risk/reward Archives | Opportunity Identified

November 6, 2015 | Posted by David Zarling, Head of Investment Research

The Power Of Technical Analysis: A Tale Of Two Trades

At 360 Investment Research, we use Technical Analysis to identify asymmetric risk/reward opportunities. This approach allows us to mitigate risk and maximize reward. The power of Technical Analysis is risk management and being on the right side of the trade. For example, let’s follow up on two opportunities we previously shared that exemplify the technical approach. The two trades below are equally successful.

Trade 1) The SGMO trade was stopped out, avoiding a 50%+ drawdown! (original research here | follow up chart below)

Trade 2) The FB trade confirmed, gaining 10% in 9 trading days! (original research here | follow up chart below)

We hope you took advantage of our research as both opportunities were well defined. One mitigated risk. The other maximized gain.

Lock out losses. Ride out gains. Keep it simple. Price is the final arbiter of value.

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.

March 9, 2015 | Posted by David Zarling, Head of Investment Research

EBAY: It’s All About That Base

For the past two and a half years, eBay (EBAY) has traded within a sideways range, between $48 and $59. Price corrections take place either through time or price (decline). Of the two, a correction over time carries the most power. This is what makes eBay’s most recent breakout so important. It’s all about that base. See the first EBAY weekly chart below. The 2.5 year base can be clearly seen. Last week, eBay broke out to new highs while also breaking out of a ratio we like to use to compare the underlying security against a benchmark – in this case, the S&P 500. Who doesn’t like to outperform the S&P 500? When the ratio falls, the S&P 500 is outperforming EBAY. When it rises, EBAY is outperforming the S&P 500. We like that EBAY is both breaking out of consolidation and breaking out in comparison to the S&P 500.

See the second chart below. If eBay can hold onto this breakout, the upward reward is about 17%. In addition, the well defined base also does a great job defining our risk. Our stop loss is at $59, which lines up with previous important closes and the top of the base. A possible upward resistance point can also be seen. The green tramlines have done a good job outlining the upward price movement since 2009. Right now, price is at the mid-tramline. We could see some resistance here. But if it breaks above that, the price could move quickly towards our identified upward target. Our risk is defined. Our reward is defined. The risk/reward ratio (2%/17%) is skewed in our favor. If we get stopped out, we don’t mind. That’s proper risk management. We’ll own it above $59. Below that, we’re not interested.

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Disclosure: the author is long EBAY, and will change positions on this trade based on the criteria provided in the article. The author may initiate a short position if the 59.00 stop loss is triggered.

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 22, 2015 | Posted by David Zarling, Head of Investment Research

Sangamo BioSciences Provides Well Defined Opportunity

On Tuesday, February 10th, Sangamo BioSciences (SGMO) announced its earnings results. The clinical stage biopharmaceutical company reported ($0.06) EPS for the quarter, beating consensus estimates of ($0.09) by $0.03. Revenue was 15 million for the quarter, which is up 117% on a year-over-year basis. Sangamo focuses on the research, development, and commercialization of zinc finger DNA-binding proteins for gene regulation and gene modification as regulated in the United States. Their main driver of revenue is collaboration, the most prominent being co-development deals with Biogen Idec (treatment of beta-thalassemia) and Shire Plc (treatment of hemophilia). The most advanced drugs in SGMO’s pipeline are two significant treatment drugs, both in mid-stage Phase 2 clinical trials: SB-728 for the treatment of HIV/AIDS and CERE-110 for the treatment of Alzheimer’s.

Since releasing earnings, the stock has moved 32%, from 12.74 to 16.94. This move has brought SGMO to a well-defined inflection point. Looking at the weekly chart below, it’s easy to see how important this current price level is, marking historical points of supply over the past year. It should also be noted that the price action over the past year is the result of breaking out of a 4.5 year long base. We heart long bases!

When zooming into the daily chart, the important price levels are easily identifiable. If the $17 level is broken, it will likely play the role of future demand (resistance). The price pattern over the past year has created a classic Inverse Head and Shoulders pattern. This pattern provides upward reward targets of 20.00 (18%) and 23.50 (38%). Frequent readers know that we like trade positioning that provides well defined risk, as well as significant reward in relation to that risk. This set-up fits our criteria for high reward / low risk entry point. With a stop loss at 16.50, our risk is well defined. Our reward targets are identified. Price will tell us which side of the trade to be on. We like this opportunity.

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Disclosure: the author is long SGMO, and will change positions on this trade based on the criteria provided in the article. The author may initiate a short position if the 16.50 stop loss is triggered.

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 based on your own decisions.

February 13, 2015 | Posted by David Zarling, Head of Investment Research

All-Time-High S&P 500 Provides Well Defined Opportunity

[Note: this article was edited at 13:23 CST on 02/15/15 to correct our if/then line. Our if/then line is the daily close on 02/12/15, not the daily close on 02/13/15. This is an important distinction that we find imperative to clarify. We will swiftly change to a short position with a daily close below 2088.48.]

Over the past three months, the S&P 500 has gone sideways. That is until today, when this major U.S. equity index closed at a new all-time-high. With new highs, comes new opportunity. Those readers familiar with our approach understand that we preach price. Price is the manifestation of opinion and final arbiter of value. You can have the all the strong opinions and indicators you want, but the only thing that matters is price. And since 2011, the S&P 500 has moved upward in a well-defined channel (see green trendlines in chart below). Moving in a series of higher highs and higher lows, price has guided our investment approach. As long as price behaves this way, we remain long this market. The exception being back in mid-October 2014 when we backed away from the market until price proved we could be long again on October 21st.

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. Every trade we enter has to have an entry and exit plan. In the chart below, we’ve identified some important levels. 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 (using ETF, SH). Today’s new all-time-high provides a well defined opportunity. We remain long this market, but will swiftly change to a short position with a close below yesterday’s ~~today’s~~ close of 2088.48 ~~2096.99~~. That is our if/then line. Long above 2088.48 ~~2096.99~~. Short below it. As time moves forward, we’ll reassess our game plan to minimize loss and maximize gain. This game plan is not for everyone. We’re not saying being long or going short is right for you.

We like this breakout in the S&P 500, but we will be watching price action closely as none of the concerns we’ve identified over the past 3 months (see our seven part series) have been alleviated. More coming on that soon.

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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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