INVESTMENT EDGE
With the markets and investors apparently lulled into a bullish induced coma (not unlike what happens to Homer Simpson when he sees doughnuts), seasonality tells us to expect more of the same for August. Instead with the extreme levels of complacency, extended price levels, this would be an ideal time for investors to revisit their management plans ... justin case.
My July highlights in the video link below.
When reviewing my regular review of the US sector charts, the transportation index jumped out at me. And not in a good way, let me show you why. You can see in the chart below, a 15 month look-back, price has formed a requisite 5 point, large (blue) rising wedge pattern. These patterns are typically bearish in nature and warn of lower prices, once confirmed. You can also where I have circled the area (near touch #4 of the rising wedge) where price broke out to new, all-time highs, held for a week and then reversed course retracing back to the bottom uptrend support line (touch #5) of the rising wedge. To add to the concern is normal poor upcoming stock market seasonality combined with negative momentum divergence (momentum is making lower high at the time when price is making a higher high).
I wanted to post this since it is at a major crossroad here and will likely resolve itself in the next week or two. I find it more educational and a better learning tool to post these in real time rather and watch them develop than point them out in the rear view mirror.
The bottom line is that support is support and until it is broken, this setup is nothing more than a pullback within a longer term uptrend. Because of the importance of the transportation stocks, a breakdown tough would likely pull the rest of the market down with it. If price were to reach the pattern target it would be more than a 20% decline, something stocks have not experienced for many years (but are typically regular occurrences of bull markets).
I hesitate to post bearish setups and try to keep my post more positive in nature as I have learned from feedback it freaks some investors out. I do it for those that want to look at possibilities as it then will not come as a surprise if it does occur. Forewarned is forearmed. It’s good to reiterate here before I close that I am speaking only in “possibilities” not foregone conclusions. The higher probability outcome is for price to consolidate and move higher without breaking down. That is what has happened every time since the 2009 bottom why should we expect anything different this time? Either way it’s great to remember pullbacks whether it be 5% or 20%, create wonderful buying opportunities for the next leg up in bull markets.
WW Grainger, a company who has been around since 1927 serving more than 3 million customer has increased revenues and dividends for 45 years straight. They act as a distributor (mostly) to businesses providing products, inventory management and support. In spite of their success and glorious history, their stock, GWW, has been hit hard losing more than 35% since the start of the year. Back in April during the elevator down decline, you can see what looks like capitulatory volume as it almost 4x the weekly average. In case its not clear, capitulatory volume is where a very large amount of investor throw in the towel and sell their stock. This was eventually followed by a short, reflexive counter-trend bounce and then increased selling pressure taking the stock lower. This is a pattern that repeats so it is worthwhile recognizing what is likely to happen next as it eventually will present an investment opportunity. Since we are approaching a critical support area, I would expect buyers to step in and the stock to find a bottom in the coming weeks. This bottom will likely form positive momentum divergence and provide the opportunity for at least a tradeable bounce due to how far we are below the red 200 day moving average. When looking for opportunities we cannot forget one of the most powerful investment forces, reversion to the mean.
While I try not to spend too much time on the “why’s” because they will only be known for certain in the rear view mirror. WWG’s recent demise, as far as I can tell, has been nothing more than investors fear that Amazon has them in their sites and and eventually put them out of business. As in the company is being "Amazoned”. Because of this ongoing phenomenon I am officially adding Amazon to my list of businesses or products that become so successful they are used as nouns and/or verbs.
I am going to stop this post here as I have to get some “Kleenex” to wipe off the “White Out” that I spilled while “Jet Skiing” in my “Jacuzzi” on my way to “Xerox” a paper and "Skype" a friend.
My April 5th blog post highlighted the compelling investment opportunity that was setting up in the Portuguese stock market using the proxy PGAL. At the time of writing price was at prior resistance, just under the red horizontal line, R1 in the chart below. As you can see, after a brief post blog report consolidation, price jumped strongly through resistance on substantial volume and climbed higher to the next logical resistance zone, R2. Like what occurred when PGAL approached R1, hitting R2 caused it to repel backward and consolidate.
The consolidation allowed the bulls to reload and make another attempt at breaking through R2. With volume patterns mirroring the ideal combined with the shallowness of the pullback, the probability is we see PGAL bust right on through resistance and eventually tag the first target, T1 above. A gain of 30% from my April post. If the momentum continues in earnest, T1 won’t be difficult to attain and T2 would be next on the radar and maybe (be careful as my cold medications may be effecting my objectivity J) even a retest of prior highs at $16.5.
For those that took the original signal, congratulations. Hang on as it looks like there is a lot more in store. For those that missed out, a confirmed breakout above R2 offers another compelling (not quite as compelling as R1 was obviously) profit opportunity. As always, before any investment opportunity is taken, a position management plan need be created and adhered to. The good news is that breakouts are as easy as they come. A break back below the original breakout level provides an ideal “get the heck out of dodge” sell signal. Good luck!
The Australian dollar, like other currencies has had a tough of it over the past few years. After peaking in April 2013 it declined more than 30% in value, bottoming in January of last year. That bottom, like most major declines, formed a divergent momentum low marking a high probability interim low was established. Since that point it attempted (and failed) 4 times to get over the $77 threshold.
Not until last week did it have enough oomph to break that level as it did so with a huge move. In addition, price broke above the blue, long-term downtrend line and sits above a rising 200 day moving average. These are all things we want to see when trying to pick a bottom. The upside target for this breakout is up at the $86-$87 level. Since that is mid- congestion, it could get extended, if it wants to run all the way up to $92. From a management standpoint breakouts are as simple as they come. Sell on a break below support which provides greater than a 4-1 reward for every dollar you risk.
