Beaming with Pride

After almost 3 years of intense study and enormous commitment of time I am incredibly thrilled to let you know I have just received acceptance by the MTA Board of Directors as a Member of the Market Technicians Association (MTA). Along with this acceptance came the award of the prestigious CMT (Chartered Market Technician) designation which is considered the gold standard for technical analysis. To put this in perspective I am one of less than 1900 people worldwide to have been issued this since its founding in 1989.

I do have to admit that without question that this was the most challenging, demanding and humbling educational/learning experiences I have been involved in. If you look at the list of my credentials this is saying a lot. As such, it is the one I am most proud of.  

The CMT is the only technical analysis training designed by professionals, for professionals. While there are countless technical analysis training programs available, only the CMT is designed to provide broad exposure to the classic literature in the field while emphasizing state-of-the-art analytical techniques. Over the past year while preparing for the final, level 3 exam, we have been working hard behind the scenes revamping both our investment methodology and process to incorporate the new found knowledge and expertise. In my opinion it could not come at a better time as the investment world is rapidly changing and advisers who don’t recognize it and adapt will likely be woefully unprepared for what I believe is likely ahead.

A Penny for your Thoughts

Come on, admit it. You’ve done it, maybe not as much as I have but you have done it.  What I am talking about is saying something and then regretting it later. Well, instead of actually saying it I am going to write about it and have to deal with the consequences later.

Today’s blog post is about the bullish setup on JC Penny’s (JCP).  Yah, I am speaking of that Penny’s. The company who can’t close their stores fast enough to stop the flow of red ink. The one who have tried to remake and modernize their stores so many times but without success. The one where your mothers (that includes me) took us as kids to shop for clothes for the new school year and they seem to have not changed their inventory since then.  Yah, that Penny’s.

It’s clear from the longer term chart Penny’s has been in a heap of trouble as it has declined almost 80% from its high in early 2012.  Since bottoming in January of last year it has been consolidating within the highlighted rectangle, bouncing from top to bottom. From this perspective, I would find it compelling as an investment only if it moved above the shaded rectangle on higher volume (and of course if I forgot which company it was).

The daily chart is definitely more compelling than the weekly vantage point. After peaking in September of last year, it was cut almost in half by the time it bottomed in December, 3 months later.  Since then it has clawed its way back and has formed an inverse head and shoulders pattern that, if plays out, projects back up more than $3 higher to the highs back in September.  While $3+ doesn’t sound like much, it is a very nice move on a percentage basis, ~40%.  Now, that is something that grabs my attention.  The only negative here is there is a gap just underneath the right shoulder that will eventually need to be filled. That may be now or much later but it too, grabs my attention and provides a cautionary splash of cold water to this setup.

I am sure if this does not work out (no, nothing is guaranteed), the haters will be sure to never let me forget this post.  The good thing about this blog is anything I present is just an idea and informational in nature and not a recommendation. Even the best investment idea can turn out badly if managed incorrectly. Remember, it’s your system that makes you successful, not the investment 

As with all my opportunity screens I try to be agnostic as to the company and look only at price.  I have found that biases or predetermined beliefs about a company or industry can have a negative impact on returns.  So while I have attempted to remember that with this idea all I need to close this post with is ... “yah, that Penny’s”.

(Denim) Tops and Bottoms of the SP500

A company we have loved for a long time has been VF Corporation, VFC. It has everything going for it (except a memorable name) as it is very well run, pays a dividend and has tens of millions of customers around the world. As you can see in the chart below its share price has risen more than 450% over the past 4 ½ years. In the bottom pane, which is a performance ratio against the SP500, you can see how it has outperformed the US broad market index by more than 120% over the same time period. The funny thing is when I ask most people, they say they have never heard of the company. The common response when I show them the chart is “it must be a high growth technology or biotech company”.  As it turns out it is neither, here is a quick summary of what they do and some of their more notable brands, some of which you likely have heard of (and quite possibly own) …

The company offers outdoor apparel, footwear and equipment, sports and adventure footwear and apparel, handbags, luggage, backpacks, accessories, merino wool socks, women’s activewear, packs, and travel accessories under the The North Face, Vans, Timberland, Kipling, Napapijri, Jansport, Reef, Smartwool, Eastpak, lucy, and Eagle Creek brands. It also provides denim and casual bottoms, and tops under the Wrangler, Lee, Lee Casuals, Riders, Rustler, and Timber Creek by Wrangler brands

The chart is a thing of beauty as the stock’s price has not violated the blue uptrend line since it started in 2010.  Each time it has tested that the line (red arrows) it has bounced nicely higher consistently acting as support.  Seeing this happen again last week we put this on the radar to add to our model portfolio.

