descending triagle Archives | Opportunity Identified

May 14, 2015 | Posted by David Zarling, Head of Investment Research

Silver: It’s Time

When we look for low risk / high reward entries in any investment, we need to be patient, waiting for those times where our risk and reward are well defined. Way back in November, we told you about an upcoming opportunity in Silver. Using cycles, we were looking for a low sometime between November and February along with a downside target near 14.00. Here’s the chart from back in November.

(click to enlarge)

How do we look today?

Price didn’t quite reach 14.00, but we’re not picky. We’re seeing a nice base with lows near our expected cycle low. In addition, we’re seeing price breakout from a 2.5 year downward trendline (dashed green line) and overhead resistance (supply) near 16.50. Adding evidence to our low risk entry is the beautiful divergence in momentum, making higher lows while price makes even lows. This is a significant move with well defined risk. Let’s zoom in and get tactical.

As you can see, the breakout breaches two significant areas of resistance. From a risk management standpoint, we have no reason to own it below 16.20. Our initial upward target is 18ish, but we will be watching price action closely if/when it reaches the solid green downward trendline, which has been significant resistance dating back to the 2011 top in this industrial metal. If that trendline is broken, we could have a rip-your-face-off rally. But let’s not get ahead of price. Let’s let it show us what to do. Trade safe.

Disclosure: The author is long SLV.

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.

January 29, 2015 | Posted by David Zarling, Head of Investment Research

Proof That Cash Is A Position Too

Those who check out our work often, know that we are advocates of patience, risk management, and high probability asymmetric risk/reward scenarios. This is a fancy way of saying we like to minimize loss while maximizing gain. Isn’t that what every investor wants? Related to our approach, we have been known to tell our readers that “cash is a position too.” In this article, we’ll show you just how valuable cash is as a position. At this point, it needs to be made clear that there are many opinions about the functionality and validity of fiat currency. That is not what this article is about. We are not here to debate whether the U.S. dollar is worth the paper it’s printed on. We are writing to show you that holding U.S. dollars is a valid investment position and one that can protect your capital.

To show you this, we’re going to use ratio analysis, a valuable instrument in our tool box. This approach of comparing the price of two securities against each other as a ratio is valuable in identifying opportunities. Today, we’re using a ratio of the U.S. Dollar Index (USDX) versus the S&P 500 (SPX). The U.S. Dollar Index is our proxy for the value of (you guessed it) the U.S. dollar. This index uses a weighted mean of the dollar’s value relative to other select currencies. When USDX rises, it indicates U.S. dollar strength and when it falls, U.S. dollar weakness.

In the weekly chart below, we’ve divided the USDX by SPX (the S&P 500). Our ratio (dollar/S&P 500) is in the upper panel and the S&P 500 is by itself in the lower panel.

When this ratio moves upward, the dollar is outperforming the S&P 500. When the ratio moves downward, the S&P 500 is outperforming the dollar. For the majority of the time, as you would expect, the ratio travels downward because the S&P 500 is outperforming the dollar. But when the ratio turns upward, investors should take notice. Based on this simple ratio, we know when holding the dollar is more valuable than owning U.S. stocks. Take a look at the chart (click it to enlarge). What do we see? We see that this ratio moves in relatively predictable trends. Notice the price trends identified within green channels (1995-2000) and descending triangles (see 2002-2005, 2002-2007, 2009-2011, and again during 2012-2014). These downward patterns are highlighted in green and when the downward trend has been broken, and the ratio moves up, we’ve annotated the chart with vertical black and orange dashed lines. The orange dashed lines indicate times when this ratio broke upward and the S&P saw a major correction or bear market. The black dashed line indicates a minor correction within the market when the ratio broke upwards. As you can see, starting back in October 2014, the ratio broke its upper trendline. From that point forward, investors have been better off holding U.S. dollars than owning the S&P 500. This is significant. With the dollar outperforming the S&P 500, it tells us that major money managers are seeking safety. Now is a time to pay close attention to U.S. stock markets. Will the dollar continue to outperform the S&P 500? Could this be the start of a minor correction or a major trend change for the S&P 500? No one knows for sure, but the warning signs are abundant [1]. In the end, we’ll let price guide us.

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[1] You can read more about the warning signs we’ve identified via our seven part series:

[the following chart was added on 02-04-2015 to show USDX next to the S&P 500, no ratio, dashed lines in same exact locations as the chart above]

November 1, 2014 | Posted by David Zarling, Head of Investment Research

Silver Linings Playbook

Since April, 2011, Silver has been getting crushed. When I say crushed, I mean it. Down over 65%, this precious/industrial commodity has been a wasteland for those hoping it would increase in price. We don’t fight price. Price is the manifestation of opinion and final arbiter of value. Price knows more than we do. We simply identify opportunities. And Silver, curious investor, may be approaching the best investment opportunity of the next decade. But let’s not get ahead of ourselves. There’s likely more downside to come. Between Thursday and Friday, Silver (represented here by SLV, the Silver ETF), continued its relentless downtrend – down another 7%.

We have some targets identified where a bottom in Silver seems logical. See the chart below (click it to embiggen). At first, it may seem a little confusing, but it’s really quite simple. Price moves to equilibrium. The orange annotations mark two measured moves (from the 2011-2013 broken descending triangle and from the 2013-2014 broken descending triangle). Those two measured moves end up within 10 cents of each other. We don’t get picky. The 13.50 – 14.00 range should provide stiff resistance to any further downside pressure. Assisting this logical turning point, is the downward trendline in green. And to help us in timing any potential bottom are some very accurate cycles (annotated in purple). Focus your eyes on only the cycles, you’ll notice they align with many minor and major turning points. Adding everything up, we are going to be looking for a major low in Silver sometime between now and February, 2015. Our price target is between 13.50 – 14.00. Once we reach that level, we’ll be looking for evidence of a change of direction. If/when that happens, I’ll let you know and share with you why this could a be major opportunity.

June 12, 2014 | Posted by David Zarling, Head of Investment Research

BMO at decision point

One of the stocks I follow is BMO. Shocking, I know. We’ve been tracking the price moves of BMO well. And now it is decision time. Price is consolidating into a pattern that will either lead to more new highs at 73.50 -or- correct to 66.50 (which could morph into a zigzag correction to 65.25). Either can happen, but I put the correction to 66.50 or 65.25 as more likely based on other indicators I follow -and- the momentum divergences on the weekly and monthly time frame. We should be able to determine direction by the end of this week. Price knows more than we do. Click the image below to embiggen