breakout Archives | Opportunity Identified

October 23, 2015 | Posted by David Zarling, Head of Investment Research

Facebooking Profits

Whether or not you like us changing the Facebook name into a gerund, we think you’ll appreciate our findings on one of the world’s most recognized and used social media platforms. For almost 3.5 years, Facebook (FB) has been listed on the Nasdaq. Since its debut, this social media stock has appreciated over 120%. And with their earnings release coming up on November 4, we’re sure many will be focusing on this familiar name. We think investors should be paying attention right now.

Looking at the weekly chart, we can see the steady trend Facebook has been in since 2012. We also notice that yesterday’s big move in price carried significance on this timeframe.

Looking closer at the daily chart and getting tactical, we notice that price has broken out from an area of previous resistance to record new highs. This breakout defines our risk.

We’re only interested in being long FB above 98.00. Below that, we’re not interested. Because we like to keep an open mind, we’ll consider going short FB if it breaks down below 98.00. Why? Because from false moves come fast moves. We’re always ready to be on the right side of the trade.

Until next time, enjoy your Facebooking.

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.

October 18, 2015 | Posted by David Zarling, Head of Investment Research

Why Is The Yen Carry Trade Such A Big Deal Anyway?

Depending on who you ask, the yen carry trade is either alive and well, or an overused parlance in the investment community.

What is a carry trade anyway?

A carry trade is an investment strategy in which an investor borrows money at a low interest rate in order to invest in assets they speculate will generate a greater return. This strategy is very common in the foreign exchange market and works especially well if asset prices are stable and the currencies involved do not move against the investor. Adding to the fun, many investment houses will ramp up their returns by using additional leverage. The return can be quite impressive if the currency borrowed remains stable or continues to depreciate against the currency used to purchase the investment.

So how does the “yen carry trade” work? In a nutshell:

Large money managers and hedge funds borrow the yen at extremely low interest rates.
Yen are converted to U.S. dollars, which are invested in U.S. Treasuries at a much higher yield than the interest cost for the borrowed yen. That creates a “positive carry” because of the differential in interest rates.
The buying drives up U.S. bond prices and the money managers experience large profits, especially when done with additional leverage (this assumes the yen doesn’t rise in value).
Even more profits are made when (A) The dollar rises vs. the yen and (B) U.S. Treasuries rise in price

Whether one thinks this investment strategy is widely used or not, we can assure you that investors (especially U.S. based investors) should care which direction the yen moves. Why? Correlation. The yen has an impressively high negative correlation to U.S. equity prices (today, we’ll use the S&P500 in our examples). And for our statisticians out there, we know that correlation doesn’t mean causation, but it does have implication. For many years now, the correlation between the yen and S&P 500 has been -0.9 to -1.0. Meaning, whichever direction one goes, the other goes equally the other direction. So as investors, we should definitely care which direction the yen is heading. If it is dropping in value, that is a positive for the S&P 500 while an increase in yen value means trouble for the S&P 500.

As you might have guessed by now, studying the yen is a valuable exercise in determining what type of environment the S&P500 is in. So let’s take a look at it. Here is a 4 year chart of the yen (using ETF FXY as our proxy) along with the S&P 500 (top pane):

It quickly becomes obvious there is an important relationship here. The yen was breaking out from a 4 year downtrend at the same time as the S&P 500 was breaking down from a 4 year uptrend. Lucky coincidence? Maybe. Significantly important? Absolutely. Especially to those who are trying to make money in the markets.

When we move in for a closer look, we find the recent breakout and consolidation of the yen is targeting 86 if overhead supply near 82 is cleared and a return to 77 if the yen breaks below 80. If the former takes place, it is better than an educated guess that the S&P will continue to correct. If the latter takes place, the S&P will continue upward.

At 360 Investment Research, we don’t care about being right. Rather, we care about being on the right side of the trade. In this case, we think the relationship between the yen and U.S. equity prices is an important one for helping us identify opportunities in the U.S. stock market. Let’s keep an eye on the yen and see what happens. We’ll follow-up on this release once the yen picks a direction.

Trade safe.

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.

Keywords: yen to dollar, yen symbol, yen carry trade unwind, yen carry trade collapse, yen carry trade example, yen carry trade meaning, yen and carry trade, yen carry trade appreciation

March 9, 2015 | Posted by David Zarling, Head of Investment Research

EBAY: It’s All About That Base

For the past two and a half years, eBay (EBAY) has traded within a sideways range, between $48 and $59. Price corrections take place either through time or price (decline). Of the two, a correction over time carries the most power. This is what makes eBay’s most recent breakout so important. It’s all about that base. See the first EBAY weekly chart below. The 2.5 year base can be clearly seen. Last week, eBay broke out to new highs while also breaking out of a ratio we like to use to compare the underlying security against a benchmark – in this case, the S&P 500. Who doesn’t like to outperform the S&P 500? When the ratio falls, the S&P 500 is outperforming EBAY. When it rises, EBAY is outperforming the S&P 500. We like that EBAY is both breaking out of consolidation and breaking out in comparison to the S&P 500.

