Saturday, December 17, 2016

Watching TDG TransDigm Group

It appears TDG is at a key turning point for its longer and intermediate-term trends. Long-term the trend remains higher and only now seems to be returning to its average trajectory. The intermediate trend has been down since October, but we may have seen the turning point recently that could begin the next leg higher.

The pattern is robust. The stock consistently finds buyers when it approaches its long-term trend average. Buying near these areas goes a long way to tipping risk/reward more in our favor.

*A monthly signal is not confirmed at this time as December's bar has simply bounced off a low. Follow-through higher next month and a close above this month's high will be necessary to confirm the pattern will continue.

The Weekly timeframe remains in a correction (it should be noted most of the lost momentum recently was due to a special dividend of $24/share that was payable November 1st). It is interesting however that the stock has now recovered to the 50 Week SMA and has now traded the last two weeks inside the 12/2 Weekly bar. A move through that high would be a great sign of an end to this decline.

*The Weekly timeframe is not confirmed at this time as price remains with lower lows and lower highs.

Here is where things get interesting. On 12/2 the stock fell more than $10 early in the session only to rally all the way back and close positive. After a 2-Month decline buyers stepped in and established themselves. This kind of reversal pattern can be extremely powerful, the risk/reward is well defined also. Should the stock trade back through that 12/2 low all optimism for the pattern would be killed off. Above that low however this is a stock to hold, own, add to, etc.

Zooming in on the Hourly view we can see how TDG completely rejected lower prices. I call this kind of bar an "F You" bar. Its saying it wants nothing to do with those levels. Stops get run, sellers go short, while the market takes it and flies in the opposite direction.

Moves of this nature, especially those that occur near the long-term trend average, can create monster rewards in our favor for very little risk. This is how we can combine all the timeframes to structure a very solid probability trade and a strong risk/reward.

The Monthly chart is the ultimate reason we like this stock; a pattern this consistent is one we want to participate in as often as possible. This is what it means to identify supply/demand in the market. The key is being able to see when a notable change takes place.

When a change like this occurs it pays for us to notice. We can take an earlier entry point in the blooming trend, then as further milestones are achieved we can expand our timeframe. Hopefully it can become one of those trades we hold for a long, long time.

Saturday, December 10, 2016

Managing Risk vs Reward

The SP500 tagged its first upside objective on Friday as the surge since the election continues. I don't like calling this a "Trump Rally", many of these groups had been strong all year prior to the election and the resolution of the event simply caused many out-of-position investors to reallocate.

Its not a Trump rally, its a FOMO rally as the economy is not nearly as bad as many suggested it was. As usual investors let fear lead their investment process and are now scrambling to adjust as they have done over and over throughout history.

We on the other hand like to think independently of the emotional fear and greed slaves. We prefer to find where money is flowing, where value may be lurking, and where risk/rewards may be out of favor. Its our job as systematic traders/investors to not concern ourselves with politics, media hype, or the like. We are hear to find key turning points for new and old trends.This doesn't mean we pick tops or bottoms, what we want to find are new base setups to position into before the media and emotional traders figure out what is happening.

At a glance it appears the rotations continue to flow into Tech and Energy after multiple weeks of consolidation. Just because these groups didn't react as strongly as others to the initial wave up in the market doesn't mean they should be ignored. Quite the opposite really, now that the first wave of leaders are well extended from their bases I want to see where the next leg of the rally will be coming from. I am not bearish on Banks and Industrials, but I am not a buyer at current levels either as the pattern in place we have already positioned into when they first emerged from their bases (note I am quite bullish on Banks and Transports long-term). For new funds I am liking what I see in Large Cap Tech especially. This appears to be the next area of interest as the breakout is only now getting underway.

The weekly chart of Technology signaled a new bull flag breakout after trading sideways since July. This is a 17-week secondary base formation that is now resuming to the upside after the initial July surge from the nearly 2-year primary base structure. When we are discussing strong risk/reward this is what we are talking about. It is also the first time the group has closed a week at new all-time highs since the first week of August.

After completely reversing last week's bearish outside range, XLK regained new highs and the rising 20 SMA. That's very bullish behavior. In contrast to this orderly consolidation take a look at Industrials and Financials currently over the same timeframe:


Most news has been suggestive of caution toward Technology and growth stocks recently, and with reason as they haven't traded strongly in the past month. While many deem that as "worrisome" behavior for the market in general, I simply see it as a prior leadership group that took a rest and is now ready to resume what it was doing in July.

Different groups come in and out of favor all the time. The steady flow of funds from relative expensiveness to relative value and back again is very normal. When you trade these longer term charts, sitting through periods of digestion is often necessary to catch the biggest moves. Looking at the XLF above my trend method had two strong risk/reward entry points prior to the large surge; the last week of July was the first major trend change, then again at the close of September was another.

