Monday, May 26, 2014

Something For Everyone

I read an interesting article on confirmation bias this past week. The basic idea is that we tend to seek information that already agrees with our preconceived views on a subject. We find it comforting to read things that cater to our beliefs and emotions, yet we find it difficult and almost confrontational to seek opinions that differ from our views. This is a prevalent problem with individual investors too. We tend to form our opinions of how the market should behave based on the economic indicators, technical setups, political views, etc. As is often the case with biases, they warp our perspective of the actual environment because we attach meaning to each reaction that relates to our own current market view.

What I found so interesting while reading this article (although I had known about this concept prior to the reading), was how I had been slowly forming a more negative view of the market and found myself drifting toward a broad market bias. This is something that I try hard to avoid as I feel it offers no discernible advantage in my investing results, and may even be a hindrance due to the interference of my emotions.

Most people lose money in the markets (individual traders/investors), but some do find great success. So what separates the winners from the losers? If most people lose money in the markets, then we need to avoid behavior that appears to be that of the masses and start behaving more like the minority. If the majority of individual investors are emotional, reactionary, and fearful (the standard human tendencies in stressful environments), then we need to do the opposite of that and react systematically. We need to do our planning and thinking away from the heat of the battle so that in the moment of maximum activity we will act according to our non-emotional system and not allow our fear and greed to lead us to poor decisions.

With this confirmation bias stuff out in the open I think it is best if we simply focus on what avoids the most distraction and review our Top 10 holdings. I have spent quite a bit of time over the past month or more warning about difficulty in stocks going forward. While I still think it is a very mixed picture (at best), we need to continue to take the signals that are triggered by our system regardless of what the broader market averages are doing at the moment. Provided that the long-term trends are higher (they are), I want to be a buyer of strength in our core individual stock positions.

While we did have one buy signal in our Portfolio this week, it is important to review each position as there may be some interesting activity in a near future.

WFC (3/3) added on new buy signal
With the new consolidation breakout and RS trend resumption (not shown), WFC gives us another opportunity to increase our position size and slide our trailing stops a little higher. New positions can be added here with stops just below $48. Considering how weak the rest of the XLF component stocks look, WFC continues to be the bank to own going forward. So long as its trending smoothly, we will stick with this long term winner.

AEP (3/3)
Since hitting its base target a month ago AEP has flagged orderly back near trailing support levels. My current stop is at $50 as that would take into consideration a failed breakout attempt above all time highs as well as break the positive sloping 20 WMA and RS trend support. Above that level however we take a very small risk (less than $1.50 risk per share currently) for potentially unlimited upside after setting new highs just a couple weeks ago. Continue to follow the upswing in AEP, not to mention collecting that solid 4% dividend payout along the way.

 CMI (3/3)
Cummins just keeps motoring higher toward our $164 base target in a seemingly endless chain of higher lows and higher highs. This is a big winner for us and there is nothing to do but continue riding it. Stops near $140 make sense.

TLT (2/3)
TLT is at an interesting junction here. After a solid rally off of new downtrend lows, price is entering an area where the sledding could get a bit difficult. While we did see prices come within $1 of our target objective, the dominant down sloping trend line is causing a sticking point. I still think a stop location at $109 is the proper area for trend invalidation and it seems that we may see some choppy trading around current levels in the near future.

While I don't like the long term downtrend, according to my timeframe the trend is certainly in an upswing. An aggressive trader could consider taking off some risk at this point but since TLT is such a defensive and historically low volatility holding I don't mind riding our current position as long as the inflection level near $109 is intact.  

PPG (2/3)
PPG is on the verge of breaking out to new all time highs. A move above the downsloping resistance and a break above $200 would trigger an end to the nearly 3+ month consolidation. I would look to be a buyer of that move and trail stops to the $188 level.

UNH (2/3)
UNH looks great here after a classic retest of the prior breakout level. We did see a momentary shakeout move but price quickly recovered and is now resuming higher on strong trading activity. Above $75 we want to be holders of UNH.

HAIN (0/3)
HAIN continues to probe its downtrend resistance and we really have nothing to do but wait for a resolution of the current tightening of the price action. A breakout to higher highs above $94 would get us back invested here and we would trail our stop area to the $84 swing low support.

F (0/3)
Ford is just hanging out with the now slowly rising 20 WMA cupping the price action nicely. I like to see price consolidating just above a newly upswinging 20 WMA; that combo can create a solid base support to launch a new uptrend from. I want to be sure with this one though and a weekly close above the prior swing high at $16.50 is needed to confirm the positive analysis suggested above.

