Trend Analysis Archives | Opportunity Identified

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.

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 20, 2017 | Posted by David Zarling, Head of Investment Research

Get Intel Inside Your Portfolio

Get Intel in your portfolio. Sometimes market participants forget we’re in the market to make money. Contrary to the cacophonous media echo chambers, we’re not in the market to be right or wrong. Media may love opinions, but markets couldn’t care less about what we think. Markets are not our friends. They don’t care if we’re right or wrong, so we better be in the business of getting on the right side of the trade, managing risk, and capturing reward. With this in mind, it makes sense to own things moving up in both absolute and relative terms. Price moving upward in absolute terms is nice, but capturing trends that are moving up faster than the market itself can set our portfolios up for outperformance. One such opportunity we’ve identified is Intel (ticker: INTC). For over a year, INTC has done jack squat. Price has moved between $33 and $37 per share in a battle between supply and demand. This sideways consolidation has built a nice base right above the 2014 highs. From long bases, come high spaces. Let’s dig into the data.

To get a big picture perspective of Intel, here’s a weekly chart INTC:

Notice how INTC has been a large scale uptrend for a while now with massive two-year accumulation pattern (annotated in purple) which took it to new highs. Since the 2016 high, however, INTC has been consolidating sideways. The one-year supply and demand battle is normal and healthy price behavior. We also notice that from a relative performance perspective (upper pane), INTC has broken its relative downtrend versus the S&P 500 (using SPY as our proxy). This is a new piece of evidence squarely the court of owning INTC.

Now, let’s get a little more tactical with a daily chart of Intel:

Not until recently did INTC breakout from this sideways consolidation and breakout from a downtrend relative to the S&P 500. This is quality accumulation and change in relative trend behavior. Our number one responsibility when taking on a new position is risk management. Monitoring supply and demand allows us to identify when we’re wrong. When we can identify our risk (and reward), it allows us to determine whether the new position is worth the risk. In this case, we know we’re wrong below $35.80, which is 3% below current price and defines our risk. On the flip side, the upward target is $43 (it could go higher), which is about 14% higher from here. Risk of 3% and reward of 14% (or higher), which is a risk/reward ratio of almost 1:5. Not too bad.

In conclusion, the game plan is simple: we’ve identified an opportunity with a 1:5 risk/reward ratio. Above $35.80, it makes sense to own INTC. Below that and someone else can have it. Everyone is different. Know your time frame. 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 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.

May 15, 2017 | Posted by David Zarling, Head of Investment Research

This Is How South Korea Could Lead Emerging Markets Higher

Before we get too far into today’s research, I want to acknowledge all those amazing Moms out there. We celebrated Mother’s Day yesterday here in the United States. It’s a special day where we recognize those special Moms who have impacted us and those around us. For me personally, I’ve been blessed to be around some amazing Moms, including my wife, my mom, my mother-in-law, my sister and sister-in-laws, and each of my grandmothers. These are some of the strongest and most compassionate people I know. For many, this is a time to reflect on Moms from today and yesterday. Some are no longer with us, but their impact is still felt. What would our world look like without Moms? I have no idea, but we’d all agree it wouldn’t be good. Who would care and nurture like they do? Who would unconditionally love the next generation? Who would bring empathy and thoughtfulness into our everyday lives? Moms are so important to our families and society. If you’re one of them, thank you! Here’s to the Moms. We appreciate everything you do.

*****

With that important acknowledgment concluded, let’s dig into today’s findings: South Korea. And right away, I know what you’re thinking. How could South Korean stocks possibly be a good place to invest? They’ve had major corporate and political corruption scandals, including the impeachment of ex-President Park Geun-hye this past March. On their northern border sits a nuclear saber rattling regime lead by enigmatic “supreme leader” Kim Jong-un. And South Korean stocks have gone nowhere for eight years. So how can anyone consider a position in South Korean equities? Well, as you know we’re fond of pointing out: price leads news, not the other way around. Case in point, remember our research in March 2016 regarding Brazil? No one wanted to touch Brazilian stocks and the negative financial “news” surrounding them was palpable. Since that article, Brazilian equities have rallied 65%. Price first. News second. Just recently, YahooFinance reported, “Brazil’s Economic Activity Hits Fastest Pace in 8 Years.” We need to keep in mind that financial news reports on the past. Price is from today. And markets are future discounting mechanisms. Brazilian markets saw the economic improvement before the financial media. Accordingly, we should use price, not news, to participate in markets. Even though the news surrounding South Korean equities is negative, we don’t need to listen. It’s noise. Price is all that matters.

