Sunday, June 28, 2015

Higher Highs and Trailing Stops

The market closed slightly lower on the week. Attribute meaning of that however you wish; many are saying it's because of Greece, interest rates, quarter-end rebalancing, or summer seasonality. But regardless of all the news flow, the SP500 sits less than 2% from all time highs.

SP500 weekly

Despite the down week we had 9 of 13 holdings post new highs and 7 of the 9 made new weekly closing highs. Our Portfolio continues to outperform against the broader index. 

Charts In Focus

We saw 3 significant upside breakouts this week that need a closer look.

 Facebook has signaled a new buy trigger this week, fortunately we are already quite long this name so no additional action is needed. However had we not been holding shares, I would be a buyer here.

Price resumed to new all-time highs on a gap higher open to the week. Volume expanded on the breakout as well signaling that big buyers are present at these levels. Both of my confirming indicators suggest a bullish stance here as well. Relative Strength vs the SP500 broke its year long downtrend and moved to all time highs. The Weekly MACD signal has crossed over bullishly after a false move in early March. This bullish crossover has occurred as the MACD has pulled back over the past 18-months, yet never violated the Zero line. This shows the stock has simply been consolidating within a larger uptrend and that the long-term trend is still intact. Success is certainly not guaranteed in the future, but all big winners display this same pattern.

Last week I said that I wanted to see FB move away from this trading range soon or our positions would become suspect. Ask and you shall receive! Shares rallied nearly 10% and it appears much more upside is possible.

Fundamental metrics are phenomenal for Facebook: (As per They have grown EPS by 83% this year and are expected to grow at a fairly steady rate of 25-30% over the next five years. The metric I like the best is that they grew Sales at 41% Q over Q, and have had 74% Sales Growth over the past 5-years.

The fundamentals are in place for strong growth and the price action is telling us the market wants higher prices in the future. With the new high breakout we can trail stops marginally to a weekly close below 78.50.

 Our oldest current holding, UNH, has seemingly broken above its 4-month trading range this week on strong volume. The Obama Care ruling sent the Healthcare sector soaring this week and UNH was certainly a beneficiary. This is simply what leading stocks do; they rally for multiple months, consolidate near the highs and eventually breakout and resume another leg higher.

There is no reason to trail stops yet as our current placement remains the lowest closing bar in the last 10 weeks. But this is exactly the kind of action we wanted to see from this consolidation. We have held positions for our Portfolio since Spring of 2013 and just goes to show that you can never truly know where you are in a trend. The best we can do is ride these market leaders until the price action tells us to step aside and protect capital.

 Disney continues to shine and followed through on last week's expansionary bar with a gap higher rally this week. While the SP500 closed at the lows of the week, DIS closed almost on its high tick. This market environment continues to reward a select group of stocks and we need to pay attention to where money is flowing. Volume has increased each of the last two weeks and shows a healthy rotation into this name.

Determining trailing stops and stocks that are trailing higher

The key to trailing stops successfully is to keep them far enough away from the current price action to let a winner run, while also keeping the exit point close enough to keep open losses small to protect gains. 

I employ a trend approach, this amounts to tracking higher highs and higher swing lows. After a new high is made, the prior swing low becomes the new trailing stop level. Because simply if the recent "higher low" is violated the trend of higher lows is invalidated. Using the recent swing low as your stop location is based on the theory where after a brief pullback, buyers stepped in at those levels. With a strong trending stock the expectation is that on the next pullback new buyers will come in even quicker and continue the uptrend. Should they fail to do so often suggests selling pressure has overtaken buying pressure and a new trend may be developing. 

Through my experience and research I have found for a longer term strategy that the lowest close of the last 10 weekly bars (50 Day lows) works well for giving a stock adequate room. It also allows for tight enough stops to protect gains in the inevitable event the trend changes. Often this 50 Day low occurs very near the 20 WMA. 

The combination of a rising 20 WMA and 50 day swing lows offers an ideal exit point for intermediate-term trend trading. 

*Note: This is an exit strategy that tends to work best for large cap stocks. For more volatile small and mid-cap stocks, shorter timeframe stops are often preferred. 

Let's take a look at a few stops that can be trailed in our Lg-Cap holdings this week.

Stops trailed higher:

 SBUX continues to press new highs. With each surge higher we are able to ratchet up our stop point. While it certainly has been an amazing run for Starbucks in 2015, this is not an unprecedented move for the stock. The last rally from late 2012-2013 lasted 12-months and +48% from breakout to peak. The current move has been in place since the 11/28/14 breakout. That puts us at almost 7-months and a +34% gain . So even using recent history as our guide this could continue for some time yet without being unreasonable. 