DDD (0/3)
As with most of the "hot money" momo names DDD continues to bounce nicely from severely depressed levels and long term support. We still need more confirmation that the downtrend is over before we take new aggressive positions here, but so far this is doing everything it needs to to right the ship. This week we saw both the downtrend line in price and Relative Strength broken to the upside. Now if a solid support base can form and we can get the longer term average to flatten and start moving higher again, this could be a stock to own pretty soon.

I said last week taking a small, longer term entry around current levels is not a terrible idea and I have done so over the past few weeks in other accounts, but for true trend based systems this one is not quite there yet.

PBW (0/3)
Clean Energy finally saw a strong bounce back this week but still remains below all measures of downtrend resistance. Until we see a real effort beyond one week's worth of trading to change the trend back to positive, this is a no touch currently. It would take a move back above $7 to get me interested at this point. Long term I love this space, but the short term picture suggests elevated risk and I choose to invest with the wind at my back, not blowing in my face.

--The current environment gives everyone a little something depending on their market bias. We have stocks suggesting further strength ahead and we have others that continue to be entering new downtrending phases. There is something for the Bulls and the Bears depending on where you look, yet I find it much more profitable to simply focus on what we know and not on what we guess will happen. You don't need to predict the next move in the markets to be successful investors, in fact it may be highly counter productive to attempt to position yourself based on your preconceived views. Its better to let the market show you where the strength is and simultaneously where to stay away from as that will always keep you aligned with the positive price action.

Chart of the Week

Russell 2000 Index (RUT)
Again, something for everyone here. For the Bulls we have finally seen price break above the downsloping resistance of the dominant trend channel of the past few months. For the Bears, they can say that while price is poking through the channel line, the RS trend is simply retesting the underside of the long-term Relative trend support. They could also say that even if we see a bounce from here it is likely to be short lived and would be setting up a larger topping pattern with a bigger right shoulder formation. Any positive trading up to the 1,180 level could still be considered a lower high on the long-term charts and would be vulnerable to selling pressure.

Fortunately we don't need to dwell on this battle. We simply need to focus on how our leading stocks perform and whether or not they provide the positive risk/reward setups we seek to be profitable and successful investors.

Sunday, May 18, 2014

Test Continues

Not much was accomplished this week. While the SP500 did touch another new high this week, the breakout attempt could not hold. At the same time the Russell 2000 traded to a lower low and briefly violated its 1,100 support level before recovering late Friday afternoon. It is unusual to see one index test new highs while another tests lower lows but that's what we saw this week. The divergence between the lower risk large-caps and higher risk small-caps continues and it can really be seen on the daily timeframe.

Russell 2000 (daily)

SP500 (daily)

You can see that while the SP500 continues to trade with higher highs and higher lows the Russell is in a very defined trend of lower lows and lower highs. What this means to us as Relative Strength investors is that we want to remain focused on the large-caps which are working and avoid the small-caps which are not. It really is as simple as that. Buy strength and sell weakness.

What was particularly interesting this week was how the Russell was on the verge of breaking below its major 1,100 support multiple times yet managed to rally back and trap the over eager bears looking to short the breakdown. We are truly in a holding pattern across the markets as the SP500 continues to trap bulls on these failed moves to new highs and the Russell 2000 continues to trap bears on the shakeout moves lower. However until we see a sustained move above or below these key resistance/support zones it will continue to be a range bound and difficult trading environment. This is why I emphasize focussing on individual stock strength and avoiding the mess that are the larger stock averages. There are many stocks that continue to act well despite all the chatter and that is where you should be focusing your funds. Large-cap names like CMI, CAT, AAPL, UNP, WFC, JNJ, etc continue to make higher highs and buck the overall confusing environment.

The key growth stocks we mentioned last week managed to hold on to major support and as expected are seeing some buy interest at current levels which should keep a floor under the market so long as it continues. Really though our focus will continue to be on the SP500, Russell 2000, and the large-cap winners. The stocks we should be watching are those making new highs as they continue to outperform the market. It is an interesting time for the markets as bonds continue to see fund flows and safety sectors are still leading the way.

 We really only have one notable chart from last week as our portfolio has continued to remain neutrally positioned. HAIN took a shot at a breakout early in the week but was then steadily sold the rest of the way and failed to retake broken support. Once again showing how difficult this market has been on shorter term traders; we are seeing a lot of false moves out there.