Let’s take a look at what’s really happening in South Korean equities. Below, is a weekly chart of the South Korean Composite Index ($KOSPI) dating back to 1999. Quickly, we can see South Korean stocks have gone nowhere since the selloff in 2007. That’s 10 years of zero to negative returns!

More recently, since 2011, the $KOSPI has been in a narrow range between approximately 1700 and 2200. This battle between buyers and sellers has created a base six years long. If you’ve followed our work long enough, you know we’re fans of long bases as they can lead to high spaces. Here’s our Tweet from March as we’ve been watching this base for a long time.

No doubt about it, six years is a long base. This battle of supply and demand was worth keeping an eye on. Here’s a closer look. For six years, we had no business owning South Korean stocks as a group. But that’s changed as we can clearly see the recent breakout to new 10-year highs.

Does this long base and subsequent breakout guarantee higher prices? Absolutely not. Yet, we know if there’s enough demand to push prices past areas where sellers have shown up before, it likely means a change in the demand/supply dynamic. Buyers have control. And the advantage of identifying important levels of supply and demand is we can use those levels to manage risk. You can’t invest in the $KOSPI directly, but it’s 2017 and ETFs allow us access to markets our parents only dreamed of. By the way, if you haven’t done so already, we’ve created a free resource for you – the Ultimate ETF Cheat Sheet. You can click here to get it => Ultimate ETF Cheat Sheet. It’s a great reference tool for ETFs of all types, including an ETF for South Korea: EWY. Let’s use it to participate. Here’s the weekly chart of EWY:

The $62 level is the line in the sand. We can use that level to manage risk. Own EWY above $62. Don’t own it below $62. Pretty simple. As long as EWY sustains trading above $62, the upside target remains $82, which is calculated using the range between lows and highs. In this case, buyers showed up at the $42 level and sellers previously showed up at the $62 level. Add the difference ($20) to the high of the range ($62) and we have a target of $82, or +24% from current levels. With defined risk of 6%, we have a reward:risk profile of 4:1. Not too shabby.

As always, we’ll let price dictate our involvement. To us, this is pretty simple. Own EWY above $62. If it’s below $62, someone else can have it. After all, our job is not to marry our positions. Our job is to be 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 an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

May 1, 2017 | Posted by David Zarling, Head of Investment Research

One Important Divergence Bulls Need To See

Last time we checked, new all-time-highs are not a characteristic of bear markets. While all bear markets start from all-time-highs, not all-time-highs start a bear market. With many U.S. Indices recording new highs last week, we see uptrends still intact. And new all-time-highs have a tendency to make traders and investors nervous. In the end, we don’t need emotions involved in our investment decisions. We need to use hard data and the weight-of-evidence to guide us. And since we’re students of the markets and use intermarket relationships as part of our approach, we can look across sectors, industry groups, regions, and asset classes to get a top-down, big-picture view of market health. As part of that exercise, we want to see what areas are not making all-time-highs. Simply, as all-time-highs in U.S. markets are recorded, are there any important areas not currently joining the uptrend party? This is called divergence. Once such divergence market bulls need to keep an eye on is the Transportation sector. Take a look.

For many logical reasons, the Transportation sector is a bell-weather sector. This means it gives important clues about overall market health. This is due to its economic importance. If there is no demand to transport goods and commodities, it is logical that overall demand for those goods and commodities is to be desired. Many reading this will identify this relationship in regards to Dow Theory. For brevity’s sake, we’re not going to get into the nitty gritty of Dow Theory. We’ll save that for another post as it’s an important tenet of technical analysis. For now, we’ll observe the relationship in the chart above. Right away, we notice the Transportation industry giving important clues to market health in late 2014 through 2015. As U.S. markets were making new highs (using the S&P 500 as our proxy here), the Transportation sector was not. It was diverging. Making lower highs and lower lows. By very definition, this was not an uptrend. Rather, it was a downtrend. A downtrend that signaled caution for the overall market, which ended up selling off hard in July 2015. It came as no surprise when the S&P 500 bottomed exactly when Transports did the same. Together, they recorded higher highs and higher lows, the most significant new high coming in early November 2016. Since then, U.S. equities have been ripping. However, with last week’s new high across many U.S. indices, the Transportation sector recorded a divergence as it did not follow suit with new weekly highs. This is an important divergence bulls will want to see resolved to the upside. A breakdown here (below $160 using IYT, an ETF for the Dow Jones Transportation Average), would be problematic for broad market health. Conversely, if bulls are going to see this market continue to rip higher, we need the Transportation sector to participate. A new closing high above 170.74 would clear this divergence and indicate ongoing health for the overall market. Keep your eye on this one.

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. It’s an easy-to-use resource guide.