Monday, August 7, 2017

Monster Stock?


Let's take a look at something I find fascinating. I love studying historical patterns and then watching very similar structures play out over and over across many different time periods. Take for example this little trio here:

1986-1989

 2006-2011

2009-2017

Now let's see what happened next:

1990-2000

2012-2017

2017- ?

Will this follow in the footsteps and rhyme like the others? Ultimately we don't know. Fortunately we don't have to know. All we need to do is be sure to manage our risk and let it play out. I'll tell you this, if it does turn into a similar outcome I better be participating when it happens.

How easy would it be to just say "oh this stuff is all completely random and this stock is too high. Its probably going to crash and fall apart". But what if it doesn't? Imagine being the guy in 2011 that said MA doesn't have a chance to play out in a similar way as MSFT did in the 90's, "its probably going to tank".

Granted MA hasn't had the same percentage run that MSFT did, but the outcome of the pattern was similar in that both experienced tremendous expansion. Also note that MSFT's run lasted 10-years and MA is only 5-years into its move at our current time.

So now we ask, can MDSO do it too?

Why not, is my question? Why can't it? Because the market is up too much? Didn't people say that in 1995 and again in 2013? Why is this time any different? Why can't a medical cloud computing company growing EPS Q/Q +60% and Sales Q/Q +20% participate in a similar uptrend?

I'm willing to give it a chance (disclosure I am Long MDSO from February '17 at $56/share)

Tuesday, July 18, 2017

Should Amazon Buy Tesla?

This idea has just recently occurred to me, should Amazon buy Tesla? They seem to making headways into every aspect of our lives, why not energy generation and electric cars too?

Likely the most upside could come from merging their space programs, Blue Origin and SpaceX. A joining of Elon Musk and Jeff Bezos could reshape technology in a completely new direction.

What kind of growth premium could space exploration demand? Think of the possibilities in travel, colonization, etc. 

I saw a stat last week on Twitter showing AMZN gaining $20B in market cap since the Whole Foods acquisition, and therefore paying for the deal 1.5x already. What an interesting purchase..

Probably the most accessible and immediate application would be Alexa in your car. Imagine the scenario of leaving the office, climbing into your Tesla and your wife calls saying we need a few things from the store. You say: "Alexa, I need Peanut Butter, Milk, Bread, and 1lb of Hamburger". You drive to your newest Whole Foods, pull up outside the entrance, and an employee delivers the groceries to your vehicle. No need to pay either because your Prime account has already been billed.

What Tesla needs is funding, Amazon could provide all the capital they would ever need. Tesla offers the most brilliant engineering minds in the world. Intellectual property meets unlimited capital.  

As far as the stocks are concerned both continue to trade near their all-time highs and are in strong position going forward as growth leaders.

Tesla's stock has just thrown back to retest a 3-year horizontal resistance level. It appears TSLA is beginning a new secular breakout.


I think Goldman has been doing some buying...I'll put it this way, they don't make downgrades to prove how smart they are to us lowly retail investors. They want to accumulate positions...Just a hunch ; )

This doesn't even have to be a full takeover, though I don't see the regulators having too much conflict in such an event. But in my view it appears to be a match made for a possible future merger.


I am sure there are those much smarter than myself who could offer plenty of additional reasons why this should or should not be done, I simply find it intriguing from a technology and diversification standpoint. Whether it ever happens or not I have no idea, but the possibilities from such a merge could absolutely change the way we live.

Saturday, July 8, 2017

Regional Banks Build Bullish Patterns

Taking a look at Regional Bank ETF KRE on multiple timeframes

Monthly
In November of last year KRE emerged from a 10-year base following its inception in 2006. This is the equivalent of a "post-IPO" base for a newly issued equity. The recent breakout above the prior high from 2006 is what has my attention here.

The base has formed a decade-long Cup/Handle pattern that is currently in motion. November's breakout kicked off the pattern and since we have seen price consolidate sideways, all the while holding above that 2006 high.

