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June 13, 2017 | Posted by David Zarling, Head of Investment Research

The Correction In Tech Everyone Was Hoping For, But Won’t Take Advantage Of

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Fear and greed are as old as the Garden of Eden. For many market participants, these are crippling emotions, often causing individuals to sell and buy at the wrong time. The market is extremely good at triggering these emotions, which can be valuable for survival, but detrimental when trying to make money in the market. Over the past two trading sessions, the U.S. Tech Sector has dropped in price. Some would call this price discovery, while others, such as our friends in the financial media, have dubbed it, “the tech tumble.” Alliteration always amuses (See what I did there?). It’s almost as if the financial media was in the business of entertainment. For sure, they’re not here to help us.

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” ~Jason Zweig

If the financial media is not interested in helping us but prefers to trigger emotions just to increase viewership, then it’s likely in our best interest to turn off the TV and stop getting hooked by click-bait headlines. But what can we use to fill the void? Where can we get unsensational, fact-based, and objective information? It’s called PRICE. We know… that’s not a very sexy answer. But it’s the truth. Price is factual data which reflects the interaction of supply and demand based on economic law (not theory). Price is objective and doesn’t care about your opinion nor mine.  Even if you disagree with it, price doesn’t lie (some really hate this and fight with the market). The fact-based nature of price is exactly why we use it to identify opportunity in the marketplace. Let’s take a look at the price of Technology, using ETF XLK, to help us.

Technology Daily Chart

As you may recall, we use a simple technique to helps us make better trade decisions. When we look left on the daily chart of technology above, even after the recent price correction, price is still making a series of higher highs and higher lows, which is indicative of an ongoing uptrend. In fact, we notice sideways movement and drawdowns ranging from -2% to -4% are a natural part of trend progression. However, this is difficult to handle if we 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.

Prospect Theory Loss Aversion

Many market participants experiencing twice as much pain during drawdowns than the joy experienced during equivalent gains. Not helping matters, and many times feeding the negative response, is the inundation of sensational media opinions during times of drawdown. TV Networks and Financials websites are touting “Tech Tumble” even though price is working well within the characteristics of an ongoing uptrend. This sensationalism is extremely unhelpful to market participants who need to manage (or better yet, remove) emotions during the investment decision making process.

As market participants, we don’t need to predict (media pundits will play this game, we don’t have to). We need a plan. We need to know when we’re wrong, which is the beauty of studying supply and demand via price. Using the daily chart above, we can see price moving in a sequence of equivalent higher highs and higher lows. These levels give us important clues on where previous battles between supply and demand have taken place. And this particular sequence has established a nice upward momentum channel (annotated in green). The first clue this trend in Technology is changing would be a breach of the lower green trendline on a daily closing basis. If/when price would close and hold below the lower momentum trendline, it would indicate a shift in the demand/supply dynamic with sellers able to change the trajectory of price. Secondly, and more importantly, a closing price below 54.30 would likely usher in price discovery towards the 52-53.50 level. And if that can’t hold, a much larger correction is upon us and the media aggrandizement would be at a fevered pitch, providing another excellent opportunity down the road.

For us, this one is pretty simple. A breach of the lower green trendline would be a warning and a close below 54.30 would indicate we’re wrong on XLK. Someone else can have it. Above these levels, the trend remains your friend.

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 time-saving 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.

Filed Under: Education, Equity, ETF, Market Outlook, Other, Psychology, Sector, Supply and Demand, Technology Tagged With: $FDN, $NQ_F, $QQQ, $SMH, $XLK, Technology

May 8, 2017 | Posted by David Zarling, Head of Investment Research

Why The Hindenburg Omen Is More Than Just A Scary Name

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Four days ago, on May 4th, a Hindenburg Omen triggered on the same day for both the New York Stock Exchange and Nasdaq Composite. Recording a Hindenburg Omen for both exchanges on the same day is a rare event. This chart, courtesy of SentimentTrader, shows just how rare this event is:

Chart of NYSE & Nasdaq Hindenburg Omen Events

Before we dig into the market implications, let’s put the work in and get a big picture understanding of the Hindenburg Omen, how it came to be, what it is, what it’s not, and how we can use it to identify opportunity and manage risk.

Ironically, two days ago (May 6th) was the 80th anniversary of the tragic explosion of the Hindenburg, a behemoth airship which measured as long as the famous ocean liner, Titanic. Filled with hydrogen, the Hindenburg represented the aspirations of human flight only a decade after Charles Lindbergh became the first to fly solo across the Atlantic. The Hindenburg carried passengers during a time when very few had experienced human flight. It was a futuristic symbol of aviation and an icon of technological progress.  However, on May 6, 1937, the Hindenburg exploded in flames, crashing to the ground, taking 36 lives with it. It was a catastrophe not only because of the loss of life, but because just like the Titanic, the Hindenburg had once projected invincibility. It was a tragedy which reverberated across the globe as new technologies of film, tv, and radio, carried the calamitous news far and wide. Are you familiar with the phrase, “oh, the humanity!”? These were Herbert Morrison’s famous words as he emotionally reacted to the disaster live on radio. Watch the 40-second clip below to hear the emotion in his voice and grasp the magnitude of this event:

To the world in 1937, this was a tragedy of immense proportion. And for decades following, the word “Hindenburg” was synonymous with catastrophe. Which brings us to the Hindenburg Omen, a technical indicator named after the aforementioned crash. If using the word “Hindenburg” wasn’t enough, adding the word “Omen” surely solidified the sinister connotation implied when labeling one of the most misunderstood indicators in the market today. If you were to Google “Hindenburg Omen,” you would receive a plethora of results providing the metrics for calculating it, yet none of them are in agreement. We’re not going to pretend this article has the final say on the specifics of the Hindenburg Omen. But, we’re hoping this post provides a tremendous amount of clarity (and sanity) regarding this legitimate approach for identifying market conditions during which there is an increased likelihood of a market correction.

