Are Metals and Mining Stocks Losing their Luster?

The metals and mining sector ETF, XME, had been in a severe downtrend losing more than 70% from Sept 2014 to Jan 2016, where it found a bottom. It quickly reversed not giving those waiting for a pullback a chance to enter and completely miss the train. It rose more than 100% before it took even the slightest breather. That’s how strong bull markets work, once the train leaves the station and the bears are forced to cover their shorts and if you want to participate you are forced to hold your nose and Buy, Buy, Buy.  

As you can see in the chart below, XME rose more than 150% before the negative momentum divergences and bearish rising wedge pattern took hold. The pattern if it were to play out, projected to a correction of some 30% lower.  That could have created significant pain to position holders depending upon their entry price. But at least they were warned of the pullback probability allowing them a chance to insure they had an exit plan.

From that point and as you can see in the follow on chart below, price broke down from the wedge pattern and horizontal support, but only fell 18% before finding support and then consolidating sideways for 3 months. 18% is much more palatable of a pullback to live through than the 30% target. This is a great example of how “projected” targets (whether they are to the upside or down) are just that, “projected”. Price does not have to ever meet the projected level and even if it does, does not have to stop. As such targets are best used to help manage position risk.

With that background we fast forward to chart that includes data through today.  We see XME broke to the upside out of that 3-month consolidation and extended its gains. Maxing out at a healthy 210% total rise from the Jan 2016 bottom. In spite of that excellent performance, all is not well with XME. Once again it has formed a second and much larger (outlined in red) bearish rising wedge during a time when divergence is prominent in the upper pane of price momentum. I emphasize the importance of patter recognition for this exact reason, they repeat. But results out of similar patterns don’t always repeat, XME holders are currently sitting at a crossroads. Having broken down through the bottom side of the wedge, a breakdown below the horizontal support is warning of a much bigger pullback. What I am wondering is if it will be muted like what occurred in the prior (blue wedge) example above or will this one meet (or possibly exceed) its “projected” $24-$24.5 target, some 30+% below its February top?

February 2016 Charts on the Move Video

A February follow through pushed stocks higher. Stocks are overbought and overstretched while sentiment is at an extreme. Add to that the potential (now sitting at 80% probability) the FED raises rates, stocks are facing some headwinds.  Sounds like a perfect recipe for a short to intermediate term pullback.

My latest market video can be viewed at the link below

https://www.youtube.com/watch?v=ZfT8VOGBYJ8

It’s Whats for Dinner

Back at the end of April in 2015 I wrote about the potential topping pattern developing in the price of beef. At the time, the futures Live Cattle Subindex was ~$80 and looked very vulnerable to lower prices. I wrote that if the head and shoulders pattern played out it projected a target price of $63, which would be a healthy 21% drop.  As you can see in the chart below, price not only hit the $63 initial target but continued lower down to $54 before it eventually bottomed in Sept of last year while forming positive RSI momentum divergence.

Since that time, price has moved higher and has now formed the exact same reversal (but inverse) pattern that developed at the top. In addition, the 200 day moving average is flattening and given additional time and a continuing uptrend, will curl northward. Interestingly, a break and hold above the (blue horizontal) neckline will be technical confirmation the pattern is in play and the upside target is right back where it was at my original post in 2015, $80.

If the charts are correct you should expect this summer’s BBQs to cost a bit more than last year.

Dumpster Diving

The human brain is an amazing thing, especially when it comes to investing. We seem to be wired to want to buy investments that are falling, catching the proverbial knife and shunning those going up. Why is that? I am don’t know but what I consistently hear for investments going up is “It’s at all-time highs. It can’t go higher. When falling, the rationale is “the falling will have to end sometime and the upside when it eventually ends will be huge.” We apparently seem to think we are capable of picking tops (and bottoms). After more than 15 years, being trained by some of the most successful traders/investors, I can confidently say it rarely happens. Sure, a stopped clock is right 2x a day but getting those instances right does not mean it can be done successfully and consistently over the long haul.

Trying to find the bottom in a stock, because of the potential upside is a great lure and one that appeals to me too. These types of trades/investments I affectionately call dumpster diving. To have any chance of success with dumpster diving, I have found they call for a completely different approach than an investment that is in an uptrend. I thought for this post I would actually walk you through a dumpster dive “trade” that I have made in my own account. In the weekly chart of Fitbit (FIT) below you can see it has done nothing but decline once its IPO hangover begun back in August of 2015, losing almost 90% of its value (peak to trough). We see momentum in the upper pane is currently in the oversold zone but is flattening while price has closed higher (albeit slightly) over the past two weeks.  This week we closed with another hammer candlestick which, in a decline, can be indications of a POTENTIAL, short term bottom. Notice the other hammer that occurred back of the end of June last year and marked a tradeable bottom. During those next 12 weeks after the hammer, the price of FIT rose 40%.  40% in 3 months is nothing to sneeze at. But following price further, we see it turned out to only be a temporary bottom (why dumpster diving must be a trade and not a buy and held) and the decline once again continued in earnest. Going into this trade with price well below the (red) 200 day moving average I fully realize the odds this trade will not be “the bottom” so I will be looking to take profits rather than hold this long term.

To optimize entries into any investment, whether it be a dumpster dive or not it is imperative you view the investment on a shorter term time frame and look for triggers and entry setups. For dumpster dives, in an ideal world what I want to see are

1.      A bottoming pattern

2.      An oversold divergent low in momentum

3.      An increase in volume more than 25% greater than the moving average on its breakout from the pattern

Since all of these were present (as you can see in the daily chart of FIT above) I entered the position on Friday of last week.  My first target will be the first gap fill where I will likely take at least ½ the position off the table. If the stock wants to run higher after the fill, the upper gap fill would be my final target where I would be closing out the balance of the position. If I am wrong in my interpretation and the market pushes FIT immediately lower (without filling the initial gap), I will be exiting on a close below the prior low (in this case the “head” of inverse head and shoulders pattern).

Because dumpster dives are not high probability of success (price is below the falling 200 day moving average which suggests you stay away), they should be viewed as only a reversion to the mean trade and managed accordingly.  I will circle back at the point some point in the future when my position has been closed out to see what can be learned from its outcome. 

Wish me luck.

Is Low Volatility Here to Stay?

We've had  90 straight trading days without the SP500 dropping -1%. The last time it happened?  October 11.  Pre-Trump Surprise.  Longest streak since 2006.