Wednesday, February 27, 2013

A Portfolio for the Kids

Something I have been thinking about recently is how am I planning to save for my kid(s) college, braces, etc. Setting aside a certain amount from my income is simple, what isn't so simple is how am I going to grow it over the course of their early lives so that it actually amounts to something when they need it. This is what I have come up with:

First, an important thing for me to consider is that my kid(s) will have a long time horizon for this savings account (10-20 years), so I need to think about what are the dominant themes that are changing now based on the economy, the world, and population demographics. At this moment there are several ideas I have on the future of the investing landscape.

1. Healthcare
We are seeing the largest generation in American history (Baby-Boomers) reach an age where things inevitably start to go wrong, health wise.

2. Real Estate Market Recovery
The past 5-10 years have been an unusual time for housing in America. We saw a huge boom, followed by the worst housing crash ever. I am of the belief that housing will stabilize.

3. Organic Food/Products
America has a problem; we are unhealthy as a people. We eat poor quality foods due to convenience and we have grown addicted to high fats and sugars. As people begin to (and are beginning to) realize the problems attributed with eating poor quality foods, a major shift is taking place.

4. 3D Printing Technology
I feel that the usefulness of in home 3D printing will become the next major technological advancement in our lives. Being able to make basically anything in your home at a moments notice will change everything. Already, 3D printing companies are making the technology accessible to individuals for much lower prices than were previously possible. Remember your life without a computer? Your kids will think the same thing about their 3D printers.

5. Energy
This idea has two facets: clean energy for sustainability and oil/gas transportation as a hedge in case America in fact becomes the major energy producer that it is thought to become. Clean energy is something that is just getting started, the use of solar, wind, and general conservation is a necessity for the future health of our world. On the flip side (the side my wife hates!) is the fact that America is sitting on more oil and natural gas than has really ever been seen in the world. Giant discoveries in the mid-west are being made and it is very possible that America actually becomes a net energy exporter in the future.

So, now that we have some themes for the next 10-20 years, we need to pick some stocks that will take advantage of those ideas.

Healthcare- Abbott Labs (ABT)  

 Abbott Labs recently divided its business into two parts and this almost always creates value for shareholders. Abbott is primarily a pharmaceutical company but is widely diversified throughout the healthcare sector. They offer solid growth and a healthy, growing dividend.

Real Estate- American Capital Agency (AGNC)

American Capital Agency is a real estate investment trust, meaning they own and trade large lots of property mortgages. This company has shown strong ability to manage risky interest rate environments and continue to produce a monster dividend for investors. The dividend is currently above 15% annually. Compound that dividend over the course of 20 years and you will have yourself a solid return on investment.

Organic Foods/Products- Hain Celestial Group (HAIN), Annies (BNNY)

Hain and Annies are interesting picks for future growth in the organic food space. Hain is the more solid company with a very wide variety of products, while Annies is a recent IPO that has been producing organic foods for years. While I feel Hain is a more stable pick for the long term, Annies has been showing very good relative strength recently and could be a big beneficiary of the continued move toward healthier eating. I think pairing them in a portfolio will give you good exposure to the organic food space.

3D Printing- 3D Systems (DDD)

3D systems is the largest 3D printing company in the world and has been producing revolutionary printing technology since 1986 (yes this technology has been around for that long!). At this point I don't think you can really go wrong with any of the 3D printing companies long term. I happen to prefer the best of breed companies for these long term picks and 3D systems is the best. They will be volatile, as all high growth industries are, but using that volatility to your advantage (buy those dips) will create solid long term returns.  

Energy- Clean Energy Fund (PBW), Enbridge (ENB)

These energy choices will create growth and dividends which is a great combo for a long term investment. Both PBW and Enbridge have +3%  annual dividends as well as the opportunity to expand their share price through time. Clean Energy will be volatile as it is widely impacted by government funding, but at these current prices is a great time to start gaining some exposure. Enbridge has been a growth monster and continues to rip, being the largest North American pipeline company makes them a huge beneficiary to the opportunities in America's energy production.


That's my list for a diversified portfolio for the future. It hits some major themes that I feel will play out over time and creates opportunities for capital growth and dividend growth. If you are looking to grow some funds for your kids' needs, I think you could do worse than following this simple plan.



