Sunday, January 31, 2016

A Monthly Look

Regardless of the timeframe you choose to trade/invest, I feel it is important to know the trends on all major timeframes. Studying the Monthly bars at the end of a month is very helpful for seeing the bigger picture. So much gets made of the short-term action, day-to-day activity is actionable but you can lose perspective of the larger trends by focusing in too closely.

This week I want to zoom out and take a look at the monthly charts after one of the weakest starts to a year in stock market history.

SP500
To lead off, there is much talk of this current environment being a "Bear market". Granted many stocks are in large declines and most classify a bear market as a decline of -20% off the highs. But for me a bear market means a long-term and persistent downtrend. 

What we have seen over the past year is a sideways market that has recently begun to trend lower. From my view the stock market remains in a corrective pattern, but still in the context of a long-term uptrend. It could certainly devolve into a larger decline and bear market but as long as the SP500 remains above the 1,500 breakout level, I am of the opinion that secular bull market remains intact. 

I am a trend trader and being that the market has been sideways to lower for over a year my accounts are positioned defensively. However the long-term view of the market tells me to be prepared for another lasting a strong rally once this downtrend runs its course. 


Taking a zoomed in view of the monthly bars the SP500 has closed below the 20 month MA. This is a line I use to determine a positive trend vs a negative trend. Currently this chart suggests a weakening market and one to be cautious of in the intermediate term. 

NASDAQ Composite
The COMP also closed below its 20 MMA but is in a slightly better position than the SP500. Only because the NASDAQ did not violate its low from Oct 2014 like the SP500 did this month. The trend is still sideways for the NASDAQ and remains tenative at best. 

Russell 2000
The Russell 2000 small cap index is the weakest of the major US markets. Not only did the Russell violate its Oct '14 low but despite a late month bounce, it closed January below the low of Oct. 

There is a very clear topping formation in the small caps and a definite lower high and lower low in place. Of all the major indices the Russell looks like the best bet to continue its decline and test the 2013 breakout near 850. 

Oil (USO)
Oil is in a bear market. This is what a bear market means to me. It's been persistently lower, declining over the course a year+ and lost more than 75% of its value. 

If you follow me on social media you'll know that I have recently been quite bullish on the short-term outlook for Crude Oil. The monthly chart shows a very interesting signal that at least a temporary low may be in place. The oil ETF USO that tracks the return of the oil markets saw its highest monthly volume ever this month. This amount of volume has occurred after an 80% decline in oil prices since July of 2014 and saw buyers return, rallying prices more than 15% off its low in the last two weeks. 

I'm not calling a permanent low for oil as I simply don't know and can't know if it's happened. But I believe that the recent action we have seen is suggestive of a major change in the direction of oil for the near future. I'm also a believer that oil will remain in a "lower for longer" scenario. Meaning while Crude prices may not exceed their current lows, they will likely stay depressed long enough for the oil stocks to continue to see major losses over the next year or more. 

That's my working thesis and I'm certainly open to be proven wrong. But the signs are in place for this scenario to play out. 


XLE
Here is a scenario that could be under formation (granted its way way early to call this likely). This would fit with my above theory of a low being set for the price of oil AND a lower for longer move that would begin to cripple many marginal oil producers. 

The XLE put in a tremendous rally to end January and did so right at a major support level. It's not unfathomable to think that prices could rally back but then top out again and resume lower. As always, keep an open mind to all possible outcomes and follow the price action. 


XLF
  Financials have been the hardest hit sector in 2016. The monthly chart is clearly rolling over and there is really no support until about $17. This can and has been a major drag on sentiment and markets overall. 

TLT
After years of a supposedly "rising rates environment" the Fed finally increases rates but income generating assets hardly budge and are now rallying. This is why it pays to follow price action and not opinions of what economists and pundits say will play out in the future. 

The trend in Treasury Bonds remains higher highs and higher lows. News from the BOJ this past Friday announcing negative interest rates will no doubt continue to support US bond prices.  

XLU
Following along with Bond prices, Utilities remain strong and are setting up to resume their long-term uptrend. The strong move through the 20 MMA in January suggests the recent correction has run its course. 

+Entering AEP
Our Lg-Cap Portfolio is reentering AEP after being shaken out in the decline of 2015. The recent correction appears to be nothing more than a breakout throwback and is now resuming higher.

+Entering PCG
I feel I traded both of these names poorly the last time around. While I identified the large base breakouts, I failed to capitalize on the sudden rise AND also sold prior to the base failing its breakout. What I got caught doing was crossing timeframes. I liked this setup on a multi-year thesis, but then stopped out based on a weekly timeframe when the long-term setup was still valid. 

Ideally with a monthly chart I want to be a holder as long as price is above the rising 20 month MA. That's basically how we will manage these positions going forward due to the long-term nature of these setups. 

I will place my stops in conjunction with the long-term moving average and weekly support areas. For AEP we will use $56.60 which is the weekly swing low and rising 20 month MA. For PCG we will use $51 which is just below the weekly support and the 20 month MA. 

The risk/reward sets up very well for these positions. Both project base targets much higher than current prices. AEP has a measured target near $75 and PCG could easily go to the high $60's as well. In both cases we are risking around $4 for potentially $10-20 profit objectives. Also it should be mentioned that they both offer annual dividend yields of 3.5%. That's hard to get in today's low rate environment. 

UUP
Im still in the camp that the Dollar remains strong and the monthly chart suggests the same. It appears likely that the right side of this multi-year base is near completion and a breakout could be imminent. A clean move above 26-26.50 would confirm this setup. 

FB
FB broke to all-time highs this week on a strong earnings report. The monthly chart remains in a strong uptrend and we can now trail stops to the weekly swing point at $94.97. 

GE
GE pulled back with the market but managed to hold its prior breakout level very nicely. I remain constructive on this name long-term and a resumption to new highs would allow us to trail stops up to the new potential swing low at $28. 

LMT
LMT came very close to hitting our stops this week but managed to hold on. The monthly chart still shows a rising trend solid price action. 


I would emphasize keeping an eye on monthly charts as part of your usual analysis. Often taking a step back allows you to see the forrest for the trees and not just being overly focused on the color of the leaves. I hope you find adding this to your regular routine beneficial. 

Thanks for reading 
-ZT


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