This is a huge pattern and these don't resolve overnight or over the course of a few weeks. Often the length of rally will resemble the length of base its emerging from. It is not impossible we could only be 7-months into a 10-year bull market for Regional Banking stocks.

For this analysis to be invalidated price would need to trade below the November 2016 low.

Weekly
The Weekly shows a closer look at the 7-month breakout consolidation. Participants got quite negative in March and then again in May when there was a lot of discussion that KRE was forming a Head/Shoulder Top. As with any price pattern, nothing is confirmed until price breaks down through key support. In this case the support from those prior highs in '06 was never violated and price has since reversed back higher and is pressing against a significant resistance level.

A breakdown below the $51 support would become more problematic for the intermediate-term trend. Above that however the setup remains very constructive.

Daily
The Daily chart looks very positive to me as well. Price continues to press against the $56.50 resistance. Once the range from 3/21 is overcome it should be a quick shot to the prior highs near $60.

Due to the size of the overall pattern on the larger timeframes, this range breakout could be the launchpad to reignite the prior trend.

Hourly
Zooming in on the Hourly chart the trend is in firm position. The past 4-weeks have formed a Cup/Handle pattern and recently a bull flag into the rising 50 SMA. A move over about $56 would kick off this shorter-term pattern.

When viewing Regional Banks on multiple timeframes it appears to me that they are all suggesting the same thing. Patterns don't always play out but they give us an indication of the market's intentions and a way to measure risk.

From my view it looks like these Banks want to push higher, until price suggests otherwise I will continue to put money to work as the patterns suggest.


Sunday, June 11, 2017

Tech Rotation

To close out the week we saw many of the major leading names get pounded along with any other tech stock you can think of. The NASDAQ Composite declined -1.8%, while the QQQ and XLK ETF’s dropped -2.5%.

What is astonishing despite this carnage is that the SP500 finished the day unchanged and the Dow Jones was up nearly ½ a percent! Normally if the market was set for a broad correction, when the leading index completely falls out of bed the other Indices follow suit and decline even more.


However, Friday was a day marked by textbook market rotation. Hardly any other sectors were phased by the slaughter that went on in Technology. In fact, Financials, Industrials, Health Care, and Materials all rallied fairly substantially. 

We've been waiting for the extended Tech sector to cool-off and it seems that time may have arrived. This doesn’t mean sell everything indiscriminately, but it is prudent to reduce exposure to the prior large winning positions we have held for some time now. 

I want to discuss what it means to watch price behavior for adverse “changes” to a prevailing trend. When a trend has been tremendously strong (at least on an intermediate basis) it pays to stick with that trend through normal retracements as long as the behavior of the price action is within a “normal” character. Let’s look at the Financials (Regional Banks-KRE) for a recent example of what this means. 


In November price made what appeared to be a major bullish shift in momentum by breaking out of a multi-month range. We then saw a sharp rally for 6-weeks which consolidated orderly with no real shocks to the prevailing trend. Consolidations after rallies can have little shakeout attempts (as seen in the middle of January) but follow-through is important to watch for in the following week or two. Price held the initial dip and then resumed normally to new highs.

It wasn’t until the gap higher rally that then saw a shocking reversal the following day that participants began to be alerted to a potential change in character. It is one thing for a consolidation to provide a one day shakeout, it is another to see a very bullish indication (gap higher from a consolidation) immediately sold and reversed so strongly, which occurred on March 2nd.

The ensuing action the next week or two provided zero sign of recovery, price continued to drift lower and all rally attempts were faded quickly. This is the follow-through confirmation we look for.


Clearly something had changed in the behavior after the Outside reversal from new highs, shares were then being distributed on any strength rather than accumulated in an orderly consolidation.

Seeing no relief during this time the bottom finally gave way mid-March with a selling day that has defined the market action since. There was a bit of a pop at the end of March but for all intents and purposes, price has been contained in a volatile sideways trend bounded by the March 21st range since.

Turning to the Tech sector, it is possible we may be seeing that initial shock to the prevailing, extended trend. 