Most people can't fathom a rally like this and continuously call for a correction as the stock is "overbought". I prefer to stick to reality and the concept that the most bullish thing a stock can do is go higher. We bought it because our strategy suggested it would go up, now that it has there is no reason to get itchy and pretend that we know where it will end. 

The recent swing low at 49.78 can be our new stop location as that was a key pivot location for the stock and the rising 20 WMA has now caught up to that level. Even if the stock were to tank from here, we are looking at roughly a 25% gain regardless at this point. It would take a 10% correction from current levels to invalidate the trend for my timeframe. 

 GILD has been a beast since May. The stock made new all-time highs this week, but faded some into the end of the week. A pullback here would not be a shock and anything above the prior swing low and support at 103.85 would be seen as constructive consolidation. With this trailed stop we are now basically on a free roll as our entry was $1 above. Should we see a sharp reversal from here we would be exiting with very little loss of principle capital. I'll take that; the leading stock in the leading sector (Biotech), growing EPS 107% Q over Q and 300% EPS Growth this year. Sales Growth Q over Q is above 50%, a 1.44% dividend yield and a forward P/E of only 10 makes GILD an incredible candidate for future returns. Considering we are taking little to no risk in the stock makes this a no-brainer holding going forward. 

 GS finally saw a little selling come it this week, but the trend is so clearly higher and our new stop location is above our entry point. Its another situation where we are risking no principle to see where this move can go. 

 AIG managed to push higher on a gap move this week despite the ominous looking bar from last week. This is why I don't tend to give much credence to any one trading bar and defer to the longer-term trends in all cases. We can edge our stops slightly higher this week to just below our entry point at 56.99. 

It should be an eventful, holiday-shortened week of news ahead of us: Greece's debt deadline, the June Non-Farm Payroll Report due Thursday, and no Friday trading due to the 4th of July Holiday. These events will no doubt move markets, but it is not our jobs to predict what these outcomes may be. While many are very negative and cautious on the near term, the market continues to present leading opportunities. It is our job to follow the market's lead regardless of the noisy news flow we will be bombarded with. 

You don't need to know how the Greece bailout will turn out to be profitable in the market. You don't need to correctly guess the Payroll number or the market's reaction to these events. What we need to do is simply react to what happens either way. If the market's take the news poorly and trigger our stop levels, we will exit those positions. If the market responds positively we will be positioned in the current leading names and they should continue to display leadership. 

Successful investing is not about predictions and opinions. Successful investing is about reading the market and positioning your funds into repeatable, high probability situations. Your ideas will not work every time, but if you continuously put yourself in low risk/high reward positions you will be a big winner in the end. Our profitability is not dependent on this particular round of trades we currently hold. What matters is the next 1,000 trades we take and sticking to a system that rewards correct ideas and eliminates incorrect ideas quickly. 

For up to date charts throughout the week Follow on Stocktwits and Twitter @ZenTrends.

Sunday, June 21, 2015

Lg-Cap Portfolio Review (6/19/2015)

We had no changes to our Lg-Cap Portfolio this week. While the market has pulled back a little over the last few weeks, most of our holdings have managed to grind higher. This week 6 out of our 13 names closed at new weekly closing highs. We continue to see the top performing stocks lead despite the choppy overall market.

For those traders who focus on relative strength and leading stocks, you likely have been confused as to what all the bearish talk is all about. This week a couple notable investor surveys showed quite a bit of negative sentiment, most investors are expecting a flat to lower market over the next 6-months. These survey results are typically contrarian indicators, meaning when negative readings increase market returns tend to be better than average.

Personally I hear an awful lot of negative talking points from both the public and the financial media, many it seems are expecting a large decline in the near future. However I haven't seen many of the issues they are discussing affect my individual trades. This is still a bull market and there are many opportunities presenting themselves that offer high quality risk/reward setups. So while the majority of traders/investors, analysts, and financial media see these swirling death clouds for the market, my scans continue to pull winning stocks with strong fundamentals emerging from large technical bases.

Maybe the punditry are correct and we will see a large correction soon, but if you follow the price action of leading stocks they will alert you when its time to step aside. As its been said before, "price will not miss the next bear market". This is a cute way of saying that all large declines (aka downtrends) offer multiple exit points before the bottom ultimately falls out. We are always looking for hints that this may be occurring, but so far the larger indexes continue to make higher highs and higher lows.

