January 6th, 2015

Forget Oil, Go Lithium

GigafactoryOil prices has tumbled more than 50% since the beginning of last summer so many investment advisers are recommending today that investments be made in the energy sector, arguing that the stocks have fallen so that many represent the best bargains in many years.

If you had been able to predict the oil price rout in July and sold short, you would have discovered that not all energy-related stocks and ETFs acted uniformly. Some actually went up (EEP up 12.49%, VLO up 1.68%) while others dropped anywhere from -5% to
-70%. For example, CVX decline -16.81%, COP declined -19.33, OIL -49.48, RIG -56.39 and CRK -73.99.

If you believe that oil prices can’t go much lower and will soon rebound then it would seem logical that buying an oil-related stock is a “sure thing”. But how does one select among the more than 300 energy stocks of all sizes, dividends, volatility, growth.

Oil Prices

Should you select those that performed the “best” over the past 4-5 months under the assumption that they will perform best in the future. Or, conversely, should you buy those that performed the worst because they could possibly bounce back the most. If you’re looking to put money to work, though a better strategy than catching one of 300 “falling knives” might be to look someplace totally different, someplace that will be “driving the future” rather than the energy that has “driven the past” (no pun intended).

Rather than betting on a recovery in oil prices, why not take out a stake instead in the industry making possible electric transportation – lithium, one of the most valuable natural resources of the new electronic world thanks to its unique and extremely valuable characteristics:

Lithium

As described in a recent Mauldin Economics report:

  • Lithium has such a low density that it floats on water and can be cut with a butter knife. When mixed with aluminum and magnesium, it forms lightweight alloys that produce some the highest strength-to-weight ratios of all metals.
  • Lithium tolerates heat better than any other solid element, melting at 357°F.
  • Lithium batteries offer the best weight-to-energy ratio, making lithium batteries ideal for any application where weight is an issue, such as portable electronics.
  • That same high energy density and low weight characteristic makes lithium batteries the best choice for electric/hybrid vehicles due to car gas mileage. A car’s biggest enemy is weight.
  • Lithium has a very high electrochemical potential, meaning that it has excellent energy storage capacity.

The lithium market is dominated by only three publicly-owned producers:

  1. Chemical & Mining Company of Chile (SQM);
  2. FMC Corp. (FMC);
  3. Rockwood Holdings (ROC)

Lithium Industry

In addition to its excellent dividend yield and relatively low (as compared to the pure-play ROC) price-earnings ratio, the SQM chart is most volatile and shows promise to bounce off the bottom of the horizontal channel it’s formed since late 2013 and attempt to cross above the upper boundary at 33, a 40% move.

SQM - 20150105

Tesla has just completed a gigafactory that exceeds all comparisons in the belief that the lithium-ion battery will be the power source for many more battery powered cars, drones, toys and power grid storage.  I’m hoping that SQM will benefit from that future.

May 8th, 2013

Auto and Truck Parts Suppliers

I believe I’ve finally made some sense of how to differentiate between the Weekly Recap Reports offered to Members, the Stock Chartist blog and the articles I begun to write for SeekingAlpha.com. I believe the answer was provided by Seeking Alpha when they made clear that their preference is for fundamental as contrasted with technical analysis.

Every investment decision begins with a clear vision of the market’s near-term direction, or what Seeking Alpha calls “Market Orientation”. My last two articles met the prerequisites of that category and were well accepted by the Seeking Alpha readers. Once you have a market point-of-view, the next step is stock selection.

If market timing indicates that the time is opportunity for new investments then the next challenge is choosing from among the 7000 stocks and ETFs. One can do attempt to narrow the search down to a few of the best stocks by, what Cramer calls, “doing your homework”. Or you can use my approach of finding stocks that appear to be ready to cross out of consolidation or reversal areas (i.e., patterns) by crossing above resistance zones (i.e., trendlines) focusing first among the Industry Groups that seem to be most desirable at the time to the “herd”, or Wall Street’s institutional investors. The approach I use for this final step is, of course, my various scans and a continual search through literally hundreds of charts.

Instant Alerts members have the benefit of both market and stock selection plus an inside view of how I manage my Portfolio.

Bottom line, the blog will now focus on individual stocks based on my own Industry Group and stock chart analysis. Some blog posts will focus on an individual stock while other posts might include several stocks. The following is the first:

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imageThe stocks of several truck and auto original and replacement parts suppliers have advanced smartly since the beginning of the year, like AXL, DORM, SMP, LKQ and DLPH. Even though these have significant momentum, I avoid them because these are now far above what I consider breakout entry points where initial positions can be safely established.

