Risk Management Archives | Opportunity Identified

October 13, 2017 | Posted by David Zarling, Head of Investment Research

How To Get Involved In The Drug Trade (It’s Not What You Think!)

Eli Lilly & Co. (ticker: LLY), one of the world’s largest drug manufacturers, has seen its stock go nowhere for 2 years. We don’t know many participants who would like a 0% return for 24 months. But this nowhere action is perfectly normal behavior. After all, Eli Lilly was up over 350% from the bottom in 2009 through September 2015. That’s a pretty nice return, but trees don’t grow to the moon and LLY couldn’t continue that pace without some digestion. And since September 2015, LLY has corrected and consolidated through price and time. If you’re familiar with our work, you know corrections through price and time provide opportunities. By studying supply and demand, we can identify when an opportunity with low risk / high reward characteristics is upon us. Eli Lilly is another such opportunity. Last week, LLY broke out of the aforementioned 2-year base. Check it out:

Not only that, but LLY is on the verge of breakout out on a relative basis versus the S&P 500. We like absolute and relative breakouts. And we like large bases. From large bases come high spaces. The 2-year base built by supply and demand is large and has strong polarity characteristics. For those non-believers who think buyers and sellers don’t remember the prospects of a stock from 17 years ago, we present the following:

Historical prices have significance. They are not random as some would have you believe. But we digress. Let’s identify how to get on the right side of the trade with LLY.

Here’s the daily chart of LLY:

Buyers drove the price of LLY above $85. We’ve seen a subsequent retest of that important level. Everyone has their own time frame and objective. But to us, it makes sense to own Eli Lilly above $84. With an upside target of $105, the reward-to-risk ratio is tilted in our favor. Below $84, and we’re wrong. After all, we’re not in the market to be right. We’re in the market to make money, which means being on the right side of the trade.

In conclusion, Eli Lilly has just broken out of a large 2-year base with the potential for a nice reward (about 20%) and defined risk (about 2%). We like this 10:1 tilt in our favor. As always, price knows best. Trade at your own risk.

You can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to a great tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

September 28, 2017 | Posted by David Zarling, Head of Investment Research

This Is How To Navigate Amazon

Much like its namesake, Amazon stock (ticker: AMZN) is difficult, yet rewarding, to navigate. Over the past two decades, this well-known retail (not technology) company has risen over 48,455%. That’s not a typo. $1,000 invested in AMZN back in 1997 would be worth $484,558 today. That same $1000 invested in the S&P 500 would be worth $1,999 today. Making money in the stock market is easy, right? Wrong. As much as we’d like to think we’re rational individuals, we’re our own worst enemy. When involved with markets, we tend to respond to gains and losses emotionally. Loss aversion is a real and present danger to many portfolios. Here’s a visual of this common emotional experience.

Many market participants experience twice as much pain during drawdowns than the joy experienced during equivalent gains. So what would it have been like to hold on to Amazon since 1997? How bad would the pain have been? Take a look:

Amazon Drawdowns [original chart source]

The upper pane (green) is the price appreciation of AMZN stock. Using hindsight bias, many think the tremendous gains in Amazon were a slam dunk and easy to come by. That couldn’t be further from the truth. The lower pane (red) are the drawdowns experienced by holders of AMZN stock. Talk about agony. For more than a third of its life as a public company, Amazon has been in a 50+% drawdown. For the buy-and-hold investor, it’s hard to imagine the discipline needed to hold on during 70-90% losses. It’s likely many capitulated under the duress. The good news is, we don’t have to be buy-and-hope investors. In fact, we might even call drawdowns a downtrend! Remember, our number one job as market participants is to manage risk and protect capital. Using supply and demand dynamics (aka price movement) to do so, there is zero reason to experience such massive drawdowns. Let’s take a look at the buying and selling going on with AMZN.

Here’s the weekly chart:

For a while now, AMZN has been making a series of higher highs and higher lows. This is normal behavior for uptrending stocks. This doesn’t mean Amazon doesn’t experience sideways consolidation from time-to-time. All of 2014 was an intermediate downtrend / consolidation prior to resuming its uptrend ways. Even then, we would’ve been able to recognize a price momentum change using a trendline dating back to 2012. And more recently, we saw AMZN break a price momentum trendline (green) back in August. This took place both on an absolute and relative (to SPY) basis. This was a clue to let someone else have AMZN. It doesn’t necessarily mean impending doom. A broken price momentum trendline just means the demand/supply dynamic has shifted. Back then, we tweeted (click here to follow real-time supply/demand analysis) AMZN would likely form a Head & Shoulders pattern:

