is over and price moves above both resistance levels, it should be smooth sailing until $1580.

Risk Back On - Trifecta Finish

To close out the third of three posts on world equity markets breakouts the charts of Australia, and Canada and Singapore are presented below without commentary.

Have a great weekend.

Risk Back On - Part Deux

As a follow up to Monday’s post about what appears to be a global equity breakout, my next two charts are from Asia. Both Taiwan and Hong Kong look very strong. In both cases, price has broken above prior resistance and is above a rising 200 day moving average. RSI momentum is in the bullish zone, is rising but has more room to run before it reaches an overbought state.

Additionally, in both charts price is moving strongly higher on the breakout from the neckline of an inverse head and shoulders reversal (bottoming) pattern and have more room on the upside before their targets are hit.

While the timing is a little late to the party, it looks as if both of these opportunities could provide swing investors with additional upside potential with limited, known, downside risk.

Risk Back On - World Equity Markets Are Breaking Out

The post-Brexit vote equity selloff didn’t last long as most world markets have rebounded strongly and are breaking out. From a technical standpoint, it appears (for now) as if investors are favoring stocks. To illustrate this point, all my posts this week will focus on some interesting and exciting opportunities. 

The first being the emerging markets (using EEM as my proxy). As you can see in its chart below it peaked in mid-2014 and declined some 35+% bottoming in January of this year. It has since taken back 50% of that loss and has formed and broke out from an (in blue) inverse head and shoulders bottoming reversal pattern. If this pattern plays out to completion its upside target is some 20% higher. With RSI momentum in the bullish zone and rising and price above a rising 200 day moving average, you can’t ask for a nicer opportunity setup.