Sunday, February 24, 2013

Weekend Update: Pattern Complete

The SP500 ended slightly down for the week. But it didn't come without action. After completing the current Inverse Head/Shoulders pattern at 1525, the market took back most of the recent gains with two sharp down days. Friday we saw a rally attempt to just retake the 20 DMA.


This pattern acquisition leaves us in a undecided position. Now that the Inverse Head/Shoulder target is complete we no longer have any current patterns (Bullish or Bearish) to work from; this means we need to adjust our holdings for an uncertain environment ahead. As of this week I now am holding a significant amount of cash waiting for the market to decide which way it will choose to proceed. Based on recent history, after a key pattern target is acquired, we tend to see a period of weakening. Take a look at this chart that was originally displayed on The Kirk Report:


This is interesting because every major move in the last 2 years has been preceded by a significant reversal pattern. Whether it is a top formation like the Inverse Head/Shoulder tops in 2011 and mid 2012 or the Double Top pattern in late 2012. Each major sell off has been equally met with a reversal setup, leading the market to new highs. Now that we have completed our latest inverse Head/Shoulder pattern, we are left waiting for the next move to take shape.

The point of this is to always wait for the market to tell you where the next move will be coming from. You can drive yourself crazy trying to determine when to buy and when to sell based on random movements in prices. But if you let some setups like these form, you greatly increase your overall chances of success. Since we don't like to be on the wrong side of the trend, it is very important that we wait for the trend to shift from down to up before we jump back in. These patterns are a great way to gain the confirmation that the shift is indeed happening.

An important thing to remember when reading chart patterns is that they don't always play out or form perfectly. Sometimes the shoulders are a bit jagged or instead of getting a nice looking head and shoulders, you end up with 3 odd looking peaks with similar support necklines. Either way the patterns represent a certain consistent action of traders and their emotions in the markets. And as long as we are looking out for these clues we will be on the right track to being patient, successful investors.

Some quick notes on our watch-list stocks:

DDD

DDD broke down from its triangle formation and rising 50 DMA. They announce earnings this coming week and it will be interesting to see what kind of number they report for the quarter. As of now the price action suggests a date with the long-term uptrend support around $45-$46; that would be an excellent entry point. Lets hope for a miss on earnings and look to take advantage of the resulting sell off.

MOS

Well our perfect Inverse Head/Shoulders setup in MOS is under major pressure after this week's action. It is do or die time for MOS as it really needs to hold the $56.50 support area. I have currently closed my position in this stock (luckily I got rid of the rest on Wednesday morning). At this point I will be waiting for a decisive breakout above the neckline resistance at $62.50.

CMI

CMI broke down from its very tight trend channel this week and then failed to hold the 50 DMA at the close on Friday. I also closed my remaining position in CMI on Wednesday's sell off.

F

F failed at its $13 support area and now we are watching for a retracement back to its medium term trend support around $12.

PBW

Our clean energy fund sold off pretty heavy after its recent up move and is now flirting with the trend support, 20 DMA and key support at 4.50. I am still holding this one and have hope that 4.50 and then the 50 DMA can hold. If not, I will be looking for it to fill its gap from Jan 2 and hopefully find support around the $4.00 area.

HD

As we discussed in our Bearish Reversal post, HD has formed a near textbook Double Top. I have closed my position entirely as of Friday; I sold on Wednesday's rollover and then closed the rest out on Friday's throwback trade to the Double Top neckline. I sort of went against my original stance of holding within the trend channel because this setup looks pretty solid. The Relative Strength has also signaled a failed bounce to get back above the trend support. We will see shortly if I was premature in my selling, but luckily if I am wrong and this rallies right back above the $66 now resistance, I will just get back in. If I am right on this setup, we may be seeing an end to this nice rally. This is a difficult setup for me, i mean it failed with a very solid reversal pattern, but then held the 50 DMA and trend support. If this was just a shakeout trade, then I tip my hat to Mr. Market...You got me here if this just turns and rips higher. Just with so many trend reversals this week, I am beginning to think we may see an extended period of weakness ahead.


HAIN

HAIN was moving up so well just a week ago, but all of a sudden this thing has rolled over hard. I closed my positions in HAIN on Friday as the key support at $57 and the 50 DMA both failed on heavy selling volume. Ultimately if this can hold above the low at $52, I am still bullish on this stock long term, but if that low gives way, then another leg lower is likely.

ENB

ENB has held support well, twice recovering intra-day to close back above the 50 DMA. I expect this stock to retest the $42 breakout at some point and that would be a great buy opportunity.