As most know it was difficult to get involved once the November breakout was already underway. The consensus narrative was that the move was just a "knee-jerk" or "too far too fast". But had one been willing to sit through several weeks of orderly consolidation and followed the initial signals (while everyone was obsessing about the election and when the next market crash was coming), there were tremendous rewards gained for trading the price and pattern rather than the news flow.

For the past couple months Tech stocks have mostly churned, it now appears they are likely to step into the next leadership position.






Stocks go both up AND down. I know it seems when stocks are rallying they will never give us a good entry again and when they are correcting they will never turn things around. Its important to remember that the consolidation is necessary to set up the next rally opportunity. The swing point tells us where the real buyers are and allows us a better reward to risk for our money. The key is to not get caught up in the narrative and execute the signals when they first present themselves. Most are afraid to buy the early base signal still fearing the negative news flow, by the time the real move has been made only then do they have the confidence that its finally safe to enter. This behavior leads to chasing and getting shaken out repeatedly, or buying high and selling low.

We strive to not be emotional traders, have a systematic process based on the price action, and follow the signals the system triggers regardless of the current narrative of the financial media. Making these small adjustments in the overall process helps improve our long-term expectancy and profitability.

Thanks for reading

Sunday, December 4, 2016

Lg-cap Portfolio Review 12/3/2016

Large Cap stocks are performing well as a group, there are laggards and even fairly soft breadth (this is mainly due to the complete lack of any buying in sectors like Utilities, Staples, and Healthcare, although Tech has recently joined the group), but overall the SP500 is at all-time highs with Financials, Industrials, and now Energy leading the charge.

There is much talk of how the Nasdaq is not participating and creating a key divergence. Growth traders like IBD have been discussing a topping trend due to this underperformance. While this is true that names like Facebook, Amazon, Gilead, etc have been underperforming, but there are plenty of opportunities to make money right now, isn't that why we are all here?

If you are simply following the rotations Financials, Transports, Energy stocks have been showing relative strength for some time. Now no question these could pullback over the intermediate term, they have been making monstrous moves. But isn't it our goal to catch these types of moves rather than think and worry how money has rotated out of some other select groups? I don't know about you but I find it a natural flow for sectors to come in and out of favor. Lets not forget that Technology, and Healthcare lead much of the way since the bull market began in 2009. Financials, Industrials, and Energy have all underperformed the market over the same period, but are seeing strong new rotations as the market moves to new highs.

I for one am not fighting this action and positioning accordingly.

At the open of December our Lg-Cap Portfolio is 80% Long and 20% Cash




















Saturday, November 19, 2016

A Look at Alibaba on Multiple Timeframes

I find using multi-timeframe analysis helpful for identifying strong turning points. Being a long-term swing trader I want to position myself in a blooming trend early to capture large profit opportunities. The kind of moves I prefer take time to develop, they don't occur over a one or two week period. If I position correctly and the stock cooperates I may hold for a year or more.

BABA is offering the type of opportunity I look for as long-term swing trader. Not only do they sport solid growth numbers, but also a very low 33% Institutional ownership at the current time. It should be noted, according to Institutions added 6.5% more exposure in the most recent quarter. When the Big Money are accumulating shares it is often a positive sign for future growth. BABA grew EPS by nearly 200% in the past year and posted 60% Sales Growth Q/Q.

It appears the fundamental numbers are headed in the right direction, now lets take a look at the four primary time periods I use to identify these turns:

For my methods it all starts with the monthly view. Being that BABA is a relatively new issue stock it is only recently showing a 20 SMA, which is now turning higher. The rally this year extended in the late summer and was trading more than 40% above the 20 Month SMA. When this amount of "air" exists between price and the 20 SMA I know its time to wait for a better risk/reward and let the stock settle out for a while.

Since the $110 high in September BABA has pulled back to just above the prior breakout level near $85. This has allowed the trend to rest and has shaken out a lot of the excess bullishness as traders chased the prior rally. Much of the air has also been filled as price is now approaching the rising trend average.

The Weekly view is where most of my signals generate from. For BABA to trigger an entry we first need to see price above the prior week's high, currently that comes in at 95.30. For a valid weekly Buy signal to confirm price will need to close above that prior week's high.

I have alerts set for 95.30 to notify me when the trend is making the "higher high" we are seeking. We will then watch how the week plays out to see if price can hold and suggest a turn is in place.

Drilling down to the Daily timeframe can give us an indication of the underlying patterns that may be forming. There are a few things that stand out to me right away. First we have a gap fill from the August breakout that also coincided with a 61.8% retracement of the summer rally. Secondly I notice the pullback has seemingly formed a very clear 5-wave pattern that may have completed after the gap fill and Golden Ratio tag.