See the second chart below. If eBay can hold onto this breakout, the upward reward is about 17%. In addition, the well defined base also does a great job defining our risk. Our stop loss is at $59, which lines up with previous important closes and the top of the base. A possible upward resistance point can also be seen. The green tramlines have done a good job outlining the upward price movement since 2009. Right now, price is at the mid-tramline. We could see some resistance here. But if it breaks above that, the price could move quickly towards our identified upward target. Our risk is defined. Our reward is defined. The risk/reward ratio (2%/17%) is skewed in our favor. If we get stopped out, we don’t mind. That’s proper risk management. We’ll own it above $59. Below that, we’re not interested.

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Disclosure: the author is long EBAY, and will change positions on this trade based on the criteria provided in the article. The author may initiate a short position if the 59.00 stop loss is triggered.

Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions. 🙂

February 4, 2015 | Posted by David Zarling, Head of Investment Research

PAYX: The Trade That Was Wrong In All The Right Ways

[Note: as of 02/11/15, a long position has been established in the subject stock based on the parameters outlined at the end of this article. We have initial targets of 51.60 and 55.00 identified.]

Ten days ago, we wrote about a stock we thought was going higher based on its breakout from 11 weeks of consolidation. We were wrong. And we like it. At 360 Investment Research, we aren’t concerned about being right. We’re concerned about being on the right side of the trade. In this instance, our methodology was solid:

Price was breaking out to new highs
The breakout was occurring after 11 weeks of sideways price action
The sideways consolidation took place after a large cup consolidation
All the aforementioned was taking place within a well-defined weekly uptrend
We could identify when we were wrong (stops of 47.50 and 47.00)
We had a target based on the pattern (55.00) that held an asymmetric risk/reward ratio

With the aforementioned parameters, we would make that trade again and still could (more on that in a bit). In this case, we were stopped out at 47.50, which eliminated our exposure to the 5 day, 5% drop in price. Such an event will school you quickly on investment psychology. Our risk management was solid.

So what happened? Why didn’t our higher probability scenario of more new highs play out? Simple. Buyers disappeared. Price discovery (the determination of price) is rooted in the simple economic law of supply and demand. More demand than supply, the price goes up. More supply than demand, the price goes down. In this particular instance, price rose to new highs and demand disappeared. When breakouts like this one fail, it carries significance and means demand was exhausted. When this happens, price can experience quick downward pressure. Hence the phrase, “from false moves come fast moves.” This was confirmed in PAYX by observing the swift downward price action over five days. With technical analysis helping us identify a proper exit, we were able to avoid this rapid decline. In addition, it should be noted that it also allows us to change our trade to short. Knowing the aforementioned – that a failure of the breakout would likely mean rapid price decline, we’re able to jump on the other side of the trade quickly. A current month, in the money put option (near our exit point), gained over 60% in five days. That is the power of technical analysis – knowing when you’re wrong, which can put you on the right side of the trade.

As for the future plans on PAYX, we like that it held within the green upward price channel and found new buyers near its most logical point of demand (44-44.50). We’ll own it above 48.00. Below that price level, we’re not interested.

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September 21, 2014 | Posted by David Zarling, Head of Investment Research

JUST DO IT

Nike has broken through overhead resistance to new highs on weekly and daily time frames. The move comes after the fourth knock on the 79-80 door. Corrections take place in one of two ways – through price (declines) or through time (sideways price consolidation). This bullish continuation pattern in NKE is a classic ascending triangle, meaning that price formed this pattern during a period of consolidation within an uptrend. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher (for NKE, 79-80), while the second trendline connects a series of increasing troughs (marked with a “360 green” line). What’s great about patterns is that our risk and rewards are well defined. In this case, our reward target is 96ish, a 17% gain. And we can choose one of two stop loss levels to manage risk – either 79.50 (below previous weekly resistance now turned support) or tighter at 80.75 (the ideal support level on a daily basis)

We have our entry (right now), our stop loss, and our target. We don’t enter a trade without an exit plan. So we have our game plan and will enter this trade because of the robust risk/reward opportunity. If we get stopped out, we don’t care. That means our risk management is solid. We’ve removed the emotion while identifying great potential gains. You’re welcome.