WFC

WFC really bucked the overall market trend this week breaking out and following through both Thursday and Friday. The fact that the financials held up really well this week is a reason why I think this recent sell off could be just a shakeout trade and is still a reason to believe in the current rally. If Wells in fact rolls over here soon and the breakout fails, that would be enough for me to go to 100% cash and think that a deeper correction would be coming.

AAPL

AAPL still is performing terribly (great if you are shorting it!) and in my opinion this is still a short as long as it is below its declining 20 and 50 DMA's and is unable to take out its down trending resistance line. The thing to keep in mind here is that AAPL is in full trader mode. Fundamentals don't matter one bit until everyone who is going to sell has sold. I can't imagine we are too far from a bottom, but the market has a way of "remaining irrational longer that you can remain solvent" as the saying goes. This seems to be the case with AAPL and as long as there are people willing to buy and try to pick a bottom this will continue to roll lower. A note as well, we have not seen any type of reversal pattern or momentum on the daily time frame yet to signal a turn yet. 2 weeks ago there was a very short term Inverse Head/Shoulders pattern that I played (successfully) rallying back to the $480 resistance level, but other than very short term, there is nothing to like in this space.

Thursday, February 21, 2013

Chart Patterns 2 of 3: Bearish Reversals

Our previous discussion covered my favorite Bullish Reversal patterns to look for. Today we will take a look at Bearish Reversal patterns which are the inverse of the Bullish patterns we discussed; the Head and Shoulders Top pattern and the Double Top. It is interesting how these same formations take shape over and over again in our research. As you follow the markets more, you will begin to see these and other signals often.

Head and Shoulders Top

This pattern is the mirror image of the Head and Shoulder Bottom; it is formed with a peak followed by a pullback, then a higher peak that then retreats back to the same support as the prior decline, finally followed by another lower peak that eventually rolls over and breaks the neckline support.


Here is a look back at the weekly bar SP500 in mid 2011. As you can see after the large rally in the end of 2010 the Market formed this nasty topping pattern and subsequently broke down hard and fast, dropping some 120 points. The measured move process is exactly the same as with the Inverse Head and Shoulders pattern; take the highs of the head minus the neckline support, then add that difference to the neckline break and that gives you your downside target.

There are not many Head/Shoulder Tops being seen in the markets right now on any intermediate to long term charts to show as current examples (which is a good thing for near term market strength), but believe me, we will certainly get our share of them some time in the not too distant future.

All I could come up with was a short term view of Caterpillar (CAT) which seems to be putting in a bit of a top here. Now, the time frame that you observe a pattern in is very important. Short term (30 minute bar chart or less) simply signals a small pullback. That small pattern could begin to set up a larger pattern in the future, but we deal with that as it comes.



 Here I just think we are seeing a needed pullback in the stock and is nothing of major concern, I just simply wouldn't be too eager to jump into CAT at these levels. Something interesting to note in this chart is that if you look at each peak (both shoulders and the head), you can see that they all have similar mini Head/Shoulder patterns also. As we get further along in our research you will see how one pattern often begets another pattern and so forth. These 3 mini Head/Shoulders within the larger pattern lend more support to the larger pattern fulfilling its price target and show even more bearish trading activity taking place under the surface.

Double Top

The Double Top is a popular pattern for the media to talk about because it is easily observable and any time a stock is attempting to make a new high, the chart can look to be a "potential" Double Top; the media loves it because they can use it to sell their fear agenda to retail investors.
So just know that


Here is the ugly beast. Seeing this kind of action on a long-term chart like this (Weekly bars) spells trouble below. As we can see here following the peaks came a quite significant sell off; CHK lost more than half its value in the next year. This Double Top, measured from roughly $36 to $27, a $9 pattern projecting a target price of $18. That would have made a nice trade and it even ran further. Just as with a Double Bottom pattern, I like to see momentum weaken with the second peak; this shows a lack of conviction behind the rally attempt to new highs.

Watch list stock HD could be putting in a possible Double Top here:


As much as I would like this to not be the case, the market doesn't care about my plans. I've had to reduce my position and will wait for the target completion and trend support to add back shares.
You can see the weakening momentum here from the MACD. One thing to still be aware of is that we still have a nearly 2 year, very clean uptrend intact. So you can't let a pattern like this run you off just yet. As long as trend support can hold, we will continue to see higher highs and higher lows. If that changes however, we will have to change with it.