However, a few have recently or are about to break out of consolidation areas.  I consider them consolidations since there’s nothing to indicate that the market is anywhere near making a significant reversal.  Those stocks include:

  • BWABWA - 20130508
  • LEARLEA - 20130508
  • DANDAN - 20130508
  • WBCWBC - 20130508
  • THRMTHRM - 20130508

It goes without saying that these stocks and their charts were selected exclusively on the basis on a technical analysis of price action and timeliness of an investment. There’s no attempt to rank them as to prospective appreciation of each nor the time needed to achieve those gains. Investors should assess their own tolerance for risk and perform their own assessment of their suitability to be included in a portfolio.

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April 5th, 2013

Gold (GLD) in an “Indecision Zone”

I was recently accepted as a “columnist” for the subscription portion of SeekingAlpha.com, a well-respected stock-oriented editorial site, and quickly got my first submitted article accepted.  Much to my disappointment, however, my second submission was wrongly rejected, I believe.  The rejection notice stated:

As a fundamental investing site, Seeking Alpha doesn’t publish articles based primarily on Technical Analysis.  Feel free to post this piece to your instablog.  Thanks!

Sincerely Yours,

SA Editors

As you might expect, this response raised my blood pressure on several counts.

  1. First, I thought that I had summarized most of the fundamental arguments, bullish and bearish, covering the subject of the future direction of gold prices.
  2. Second, I can’t imagine any site that doesn’t take technical factors into account when presenting content about stocks, markets, commodities and forex can do so without including a heavy dose of technical factors and opinion.
  3. Finally, why isn’t there a site that features articles contributed by vetted contributors focusing on technically-based market and stock opinions?  It might even be called www.stockchartists.com

In any event, the rejected article appears below. What say you? Should it have been rejected? Would you be interested in reading or even contributing to a technically-based content market opinion site?

========================================================================

imageI know both the bull and bear fundamental arguments surrounding gold, you’ve heard alll of them before.

  • The Bulls point to the fact that gold is both a commodity used by industry and consumers and, perhaps even more so, a safe haven alternative for fiat money and store of accumulated wealth.
    • Central banks around the world flooding the market with currency that eventually will lead to inflation and rising commodity and gold prices
    • A fixed world-wide supply of gold in a world of ever increasing demand
    • Increased demand resulting from the growth of ETFs
    • Increased demand due to increased wealth from emerging market consumers
    • Increased demand from governments beginning to accumulate
    • Continued political uncertainty
    • Finally, the price of gold is still only around 70% of its inflation adjusted peak price of $2300 reached during the 1970’s energy crisis.
  • The Bear’s argue that the price of gold has quadrupled with only minor corrections from less than 50 in 2005 when the GLD ETF was first made available.
    • Hedge funds are reportedly unloading their large cache of GLD
    • There will be better places to invest your money than gold as stocks and commodities continue to reflect an improved economic environment
    • The bull market for gold paralleled the secular bull market for bonds therefore a reversal in fixed income secular trend will also lead to reversal in gold prices.
    • QE and monetary easing will end soon and the excess money supply that the Fed pumped into the economy will begin to be drained
    • Governments are actually unloading their gold hoards

Rather than trying to second guess the experts and come up with my own prediction of gold’s future direction, I believe price action and trend best represents the consensus of how the world’s investors actually act on their beliefs. There’s no question that the price of GLD has stalled but what isn’t as clear is whether this the beginning of a reversal leading to sharply lower prices or whether this period could be actually represent the end of a consolidation pattern.

In the chart below, there’s not question concerning the top boundary of the pattern … it’s clearly defined.  There are two possibilities, however, for the zone’s lower boundary. The blue dashed line assumes the zone is a descending triangle reversal top pattern while the green dashed line assumes the zone is a flag consolidation pattern. We will be left in the dark as to which pattern interpretation is correct until GLD declines to approximately 137, or down another 7.4%, at which point GLD will likely find some support.

It’s said that “the longer the pattern the stronger the trend out of that pattern”. If the price stabilizes around 137 and then reverses, a major bull move could be launched that could finally carry GLD substantially above its previous high of 182. But if it again fails after that reversal at around 150, or today’s price, then a reversal top would be confirmed leading to further declines possibly to under 100. GLD is clearly in an “indecision zone” (click on image to enlarge) and I would wait to make any further commitments either way (bullish long or bearish short) until investors drive the price out of the zone one way or another.

