Stock Exchange: Does the Symbolism of Dow 20K Affect Technical Analysis?

Last week’s Stock Exchange focused on making hay while the sun is shining. The week before we discussed risk, where every trader and investor should start. Now the models must deal with news and symbolism. Dow 20K is grabbing the headlines as I expected. It is very nice to get some recognition for my early call on the most important investor perspective – concern about “upside risk.”

How does this affect the decisions of our technical experts? The models are not caught up in the symbolism of Dow 20K or the promise of Trumponomics. It is all about the charts.

Getting Updates

I have offered a new service to subscribers (free) on our Felix/Oscar update list. Each can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. Sign up at etf at newarc dot com. Ideas and comments are welcome, as always. Green represents a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. For now we are not holding the list to the top fifteen, but we soon will. Sign up now to vote your favorite stock or sector onto the list!

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This Week— Coping with the symbolism of Dow 20K

Holmes

Holmes: Amgen (AMGN) is an interesting opportunity. The early November drop and recovery attracted my attention. The market message seems to reflect a concern that has been re-evaluated. We could easily see some price recovery here, perhaps to the level of the 200-day moving average.

J: Do you understand that the Presidential campaign involved everyone attacking drug prices?

H: What campaign?

J: Do you know that the President-elect is tweeting about drug prices?

H: I do not know what a President-elect is. And by the way, what is a tweet?

J: Do you know that everyone is focused on Dow 20K?

H: What is this “Dow.” I am talking about Amgen. Whatever you humans might think to be important, the message of this chart is clear – a possibly dubious selloff and a great rebound opportunity. It is my kind of trade!

Athena:  Some might think I have been a little late to the party on some recent picks. In the long run, you all will see. This week I especially like McDonalds (MCD). There’s been a bit of a recovery in place since early August. More importantly, though, the SMA 500 and 200 are both itching to shoot up a little higher. I’d be very surprised to see the price decline, or even start to flatten out, within the next couple weeks.

J: This is yet another of your over-valued picks. Take a look at the excellent analysis from F.A.S.T Graphs:

A: As I keep explaining to you, valuation is not relevant for my trading time frame.

J: Do you realize that this stock is caught up in the “Trump Rally” and the quest for Dow 20K?

A: Unlike the other models, I am aware of news. It is a reflection of my superior wisdom and knowledge. Whatever the causes that motivate you humans, I will enjoy this rally. When it ends, I will sell.

J: That sounds like what some call the “greater fool theory.”

A: There is a limitless supply of fools!

J: I like biotech stocks that have real earnings, like AMGN, but there are better choices. The bottom might well be a few months away.

Felix

Some might be apprehensive about buying a stock at a 12 month high. I like to see a sustained recovery in price and volume, since I plan to buy for a holding period of more than a year. US Steel (X) pushes all my buttons. With improving strength in the overall economy, I predict consistent growth over the next 12 to 18 months.

J: Your choice might also be helped by Trump trade policies against China.

F: Who is Trump and where is China?

J: Those are important fundamental considerations.

F: If it is important, it is all reflected in the price.

Oscar

They may call it the Lombardi Trophy, but there will never be a Super Bowl in Green Bay. And that’s not just because it’s inhospitable there come February (though it is). There simply aren’t enough hotels around to hold the massive crowds. After all, they can barely find a place to host the Vikings fans in Appleton!

J: Very interesting. Moving beyond your favorite part of the newspaper – the sports section — do you have a sector pick for us this week?

O: Right – I got distracted thinking about REIT Hotels. VNQ is the most popular REIT, but I have it rated as a “sell.” The group has been on a downswing the past six months.

J: I expect REITs to be hit hard by rising interest rates. That is what your chart shows. I especially do not like VNQ.

O: Well, there are some better charts.

J: Don’t hold out on us.

O: I really like APLE; it is better oriented to a growth sector.

J: I agree. This is a REIT that we hold for clients who really need fixed income. I expect it to handle higher interest rates via economic growth.

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Conclusion

Are the models ignoring the Dow 20K story? None of them watched my CNBC appearance reprising my 2010 call, even though they all work for me! As true technical analysts, they focus on their own setups and expect anything really important to be reflected in price, momentum, and volume.

Will 20K represent resistance? If so we will see some interesting adjustments next week.

Stock Exchange: How to Maximize Gains

Last week’s Stock Exchange focused on risk – my first step in speaking with a new client. If you take on too much risk, you will find yourself bailing out at the first modest downturn. Our guest expert last week, Blue Harbinger, helped us in discussing the topic. Mark did a great job, just as he does consistently on his blog, and we got a very favorable response from readers. We will invite some other guest experts in the coming days, and we also hope to bring Mark back.

Once you have a handle on risk, it is time to maximize your returns. This is much more difficult than it seems. There are always many reasons to be fearful. It is only when you have confidence in your methods that you can stay the course through the inevitable blips.

Our models help with this problem. There are differing approaches, but all have been doing great. Holmes has just completed his impressive first year of real-time trading, beating the market with a lot less risk.

