Nike Archives | Opportunity Identified

December 9, 2014 | Posted by David Zarling, Head of Investment Research

Risk Management. A Must For Every Investor. [Weight of Evidence, Part 7 of 7]

If price is the most important piece of evidence in identifying opportunities, then risk management is the most important part of taking advantage of those opportunities. From a risk management perspective, technical analysis is ideal for identifying when any trade thesis is wrong. Knowing when you’re wrong or knowing when to exit is crucial to successful trading. We don’t care about being right. We care about being on the right side of the trade. Technical analysis allows us to do that on a consistent basis.

Technical analysis allows us to identify logical entry and exit points to maximize gains and limit loss. Every time we enter into a trade, we must have an exit plan – both for locking in gains and stopping any losses. Too often, investors will enter into a trade without a game plan. That is, without targets and stop losses. This is like entering an unknown and crowded room without identifying any exits or escape routes. Not wise. At 360 Investment Research, we try to identify the most logical entry and exit points before entering any trade. For each investor, entry and exit points will vary based on risk tolerance and individual styles and preferences. Regardless of the aforementioned, all traders, including you, should know exactly when your current trade is wrong. We don’t want to get into a psychological game of chicken with the investment of choice. If/then game planning allows us to remove emotion from the trading process and eliminate as much bias as possible. How do we this? Some examples of setting up if/then scenarios can be found in two great trades we shared with our readers this year: Nike (NKE) and Russia (RSX).

For another example of game planning and risk management, we can look at the current state of the S&P 500. We like to use ETFs to capture markets, sectors, or segments. In this case, we’re long the S&P 500 using the ETF, SPY, as our vehicle. As we’ve previously highlighted in parts 1-5 of this series, we’re seeing some negative evidence appear that is causing us to watch price (the most important piece of evidence) very closely. So we’re long the S&P 500 with some warning signs that need to resolve. What’s our game plan? Where is our exit (which can also be an entry going short)? Let’s take a look. The chart below is of SPY. As you can see, price has been steadily making higher highs and higher lows within the green upward channel. The exceptions being lower lows in February and October, which were subsequently countered with new higher highs. So the trend is up and we are long this market. What will it take to change our long stance? Simple. Breakdowns below previous areas of likely demand (aka previous highs) and below the green price channel. As annotated on the chart, our game plan is to change from long to short (using SH) with a daily close below 204.00. This is our if/then line. We are long above it, short below it. If price moves below 204.00, we would add to our short position with a close below 200.00. Each of the shaded areas and the lower green trend line would be logical places to reassess what price is doing and either add to our short position or change back to long. At each of those levels, we’ll analyze price and make adjustments as needed. With risk management, no game plan is static. We continually reassess our game plan to minimize loss and maximize gain. This game plan is not for everyone. We’re not saying going short is right for you. But, cash is a position too. And for right now, the lines in the sand are pretty clear.

Trade safe and stay curious, investor.

September 28, 2014 | Posted by David Zarling, Head of Investment Research

Nike Revisited: Did you JUST DO IT?

That was quick. Last week, our technical analysis pointed to a good probability of higher prices in NKE after identifying an ascending triangle on a weekly time frame. Maybe you got stopped out at 79.50. Or, maybe you enjoyed the 10% gain! One of the first questions I got from individuals who saw this analysis and subsequent gain was… Why? What happened? My answer: does it matter? Does the 10% gain not count if we don’t know exactly why. You see, every ounce of our body is programmed to ask this question. It could be curiosity. It could be our rebellious nature. We want to know why. In investing, this desire to know why is looming in the deep recesses of our analytical minds. But guess what? We cannot know everything. Do you want to know why NKE went to $89? Because that is what it’s worth. Price is the final arbiter of value. Why is NKE worth $89? Because enough money believes such that it created demand that outstripped supply to the tune of $89/share. That’s really what happened. Sure, fundamentalists will point to earnings. Ok, that’s fine. But how many times have you seen great earnings and see the price drop? That’s right. It happens a lot. Could it be that price forecast the earnings would be that good? Absolutely. We can think what we think, but we must trade what we see. What did we see? That the likelihood of higher prices in NKE were pretty good. Now what? Move your stops up to $84.50 (which is equal to 50% of this original move).

If you benefited from this information, you’re welcome. Share the wealth. Share 360 Investment Research with your friends. Trade safe, curious investor.

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.