Many people use patterns to confirm their biases rather than create if/then binary decision-making scenarios. For example, the Head & Shoulders pattern itself has gotten a bad reputation as a “Topping Pattern.” In reality, Head & Shoulder’s patterns are a compression in price as the disparity between buying urgency and selling urgency narrows. So here we are at the end of September talking about the Head & Shoulders pattern in AMZN. See the daily chart below:

Amazon has gone nowhere for five months. The battle between supply and demand has created a well-defined Head & Shoulders pattern. Is this a top? We have no idea. No one does. Don’t let anyone tell you otherwise. It could simply be a five-month consolidation. Afterall, consolidations tend to resolve in the direction of the primary trend. This could be a top. It could also be consolidation before heading higher. Our job is not be right or wrong. Our job is to be on the right side of the trade. Let’s a look a little closer to identify some important support levels.

Up close, we can see buyers have shown up before near the 935 price level. If they don’t show up at this level upon any retest of that price point, we have the evidence we need to make a decision and let someone else have AMZN. From an upside target perspective, Amazon will need to first clear the downtrend line (in green) and then sustain above the left shoulder highs near 1,011. If it can close above, and hold, those levels, it’s like a new series of higher highs and higher lows are upon us. Another possibility is price continues to be range bound between 935 and 1,000 through the end of the year (this would bring time symmetry to the right shoulder, matching the time duration of the left shoulder). Trade accordingly.

In conclusion, the game plan is simple. If Amazon closes below 935, we want nothing to do with it. Above that level, it makes sense to own one of the top three appreciating stocks of the past decade. Get yourself on the right side of the trade. We don’t need to experience capital crushing drawdowns. Trade at your own risk.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to a great tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

September 18, 2017 | Posted by David Zarling, Head of Investment Research

Simple Market Secret: Just Look Left

One of the most important jobs of a market participant is risk management. If you’re unable to identify when your position is wrong, then you shouldn’t be entering a position to begin with. Would we ever enter a crowded room without identifying where the exits are? I don’t think so. We have the same responsibility when entering a new position. At 360 Investment Research, when we enter a new position, we identify risk (and potential reward) by looking left. By looking left on a price chart, we can identify previous changes in supply and demand, which can give clues on where demand or support could appear. By looking left, we can identify when buying momentum wanes and when selling pressure has entered the market. For example, if over a certain time period, price is making a series of lower highs and lower lows, we know sellers have more urgency than buyers for that time period. There is more supply than demand and price is trying to discover where the buyers live. So by looking left, we are using economic law (not opinion) to guide our investment decisions, entries, and exits. Using price removes mystery (and emotion) from our trading process. Let’s go through this exercise with the S&P 500 on daily and weekly time frames to identify where we are with the current market.

First, here’s the daily chart of the S&P 500:

When we look left, we can see price made of series of higher highs and higher lows from November through March. On March 1st, this important index recorded a new all-time-high. A series of higher highs and higher lows is indicative of a bull market. However, for the remainder of March and most of April, the characteristics of supply and demandchanged. The S&P 500 recorded a series of lower lows and lower highs over that two-month period. This was a downtrend on the daily time frame until a new high was established in mid-May. With the exception of recording a lower high and lower low in August, the sequence of higher highs and higher lows in one the world’s most important indexes has been relentless. Relentless higher highs and higher lows are classic bull market behavior.

Now for the weekly timeframe:

When looking left at the weekly data, it’s clear the S&P 500 is currently in a series of higher highs and higher lows. So, can the market be in a downtrend on the daily timeframe and an uptrend on the weekly timeframe? Absolutely. That’s exactly what we had back in March / April. By looking left on both the daily and weekly timeframes, we can gain a better understanding of market trends. It’s not the only thing we look at, but it’s a big piece of evidence. And the current assessment has the S&P 500 in a daily uptrend within the friendly confines of a weekly uptrend. We’re not ones to argue with price. These higher highs and higher lows are normal behavior for a bull market.

With the bullish uptrend clearly outlined for both the daily and weekly time frames, we need to acknowledge trees don’t grow to the moon and markets don’t go up forever. So where would one look for clues this market is changing from an uptrend to a downtrend? You guessed it. Look left. If sellers were to drive price down from here, we can quickly identify buyers have shown up near the 2425 level. On both the daily and weekly timeframes, that’s an important level to watch. If the S&P 500 closed below that level, it would be a clue supply and demand are changing in an important way. That’s what we’ll be watching and you should too.

To conclude, as part of our every-day process as market participants, we need to identify sequences of lows and highs. This exercise provides valuable information to help us manage risk and remain on the right side of the trade.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to great tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.

