trendline Archives | Opportunity Identified

October 15, 2015 | Posted by David Zarling, Head of Investment Research

Mega Pattern On The Dow

A unique pattern on the Dow Jones Industrials Average has been in the works for almost two decades. Developing since the late 90’s, this broadening formation of price is called a megaphone pattern. Just as the pattern suggests, price forms boundaries, that when connected with trend lines, form the shape of a megaphone. We can take a look at this formation in the chart below.

(click to enlarge)

As you can see, these trendlines identify important price levels on the Dow, a major U.S. largecap index worth paying attention to. When we connect the lows from the late 90’s, 2002, and 2009 we get a downward sloping trend line. When we connect the highs from 1999 and 2007, we get an upward sloping trendline. What makes this pattern significant is that price is reacting strongly to this level. In fact, just recently, price rapidly fell through it and now this 15 year old upper trendline is providing stiff resistance. Let’s take a closer look.

(click to enlarge)

As you can see, this trendline has significance. We are not interested in U.S. largecaps until this trendline is recaptured. That could happen today. It could happen tomorrow. No one knows. If anyone tells you they know where price is headed, they are fooling you. As for us, we’ll continue to let price guide us. And right now, this development carries significant risk.

As always, trade safe. We’ll keep you updated on price.

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.

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 29, 2015 | Posted by David Zarling, Head of Investment Research

Proof That Cash Is A Position Too

Those who check out our work often, know that we are advocates of patience, risk management, and high probability asymmetric risk/reward scenarios. This is a fancy way of saying we like to minimize loss while maximizing gain. Isn’t that what every investor wants? Related to our approach, we have been known to tell our readers that “cash is a position too.” In this article, we’ll show you just how valuable cash is as a position. At this point, it needs to be made clear that there are many opinions about the functionality and validity of fiat currency. That is not what this article is about. We are not here to debate whether the U.S. dollar is worth the paper it’s printed on. We are writing to show you that holding U.S. dollars is a valid investment position and one that can protect your capital.

To show you this, we’re going to use ratio analysis, a valuable instrument in our tool box. This approach of comparing the price of two securities against each other as a ratio is valuable in identifying opportunities. Today, we’re using a ratio of the U.S. Dollar Index (USDX) versus the S&P 500 (SPX). The U.S. Dollar Index is our proxy for the value of (you guessed it) the U.S. dollar. This index uses a weighted mean of the dollar’s value relative to other select currencies. When USDX rises, it indicates U.S. dollar strength and when it falls, U.S. dollar weakness.

In the weekly chart below, we’ve divided the USDX by SPX (the S&P 500). Our ratio (dollar/S&P 500) is in the upper panel and the S&P 500 is by itself in the lower panel.

When this ratio moves upward, the dollar is outperforming the S&P 500. When the ratio moves downward, the S&P 500 is outperforming the dollar. For the majority of the time, as you would expect, the ratio travels downward because the S&P 500 is outperforming the dollar. But when the ratio turns upward, investors should take notice. Based on this simple ratio, we know when holding the dollar is more valuable than owning U.S. stocks. Take a look at the chart (click it to enlarge). What do we see? We see that this ratio moves in relatively predictable trends. Notice the price trends identified within green channels (1995-2000) and descending triangles (see 2002-2005, 2002-2007, 2009-2011, and again during 2012-2014). These downward patterns are highlighted in green and when the downward trend has been broken, and the ratio moves up, we’ve annotated the chart with vertical black and orange dashed lines. The orange dashed lines indicate times when this ratio broke upward and the S&P saw a major correction or bear market. The black dashed line indicates a minor correction within the market when the ratio broke upwards. As you can see, starting back in October 2014, the ratio broke its upper trendline. From that point forward, investors have been better off holding U.S. dollars than owning the S&P 500. This is significant. With the dollar outperforming the S&P 500, it tells us that major money managers are seeking safety. Now is a time to pay close attention to U.S. stock markets. Will the dollar continue to outperform the S&P 500? Could this be the start of a minor correction or a major trend change for the S&P 500? No one knows for sure, but the warning signs are abundant [1]. In the end, we’ll let price guide us.

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[1] You can read more about the warning signs we’ve identified via our seven part series:

[the following chart was added on 02-04-2015 to show USDX next to the S&P 500, no ratio, dashed lines in same exact locations as the chart above]

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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