We discussed last week how we would need to see the $94 level broken on a weekly basis before the downtrend was proven over. We did not see that this week although there was a good attempt. This looks like a classic false breakout and as long as prices stay below the swing high we will need to stay sidelined to avoid unnecessary risk.

The best advice I can give in an environment as tricky as this one is to lengthen your time frame so you are not caught in the many false moves we are seeing. The market is struggling to find it's direction and until it resumes in one direction or the other we need to remain patient and not make any large, aggressive moves. The time calls for capital preservation and only stocks showing strong relative performance should be considered for your holdings.

Sunday, May 11, 2014

The Rubber and The Road

We have reached a point where the market will have to decide one way or another; the rubber has met the road. Both the SP500 and Dow Jones are probing and holding just below all-time highs resistance, while the Nasdaq and Russell 2000 are barely holding very important intermediate term support levels. Either we see a further breakdown in the riskier stocks that finally drags the large cap names with it or we see breakouts in the large caps through resistance that would coincide with bounces from key support in the Nasdaq and Russell.

Which way this goes is anyone's guess and it is not our business to anticipate, but we should be looking for any hints the market may be offering as to its next intentions. At major inflection points is where using a multi-timeframe analysis can be helpful to determine the risk/reward of the particular outcome to follow. I think it is important to look at both the longer view and then a shorter view to zoom in on the battle of the support zones.

Nasdaq (weekly bars)
As we have discussed previously, the 4,000 level is the line in the sand for the Nasdaq. Currently many of the "hot money" leading tech names are finding very important trend support and likely will provide the catalyst for the resolution of this sticking point for the major index. Names like GOOG, FB, AMZN, TSLA, DDD, etc, these have all made similar moves as the Nasdaq recently and are also at serious trend inflection points. While the look of the longer-term charts are increasingly negative in my opinion, support is support until it is broken.

Russell 2000 (weekly bars)
The Russell, looking nearly identical to the Nasdaq, is sitting right on top of its key support level. There is a bearish price pattern under construction and price is struggling to find buyers while being below the 20 WMA. For continued trend health we are going to need to see this support hold and for price to retake its 20 WMA.  

Here is the long-term RS trend off the 2009 lows: 
You can see how after the massive slide that broke the uptrend of 2013 that now we are testing the long-term uptrend support. This is occurring with the Russell sitting right on its intermediate price support. A breakdown here and this could get really ugly.  

Now let's zoom in on the price action and see what is occurring at this important battle ground. We are going to look at a 30 minute bar chart and add the MACD as our momentum indicator for "under the surface" trend. 

We are seeing momentum building under the surface as price continues to make lower lows into support. This often leads to at least a solid bounce in prices and possibly a bottom forming event. We still don't have the confirmed price action to act on a setup like this, but seeing momentum make higher lows while price makes lower lows is a positive signal that buyers are coming back in at these levels. A move above the prior swing high at 1,119 would confirm this reversal. 

Both the Dow Jones and SP500 look similar to each other as they are holding their uptrend supports, 20 WMA, and continue to trade at the upper end of the recent trading range. 

Here's a look at the SP500 from the weekly view:
SP500 (weekly bars)
Something has got to give in the SP500 very soon. Price has repeatedly tested this upper resistance area and is now being squeezed between the range highs and rising uptrend support. At some point soon one of these levels will break either up or down. I believe the nature of that move will be due to how the Russell and Nasdaq handle their key supports. 

We are in a holding period for the markets and are just waiting for some resolution of the choppy environment. That being the case we had no changes to the Portfolio this week but we do have a couple interesting items of note. 

Because of last week's only marginal violation of support I gave UNH a one week grace period to see if it could recover. We saw a strong bounce back early in the week and most of those gains held. Price is now back above the 20 WMA and as long as it stays that way we will continue to hold our positions. A breakdown of last week's lows and we will exit. 

HAIN saw a strong bounce after positive earnings this week and is now testing very important resistance. Both price and Relative Strength are now kissing the underside of the broken uptrend. We will need to wait for a resolution higher above these levels to have enough confidence that a new position should be entered. A closing price above $94.17 will be needed to break the downtrend. Be ready for that potentially. That would show that the recent weakness was a shakeout move and more upside is to come. 

Nothing is confirmed yet and frankly this is how real breakdowns cement overhead resistance levels; price likes to retest broken support and when it holds as new resistance, look out below. Especially after a positive surprise surrounding the company. Market tops are not made on bad news, they are set by a positive event that "blows off" the rally and buyers dry up. Are we seeing that here? We will know soon by how price handles this inflection level.  