Readers see many bloggers who publicize alleged results. Some readers ask us to join in this deceptive game. Those others are either reporting on newsletters or they have bad lawyers! A legitimate investment advisor understands the regulations on reporting results. It is very tricky to put anything on the Internet, no matter how honest you are. We’ll respond to any inquiries by qualified investors with detailed results and a discussion. For most of my readers I must explain in more general terms. Today I include a recent discussion with Vince – the man behind the models. (More background here). I am trying to provide some ideas for your own consideration. While we view them as low-risk when employing our stops, no general results should be regarded as specific advice.

J: The models have all been doing well. Is it just because of the market rally?

V: When the market is strong, the models are even stronger. A rally helps.

J: What if things turn South?

V: Each model has a disciplined exit rule. No method comes without risk, but we do a good job of limiting it. How did Holmes do during the January dip?

J: Holmes pulled back a bit, dipping less than 4%. I was impressed. How do you develop such confidence in your results?

V: My method involves extensive training while preserving a generous out-of-sample period. If the latter period performs like the training time, you know you have something.

J: I add an extra test. When we start trading in real time, I track every trade. I am verifying that the model does what it is supposed to – making the right sort of trades and exiting when needed. It confirms the test results, but does much more.

V: That is only what I would expect. Humans are not really needed in my models.

J: Which brings us back to the old story of the space capsule, previously carrying only monkeys. Humans were supposedly not relevant. The designers of the manned capsule insisted on a window and engineers (like you) thought it was unneeded. The explanation? So that the astronauts could see to pilot the craft! We do not override the model choices very often, but humans remain in control.

To summarize: You need to make hay when the sun is shining. Do not get mired in pessimism. A disciplined method helps you to stay the course.

Getting Updates

I have offered a new service to readers on our Felix/Oscar update list. Each participant can suggest three favorite stocks and sectors. I plan to report the “favorite fifteen” in each category– stocks and sectors. If your favorite is not picked as part of the group, I’ll try to provide some individual answers. Sign up at etf at newarc dot com. Ideas and comments are welcome, as always.

This Week— Profiting from the Rally

Holmes

Recently TAP (Molson Coors Brewing) showed up on my list I’m the rebound specialist, and this one really fits the bill. Buying at 97.50 with a 94 Stop, looking for a move back to the 50d MA of 103.75.

I really like the risk/reward of this type of setup. If the stock starts to really move in my direction, I can raise my stops and raise my target price, although I would be likely to take some profits.

While I don’t play strict attention to what analysts say I see that there is a price target of 120.73. This is an added source of comfort for me.

J: Congratulations on your great first year of real-time trading! How much luck did you have?

H: There are always good rebound plays. My method is a natural for traders, and it minimizes risk.

J: Your choice of TAP makes no sense to me. The P/E ratio is over 26 and earnings growth is in the single digits.

H: You humans keep drinking beer! I am playing for modest rebound. You will see.

Athena:  SM Energy (SM) has been down this past week – I see that as more of a buying opportunity than a trend. Energy stocks have been favorable across the board, and here I see an opportunity to take part in a sizeable rally.

J: You and your colleagues all seem to be reaching for energy stocks. In general, I see the idea, but why not pick a name with some earnings.

A: Earnings? Look at the chart, the uptrend, the support…. This is a story. Earnings are not relevant to sustain the uptrend.

Felix

Nvidia (NVDA) recently experienced a sharp bump in price, but don’t let that scare you. The long-term trends here have been moving higher at a steady rate, suggesting the potential for gains over the next year or so. Some correction may be inevitable, but that’s a storm you’ve got to weather to hold out over the long term.

J: The company beat earnings expectations and guided higher, a winning combination.

F: The chart reflects that strength. I see this as a long-term winner.

J: Should we wait for a pullback?

F: For long-term investors it is more important to make attractive purchases when opportunities present.

Oscar

I want to talk about defense this week, and I don’t just mean the Kansas City Chiefs. (That said, eight straight games with at least one turnover is worth mentioning). My favorite sector this week is Defense (XAR).

In the past six months, we have seen a solid upswing in the moving averages here. I still think there’s plenty of room for growth here. I couldn’t say why it’s taken off so drastically since November, though.

J: Did you hear about the election?

O: Sure. Bud Selig in the Hall of Fame???? I did not vote for him.

J: You have a vote?

O: I mean that if I had a vote, I would not have picked him. That All-Star game home field advantage is strange.

J: I was referring to the Presidential Election. The results are viewed as favoring defense stocks.

O: The reason does not really matter, does it? This is a great trade!

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Conclusion

Last week we noted that accepting risk before year-end might well be correct. This week we balance the risk assessment with attention to possible rewards. The group still sees a very positive outlook.

Stock Exchange: Spotting a Great Chart

Technical analysts dominate the daily discussion of stocks. Fundamental concepts change slowly. Chart patterns change constantly. Usually the calls are dramatic, because no one cares about advice that says, “all is well, keep holding.”

Traders live on stock charts, but investors also pay close attention. Everyone wants to know whether a stock is breaking down, breaking out, or stuck in a trading range. Here is the key question:

How do you spot a good chart?