The Nasdaq 100 (QQQ) has been red-hot since the January breakout

It should be noted there have been two one-day shakeout attempts since the January breakout began, one in mid-March and another mid-May. Note that neither saw a single day’s worth of follow-through.

One key item that seems different to me with Friday’s reversal is the sheer width of intraday trading range. While the other two attempts to break trend were relatively wide, Friday’s range was roughly double those prior days.  

Obviously the most important factor will be watching how price now reacts over the next couple weeks. If there is no problem and this too was just another shakeout attempt, we should see price stabilize quickly and recover. What Tech bulls don’t want to see however would be action similar to the Financials in mid-March; they don’t want to see Friday’s low taken out on a closing basis and certainly don’t want to see any rally attempt sold into strength.

Bottom line the trend remains intact for now as no lower lows were made, price is above its 50 Day and 20 Week SMA’s. But evidence is beginning to mount that suggests Tech may be due for an extended rest over the coming summer doldrums ahead. 

Saturday, April 29, 2017

CRHM: Position Review

I received many questions regarding the increased volatility in CRHM this week. This is a position I have been involved with since the middle of last year and would like to discuss my ongoing management of this trade.

To preface, this is a perfect example of what I discuss with members about not chasing extended Monthly charts. When prices begin to stretch well beyond the longer-term trend averages the likelihood of an adverse retracement increases substantially. The proper time to get involved with a long-term uptrend is after prices have rested and are near the trend average.

 A lot of traders get caught up in the Daily movements of stocks and assume after a 3-week pullback that the stock is in strong posture to continue in the desired direction. However without assessing the longer-term trends they often are entering a position that has much higher risk than they are preparing for. In this game managing risk is of paramount importance, knowing when a stock in the vicinity of "high risk" can go a long way to reducing that initial risk. This is not to say that momentum cannot continue and the stock cannot become more extended, it certainly can. But in the market we are not forced to trade, we can wait for our pitch, it is not necessary to take an increased risk for the chance that this particular stock continues to defy the odds.

In my experience and testing it is not the strongest play to ignore long-term posture of the stock even when entering for a shorter-term trade. Unless you are a highly experienced, highly skilled, and very short-term trader, most often returns will grind to a halt because of chasing stocks that are due for a period of longer-term consolidation. Stock trends ebb and flow, depending on your timeframe that can mean the difference between a normal trend digestion and a shakeout due to increased short-term volatility.

Key point #1 to effectively manage risk and trade fast growing stocks: Don't chase extended Monthly charts

This is the first rule I consider when entering a new position; has the monthly chart rested and coiled near the longer-term average OR has price expanded beyond its prior base support, leaving a significant amount of "air" between price and the trend average?

According to my method of trading longer-term growth stocks, CRHM has presented 3 places to enter at the lowest risk/reward. Only three times since the IPO has this stock offered the "right pitch" for me to strongly enter with the best odds of success.

The optimal entry point revolves around a tight consolidation as price moves into the rising 20 Month SMA. This combination gives a relatively close stop and the coiled spring for a "liftoff" move.

Key point #2: "re-balance" position size as the longer-term trend extends.

Something I do to keep risk in check with stocks that have since run strongly from prior consolidation is to re-balance the position size at certain intervals. As an example I like to keep individual position sizes to roughly 10% of total account. Once a position grows beyond 10% of total equity risk to the portfolio becomes more lopsided to that individual issue. In terms of diversification, if a holding grows to 15% of total equity (+50% appreciation in the position), I will "re-balance" the size back to the 10% portfolio allocation. The intervals I use for rebalancing are +50%, +100%, +200%, etc.

Entry points are shown in Green with "re-balance'' sales shown in Red at +50% and +100% gain. Stops only trail to where viable support has been established. I determine established support once a new consolidation forms and then resumes higher. Currently the most recent Weekly stop is below the 12/30/16 Bull Flag signal at $5.15. Monthly stops remain under the most relevant monthly support established in September 2016 at $3.40.