Ford should be on your radars here as we have seen the 20 WMA flatten out and turn positive. Price still needs to break its downtrend at $16.50. A move above would also trigger a nice looking reversal formation projecting higher prices, should that occur. 

That was quite a round trip for DDD since our previous position entry last summer. There is nothing currently saying that the downtrend is over and prices are reversing...Price is well below a steeply declining 20 WMA and still below a nearly vertical downtrend resistance off the highs. What is interesting though is that since the 50%+ correction, price has come all the way back to those prior breakout levels where we were initial buyers. This area also coincides with the long-term uptrend support for the stock going back to late 2011. This is certainly not a momentum buy by any means at this point. But as a place to make a low risk nibble at a long-term potentially life altering technology company at the forefront of 3D printing, you could do a lot worse. 

If you like the 3D printing theme for the future, you certainly have a defined risk level to enter a position against. If it breaks $43ish, you sell and wait for another opportunity. This has been a place prices have rallied from in the past and there is a confluence of support. We don't have much along the order of positive price action for a trade, but as a small entry to build a long-term position, this is a place where risk/reward is favorable. 

Chart of the Week

Tesla Motors (TSLA)
One of my personal favorite companies is Tesla. Not so much for the car (although the Model S is sweet), but more for the company leadership, specifically Elon Musk. The guy is a true visionary in the way Steve Jobs was for AAPL. However Jobs made phones and music players, Musk designs and commands rocket ships via his "Space X" program and is seeking to alter our travel and energy use plans for a sustainable future. 

Needless to say, its pretty badass. Currently the best way to have access to investing into this possible future is through his car company, Tesla Motors. So there is the backstory, electric cars, space ships, Giga-Factories, so nothing huge... 

As for the stock, its been on a whopper of an uptrend since early last year. Granted its been a bit of a wild ride, the stock price has consistently made higher highs and higher lows. Since experiencing a nearly $100 correction from the recent highs, prices have now returned in-line with the prevailing trend support. A lot of people and pro traders have been caught up in this momentum slide (not just TSLA but all the names mentioned above) and were beaten up by it, both emotionally and financially. This creates much displeasure for the "risk on" names at this point. TSLA and the rest of the momo names are being left for dead here right as they trade into critical uptrend support. Will we see bounces here? Its impossible to say. But we know where we are wrong really quickly should the downtrend prevail. 

Saturday, May 3, 2014

Weekend Update: Safety Trade

To Piggy-back off last week's ideas, despite continued positive economic data and solid earnings reports, markets continue to have trouble following through to the upside. While the major indexes did manage gains this week, the key levels of resistance continue to be met with sellers. We saw a good example of this on Friday; the April Jobs Report was released and it was solidly above consensus estimates. One would expect the market to finally put a breakout together and move above this ceiling in prices. However initial strength was met with caution and all but the Russell 2000 finished negative for the day.

 An important concept to understand is that if an asset fails to trade higher on good news (positive surprises) it often means the market is fairly priced at current levels. After a very strong year in 2013 stocks have struggled to continue to push higher. When you see a company trade lower on a blow-out quarter or the market reverses after strong economic news, it is a big red flag that needs to be taken seriously.

 There are several things holding back new buyers at this point such as Russian tensions, tepid US growth, and poor seasonality. You have heard the saying "sell in May and go away", while it sounds catchy, there is actually a fairly significant historical headwind that faces the stock market from May through October. Take a look at this article for a further explanation of this phenomenon. While we certainly could see continued gains from here, history and the odds favor more difficulty in the months ahead.

When you combine poor seasonality with a market that is not responding to positive news AND previously leading stocks breaking down while defensive groups show relative strength, it is careless to ignore the confluence of warning signs. This doesn't mean go out and build a bomb shelter but it does mean that caution is the correct position to take.

Lets take a look at the major market indexes after this week to recap where we currently stand:

The SP500 took another shot at the range highs but once again failed to break higher. The fact that the blowout jobs number Friday failed to push the S&P above its resistance levels is notable. This is still the best of the US indexes and it is still holding its uptrend trajectory (for now).

Russell 2000
This is a pattern I am seeing develop in a lot of individual names as well. I am seeing stocks breaking their longer-term Relative and absolute uptrends. While the trend weakens, prices are just consolidating the prior losses below the 20 WMA and below prior support levels. Remember the idea of "polarity" in the market: once a support level is broken it will then act as resistance on a move back higher. What I'm seeing in the Russell 2000 looks to be the early stages of a trend change.