We have several great charts this week. The Stock Exchange provides an expert-level debate on technical and fundamental analysis. (Important background is available here). Comments, dissent, and specific stock questions are welcome!

This Week—Is Felix right about KHC?

One issue with charts is the wide difference in interpretation. Do analysts see what they want to see? Are the interpretive criteria constant and objective? This week (without telling him) I searched for other opinions on one of our expert selections, Felix’s choice of KHC. The same principles would apply to all the picks, but this is a convenient example. Before turning to Felix, let’s look at other approaches.

This one provides a complex chart and plenty of additional points of interest. It makes a lot of specific predictions, suggesting many trades with moves of less than one point.

 

Here is another, one-year term and 50-day MA. This is a much longer time frame with an implied criterion reflecting that.

And a dramatically different time frame from the same source. Instead of a 50-day MA, we now have two hours.

And one more site, which invites predictions. I am not sure what conclusion you would reach, but the participants have many different conclusions.

The key point of this comparison is the widely differing images and viewpoints. The time frame matters, and so does added complexity.

Let’s see what Felix has to say, and also check out my own conclusion to this article.

Felix

I look for long-term themes, and I have a great one this week. I have a pick without an army: KHC. It is my lone soldier of the week, a strong company. The recent selloffs provide a good point of entry with the rebounds already underway. This should be good for another 5 points.

I’ve had a question this week from A Dash of Insight:

Question from Fred Barone:
Any opinion on CVI thank you

 

Felix: This is a stock I won’t be holding for a while; it has been going downhill since 2013. There hasn’t been much upside. On the other hand, it does rank in the top 25% of my universe, so it is not terrible. I would take a guess that you have been holding this for a while?

[F] Please keep your questions coming. I could use the overtime pay. And by the way, Jeff. Are we working next Thursday?

[J] Next Thursday the market is closed and we are all taking a day off to give thanks and spend time with family.

[F] I don’t have a family and I could use the overtime bonus.

 

Athena

I hope I’m not too late to the party on this one. Teck Resources Ltd (TCK) has been on a solid rise since March. We’ve had the stock price quadruple since then, which is remarkable to say the least. While I don’t expect to cash in on that kind of return in the next few weeks, there is still a tidy profit to be had here.

[J] This pick is not completely hopeless. The company has some earnings. There is plenty of fluctuation but excellent growth expectations. This might work.

[A] The market is sending a message that it will work. I listen, Jeff, and so should you!

Oscar

While I focus on sectors, sometimes ideas get as narrow as a single country ETF. My regular sports channels had a brief blurb about some guy named Abe meeting with Trump. Some of my sources suggested that I should check out the WisdomTree Japan Hedged Equity ETF (DXJ) this week. Much like Japan’s national sport, sumo wrestling, this pick is all about momentum off the bottom.

[J] So you are telling us that you have been following the visit of Japanese Prime Minister Abe? The first foreign leader to meet with President-Elect Trump?

[O] Not exactly “following.” It was on my Facebook news feed.

[J] Why did you choose the Wisdom Tree ETF, which is adjusted for currency variation?

[O] Variation?

[J] Yen for each dollar.

[O] I’m not sure, but on my last visit, dollars were welcome.

Holmes

This week I’m picking DXCM, DexCom a specialty health stock. After a sharp decline on November 1st, this stock has proceeded to consolidate and slowly climb back up from a low of 61.00. I will put in a stop at 62.50.I bought this stock at 70.96, looking for a nice rebound to low 80s or even higher. If we start to rally, I’ll be moving up my stop aggressively. My major concern is that move is based on perceived changes in medical policies from Washington, vs. improvement in the outlook of this company. I’ll be very tight on the trigger if the stock starts to drift lower day after day.

[J] Do you understand that his company has no earnings, no dividend, and no real prospects for the next two years?

 

[H] How have I been doing?

[J] Your picks have been profitable. I also like your frequent decisions to take profits and move on. You are not overstaying your welcome.

[H] That is a very honest. I like that in a human. Next you must learn to be more intuitive. Sometimes stocks rebound before the fundamentals confirm. I often spot such cases.

[J] Are you really considering policy changes from Washington?

[H] Of course not. The price and volume reflect that information!

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.

 

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Conclusion

 

My first job in the investment business involved a wide variety of research tasks. My boss, a clever fellow, became suspicious of conclusions from our technical analyst. He asked me to create some stock charts with the data inverted. He presented one group to our analyst, and got a verdict of bullish on all fronts. A bit later he presented the same charts, with the pattern inverted. As he suspected, those were also deemed to be bullish!

Technical analysis is interesting, but usually lacks rigorous testing. In today’s example, I do not know precisely why Felix likes KHC, but here are three ideas:

  1. The stock chart is like those I have seen before — descent from a prior high, a new base, and often an uptick.
  2. Some might see this as a “cup-and-handle” but not all such patterns qualify for Felix.]
  3. When we get a pick, it represents thousands of similar training cases, and hundreds of test cases. It is not just an idea with an argument, but a scientific conclusion.

You cannot identify a “good chart” unless you have many, many comparisons.