Sunday, February 17, 2013

Chart Patterns Part 1 of 3: Bullish Reversal Patterns

A large part of reading price involves identifying reoccurring patterns that tend to reflect investor/trader psychology. While spotting and trading patterns is not perfect, it is usually a good way to determine the general strength or weakness in a stocks' movement. Typically all moves in a stock price will reflect a price pattern forming at some point in the trend.

Generally there are 2 types of patterns that we look for depending on the current trend of a stock. The 2 such pattern types are Reversal Patterns and Continuation Patterns. Reversal Patterns can fall into 2 sub-groups depending on the trend they are changing, Bullish Reversals and Bearish Reversals. Continuation patterns tend to move price in the direction that it was currently moving prior to the new pattern forming.

For the sake of keeping your interest and not bombarding you with too much information I am going to break this pattern lesson into 3 parts: Bullish Reversal Patterns, Bearish Reversal Patterns and Continuation patterns. So lets get started looking at some Bullish Reversal Patterns (my personal favorite!).

Bullish Reversal Patterns

Generally speaking there are only a couple major Reversal Patterns that I look for, Inverse Head and Shoulders, and Double Bottoms. There are a few others but they are more rare and I am all about having a simple trading method, so I will just be focusing on the big patterns.

1. Inverse Head and Shoulders

This is a pattern that we are seeing a lot of right now in the markets, it indicates a major shift in trend direction is beginning to take place (steady down trend is going to become an uptrend again). The Head and Shoulders pattern is the strongest and most reliable in technical analysis.

From Investopedia:
1. The price falls to a trough and then rises. 
2. The price falls below the former trough and then rises again. 
3. Finally, the price falls again, but not as far as the second trough. 

Read more: http://www.investopedia.com/terms/i/inverseheadandshoulders.asp#ixzz2LCSNhtcZ


Our first example is from one of our watch list stocks, Mosaic (MOS)


You can see here the 3 peaks and each corresponds with the criteria stated above. What we will need to see for this to confirm is next to see the price break decisively above the resistance line formed by the "arm pits"; the place where any rally attempt has struggled and rolled back over. With a strong Head and Shoulders pattern the "arm pit" peaks should be roughly in the same price area. Once price confirms the pattern and breaks out from the "neckline" resistance, there is a simple way to measure the projected move the stock should make. Simply we measure the price at the lowest peak and price at the "neckline". We take those two prices and subtract them from each other and that gives us our projected measured move target. In the case for our example above the head peak was at $44 and the neckline resistance is at $62.50. We subtract the difference between the two and we get $18.50. We then take the $18.50 pattern size and add it to the neckline resistance giving us ($62.50 + $18.50 = $81.00) Basically if this stock can move above the 62.50 level, our expected gain on this trade would be up to the $81 mark. That's almost a 30% gain from current prices!

Another example of an Inverse Head and Shoulders is seen here in Annie's (BNNY)


Double Bottom
The second Bullish Reversal pattern we like to look for is a Double Bottom. A Double Bottom is formed when a stock makes two successive lows to the same price support and then clears above the peak in between the lows. The price should form a W like formation; once price clears the "peak" resistance, the pattern has triggered. Another thing I like to see in a Double Bottom formation is for momentum to be showing strength vs price (this can be seen with a momentum indicator such as MACD or RSI). We want to see price make two successive lows while momentum shows a low and a higher low. This indicates that strength is building under the surface.

Here is a look at another one of our watch list stocks Ford (F)


Ford looks to have put in a Double Bottom pattern on this longer time frame. We are looking at a weekly bar chart here. $12.90 seems to be the resistance level for this double bottom, so as long as price can hold above that level, I think this one is in play right here. Momentum is also confirming the Double Bottom, shown here by the MACD. While price tested the $9.00 area twice, the MACD set a higher low, indicating more strength the second time the 9.00 level was tested.

The projected move of this Double Bottom is measured the same way the Head and Shoulders pattern is; take the price of the lows, subtract it from the peak level and add the difference to the breakout level. So looking at Ford here this pattern should have a target of:
$12.90 - $8.90 = $4.00 move.
Target: $16.90

Double Bottoms are not as prevalent as Inverse Head and Shoulders, but they do have a pretty strong track record of successfully fulfilling their price objectives.

