Price Archives | Opportunity Identified

October 11, 2015 | Posted by David Zarling, Head of Investment Research

Supply And Demand

Back on September 28th, we took a look at the S&P 500 (SPY) and shared the following with our readers:

We anticipate buyers should step in right here and provide a relief rally. If that takes place, any ownership should be sold until new highs are made.

9 trading days and +7% later, here we are with another update. And again, we are at an important juncture. After anticipating this rip-your-face-off rally, we’ve reached a level of resistance that is worth watching. As you might remember, price is simply the interaction of supply and demand. More demand than supply, price goes up. More supply than demand, price goes down. This is economic law. Price moves to equilibrium — where there is a balance between supply and demand — until one outbalances the other and a new equilibrium must be discovered. In liquid markets, such as the S&P 500, this is an ongoing and fluid process.

As we study price (aka technical analysis), we can identify those areas where supply (selling) and demand (buying) are greatest just by watching price itself. As of Friday’s closing price, the S&P 500 (using ETF SPY as our proxy), has hit an area of resistance we find significant. In the past, the 201-203 area was an area of support, where buyers would step in and send price upward. This characteristic changed on August 21st, when SPY dropped through this important level without buyers stepping in. Using the chart from September 28, let’s zoom in a bit so you can see what we’re referring to:

We see price is currently up against an area of resistance. Looking left , we find this area of resistance was previously an area of support, where buyers stepped in to create demand. But on August 21st, this changed. On that date, there were not enough buyers to keep price from descending through this level. Accordingly, this area of support became an area of resistance, which was confirmed on September 17th, when increasing prices were met with significant supply (selling) at the 202 level, sending price downward in search of new demand.

Because of the aforementioned, we will be watching price closely. Those long SPY want to see buyers increase and drive price through this level and on to new highs. Those short want to see resistance hold and price turn downward again. We anticipate that sellers will step in at this level. However, we’ll let price determine our next step.

Trade safe.

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.

September 28, 2015 | Posted by David Zarling, Head of Investment Research

Should You Own U.S. Stocks Right Now?

As you know, at 360 Investment Research, we’re big proponents of price. Price is the manifestation of opinion and final arbiter of value. When we visualize price on a chart, all we need to do is look left to identify important characteristics of the security we’re observing. We like to look for evidence to support our investment decisions. The best and most important piece of evidence is price. What is it doing? What’s its direction? If price is making higher highs and higher lows, the trend is up. If price is making lower highs and lower lows, the trend is down. By analyzing price itself, we can determine the general trend and the potential change thereof.

When observing a popular U.S. equity market, such as the S&P 500, we can grasp the current state of that market by looking at its price action. To summarize what we’re seeing currently, the price behavior of the S&P 500 indicates there is no reason to own U.S. equities (as a whole) right now.

Using the ETF SPY as our proxy for the S&P 500, you can see that our concerns dating back to 01/17/15 were warranted. Here is the chart of SPY we shared on that day back in January:

[click to enlarge]

And, here is the same chart updated through today’s prices:

[click to enlarge]

As you can clearly see, price moved to new highs in early February, but could not hold them. The lower green trendline proved to be a significant resistance point, that when broken, brought in new supply (aka selling). Accordingly, a new lower low was established, indicating a major change in trend could be upon us. Subsequently, we noticed a new lower high recently, where sellers stepped in near the 200.00 level, causing the price to fall again. Bringing us to today. See the re-annotated chart below:

[click to enlarge]

As a reminder, in an uptrending market, we want to see higher highs and higher lows. As of right now, a new lower low and lower high have been established. If buyers do not step in at this junction, price will fall rapidly again to find demand. Though it is possible that a rip-your-face-off rally could take place from this price point, we want nothing to do with this (as a long trade) until new highs are established (a close above 212.00). Each gray area indicates where previous demand, now turned to supply, will be at its greatest. And if the lower green tramline (aka parallel line equidistant from previous trendlines) breaks, the next area of support / demand near 177.00 will be tested.

Nothing is guaranteed and our opinions, no matter how strong they are, don’t matter. Only price matters. We’ll continue to watch price to identify our next move and find our next opportunity.

Trade safe.