Jumping to the daily chart and using a shorter timeframe in an attempt to optimize our entry, we see price was in a (blue) corrective down channel for almost a month, after peaking in the middle of January.  On Feb 9th we got an ideal bullish hammer reversal candle that formed after bouncing exactly off the red horizontal support. While that was a great early buy signal, because we are investor on a longer timeframe, we want to see some form of confirmation before committing client’s investment dollars. 3 days later that confirmation triggered as price moved out of the (blue) downtrend channel. Notice how, at the same time, the RSI crossed above its moving average while the MACD bottomed and crossed its signal line. That was more than enough as we quickly took action buying before the end of the day close. You can see what happened next on Friday (the 13th - the last candle on the chart), priced gapped and closed up 6%.

With price now approaching all-time highs, I do expect it to take at least a short term breather for its eventual push higher. As long as the stock market wants to go higher and the fact that there is no resistance above $77, where this finally tops out is anyone’s guess but my first upside target is $81 followed by $85. While breakouts are not all this clean and play out this ideally, hopefully you can see the value Technical Analysis can bring to improving returns.

Is the bottom in on Gigamon?

Gigamon, GIMO, a maker of corporate network performance monitoring equipment and one of 2013’s high-tech IPO darlings, saw its price more than double in the early months of trading. Since March of last year though, it has had a rough go of it as its shares have lost more than 70% from its peak, bottoming in October of last year. Interestingly, at that bottom you can see in the weekly chart below it created a divergent, over-sold low which we have found to be one of more reliable indicators for identifying bottoms and potential early entry points. In retrospect, we wish we would have jumped on it as it has risen almost 100% from the lows.  Woulda, shoulda, coulda!

The daily chart below clearly shows we are sitting just below a level of strong resistance (red horizontal line) and if overcome would likely be a catalyst to propel this stock to much higher levels. Its ugly inverse head and shoulders reversal pattern projects to a target around 30 and the gap just above will likely grease the way for a quick move higher.  I want to bring your attention to the blue circle. Notice the confluence of signals right there as the downtrend ended and all the moving averages were pinched together and begun to point higher rather than lower.  As we learned in last week’s post, this is another early signal that I have found to provide high-probability, winning entry points for investments.

Whenever I decide to enter into a position I use the many tools Technical Analysis teaches you to insure the risk/reward ratio makes it sufficiently worthwhile.  One that I like to use but have not introduced to my blog readers is point and figure charts. Due to their unique construct they provide very good price targets but their beauty is their simplicity.  They visually appear like a collection of X's and O's on a grid of square boxes. Columns of X's alternate with columns of O's. The X's represent a period of rising prices and the O's represent a period of falling prices. Because time is not a variable, the only thing you see is and allows you to focus on is the movement of price. The PnF chart below for GIMO projects a bullish upside target of 27.14, very close to the head and shoulders pattern target projected in the paragraph above.

I really like this opportunity as there are a number of other elements, that in an effort to keep this post to a minimum I have not addressed, almost all positive. In investing there is never a perfect setup and this one has a concern too, the open gap that sits just under the current consolidation around $17.5.  Because we know that gaps want to be filled the question that is nagging me is should I wait for it to fill the gap and potentially miss out on an excellent opportunity if it decides to move higher without filling or do I buy on the hope it gets filled at some point in the distant future when I no longer own it?  This question is a perfect example of what why what I post is for informational purposes and to be taken as a recommendation.

Pinch Me

I look at hundreds of charts a week scouring the markets for investments that are in the later stages of consolidation. I put them in different folders depending upon how quickly I feel they may be ready to buy. I hate to sound like a broken record but there is nothing more important to understand about perfecting your entries than the concept of consolidation. Markets only do two things they either 1) trend or 2) consolidate. Finding an investment that has been in a strong trend up but is in a period of consolidation is an investors dream.  Don’t get me wrong, even if you get the perfect setup there is no guarantee its breakout will be higher so you still need patience and some sort of trigger or confirmation before you buy. The chart of Arbor Realty, ABR, below is a great example. I had this in my “actionable” folder as a potential “buy” candidate.  As you can see price was in a nice uptrend until June of last year when it peaked and then began its current consolidation. What is interesting is to see during this time is how price moved very symmetrically as it formed two left shoulders, a head and two right shoulders of an inverse head and shoulders pattern before it actually broke out.  Notice during the entire consolidation period, the stock could not sustain a price close above that red horizontal resistance (at ~$7.04) for more than one day.  Each of the 4 times it tried to move higher, it failed until the most recent push.  That tells you how important that price level was. But the more times you bump up against a resistance the higher probability you will break through. And break through it did.

One other key concept you can learn from this post is you’ll notice the blue circle I annotated on the chart just prior to the end of last year. At that point in time we got a signal the upward trend will likely be resuming soon and provided an early entry signal for the more aggressive investors. The signal ws the fact that all 3 moving averages (red, blue and green lines) were pinched together, all 3 were pointing up and bullishly aligned (the faster is on top of the intermediate which is on top of the slower).  A pinching of bullishly aligned and upwardly pointing moving averages can provide a high probability early entry point for investments in consolidation.  Keep this in your investor toolbox and see how it has the ability to enhance returns.