Bull and Bear Gold Case

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February 15th, 2013

Bullish Technical Gold Outlook

imageHave you ever heard of the “fear industry”?  That’s what Philip Pilkington called those economists and writers who are the leading voices among what can be called “goldbugs”, those who believe that gold is the only safe haven among all asset classes.  In his recent blog post on Naked Capitalism entitled “The Fear Industry – Austrian School Propaganda and the Gold Market“, Pilkington writes

the sheer scale by which the fear industry has taken off is, to be frank, quite surprising. We have all seen the likes of Peter Schiff as a regular guest on the American business news spouting vague talking points about the impending dollar collapse and gold reaching $5000 an ounce…..What is so interesting is that the fear industry grows larger and larger at a time when the make-up of their key market – the gold market – has fundamentally altered its composition…..the fear industry’s most successful year was actually in 2011 and this in turn is reflected in the fact that the gold price reached its record high in the summer of that year……the fear industry has probably stretched itself too thin and it is likely that we saw its peak last year.  From here on in it will probably be diminishing returns and we’ll likely hear of more and more scams as people within the industry compete for ever scarcer resources…… the end game is just around the corner….”

On the flip side of the coin, there’s Trustable Gold who at the beginning of the year in “Gold 2013 – What is the trend for the gold price in 2013 and beyond?” summarized forecasts from various trusted sources:

  • “Bloomberg in November 2012 forecasted a level of US dollars 1,925.- per ounce of gold.
  • The bullion bank ScotiaMocatta forecasts a rising gold price in 2013 and would not be surprised to see a gold price above US$ 2,200.- per troy ounce of gold.
  • BNP Paribas estimated in November 2012 gold to reach US dollars 1,675 per ounce in 2012 and US dollars 1,865 per ounce in 2013.
  • Members of the London Bullion Market Association forecast a gold price of US dollars 1,843.- by September 2013.
  • The global bank HSBC predicts a very similar gold price of 1,850 US dollars per ounce of gold in 2013.
  • The CEO of Newmont Mining estimates that the price of gold in 2013 may increase to US dollars 2,550.
  • In November 2012, Deutsche Bank updated its forecast on the gold price to US$ 2,000.- by next year, i.e. 2013.
  • Credit Suisse expects a gold price of US$ 1,840.- in 2013.
  • In October 2012 private bank Coutts predicted gold prices to reach US$ 2,000.- in the coming months.

At the risk of being lumped with the “goldbug” crowd, I took another look at gold’s long-term trend to see whether I can add anything new to this debate from a technical perspective about gold’s future direction.  I believe I’ve discovered something interesting:

GLD - 20130215

Since it began trading in 2005, the gold ETF, GLD, has had three consolidations in its secular trend higher, each of which lasted around 2 1/2-3 years.  The secular trend channel ascends at the rate of approximately 20%/year and can be clearly seen through the upper trendline connecting the 2006, 2008 and 2011 peaks.  A parallel line connects the 2008 trough with a point slightly lower than the current price, 155.54.

I believe we may be at or very near the end of the most recent 2 1/2 year consolidation and, if the secular trend can be trusted, a new bullish leg will begin shortly.  Extrapolating the channel suggests that the target of this next push higher would be in the area of 240-270 (or gold prices of 2400-2700) towards the end of 2014.

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October 24th, 2012

ARMH: Patience Pays Off

When the market has been as frustrating as it’s recently been, you are always on the lookout for something to reinforce your confidence and beliefs.  It came this week from an extremely surprising direction.  A stock chart that ultimately delivered on its promise.

When I purchased ARMH (ARM Holdings PLC) on February 29, I wrote to members of my Instant Alerts service that that stock “was captured in several of the previous “Stocks on the Move” scans and is a favorite of momentum traders.  The stock has been trapped in a 12-mos. consolidation pattern.  Whether you see a horizontal channel, an inverted head-and-shoulders or a cup-and-handle doesn’t really matter that much.  The point is that a breakthrough on the upside with a strong market as tailwind could lead to substantially higher prices.”

Unfortunately, that horizontal channel morphed into a descending channel or flag.  There were many times during the past eight months that I felt like I should sell the stock but I felt that, given time, the stock would come through with its promise of a strong upward push.

