Resistance 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.

February 25, 2015 | Posted by David Zarling, Head of Investment Research

Yields Retreat As Bonds Bounce Off Logical Resistance

Technical analysis allows us to identify logical points of increased supply or demand for any liquid security. We can find places where a change in the direction of price is likely. As previously mentioned, this applies to any liquid security we can chart, including bonds. Over the past week, the financial media has been quick to point out the “spike in bond yields.” While true, bond yields have moved quickly upward since the beginning of February, the bigger trend (yields decreasing) remains intact. And as of the past few days, we find that bonds and yields are reacting to logical points of resistance. Let’s take a look at the 10 Year Treasury Note Yield ($TNX) and the 20+ Year Bond Fund ETF from Barclays (TLT) so you can see what we see. But before we get too far, it should be remembered that the relationship of bond yield to bond price is simply this: when the bond price goes up, its yield goes down and vice versa. Technically said, a bond’s price and its yield are inversely related. Ok, on to the charts.

First, the weekly chart of the 10 Year Treasury Note. Notice that for 20 years now, the yield on the 10 Year has been steadily declining within a well defined trend as marked by the green channel. Annotated in orange is the incredible “spike in yields” being reported. As you can see, this is minor in relation to the overall trend. We do concede that someday, yields will breakout of this channel and begin a new upward trend, bringing many financial ramifications with it. We’ll make sure to let you know when that happens. But for the time being, the overall trend in yields is down.

Taking a closer look at the 10 Year Yield below, we find that its yield has reversed course upon reaching 4 different levels of significant resistance:

The mid-channel line dating back 20 years
Demand/supply dating back to 2009
38.2% Fibonacci retracement from 2013 highs
Former support turned resistance dating back to 2012

This is a logical move and one that indicates a high probability of resuming the downward pressure on yields.

The resumption in downward yield pressure and upward bond price movement can also be seen by taking a look at the 20+ Year Bond ETF, TLT. Looking at the chart below, it’s easy to see that prices dropped from January highs and have so far found demand around the 126 level, which used to be a prior supply/resistance level. In addition, this bond ETF continues to move within an upward slopping series of tram lines. Until the 126 level and lower boundary tram line is broken, the trend in bond prices remains up. With bonds finding support here and major stock markets breaking out across the globe, it’s our opinion that we’re likely headed into an environment of rising bonds and stocks. In the end, however, that is our opinion. We don’t trade on our opinion. We trade on price, the only opinion that matters.

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

Stay Calm And Break Out? London Financial Times Index On The Verge

If you initiated positions in the London Financial Times Index back in the year 2000, you would now be back to even. This index, representing the 100 largest publicly traded companies in the United Kingdom, just reached 6898.13, its highest close since 1999 (6950.60). That’s 15 years ago if you need to do the maths like me! After a decade and a half, and two steep price corrections, the FTSE is at par. Some investors might call the past 15 years exhausting. Others might call it consolidation. If the latter, then we may be on the verge of an opportunity. From a big picture perspective, you can see the magnitude of this price action in the first chart below, which holds the monthly price candlesticks from 1990 through today.

When we zoom in to the weekly chart (see below), we find that the British index has been battling the 6800-6890 level for about 2 years. This level is overhead resistance – where sellers show up and cause the price to stagnate, retrace, and find demand. As a reminder, price is the work of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. For nearly 24 months, the 6800-6890 level has provided plenty of supply.

Digging deeper into the index on the daily chart (see below), the significance of this level can be clearly seen. We are on the tenth attempt to break this level. The more times price attempts to break through resistance, the weaker that area of supply becomes. Today, we may have witnessed the breakthrough. If that’s the case, the opportunity ramifications are large. The longer the base (2 years -or- 15 years!), the higher the space. If this breakout holds and does not prove to be a false breakout (closing below 6800), then the initial price target is 7700, 12% above current levels. The risk is well defined as we don’t want any exposure below 6800. A risk of 1% for a gain of 12%. Not bad.

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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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January 25, 2015 | Posted by David Zarling, Head of Investment Research

Consider Taking Some Of Your Paycheck To Buy Paychex (PAYX)

Paychex, Inc. (PAYX) has a lot going for it. This commercial services company recently expanded its outsourcing capability with three notable value-adds:

A cloud-based time and attendance service (bolt-on via its acquisition of Nettime Solutions last June)
A mobile time-punch application called Paychex Time
A health care product that helps clients navigate the complexities of the Affordable Care Act

In addition, their client retention level is 82% (an all-time high), their quarterly dividend has tripled since 2005, and their previous quarter earnings were up 9% while revenue grew 10% (the best in over four years).

More importantly, last week, PAYX broke through overhead resistance to new 52-week highs. The move comes after an 11-week price consolidation. Corrections take place in one of two ways – through price (declines) or through time (sideways price consolidation). Of the two, a correction through time is the most powerful. This bullish continuation pattern in PAYX has formed within an uptrend (note the upward price channel on the weekly chart below). In addition, last week’s breakout took place after a previous breakout from a bullish cup formation (see rounded line on weekly chart below) that took 45 weeks to form. That is a real nice base. Technicians know, “the longer the base, the higher the space.”

What’s great about price patterns is that our risk and reward are well defined. In this case, our reward target is 55ish, a 14% gain. And we can choose one of two stop loss levels to manage risk – either 47.00 (below previous weekly resistance now turned support) or tighter at 47.50 (a logical 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. Enjoy.

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