Basically what we are trying to do with reversal patterns is identify a shift in direction of a stock that has fallen from previously high levels. It's usually a bad idea to go diving into a stock that has consistently been falling (known as catching a falling knife), but using simple, proven price patterns can give us a much better indication that we are seeing a bottom and price is nearing a reversal of trend.

Next time we will cover the concept of Bearish Reversal patterns:
The Head and Shoulders Top and Double Top formations.


Friday, February 15, 2013

Weekend Update: Sideways and Choppy

Well, another week of sideways trading. However we did manage to hold above the prior range resistance at 1515 and were able to make another new high. Although we held above our key support level, we failed to take advantage of the situation and look to have created another trading range (1525-1515).


At this point we are basically in the same spot we were last week. We need to see a resolution of this trading range before we make many adjustments to our current holdings. This week I did raise some cash on Wednesday in a couple stocks that had run up nicely and have earnings reports just ahead. I made no significant moves to speak of, I simply trimmed up and rotated into a couple new positions. Until this market breaks out of its ranges I will likely sit with a similar posture; I am positioned about 65/35, stocks to cash.

There are a few notable updates to our watch list after this weeks trading:

DDD


So this one is thrashing around a bit but has begun to form a triangle pattern. Typically a triangle pattern tends to resolve in the direction of the current trend (which is up). This is a position I added on Friday. Its been a bit wild, but buying here just above the triangle trend support and rising 50 DMA seems like a nice low risk entry for an opening position. If this trend breaks below the support line and 50 DMA, I will close my position.

PBW


Our Clean Energy fund continues to break away from the resistance/neckline area at 4.50. Buying interest is VERY strong here as we can see from the huge volume spikes. I have added to this position and will look to add more on a retest of the 4.50 area.

HAIN


I am very pleased with the way our organic foods company has been recovering from its long decline. I will be looking to add to my current position with a pullback to the $57 support area. If you are trading HAIN here, I think the 50 DMA is a good place to put your stop. The Relative Strength for HAIN vs the SP500 has begun to change trend also. As you can see from the chart, the blue line has been declining for several months (under performing vs the SP500) and has now broken above the down trend resistance. A good confirmation of the strength we've seen in price.

MOS


MOS has formed a very tight flag pattern just under major breakout resistance. Price has begun to move higher from the flag and is now retesting the resistance level again. Very strong stock, this is my 2nd largest holding. Above $60 I think this is a monster!

HD


Currently my largest holding, HD continues to be very strong. When you have a winner like this you just keep riding it.

That's about it for notable developments from our watch list this past week. The remaining positions are simply churning sideways with the overall market. Because we only like to be investing in the best performing stocks, the remaining stocks from our list F, CMI, AAPL, WFC, and ENB need to be considered underweight holdings for the immediate future. With the exception of AAPL, none of these stocks look particularly weak, they have simply run up nicely and are enjoying a well needed breather.

What we need to be watching for this coming week is to see if the market can hold above its support line of 1515 and continue to build on its previous strength. If you have some nice gains from this rally, tighten up your stops and watch out for closes under or above the new 1515-1525 trading range.

I will do my best to get a couple updates during the week up, but forgive me if I can't, my parents are in Hawaii until the end of February and business at the shop has been hopping (the economy seems to be improving, at least people have sure been eager to buy a lot of glasses!).


Sunday, February 10, 2013

Weekend Market Wrap: Long and Strong

The SP500 closed higher again this week and finished at another new 5 year high. The market has continued to be aided by the steady trend of declining Jobless Claims as well as substantial Federal Reserve liquidity flows. Here is the February schedule for the Fed's open market operations. In my opinion, the in-flowing liquidity from the Fed is the primary driver of this market rally. I do also get the sense that the market may need to take a breather, typically however before I am ready to call a top (which I hate doing) I would like to see one last blow-off type move to the upside. Everyone and their mother are calling for the market to pullback here which usually means the market will do the exact opposite. But the price action the last week has shown that there is a willingness to sell at a moments notice; traders are getting antsy and we can see it here with the very sideways trading we saw this week. This sort of tug-o-war going on between the bulls and the bears means that the market is finding equilibrium in price and that buying momentum has waned. Still what would cause the most pain here would be for the market to push higher, causing the shorts to get squeezed (make them close out their bearish bets) and the under-invested bulls to jump on board right at the last minute. When there is no one left to buy is when the selling will come in.

We need to keep perspective that although we have seen a big run to start the year, markets go up AND down, so we need to think about hitting the breaks if the situation dictates.