Here's something you don't typically see at the beginning of a bear market:

Russell 2000 Small Cap Index makes new all-time high
This is a weekly chart of the Russell 2000, there is NOTHING bearish about this chart. Small Caps saw a significant rally through 2013, followed by an 18-month choppy consolidation of that uptrend. Since breaking above the range highs in early spring the Russell has retested it's breakout and now is resuming higher. This is classic breakout behavior: consolidation of prior uptrend, breakout to new highs, throwback to retest prior resistance, and then a resumption to new highs.

When Small Caps lead it means that investors are seeking out the higher risk (but higher returns) of the more economically sensitive stocks. I like a heightened risk appetite, it tends to be very favorable for my style of investing.

The SP500 seems to be where the Russell was about 6 months ago. Still chopping within its range and not in full breakout mode. I would expect the SP500 to follow suit soon. But as always we keep an open mind and manage risk. Should conditions deteriorate we will take defensive measures to protect our capital. 

If you simply look at the market and the leading stocks making new highs it appears more upside is in the cards. If you listen to opinions and media you will be left behind as has been the case for much of this bull market rally. 

In case you missed it, check out my recent post about Offensive vs Defensive sector rotation that is currently underway. The correct sector groups are rotating into leaders and that should not be ignored. 


In the spirit of "leadership stocks" lets look at the 6 holdings that made new weekly closing highs this week first.

Starbucks is relentless. The stock has been mostly vertical on the weekly timeframe for all of 2015. While the daily view shows more even trading and some consolidation periods, the weekly bars continue to rip higher. It is only reasonable that we keep stops well out of the way and give this tremendous leader room to pullback.

Disney broke its tight trading range this week with an expansionary bullish "engulfing bar". This is typically a positive sign and DIS appears poised to resume its long-term uptrend after the recent 7-week consolidation. This has been a big winner for our portfolio and with the trend resumption this week we can tighten stops to the bottom of the recent trading range at 107.65.

Gilead is now up 6 weeks in a row and 9 of the last 11. As we have seen before this is a stock that can pack some serious momentum when it gets rolling and this time is no exception. I still don't have what I'm looking for to trail stops just yet. We will likely need to see the stock pullback and then form a new swing low before we can trail up stops and lock in some gains. Its still early here and there is no need to rush things. Building big winners takes time.

While most of the Financial space saw pullbacks this week, likely due to the Fed maintaining low interests rates, Goldman managed to once again close positive. You have to be impressed with how strong this name has been recently, but I wouldn't be shocked if it did pullback a little over the next couple weeks. 

UNH remains range bound at all-time highs, yet closed at a new weekly closing high. I'm not positive this marginal breakout is enough to propel the stock back into the uptrend monster it has been, but it continues to find buyers at the rising 20 WMA. After the torrid run this stock had from October to March, some extended consolidation would seem reasonable. I still remain quite positive on this position longer-term even though I feel it needs some more time in this 10 point trading range.

TWX closed at new 13-year highs this week and seems poised to get out of this year long trading range. The fact that it continues to tighten its range and press against the highs leads me to believe its nearing a key breakout point. I have been very positive on this stock for some time and maybe now its ready to finally power higher. When this range breaks I have little doubt the stock will move significantly, and I continue to feel this break will occur to the upside.

I've been pleased with how well BMY has digested its big downside reaction 4-weeks ago. Often a shock like that to a large winner will lead to more aggressive profit taking, yet the stock has been defended right at its rising 20 WMA. This week's move was particularly positive and I still remain bullish at current levels. The stock seems to simply be digesting the large gains from late 2014 and earlier this year. Until there is a break below these recent swing lows we have to remain appropriately positioned Long.

The grinder continues. HON acts well enough to always push just a little higher. Higher highs and higher lows, that's about it. Until that trend is broken I like our positioning in this leading name.

AIG looks to have hit a point where it will need a consolidation/pullback before resuming higher. That is a pretty ugly bar and is called a "shooting star". Typically this sort of trading action suggests buyers are getting tired and are in need of some rest. The recent run from February to June has been fantastic, but over the short-term some weakness is likely. Our stops have already been trailed to the breakout area and just below our entry so there is no need to get antsy. I believe the upside potential in AIG can be substantial, there is little reason besides boredom to try and trade the next 3-4 points. If the breakout fails our stops will be triggered and we will exit for a very small loss (now less than .20R).