Let’s break down the Hindenburg Omen into bite-size factoids and illustrations for better understanding:

  • The Hindenburg Omen is meant to operate as a warning signal and was developed by the late James R. Miekka as an improvement to Gerald Appel’s Split Market Signal.
  • A man named Kennedy Gammage first named the indicator “the Hindenburg Omen” in his market newsletter, the Richland Report. The label stuck. And in our humble opinion, this was a terrible label meant to imply and sensationalize disaster ahead for the market. Case in point, in today’s financial media, when there is a Hindenburg Omen sighting (which may not even be accurate – see below), they sensationalize it (e.g. “This Indicator Just Signaled Market Disaster Ahead”), and then dismiss it as ineffective when the market does not sell off dramatically.
  • The Hindenburg Omen does not guarantee large market corrections. Rather, it highlights when the market being measured is showing signs of fracturing, which can lead to corrections large AND small.
  • The Omen can be calculated and tracked on difference indices such as the Nasdaq Composite and New York Stock Exchange.
  • The Hindenburg Omen’s basic function is to identify when significant bifurcation is taking place within any given market. Basically, think of it this way. Imagine you are driving down a two-lane highway with hundreds of other vehicles, all heading in the same direction. The traffic is flowing in sync at about 75 miles per hour. This is perfectly normal and expected behavior. We’re making great time and life is good. All of a sudden, the traffic in the left lane accelerates to 90 miles per hour and the traffic in the right lane slams on the breaks. What’s going on here? Is it an accident? Is there road construction? Has someone been pulled over by highway patrol? We won’t know until we travel further down the road. It could be nothing, but understandably, we may want to take heed and be on alert for something odd up ahead. It’s the same way with the Hindenburg Omen, which does a great job identifying when stocks are traveling at two different speeds (or more accurately, directions).
  • Here is the formula for triggering a Hindenburg Omen, as written by Jim Miekka himself:
    1. First, the number of issues in a specific exchange hitting 52-week highs (left lane of traffic) and lows (right lane of traffic) must both exceed 2.8 percent of the number of issues in said exchange. (Many articles report a requirement of 2.2 percent, which is incorrect.)
    2. Second, the benchmark index for the exchange must be above the value it had 50 trading days, or 10 weeks, ago. (Again, many sources get this incorrect, referencing an exchange must be above its 50-day moving average. This is not accurate.)
    3. Once the two aforementioned events have occurred, the signal is valid for 30 trading days. During the 30 days, the signal is activated whenever the McClellan Oscillator (MCO) is negative, but deactivated whenever the MCO is positive. (This is an extremely important distinction that many publications inexplicably omit.)
  • There are many charts and articles on the internets which indicate the Hindenburg Omen is a “cry wolf” indicator that only “works” 30% of the time. Unfortunately, these articles use incorrect calculation methods (they do not use the parameters above, often omitting the McClellan Oscillator requirement) or use improper success metrics (e.g. since the market didn’t crash 20% – it only corrected 5% – the indicator doesn’t “work”). Garbage in. Garbage out. If the proper calculations are not used or improper means of measuring a successful result are taking place, then it’s no wonder there is so much confusion regarding the Hindenburg Omen.

To show just how important this signal is, here is a chart showing times when Jim Miekka’s Hindenburg Omen has triggered on the Nasdaq Composite:

Greg Morris, a 40-year market technician and acquaintance of Jim Miekka, was kind enough to use the correct methodology to create the signals in the lower pane of the chart above. It’s quite clear the Hindenburg Omen tends to be an important indicator of market fracturing. It’s not perfect. But even at first glance, it becomes obvious this indicator of market health has significance and should be recognized as a warning sign for the overall market. Does it guarantee an impending market correction? Absolutely not. But it does have the capacity to identify when markets are fractured and breadth is narrow, which are characteristics of an unhealthy market.

As always, price knows best. Higher highs in the overall market are still a possibility. Market bulls will want this bifurcation to resolve with increased participation and a reduction in new lows on each index. And whenever the Hindenburg Omen is referenced, make sure it’s Jim Miekka’s formula and not a clickbait garbage pushed by entertainment networks masquerading as financial news outlets. After all, data and facts matter. And when the real Hindenburg Omen triggers, market participants should pay attention to its warning.

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.


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.

Filed Under: Education, Equity, Market Breadth, Market Environment & Structure, Market Outlook, Nasdaq, NYSE, Other, Participation, S&P 500, Video Tagged With: $COMPQ, $NDX, $NYA, $QQQ, $SPX, $SPY, Bifurcation, Breadth, Fracturing, Greg Morris, Hindenburg, Hindenburg Omen, Jim Miekka, Nasdaq, Nasdaq Composite, New York Stock Exchange, NYSE, Tom McClellan

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