A large contributor to that confidence came from the favorable divergence between the stock price action and the volume trend.  As indicated in the above chart, OBV (or on-balance-volume, the running total from adding the volume on up days less the volume subtracted on down days) has continued to edge ever so slightly higher while the price fluctuated lower from the high- to low-20’s.  That divergence tends to suggest that demand for the stock has exceed supply even as the stock’s price has slipped.

This quarter, ARMH “reported a very strong quarter, coming in at $227M in revenues for the quarter against mean analyst estimates of $222M, up 20% y/y. Pre-tax profit of $108.5M was up 22% y/y.”  Was this an extraordinary earnings report and significantly improved over prior quarters?   I don’t profess to understand (nor do I really care) why the move took place at this time.  But I do believe that others who do understand the technology and care about the company’s financial performance (aka, “the Herd”) have been accumulating the stock for the past six months. That patience was rewarded by a 12-14% gain over the past two sessions.

October 23rd, 2012

Important Stock Market Supports

I must confess that I’m disappointed by both Romney’s lack of fire in his belly during last night’s debate and in the market’s negative reaction to that performance.  I’m one of the crowd who was looking for a bounce rather than a swoon as we moved on to the election and for several weeks after a Romney victory.  My market optimism was based on the belief that a Republican victory in both the White House and Congress would a big risk factor overhanging the market (whether fairly or not) as far as economic growth and would also reduce the risk associated with the country’s falling over the fiscal cliff at year end.

This morning’s reaction forces me to go reevaluate the game plan.  Perhaps the market will slip over the edge before the economy does.  But then again, there are many potential support levels to stop the fall …. albeit after some major damage to stock prices and portfolios (click on image to enlarge):

 

Those supports are indicated on the chart:

  • The lower boundary of an ascending channel that begin in late-2011.  Perhaps, not coincidentally, that trendline actually stretches back to the 2009 Financial Crisis Crash low (see chart below) and should, therefore, be considered an extremely important and strong one.
  • Three slow moving averages that all happen to currently be ascending
  • A horizontal trendline at approximately the prior 2012 low for the year

Unfortunately, however, my proprietary Market Momentum Meter will turn red suggesting that a move into cash is advisable based on similar situations in the past.  If the decline continues at the current rate, it will be similar to the rapid decline in 2011.  The recovery from that correction was fairly quick and dramatic so many investors, including me, were whipsawed and are still trying to recover.

Some look at the long-term chart a see the market back at the top of its 12-year secular bear market tradition range and, consequently, see the beginning of another major market crash (i.e., decline of 30-50%):

One usually bearish pundit recently wrote the following typical view of an impending market top,

“Cyclical bulls follow cyclical bears, so from those panic ashes a new cyclical bull was indeed born.  And coming from excessive lows, it would more than double the stock markets again.  Over the 3.5-year span running to just last month, the SPX blasted 116.7% higher!  And that brings us to where we are today, what is almost certainly the third major bull-market topping witnessed in this secular bear.”

Rather than the proximity to the top of the secular bear market range, my focus will be on that ascending trendline from the 2011 and 2009 lows, currently at around 1400.  A cross below that line would be a clear indication of more declines to come.

 

October 10th, 2012

Assessing Market Opportunities and Risks

It’s been some time since I last posted because, well, because there wasn’t much new or much positive to write about.  As a matter of fact, the last time I wrote about the market was on August 29 in “Every Trading Range Is Not a Reversal Top“; the market is a mere 1.56% above the level at that close.

I pretty much fully invested now; I like most of the stocks I own since I’ve been cleaning house as this bull run has progressed.  There are a ton of stocks that look like they, along with the over-all market are struggling to clear an intermediate sort of resistance level (the market Index may actually be stuck in the claws of a tiny “buyers’ remorse” correction after having barely crossed above that resistance at 1420-1425.

One must always evaluate the market in two ways : what are the upside opportunities and what sort of downside reversal risks are there.  When I step back today from the market’s day-to-day noise, I see upside potential to the 1567 all-time high level.  However, I also see what I hope will be only short-term obstacles.

My longer-term optimism comes from the fact that the market has steadily crawled up the lower boundary of an ascending channel emanating from last year’s low connecting with this year’s March low.  The parallel upper boundary of the channel conforms nicely.