We essentially have minimal risk and large potential reward; I enjoy sitting on a 7% gain with little to no risk, that's where we are currently with our AIG holding. If the trade fails we take hardly any hit to our capital while leaving the possibility of unlimited upside.

AAPL remains in a relatively tight consolidation. It has been a steady drag on momentum for the broader indexes as it holds a large weighting in the SP500, DJIA, and COMP. This is just the second time its closed a week below its 20 WMA in the last 18 months. A swift snap-back above would be a good sign going forward. I will want to continue to hold AAPL above the range lows at 123.25.

Wells like the rest of the banks saw some profit taking come in this week, but it remains in breakout mode and is regularly setting new all-time highs. We will stick with this one as long as its making higher highs and higher lows.

Facebook continues to meander around between $85 and $79. I am still constructive on the name at current levels, but I will want to see some new highs soon. The range lows at $78 remain a strong place for our exit point.

CSCO had a nice finish to the week but is still just hanging out near the prior breakout highs. We've owned this name since February and its never really gotten going. However I do find the recent price action positive and I would hope for a resolution higher soon. Otherwise stops remain near the recent swing lows.

That's all I have for this week. I hope everyone has a happy Father's Day!

Please Follow on Stocktwits and Twitter @ZenTrends for up to date changes during the week. Thanks for reading.

Sunday, June 14, 2015

Risk Levels to Watch and New Trailing Stops

Contrary to what "Harry Hindsight" traders tell you, nothing is ever certain or clear with regard to the future direction of the markets. Risk of the unknown is ever present and there is ALWAYS a reason to be cautious when exposed to open market risk. But as Jon Boorman (@jboorman) has said many times, "it's called risk, we manage it". 

We can never know what tomorrow will bring, fortunately we don't need to know to be successful with our investments. All we need to know is the amount we are willing to risk on an idea and exactly where we are wrong in the event the market moves against our position. 

Now, we don't own the market, but we do own leading stocks in uptrends within the market. This means we don't take direct action on any of our trades from what the market alone says, but knowing where the risk for larger downside lies can be helpful for our individual holdings. 

This week I want to take a look at the SP500 on 3 separate timeframes and show where my risk levels are set and why. 

SP500 Daily
Looking at the Daily chart of the SP500 a lower low would be set if the market closes below the 2,079 level. Remember that an uptrend is defined by higher highs and higher lows. Once that sequence is broken the trend no longer favors high probability upside momentum. It certainly doesn't mean the market can't go higher, but it would be a cautionary flag saying the short-term price action is beginning to weaken.

A solid close below this level would cause me to rethink shorter-term bullish bets within my Portfolios. Currently the market sits above these levels, therefore any movement above that low is simply constructive consolidation within the larger uptrend.

SP500 Weekly
Stepping back a bit to the Weekly chart, my next level of risk is the 2,040 March lows. A clean close below this low would signify longer-term risk exists for the current market. This is also where the 50 WMA sits which has been a solid trailing support for the entire run beginning in 2012. October's pullback gave a good hard jolt through this moving average, yet the market found its footing and resumed higher.

I will also be watching the closing low at 2,053. On a closing basis this should be a big level of support as it was stiff resistance for the whole month of January. It held as support once before, in March, and I would want to see buyers come in at those levels to defend the uptrend.

SP500 Monthly
Zooming out further the Monthly view shows the consistency of the recent bull trend. All dips have been repeatedly bought quickly, so it would really raise an eyebrow if the swing low from January cannot hold.

My major Bull/Bear indicator looks at this Monthly view of the market. For a Bull cycle to end (or be seriously challenged) I look for the "uptrend invalidation", 20 MMA violation on a closing basis, and a MACD bearish crossover. That combination typically leads to very challenging trading environments. But until we see those 3 criteria met I will still believe the market is in a Bullish cycle higher.

Currently this indicator is showing 2 of 3 Bullish cycle confirmations:
The only signal that is not aligned with the bullish confirmation is the monthly MACD. This is also the most benign of the 3 signals; I think of it as the early warning system. What its telling me is that the market is in a long-term uptend, but recent momentum is slowing (and could continue that way). It is not inconceivable that this market continues to churn mostly sideways for a while yet. In fact a MACD reading like this usually suggests a consolidation through price or time.

The key to this whole equation however is price confirmation. So far price and trend continue to point higher. Until these other signals begin to turn lower we will continue to defer to the long-term trends and resilient price action in place.

