Visually Compelling TA

Louis Navellier recently wrote about the market's three latest lows on October 10, November 20, and March 9 (The Market Makes a Three-Point Landing). He then aptly compared these to three market lows of July 2002 - March 2003 which were followed by a sizable market rebound. Navellier builds on this observation with other similarities between 2003 and 2009 positing a similar rally can be expected at this time. He is not alone (Murphy, Lansing) in anticipating near-term rally but I observe two things different between then and now.

First, examine duration and momentum. The three earlier lows occurred over a period of eight months while the current three lows occurred over only five months. Further the bearish momentum preceding the current low was twice that of the earlier low. (The 700-point bear move preceding the current lows occurred over 12 months while the same size drop preceding the July 2002's low took place over a much longer 24 month.) Given the severity of the market's recent drop, I contend the market will take a longer time to reestablish a foundation before a new bull market ensues.

The second difference pertains to the strength of the index internals. As of March 2003, about two-thirds (342) of the S&P 500 constituent stocks were above their July 2002 price (the time of the first low). As of this past Friday, only about one-third (168) S&P 500 stocks were above their October 10 lows. Only one stock is trading at more than 100% and only 18 are trading at more than 50% of their October value. By contrast in March 2003, ten were above 100% and 40 were above 50% of their July 2002 prices. This is not the internal strength from which enduring broad-based rallies are launched.

The resolution of the current basing period will likely require a few more months of strengthening internals. As the market churns in the 800-850 range during the next few months, profitable companies will attract buyers while weaker stocks will fall further. But once a critical mass of buying interest is evident in 2/3 of the stocks rather than merely 1/3 of the stocks, we can expect a renewed bull market.

Comments: View Comments |  Sunday March 29, 2009

Bullish pennants have been rare this past year, but three interesting ones have formed over the past two weeks. See the charts for Wythe (WYE), Geron (GERN), and CV Theraputics (CVTX) below. These are especially interesting due the way they entered this pattern. First, each was positively divergent from the overall market during the past three months. And second, they each gapped upward on high volume to begin their pennant. Should any of these breakout higher, look out for a strong continuation of the uptrend.

Comments: View Comments |  Sunday February 8, 2009

Many pundits the last few months have boldly stated that the recovery from the present economic malaise will be long and slow and painful. The common thread in all these pronouncements is they never seem to offer any data to support this assertion. Nor do they claim any particular model has been used to guide them into this conclusion. The best they offer are supporting arguments such as "loss of consumer confidence" or that it is "a most difficult business environment."

It is apparent to me they are really saying it is difficult environment for THEIR business. It is also noticeable consumers are exhausted from an oversupply of indistinguishable goods and services. I suggest that macro conditions are quite fertile for business as a whole (granted some are not). First, monetary policy is now loosened and Governments world-wide are manically printing money. Further, Governments have promised they have more stimulus mechanisms in their toolbox and will not hesitate to use them. Second, energy costs are down. Almost all products have a notable amount of energy cost - in their transport if not their manufacture. Third, as unemployment rises the cost of labor will decrease and an overall workplace migration from inefficient businesses to innovative businesses is enabled. I posit the present business environment is amenable to astute enterprises.

I'll close with a small consumer anecdote. I spent two weeks looking for a Wii Fit and found them absent from retailer shelves. Wii, and the Wii Fit in particular, are unique and creative products. I noticed the electronic games shelves were stacked high with various Guitar Hero products largely indistinguishable one from one another. Suggested short: Activitision (ATVI). Suggested long: Nintendo (NTDOY.PK).

Comments: View Comments |  Tuesday December 9, 2008

Mosaic Company (MOS) has no technical merit as a buy or a hold. The 10-day, 20-day, and 30-day moving averages have been in bearish order for more than three months after reaching a high in June. Four times (A, B, C, and D on the chart below) it tested and failed to hold above its 30-day moving average. Any of these times should have been a sell signal. Even on the fourth one, a further 50% loss could have been avoided. Finally this past week it gapped down on unusually high volume (E on the chart).

While it is certainty oversold and has experienced an obvious capitulation gap down, it is too early to call it a buy. I recommend waiting six weeks of basing before considering MOS a buy. As it was downtrending it attempted to base near 105 and again at 75 but each basing period lasted only three weeks before failing. This is in contrast to the six week basing near 120 which preceded the run-up to its 163 high.

One scenario for calling a buy: when (and if) a six-week basing occurs look for a confirming upward breakout. Carefully guard this position with trailing stops and expect resistance around 70 - 75. The last basing attempt occurred at 75 so this is likely a resistance point for a resumed uptrend. It is also noteworthy an enormous amount of open interest for 70 calls (see below) exists making 70-75 a very interesting area.

Comments: View Comments |  Saturday October 4, 2008

Garry Kasparov closes How Life Imitates Chess with a final chapter titled Endgame. The theme of this book has been inspiring readers to continually challenge themselves in pursuit of success. "My hope is that in this book I have managed to pass along some of the wisdom and strategies I've learned, and that you too will find ways to use the world's greatest game to your every advantage."

I opened SLO2 with How Investing Imitates Chess (1 of 17) and with this post the series is concluded. The theme of this blog series has been to glean a few morsels from Kasparov's book and apply them to investing. My hope is that you have enjoyed them. Summarizing three of my favorite morsels:
• There are often times when an investor must practice the art of useful waiting, which is an excellent opportunity to visualize market and economic scenarios.
• The keys to great investing are self-awareness and consistency.
• Investing is comprised of three phases (opening, middle game, and endgame) each with distinct characteristics that poses problems that benefit from different modes of thinking.

Comments: View Comments |  Sunday September 14, 2008