Furthermore, this spring’s correction can be interpreted as a flag pattern.  Traditional chart reading rules of thumb suggest that the consolidation pattern will be approximately midway between the trough of the channel and the peak.  If that turned out to be true, then the peak should be somewhere in the 1600 area (1410/1125*1280), or not far from the all-time high.

The fly in that ointment is volume which just doesn’t seem to be cooperating so far.  Since 2011, the 50-dma of daily volume of the S&P 500 stocks has been trending lower (with the exception of last summer’s correction).  Even more ominous is the divergence that’s emerged between the Index levels and the on-balance-volume.  For those who need a refresher, OBV is Joseph Granville’s indicator in which volumes on up days are added and volumes on down days are subtracted from a rolling total.  A declining OBV indicates that volume on days when the market closes lower tend to exceed the volume on days when the market rises.  A divergence indicates that a rising market isn’t supported by adequate volume.

There’s sufficient cash on the sidelines waiting to be put to work and fixed income with it’s low rates isn’t the place to put it anymore.  ZeroHedge had an interesting piece this morning entitled “Are Businesses Quietly Preparing For A Financial Apocalypse?” about all the cash sitting on corporate balance sheets.  If the uncertainty coming from Presidential Election, Fiscal Cliff and continuing Eurozone saga then a good chunk of that money, both investor and corporate, could come into the stock market and make up for the volume drought.

While prices haven’t indicated a reversal process emerging yet, there sure are a lot of risks out there, both fundamentally and technically.

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August 29th, 2012

Every Trading Range Is Not a Reversal Top

One of the “Talking Heads” regularly trotted out by CNBC to share his wisdom is Dennis Gartman.  He usually makes some sort of esoteric, useless recommendation like “I’m not buying gold in Dollars but am buying it in [Australian Dollars, Indian Rupee, Thai Baht, Japanese Yen or some other currency which is equally meaningless to his US audience but meant to make him sound like a true authority.  Instead, I just chuckle at his pomposity.

In any event, he’s been taking a different tack recently calling for a market decline.  One June 4, Gartman announced the beginning of a new Bear Market:

“The weak U.S. jobs report for May and a deterioration in the U.S. economy will lead the U.S. Federal Reserve to announce another round of quantitative easing as early as this month….could come as early as the Fed’s next meeting on June 19-20, or at the following meeting on July 31-Aug. 1. The central bank will want to ease as “far ahead” of the U.S. presidential election in November as possible, so it doesn’t come off as being “politically amenable” to the current administration….”I’d much rather be optimistic than pessimistic, but I think the European governments have forced me into being somewhat pessimistic,….But will [QE3] have a bullish effect on the stock market? Probably not. The fact that they need to do it alone is very disturbing.”

On June 4, the S&P 500 was 1278.18, or 10.35% lower than today’s close.  Not having changed his mind (nor learned his lesson), Gartman went back on the CNBC air to reiterate his nervousness:

“We saw divergences between the transports and the Dow Industrials — old-style, Dow-type theory things — a lot of people having been bullish.  Now I’m just neutral.  I’m flat, and I’m nervous.”

So what’s causing all this angst for those who are supposed to be cool and collected?  I’d say it’s their superimposing what they see in the global macro-economic environment onto the market’s narrow range.  A friend of mine used to say that “if the only tool you have is a hammer then everything looks like a nail”.  In a similar paraphrasing vein, “if you’re basically a pessimist then every trading range looks like a reversal top.”

The market must be offering a lot of fodder for pessimist these days because, if you are so inclined, you can envision a “double-top” emerging from the huge trading range the market’s been stuck in since March:

Yes, if I squint hard enough I can can perhaps begin seeing the possibility of an emerging double-top.  But the market is far from clearly completing the left shoulder.  The May trough is the single pivot “defining” the lower boundary of the horizontal channel (two, if you consider the pivot point at the November 2011 peak to be a part of this emerging pattern) and that is a long way from a fully formed congestion pattern.

I don’t deny that there may be a correction around the corner but it’s a long way to a fully formed reversal top.  I’m also cautious but not so worried as to be ready to start dismantling my portfolio of excellent stocks.  One of the reasons I’m not ready yet to see the market’s reversal top is that, at the individual stock level, I see too on my watchlist as if they’re ready to finally break above key resistance levels.  One typical example of many is SRCL, one a leading momentum stock:

So let’s not walk around with a hammer breaking everything because all you see are nails.  Let’s not allow our basic caution mistake every trading range as a reversal top.