All the Right Moves?

All the Right Moves

While this chart does not show it, Inphi Corp., IPHI, a semiconductor company right here in our backyard rose almost 600% from the end of 2012 until the beginning of this year. Since peaking early this year, it fell 35% and then began to consolidate sideways (underneath blue horizontal resistance zone) bouncing between $32 and $41/share.

Interestingly, last week it broke and closed above resistance on higher than average volume. Since then, as quite often happens, price is back-testing that same level testing support on lower than average volume.  Yesterday closed with a hammer candle which, if we get confirmation in the next few sessions, indicates at least a temporary bottom. A breakout from this horizontal pattern indicates a price target back up to January’s highs which is more than 22% higher.

A price correction followed by at least a six month consolidation, a breakout on higher than average volume with a back-test of support is an almost perfect setup from this technicians view. A hold above support provides a compelling argument for additions to patient, risk tolerant investor's portfolios.  

A Bubble or the Next Safe Haven?

Digital currencies have caught most investors off-guard. Are they here to stay or just another beanie baby investment fad?

Happy Thanksgiving - The Bull in Perspective

Thanksgiving is a blessing in disguise. With your friends and family near, make this day as special as you can and thank them with your heart. May you be bestowed upon with the best of everything and have the strength to surpass any obstacle.

Have a blessed thanksgiving

Will Lighting Strike Twice?

Much of our understanding of chart patterns can be attributed to the work of Richard Schabacker. His 1932 classic, Technical Analysis and Stock Market Profits, laid the foundations for modern pattern analysis. In his book, Schabacker refers to “the science of chart reading”, but technical analysis can at times be less science and more art. This is because pattern recognition can be open to interpretation, which can be subject to personal biases, the hobgoblin of even the best investors. In spite of this I find them and the reason behind them one of the most fascinating and fun pieces of the technical analysis puzzle.  This is because not only do they provide an excellent framework to manage risk but when they work, they can be a thing of beauty as you can see in the chart of Ascendis Pharma, ASND, below.

I have found that basing patterns that extend between 6-12 months have the highest probability of success. You can see in its first consolidation February and September (7 months), price formed a very symmetrical inverse head and shoulders pattern (noted in green). The target for all target for this pattern is the distance between the head and the neckline (the lower green vertical bar), added to the neckline (T1).  As you can see, price closed within pennies of its target on the breakout.  As it turned out, that burst higher was all the bulls had as price pulled back and began to, once again consolidate and form another inverse head and shoulders pattern (noted in purple).

While price has not yet broken and held above the upper purple neckline to confirm the pattern, if it does the target is up around $42.16 some 15% higher.  It would be great to see TA lightning strike twice in a row for ASND shareholders, but because the pattern’s base will be much less than the preferred 6 months minimum, the odds of success are a notch lower than before.

There are pattern experts who will scoff at this post because I have labeled the pattern as an inverse head and shoulders (IH&S). Technically they are correct because, IH&S patterns only form in downtrends. As such both of these patterns for ASND should be labeled as a cup and handle (which is essentially the same pattern as an IH&S except it is formed in an uptrend). So please pardon the intentional mislabeling.

One Man’s Junk

Because the bond market is so large in comparison to the stock market, it can be worth monitoring for clues as to what may be in store for stocks. That might seem counterintuitive but stocks are simply a measure of investor’s appetite for risk. Within the bond market, junk (high yield) bonds take on the same role.  As such, junk bond prices normally move in unison with stocks. When they diverge, like they did last week, should give investors a hint that something may be afoot.

In the upper pane of my chart below is a plot of SP500 price (in red) and the junk bond ETF, JNK, in blue. The bottom pane is a smoothed correlation coefficient of the two investments, which has hovered near 1 (perfect correlation) for most of the past year.  As you can see that while the movements can vary in the size of the movement, the direction is almost always in the same direction. That is except for two times which I have identified within the purple ellipses. The first time being last April when stocks fell briefly while junk bonds rose. The second being the last few weeks as junk bonds have fallen substantially while stocks continue to rise.

All divergences, this one included, are warning signs to investors that something (or someone in this case) is wrong. The question one has to ask is, is it the bond investors or stock investors who have it wrong.  Are stocks ready to follow junk bonds lower? Or is this just another example of market makers playing games with junk bonds and it eventually turns out to be a wonderful buying opportunity?  The answer to these and other questions will only be known in the rear view mirror but until then the divergences should be viewed as a cautionary yellow flag for investors.