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 17, 2015 | Posted by David Zarling, Head of Investment Research

Important Levels On S&P 500 (SPY) Identified

Over the past two months, we’ve provided evidence that the probability of a correction in the US stock market was increasing. We have not made a full blown correction call because the most important piece of evidence still pointed to higher prices in the overall US stock market. However, that most important piece of evidence, price, has begun to capitulate. What does that mean? If you remember our article about price, you’ll remember that it is the only thing that matters. You can have every indicator, piece of inside information, or strong opinion you want. In the end, price is always right [anyone envision Bob Barker when you read that?]. Price trumps all other pieces of information you deem to be important. And since releasing our research, price has begun to deteriorate. The price of the S&P 500 is lower than it was when we began to identify problems back in November. It is time to pay close attention to price action in the near term. The U.S. stock market (represented in this article by the S&P 500) must re-establish new highs quickly or risk a trip to the 1800s (which increases risk of lower lows if that take place).

Using the chart below, we’re going to identify some important levels. Every trade we enter has to have an entry and exit plan. If we are going to establish a long position in the S&P 500 using the ETF, SPY, we need to know where to enter, when we’re wrong, and when to exit. The same is true for taking a short position. For us, we’ll us ETF, SH, to establish a short position on the S&P 500. As annotated on the chart, our game plan is to change from long to short with a daily close below 200.00. This is our if/then line. We are long above it, short below it. If price moves below 200.00, we would add to our short position with a close below 197.00. Keep in mind, that we will need to nimble with our short trade as we would be going against the upward price trend (as identified by the “360 green” channel). 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 long or short is right for you. Cash is a position too. Some of the best trades are those that aren’t made.

Trade safe.

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December 2, 2014 | Posted by David Zarling, Head of Investment Research

Want to Make Great Investment Decisions? Just Look Left. [Weight of Evidence, Part 6 of 7]

Using a weight-of-evidence approach is valuable for making quality decisions on desired or current investment positions. As technicians, we have a wide variety of tools at our disposal to anticipate potential rough spots, corrections, or buying opportunities. But that is all they are – tools of warning or anticipation. They give us an edge in identifying when and where to take on risk with limited downside. Finding asymmetric risk/reward opportunities is the epitome of what we do at 360 Investment Research. We don’t care about being right. We only care about being on the right side of the trade.

Over the past 5 posts, we’ve identified some warning signs for the overall U.S. equity markets. All of the posts carry weight as we analyze our long exposure to U.S. stocks. But none is more important than what we write about today – price. Price is the most important evidence. It carries the most weight. We can have all the common and proprietary indicators in the world and they mean nothing without the confirmation of price. Below is a diagram so you can visualize what we’re saying.

As you can see, we like to look for evidence to support our investment decisions. The best piece of evidence is price. What is it doing? What’s its direction? If price is making higher highs and higher lows, the trend is up. If price is making lower highs and lower lows, the trend is down. By analyzing price itself, we can determine the general trend and the potential change thereof. Using the diagram above, which shows the current status of the market, we can see that price moving to the right side of the scale would cause it to tip dramatically to the right into a new and potentially strong downtrend. In the same light, if the evidence on the right shifted to the left side of the scale, the swiftness of the uptrend would increase. So at this point in time, we are watching price like a hawk. How do we do this in reality? Simple. Just look left. When we analyze price using charts, we find the current price and look left. See the daily price chart of the S&P 500 below. Notice that price has been steadily making higher highs and higher lows. It is a beautiful staircase upwards, hallmarking an uptrending market. The exceptions are back in early February (SPX made a lower low and tested the trendline from the 2007 top) and back in mid-October (SPX made a lower low and tested previous highs/lows near 1825). Each time, the market recovered by subsequently making new higher highs without recording a lower high. When we consider this most important piece of evidence, the scale is easily tipped towards an uptrending market. All the other evidence only provides perspective in the event price changes and makes lower lows and lower highs. All the other evidence indicates caution is warranted. But, that doesn’t mean we need to short or be out of the market. Right now, price is telling us to remain long this market. As for the future, we’ll let price dictate what we should do next.

Look for our series finale on game planning and risk management soon.

October 8, 2014 | Posted by David Zarling, Head of Investment Research

Watch the S&P 500 closely

With Small Caps and Mid Caps looking increasingly weak, not to mention stock markets across the globe (FTSE, DAX, CAC), we’re keeping a close eye on the S&P 500’s price action. If this major US index does not hold/bounce from this level, the next area of support would be around 1900, a confluence of previous resistance (now turned support) and a parallel trend line running from the November 2012 low. Monitor this situation closely, curious investor. Price tells us everything.