The theory behind this method is twofold:

1. Continue to allocate the majority of funds toward the strongest risk/reward opportunities (those opportunities that are just emerging from periods of consolidation near the trend average).

2. Keep overall portfolio balance which allows for extended trades to have plenty of room to consolidate without emotional bias in the event of retracement.

Once stocks begin to run vertical, having a way to manage open risk becomes very important for outperforming returns. As prices stretch risk increases, some may argue this point, but its true. As prices consolidate risk decreases. I try to position my funds toward the lowest risk and reduce away from higher risk.

This method allows for a stock like CRHM to undergo a normal correction without making us react adversely in an emotional way. Since the longer-term trend has not been damaged, the position remains valid. But to ignore that prices are at a higher risk of correction places unnecessary exposure onto the portfolio. I never advocate exiting a position entirely due to it simply trading higher, but it is also not required to maintain 100% exposure to a position 100% of the time. Scaling around a holding allows for flexibility and better managed risk for the overall account.

Saturday, April 8, 2017

Quick Observation on This Week's News Events

In regard to this week’s news flow, apparently the market doesn’t think whatever it was that went on in Syria matters for US corporate profits. At the onset of the bombing Thursday evening S&P500 Futures fell 20 points, but within a couple hours prices had completely reversed and were nearly flat on the session. We also saw a softer than expected Jobs Report for March. With the combined military action and weaker than expected economic report I would have expected the market to be lower by at least 1%. That simply wasn’t the case at all as for most of the day prices flipped into the green multiple times and ended flat on the day.


It is some very interesting price action we are seeing. Nobody is committed to selling this market. In the face of bad news on multiple fronts it simply shrugged and relatively strong stocks continued to rally. The recent action overall has been softer for the past month, this “event” seemingly should have caused raucous noise and very volatile trading, yet it didn’t. Be sure to note that behavior. It is suggestive of great strength in the underlying price action. 

Sunday, March 12, 2017

Retests or Bull Traps?

Something we always need to watch out for are when bullish patterns go through their inevitable pullback/retests; we want to watch that the pattern formation doesn’t fail. Pullbacks and retests are very normal price behavior following breakouts and rallies. They are normal so long as the pattern doesn’t break and set a lower low.

When bullish patterns trigger we expect price to remain firm and hold the higher swing low created by the new breakout. If the pattern is to stay intact price will resume higher after the period of consolidation.

Take a look at CLF as an example of this:

CLF Weekly 

Since the trend reversal in early 2016 the stock has been in a steady trend of higher highs and higher lows. The stock pulls back into the rising 20 Week SMA and then resumes higher with a strong reaction breakout. Each pullback forms a higher swing low compared to the prior low keeping the pattern valid.

Currently we are seeing the fourth such pullback since 2016. What we need to watch for is does CLF hold the prior low near 8.25 and resume higher with another breakout (as it has done each time in this rally) OR does this pattern fail by breaking through the prior low?

Unfortunately, we don’t have a crystal ball so we can’t know with certainty whether this is the time the pattern fails or if it just resumes back higher like the previous instances. What we can do is identify character change in the market. For more than a year CLF has rallied, tripling from the first bull flag signal in April 2016 ($4 to a high of over $12), the trend of higher highs and higher lows has remained intact this whole time. If this trend were to change and price makes a lower low, we will have proof that something is changing. Maybe it’s a temporary change or maybe it completely reverses the new positive trend, we can’t know that either.

 It is our job as risk managers to avoid the situations where no pattern exists and to stick with those that do. As long as CLF can maintain its recent higher low the pattern will be intact and we will stick with the bullish pattern. If it fails we will stop out and take our gains. 

Keeping the signals and strategy simple is what gives us our edge; being able to identify with clarity what the situation is at any given time helps align us with the market. We need to be watchful of these changes in character. The individual stocks will give us the early indication of the overall intentions. When we begin to see many bullish trends fail we know that the underlying support for the market is weakening. Until the patterns break however it means we need to stick with the market as the overall trend remains intact.