The first thing I will be watching Monday is to see if we can hold this recent range breakout. This is the 2-week view, each bar is 15 minutes. What we have seen over the past 2 weeks is a trading range develop between  1495-1515. Friday, after a strong positive move in the morning, the market was able to consolidate above the range resistance. The First thing we will watch for as to determine if we will go higher or lower from here is whether we can hold the breakout support at 1515.  From these consolidations tend to come swift movements in the direction of the breakout. However from these breakouts, if they fail, they tend to fail to the downside even faster. If the breakout were to fail, I would be looking at the prior range support to hold at 1495. If that level goes then we are likely in for a deeper pullback (which from a slightly longer term perspective would even be a good thing).

 Looking at the Daily chart we see the most recent range (1495-1515) and the earlier consolidation (1455-1475).

  Both consolidations were nearly identical in length (10 days and 9 days), both were 20 point ranges, and both had 5 down days. We will be looking for a breakout follow through move above Fridays highs.
The trade target for the range breakout is 20 points above the breakout, 1535.


Lastly, lets look at the past year and see how it compares to the rally from last January through March.
1-year Daily Chart

Even with all the talk about how the market is extended and due for a pullback, you can see that compared to last year we still could move quite a bit higher before stopping out. Not that I necessarily think we will continue straight up, but the fact that we have been in a similar situation shows how far the market can continue beyond what would seem logical and reasonable.

Similar to last year, Europe is beginning to show its ugly face again with debt concerns and general uneasiness. If you recall last year Europe threw quite a little monkey wrench into the rally for a period of time.

As of the close Friday I am holding just under my maximum long exposure. I am 75% invested as of now and was 80% going into Friday, but did make one sale into the strength we saw at the end of the week. 80% invested is the maximum stock exposure I will take on, while holding 20% cash to make shorter term trades if opportunities arise. I like having that cash cushion just in case a unique opportunity presents itself.

As long as we stay above the range breakout of 1515 I will continue to be fully invested and look to reduce my weaker positions into strength as we continue toward the 1535 target. If we slip below and back into the trading range I will likely be stopped out of some positions that have been very successful but are showing signs of rolling over. Of the stocks I own at the moment about half look very strong and half look vulnerable. So I will continue to monitor those positions and the overall health of the general market as this week plays out. We will be moving out of typically the strongest time of year in terms of historical market games (Dec-Feb) soon and entering into the poorer time of year (April-September). So I think its wise to appreciate what we have gained during this strong time and start transitioning into a more risk adverse posture.






Wednesday, February 6, 2013

Don't Freeze...Know your Signal

In our previous post on how to build a plan we introduced the concept of risk management. Today we will build further upon that with some simple strategies for when to be invested in the market and when not to.

Buy and Hold
There are a lot of investors/advisers out there who will recommend buying stocks and simply holding them forever. This strategy is known as Buy and Hold, I like to call it Buy and Hope. If you buy a stock with the intention of holding it forever you will need a few key qualities: nerves of steel (because your account will suffer huge draw downs (losses) during certain market cycles; can you handle watching your stocks get hammered without panicking? You will need to display little interest in controlling and molding your investment outcomes. This will mean that you will have to not watch and follow the markets much, because without iron clad nerves, you will be prone to make the worst decisions at the worst times (very common problem with individual buy/hold investors). Also you will have to "hope" that you picked right initially in choosing a strong stock. If you are going to be a passive investor, you will be at the mercy of the market. There is nothing wrong with that, some people are very content in adding a certain percentage into their company 401k every month and never checking the balance or the holdings within it. For the vast majority of market history buy and hold has worked well; it works great when the market goes straight up like it did from the 60's to the late 90's. You just must know what kind of person you are and whether you can handle having your financial future be passively managed.

Buy and Homework
This method is Jim Cramer's strategy for long term investing and this is something that is much more prudent that simple buy and hold. Jim has a tv show on CNBC called "Mad Money" and for new investors it offers a wealth of knowledge and great stock picking ideas. Jim advocates looking at the long term but making sure the companies you are choosing to invest in are still on the up-and-up as it were. The strategy hinges around buying the strongest stocks that are leading their respective industries. He wants you to monitor your stocks each quarter after they announce their earnings results and make sure they are still growing to your standards. This involves being more active in your investing approach and requires some interest in following the financial structure of your investments. Which is of course a very good idea! You should never blindly put your money into investments that you don't understand. For longer term investors I would recommend Jim's Buy and Homework strategy.