We continue to see buyers step in at the critical 4,000 level which is a positive, but this level is being tested repeatedly and the more often a level is tested the more likely it is to fail. The previous buyers begin to dry up as each attempt at a rally is met with selling pressure.

Bonds (TLT)
Treasury Bonds took off this week gaining more than 1.5% (which is a big move for bonds especially). We continue to see money flow into safety and what was so surprising about the bond rally this week was Friday's response to the better than expected Jobs data. Typically a strong jobs report means a strengthening economy and therefore higher interest rates (bonds prices lower). But what we saw was a swift reversal just after 7am when bonds had been sold at the open following the strong data. The swift intra-day reversal showed investors are looking for any headline or excuse to pile into safety.

Money was suppose to move to stocks for a "risk on" type rally on a Jobs beat like that. This just again reinforces that no matter what we think should happen the market will always surprise us. It shows how important it is to observe what price is actually doing and not what we expect it to do. If someone told me Thursday night that the Jobs number was going to be 288k vs 210k expected, I would have said sell my bonds and pile into stocks. We don't trade what we think, we trade what we see. And I see a risk averse market where big money is seeking shelter, not risk. Continue to own TLT aggressively above $108. The Double Bottom pattern in play still targets prices roughly 3% higher from here near $115.50.

Looking at our holdings as we enter next week we have two close calls and the rest look solid. Lets look at the holdings that need the most attention first:

UNH is trading heavy and continues to probe the prior resistance area. This week we did see a violation of the 20 WMA but prices are still just at the edge of the support area. I am willing to give this the benefit of the doubt for a week to see if it can recover quickly. Should it fail to bounce back soon I will step aside and reduce risk further. The RS trend is still in play here and is in a long-term uptrend so we will want to continue to position ourselves toward that long-term strength.

PPG has closed below its 1-year trend support but is still holding the long-term RS trend and is above the key support area at $188. Above those levels we want to be in PPG as long-term this is a big winner. We will hold as long as price and trend agree with our risk management principles.

As for our stronger positions that continue to hold up well:

This is the risk you run when you adjust your plan mid-trade. AEP achieved its base target mid week, but due to the larger breakout that we looked at last week, I chose to let the full position ride instead of trimming into the target. As you can see, once the target was hit the stock sold pretty hard off the best levels. Long-term I love this holding and I want to be part of this larger timeframe breakout in motion, but just know the risk of adjusting your trade plan midstream. This is a rare occurrence for me to deviate from my plan, but in the circumstance we find AEP in long-term, it makes sense to double down here as it were.

Cummins made a new all-time high this week despite all the noise buzzing around the market place. We want to maintain an aggressive posture here above $140 and still are bullish long-term above ~$125. The RS resistance was also broken solidly this week signaling continued strength going forward. We will need to see prolonged weakness to cloud the picture too much here.

Wells Fargo is trading in a very clean and defined uptrend. Relative to the market and the Financial sector, WFC continues to outperform. What I really like about this chart is how there are very clear levels as to where the trend will fail. Currently that level is right below the 20 WMA at $46.50; with further strength and consolidation around these highs we could move our stops above $48.

It appears that many stocks are either breaking down or need pullbacks to retest trend supports. We could see 5-10% pullbacks in many leading names and they would simply be retesting their prior breakout levels. Others that are weakening could also see a similar pullback to longer-term support levels. There is no telling how long a move like this could take to play out but an orderly 10% correction through summer would seem to fit with the current look of the markets here. That would be a welcome development as it would let some of the more extended names trade back to retest key levels and also give the weaker stocks time to build proper support bases.

There should be no need to fear a correction as the proper Relative Strength rotation within your accounts should adjust accordingly to the changing environment. If you are 100% long Biotech and Consumer Discretionary stocks then you either are a glutton for punishment or are not listening to what the market is telling you. You are likely dug-in on your "hopes" for where the market will go in the future and not using an objective view of the market. A robust trading method should have you adjusting to the evolving environment and be systematically positioning you to take advantage of what the market gives you.

Don't force it, don't fight it, and don't hope...You will be in a much better position long-term if you keep risk objective and listen to what the market says is the correct path forward.

Chart of the Week

CAT is an example of a leading stock that could use a 5-10% pullback to retest the breakout level before moving higher from here. That would provide an excellent place to add to current holdings or initiate a new position if you didn't have one currently. I have been Long CAT since ~$90/share so a pullback to $96ish would suit me just fine as it would allow some of the overbought condition to work itself off through summer. There is certainly no rule that says it can't continue higher from here, but a pullback would allow the trend to refresh for another sustainable leg higher.