Trailing Stops

We continue to see strength within our individual holdings and can trail a few stops higher this week. 

Starbucks continues to lead this market. It's been a relentless rally for all of 2015 and I expect any "healthy" pullback should now hold above the 48.50 swing low. 

AIG has been a factor in leading the Financial space higher this year. Since February the stock is up 25% and is just now really moving away from its post recovery base. New stops can be placed at the breakout level and just below our entry point. 

GS looks very similar to AIG and is in the early innings of a post recovery breakout. I love the recent relative strength and breakout follow through. 

TWX is still wedging tightly near multi-year highs. I feel a move away from this tight trading will setup the next major leg for the stock. While it could go in either direction, I only want to be an owner if it breaks to the upside. Trailing stops should be placed just below the support lows.

 Again, these leading Financials all look about the same. One thing to keep in mind with WFC vs the others is that WFC made new all-time highs this week. The breakout follow-through has been consistent enough that I feel raising stops to 54.05 is appropriate. 

Please follow on Stocktwits and Twitter @ZenTrends

Saturday, June 6, 2015

Offense vs Defense

There were no changes to the Lg-Cap Portfolio this week. In fact the market didn't give much in the way of clarity in either direction. This is something we've grown used to in 2015. The market finds ways to frustrate both sides, this is apparent on social media where debates are sparking up regularly as to the next phase of this market. We can all agree that this is a sideways trending market over the past year, this means that both bulls and bears have been overeager in their postures. The longer-term trends remain higher showing the Bulls are still in control of this market. But over the shorter-term momentum in either direction has been lacking. 

In environments like these we especially want to be focusing on leading stocks from leading sectors. If/when the market moves away from this current range it will be those leaders that come out the best for the next run. 

Typically a healthy up trending market will be led by the offensive sectors- those most sensitive to improving economic conditions. These offensive groups tend to be associated with the Financials, Consumer Discretionary, Technology, and Industrials. On the other hand, in a weak market environment investors and managers seek out those more defensive groups that will hold up better during a recessionary environment. These are the high dividend paying groups like Utilities and Consumer Staples companies as well as Bonds. 

Recently bonds have been closely correlated with stock prices. But in more traditional portfolio management a percentage of Bonds should be held based on your risk tolerance. The less risk you want to take, the more bonds you hold within your portfolio. Therefore Bonds are thought of as being defensive. 

With this in mind let's take a look at those defensive sectors and see just how risky (or not) investors are positioning their funds. When a strong uptrend begins to roll over and show signs of change you will see capital rotation into these defensive groups. 


Consumer Staples (XLP)

Utilities (XLU)

Bonds (TLT)

Across the board we are seeing major (weekly) support violations on heavy trading volumes. This is a sign of institutional selling. If institutions are selling these defensive groups it means they are rotating money elsewhere. It is our job to be positioned where the money is rotating into, not out of.


Technology (XLK)

Consumer Discretionary (XLY)

Financials (XLF)

Industrials (XLI)

With exception of the Industrials, the offensive market groups are in clearly defined uptrends and NOT seeing heavy selling volume. They are also not showing significant buying volumes which confirms that convictions in the overall market are mixed. However the evidence of PRICE continues to favor upside in equities. 

An indicator many use for determining Offensive or Defensive bias is the relative performance of Consumer Discretionary vs Consumer Staples.  The theory being if Discretionary stocks are performing better it means the consumer is spending their money on products they "want" rather than just what they "need". Here is that ratio currently:

XLY:XLP (weekly closes)

 When the blue line is rising it means Discretionary stocks are outperforming relative to Staple stocks. Above we see a year-long period of out performance from mid-2013 through early 2014. The ratio peaked in March of last year and underperformed until the recent breakout on 3/6/15. Since that initial breakout above the August swing high, the ratio has consolidated and this week moved to new all-time ratio highs.

Zooming in on the "yellow box" area from early 2013:

Its been said that history doesn't repeat, but it often rhymes. The development from January-June 2013 looks remarkably similar to how it does at this very moment. It remains to be seen if the current breakout will rhyme with 2013. The current backdrop of investor polls and financial media headlines show more negativity than positive. But anecdotal data and narratives aside, our focus is to generate returns from wherever they come. Bonds and Commodities offer little for Long trends; currently the best game in town remains offensive oriented equities.

This is NOT a combination for a new emerging Bear trend.

Please Follow on Stocktwits and Twitter @ZenTrends