July 3, 2017 | Posted by David Zarling, Head of Investment Research

Check Out The 4th of July Fireworks For This Fashionable Stock

We hope this post finds our Canadian and American readers enjoying their Independence Day weekend. It’s important to step back and remember the freedoms we often take for granted. Not everyone is so fortunate. May we always cherish the sacrifices made (and be willing to do the same) to ensure a free society. Because of the holiday, this update will be as brief as possible. We’ve found a fashionable stock on the verge of a firework-like breakout: VFCorp (ticker: VFC). Let’s get down to business.

For many years, VFCorp (the parent company of Lee, The North Face, Jansport, Vans, you get the point) was a leader of markets. More specifically, from late 2008 thru mid-2015, VFC outpaced the S&P 500 (including dividends) 4-to-1*. Over those 7 years, VFC gained 230% while the S&P 500 gained only 50%. Since July 2015, however, VFCorp stock price has been recording lower highs and lower lows, the very essence of a downtrend. But last week confirmed the possibility this downtrend is over and outperformance is back in a big way for this stock.

Here’s the weekly chart of VFC:

It’s easy to see the drawdown from July 2015 through the February 2017 bottom, which filled the price gap from October 2013. The February 2017 low was also the 38.2% Fibonacci retracement of the entire move from the November 2008 low to July 2015 high. Price discovery is not random guys. We see price work like this over and over again across any liquid investment vehicle with a tremendous amount of memory from the past.

We can also clearly the see the breakout on an absolute and relative (to the S&P 500) basis. Not only that, but this momentum breakout is coinciding with a breakout from a horizontally configured inverse head and shoulders pattern. This is a bullish set-up with a confluence of characteristics supporting higher prices for VFC. Specifically, this set-up is targeting $66, +14.5% from here. Let’s get a little more tactical with a daily chart of VFC:

Whenever we enter a trade, priority number one is risk management. We need to know when we’re on the wrong side of the trade. For us, it makes sense to own VFC above $55.75. Below that, and we’ll let the market have it. This particular set-up has a reward to risk ratio of almost 5 to 1. The reward is asymmetrically skewed in our favor. We like that.

To conclude, the weight-of-evidence suggests higher prices for VFC. The simple yet prudent game plan is to own this fashionable stock above $55.75. Trade at your own risk.

*For those who are wondering what the respective returns were from the March 2009 low of the S&P 500, they were 592% (VFC) and 225% (S&P 500)

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

By the way, we created this free tool for you, The Ultimate ETF Cheat Sheet. It’s an easy-to-use ETF resource guide. We think you’ll like it.

May 22, 2017 | Posted by David Zarling, Head of Investment Research

This Important Piece Of The Market Puzzle Will Impact Your Portfolio

Back in February, we highlighted some important developments which could impact the months ahead. One of those developments was the consolidation of the U.S. Dollar. Back then, we wrote:

Another important development is the consolidation of the U.S. Dollar… the US Dollar broke out above previous resistance in the 4th quarter of 2016. On the daily chart of the U.S. Dollar, we’re compressing between $99 and $101. A break above the upper green trendline would signify a resumption of the uptrend started in 2014. And if price moves below $100, there is no reason to own the greenback. If the Dollar moves down through this important level, we could have a false move on our hands…

Here’s the U.S. Dollar back on February 27th:

The power of using price charts is we can identify where demand and supply dynamics change and use these levels to manage risk, the most important part of being a market participant. We identified the $99-100 level as important support. Here’s the updated chart:

While recording new highs in early January, the U.S. Dollar Index was also logging lower highs in 14-Period RSI (our favorite momentum indicator). New highs and lagging momentum can sometimes signal limited upside continuation. In this case, the divergence in momentum was an important tell for the demand of U.S. Dollars. This was confirmed when buyers could not keep the Greenback from breaking $99, a significant level over the past 2.5 years. You can see this important level better when we step back to a bigger picture timeframe. It’s always important to look at the bigger picture. Here’s the weekly chart of the U.S. Dollar Index dating back to 2010:

The importance of the $99-100 level can be clearly seen. Sellers showed up twice at that level in 2015 making the breakout at the end of 2016 notable. However, since the highs in January, selling pressure has returned. The increase in supply has created a false move. From false moves come fast moves in the opposite direction. The fast move in the opposite direction is taking place right now. We don’t need to predict. Price shows us there’s no need to be a buyer of U.S. Dollars right now.

In conclusion, the Almighty Dollar, an important piece of the market puzzle, needs to prove itself before we’d consider a long position. If the selling continues, we’d expect buyers to show up near the $92-93 handle, an area where they showed up in the past (see green annotated arrows in the chart above). Since many market pieces are priced in Dollars, this current move could have an impact across a variety of assets, including commodities and foreign equity markets.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. Click this link to get your FREE easy-to-use resource guide for all your ETF needs.