If we remove all bias from indicators and simply look at the trends we can see it is still a bit early to determine if the trend has fully bottomed. In July price began making higher highs and bull flag type formations. This action continued until the October rally failed to break higher and instead rolled to the downside. Since that trend change price has made lower lows and steady bear flag formations.

We don't need to be in a hurry here as we still see lower highs and lower lows on all three major timeframes. But price is now approaching some interesting support and the patterns that are forming are suggestive of a healthy pullback rather than a long-term trend failure.

  If we continue down to the intra-day action on the 1 Hour chart we can see the start of a possible trend change. But we must be careful not to get caught in a similar situation as a few weeks ago. In mid-October the price action tried to firm up and got above both a rising 20/50 SMA. Yet it failed to make a higher swing high and instead led to much more downside. This is why we really want to see the prior week's high at 95.30 taken out. That would suggest this potential low may hold and the trend could be ready to turn higher.

--The bottom line is Alibaba is giving multiple indications of more upside to come in the intermediate term once this pullback runs its course. We don't have enough evidence at this moment to plow into the stock but we could begin building a position soon if conditions suggest a low is really in place.

The first signal that the turn may be ready would be to break above the 95.30 resistance area. A move through that and I will begin to nibble at a position. Should we then see a weekly close above the prior week's high I will add more on the confirmation.

Thanks for reading

Sunday, November 13, 2016

President Trump, According to the Stock Market

So THAT happened. Whether you are pleased with the outcome or not doesn't effect our investing process. So many let politics and emotions cloud their investment decisions. That's not what we do here; we look for opportunities, we look for money rotation. There was plenty for everyone in the market this week. Some groups got brutalized and others appear to be headed to the moon. Once this honeymoon period ends things will balance out a bit, but the initial reaction is notable and we must adapt to what the market is telling us.

In full disclosure I did not vote for The Donald. Part of me really fears how this will play out with foreign policy and how many will be effected State-side. But another part of me thinks we should give him the benefit of the doubt. It is possible everything he has said over the past year + continues forward and shit really hits the fan. Its also just as possible that he becomes much more presidential and actually does a really good job of improving our economy for the dwindling middle-class.

The stock market sure voted for how it thinks this all plays out. We saw Banks indiscriminately rip higher, Transports were breaking out even before the election, industrial metals and basic materials saw big rallies, healthcare got a big relief, while safety trades, bonds, and rate sensitive groups got absolutely crushed. Heavily U.S. based Small-cap stocks dramatically outperformed as well.


My growth scans this week were absolutely over run by Regional Bank stocks. I got some of the strongest readings I've ever seen in my scan results this week and more than 70% of the opportunities where from Regional Banks. Insurers and the large institutions also saw big inflows. We've owned JPM and BRKB since August, the action hasn't blown the doors off but the relative strength while the broad market corrected was very notable.


Warren Buffet's Bershire Hathaway would seem to hit it out of the park in a Trump market. His portfolio remains heavily weighted toward Insurance, Energy, and he owns an entire railroad company. Not to mention whatever the heck he gets out of his BAC deal, BRKB appears to be a great way to position in the newly developing environment.

I added one Regional Bank name to our growth portfolio this week, WAL


The past two weeks have seen select Transport stocks break above large consolidation bases. The strength in IYT since early October has been very apparent to me and this week we got confirmation of that behavior. See my previous post on this Transport structure here.

Those 5 tight weeks were the tell here. While the market was falling apart arguably the most economically sensitive group didn't even budge.


ODFL and especially FDX had broken above large base resistance well ahead of the election. Once the news hit they continued to lead the way higher.

UNP appears to be lagging the group but is on the verge of a large breakout as well


Infrastructure stocks did very well also: Steel, Copper, Builders, Coal. Apparently some building is going to take place.






Healthcare, specifically Biotech got some relief from the recent rhetoric.

This still doesn't appear to be anything different than a range bound market. It sells off into the lows and spikes back up, rinse and repeat until it breaks.

Bonds and rate sensitive stocks continued to be sold. This is really not a new trend as they have hinted this way for weeks, but the move this week affirmed that prior rotation. It almost had a whiff of panic to it. Everyone trying to squeeze through the door at the same time, this is what it looks like when the dam breaks.


It is possible that this was the downside blow-off Staples and Bonds needed after such a strong run. I can count a potential 5-waves down on the weekly trend, which would suggest an intermediate term low could be in place. But we have no evidence at this point of this being a high probability, its purely hypothetical. The trend has been down since August and hasn't exactly slowed down as of yet.

Small-cap stocks saw follow-through on the recent breakout throwback


I'm not sure what all this means or if it reverses or continues, nobody does. All we can do is position with the big money; flow with the strength and avoid the weak. There were significant adjustments this week in the pricing of assets. Typically these dramatic moves have staying power.

Thanks for reading