Market Timing Strategies
 An alternative to long term holding strategies are strategies that include technical analysis (studying price) to determine when you should be investing and when you should be holding more cash in your accounts. This is the strategy I prefer and tend to be more short-term in my investing tactics. Now just because you are using a timing method doesn't mean you are in and out fast and often. There are very simple timing strategies that investors can use with a long-term perspective.

20 Month Moving Average
The basis of this timing strategy is to be invested in the market when the stock or Index (SP500, Dow, Nasdaq) are trading above their 20 month moving average. Conversely you would want to be out of the market or short the market when it is trading below the 20 month average. Here's a quick look at the 20 month moving average strategy:

  
While not perfectly buying the exact bottom or selling the exact top, this sort of timing misses the majority of large scale crashes and catches the majority of the significant rallies. There are several variations on the moving average strategy (10 month average, Crossing averages, etc)





MACD
Other strategies can include using an indicator such as MACD (moving average convergence/divergence as a buy sell signal):






This is a great indicator in detecting large moves up and down. When the MACD line crosses blow the gray signal line that is a sell signal, when the MACD crosses above the signal like that is a buy signal. The only flaw in the plan is that it can get tricked in certain instances. For example in late 2011-early 2012 we saw what is referred to as a whipsaw. Where the indicator signals a trend change, but price then turns and reverses back in the previous direction. But all-in-all this simple indicator would have served you very well over the last 14 years. The market basically saw a zero return from 2000 to our current date, while the MACD strategy would have returned ~500 SP500 points and would have been a significant winner.

Trendlines
 Another way to determine a trend change is to use trendline supports as signals. When a trendline support is broken that is a sell signal; when a trendline resistance is broken that is a buy signal.

 



 Previous returns don't guarantee future results, but there are ways for people educated in even simple market timing strategies to outperform the Buy and Holders. The problem comes more from the emotional swings that come with investing. Even though we have these basic signals, investors will get caught up in the moment and headlines and make poor choices that are not in line with their long-term plans. Having a plan doesn't mean anything if you don't follow it! You must follow your plan and be willing to trust the signals you receive. We tend to suffer from fear and greed and the market is a master at invoking those emotions. While there are much more complex strategies to squeeze a little more out of the market, those plans have more false signals and create more risk. For a basic investing plan you will need to look for patterns (like the ones I have shown here) and choose what works best for you and your investment goals.



These signals can be combined to try to gain a confirmation of one signal through another. They can and should also be combined with a solid understanding of the company's financial standing and position against its competitors. The primary plan for investors should be to buy the strongest companies in their respective industries, that are in a well defined uptrend, and show the highest prospects of risk vs reward.

Sunday, February 3, 2013

Weekend Update: January is in the Books

This week's update I am going to be focusing on the longer-term view of our 10 watch list stocks. The primary difference between looking at Daily charts vs Weekly charts is your time frame as an investor/trader. For more short term trades like I prefer, I will tend to focus on the Daily movement. Almost all of the charts we have looked at so far have been that Daily time frame; each bar on the chart is one days' movement. Typically with the Daily view I won't look back more than a year in the past for information on my current trade. With a Weekly view however we tend to look at a much larger picture and longer view of the past. Typically I will look back a minimum of a year and often up to 5 years. I assume a lot of people would prefer to be a little less active and invest for a longer time frame, so we will also spend time discussing the mid to long-term view of our stocks.

 Lets get started!

Enbridge


When you have a strong trend like Enbridge is in, you want to time your buys to when prices retest the uptrend support line. The arrows show the proper times to buy Enbridge for a longer time frame investor/trader. A shorter term setup is playing out from the 10 month sideways range breakout @ 42.00. The expectation is to see prices challenge the upper trend resistance. For disclosure, I have both longer term and shorter term positions in Enbridge.

Hain



Hain is still in its longer term uptrend even after the 30% correction. The 2 year trend support is still holding and price has actually broken above the downtrend resistance. Something I think is very important to look at is a stocks' performance vs the SP500 performance, this is called "relative strength". That is the chart I am showing under the Hain price chart, and it has not broken its downtrend as of yet and is not confirming our breakout in price. We will reference this often as it is important to be investing in stocks that are performing better than the SP500. Otherwise why would we try to pick better stocks? We would just buy the SP500 fund. But we can use relative strength to find stocks that are beating the market. And that is our whole purpose...Outperformance!

 For the record, HAIN has shown excellent outperformance over the past 2 years and will look to continue that trend with a breakout here. Earnings are announced Tuesday for Q4.

 AAPL

How ugly can it get? What we are looking at here is the opposite of outperforming. AAPL is in a solid downtrend and has seen heavy selling volume for the past 3-4 months now. Also something I look for is the trending pattern of the 20 and 50 week moving averages (circled crossing each other). These are simply showing that the trend has shifted significantly and until that 20 Week Average begins to flatten out and turn higher you should not be buying this stock.

MOS



MOS broke above the resistance line last week and then tried to trade back below, but managed to close just at the major resistance level. This week I would hope to see the buyers come back in and push past the prior high from 2 weeks ago. Overall, the action we have seen recently in MOS has been very strong. Some consolidation at these levels would be healthy to see.

HD



HD took a breather this week after finishing higher the past four in a row. Maybe we get a quick pop to the upper trend line, then spend some time digesting the recent gains and holding above the new support level near $65. This chart, much like the one we see in ENB, has provided some excellent buying opportunities for longer term holders as well as a short-term opportunity from last weeks breakout above the range resistance level and the prior high. The projected price target for the range (blue horizontal likes) breakout coincidentally is the top of the channel resistance. As long as prices hold above $65, this thing continues to look great!

CMI



CMI stalled out this week after running into some overhead resistance last week. Its premature to get too serious about this yet, but its possible we are seeing the early formation of a Head/Shoulders Top (bad!). To eliminate the possibility of this pattern completing we would need to see price continue through the $118 resistance level and take out the prior high of ~$133. That would nullify the pattern setup and likely take the stock to test the upper channel line. Breaking $118 in the near future will be significant for this space. I trimmed my position in this stock on Friday of last week and am waiting to add shares back once we get above $118.

F



Ford has seen a great rally over the past 6 months and is now testing the (hopefully) new support area between 12.90 and 13. This week price broke through the level briefly (likely shaking out some weak holders of the stock) but then was able to come back above $13 and hold as of Friday's close. Once a stock begins to change trend it will typically "throwback" to the prior level to retest the new support. What we then like to see is for prices to hold right near the zone and see buyer interest return to the stock. This is very typically bullish behavior and as long as we are above $13, this is a strong entry point. If prices next week should fail here, the next level of support would be right around the $11.50 area. That's where the 20, 50 and 200 moving averages all are, as well as a prior inflection point for prices going back to mid 2011.

WFC



Wells is still clawing higher here. Something I think is important will be the resolution of this triangle formation (lower highs and higher lows create 2 converging trendlines, and the break of one of those lines will tend to dictate the near term direction for the stock). I have been steadily buying this stock in its recent uptrend, if it breaks above the downtrending  resistance, I will be looking for more opportunities to add further. If it fails and breaks below the uptrending support, I will sell my position and wait for a better entry point.

PBW



Our clean energy fund has been moving in the right direction. It has been working sideways for a month now after the big surge from the November lows. While the short term action has given us a nice bullish Flag pattern, the longer term is setting up to move on an even larger pattern. The most notable pattern I see here is the Cup/Handle type pattern (highlighted by the green lines) price tends to form a bowl shaped "cup" followed by a consolidation "handle", then price should break above the resistance level and continue higher. However I could also see the setup for a possible Inverse Head/Shoulder pattern here if price pulls back a bit before continuing higher. Both patterns measure to the same price target, as you take the low from the "head" or 'Cup" and the highs from the resistance "neckline" or cups brim; you take the difference between those distances and that projects upward from the breakout/resistance area. In this case giving us a possible upside target of about $5.58 or about 25% gain.

I will try this week to put up a lesson on common price patterns and how we use them in building our investment plans.

DDD



3D Systems took it on the chin this week dropping some 15% on heavy trading volume. I posted about this pullback early last week and not much has improved. We normally like to see pullbacks, but violent moves like this are not typically very healthy signs in the near term. In this case, if we are taking a longer term view, I think this has a ways to come down until it is legitimately buy able. Short term there may be a trade to be had  but longer term, we need to wait for this to cool a week or two. And yes it might just snap right back and continue ripping higher, but we are looking for low risk/high reward setups, not every maniac rally that we see. Long term I think this stock goes higher eventually, but right now we should let it play itself out a little more.