INVESTMENT EDGE
With the election behind us the market has chosen its path of least resistance and, bythe way, is once again going against what everyone predicted. Seasonality trends should provide a tailwind through the balance of the year to keep equities elevated. As such, keep an eye on the money flow (rotation) is it gives a huge clue as to where the big boys are placing their bets.
Below is the link to my most recent CotM video
Most every chart can be either bullish or bearish depending upon which side of the plate you swing from. Your bias regardless of what it is, can be confirmed providing confidence you are right in your conviction. But that bias is like the black death of making money because the best investment decisions are made by reviewing the price action, and then developing confidence and conviction, not the other way around. The most successful price analysts are agnostic.
To illustrate the case let’s take a look at the junior mining stocks ETF, GDXJ. The first view, that of the bearish case, shows price was rejected and reversed at an area where you would expect it to struggle. The blue horizontal line (and open gap) acted as resistance in the past. Notice how momentum in the upper pane was waning and created negative divergence warning of a correction. Since that time price is now sitting right on the neckline of a bearish head and shoulders topping pattern. Notice also, in the lower pane the days with the largest volume were established on down days (red).
Switching sides the only thing that has changed is the pattern is no longer a bearish reversal but setting up to be a powerful bull flag marking the halfway point of this move. The overbought divergent momentum has unwound and still remains in the bullish zone. The correction we are in was due and should be considered a normal part of the ebb and flow of price movement. The huge selling volume that occurred 4 weeks ago was capitulatory and we should expect to find a bottom (and reversal) soon. Finally, when in doubt the direction of a move out of consolidation, the prior trend must be given the higher probability outcome.
So! What’s it going to be? There are clear and supportive arguments for both sides. Pick your flavor. Bull or Bear?
If you answered with either of those, I have failed. The right answer is neither. As of now neither of the patterns have confirmed and until that occurs investors should remain agnostic and wait for the confirmation signal(s) before committing investment capital.
One final feather in the bulls cap, is that an ideal bull flag would include declining volume in the flag portion of the pattern. As you can see volumes were at their highest and as such while not invalidating the pattern it makes it suspect.
VALE, a Brazilian mining conglomerate, got absolutely pounded over the past 5 years as it lost almost 90% of its value. Chalk up the decline to a number of factors including the fact that Brazilian stocks have been out of favor and being a commodity play, it tends to perform best in inflationary an environment. The combination of the confluence of dollar strength, Brazilian political disorder and deflation was a toxic brew.
But a funny thing happened earlier this year. Why? I cannot tell you but you can see in Vale’s chart below, price bottomed. And subsequent movement has created a very interesting and potentially extremely profitable investment setup. I have labeled what is an almost perfectly symmetrical inverse head and shoulders bottoming pattern. What makes it so attractive is 4 fold 1) the left shoulder and right shoulder formed at almost the exact same price level 2) the neckline is horizontal 3) volume patterns confirm the pattern and support further upside 4) momentum has confirmed a switch from the bearish to bullish zone. And while those technical signals are about as perfect as it gets, what really has my piqued my interest is the fact it broke out of the pattern last week indicating an upside target of more than 70%. And potentially even much more … but let’s don’t get ahead of ourselves.
There is no doubt VALE is a volatile stock and any upside movement will be met with a ton of overhead supply making the move higher a bumpy one, especially as it gets to the $11 level. In spite of that, with the right management plan, VALE is a stock worthy of consideration as it more than exceeds a 3:1 reward to risk ratio requirement which don’t present themselves all that often.
I have been saying for almost 2 years since the initial breakout of the dollar in late 2014 that it is poised to go higher, much higher. After peaking in March of last year from the first labeled breakout in the chart below, the dollar has been in a massive, multi-year horizontal consolidation waiting for the impetus to escape its clutches. Apparently Trump’s the election was what the doctor ordered as last week it found massive escape velocity and vaulted out of the rectangle.
While the first upside target is only about 8% higher to ~108, the implications on the rest of the markets are enormous. Emerging market stocks and bonds, US stocks, commodities (including oil and gas), precious metals among other all have historically been negatively correlated with the dollar and as such struggled (and some mightily) as it rises. Because correlations do not always hold, the question investors need to ask themselves is will this time be different?
Regardless of the answer, Uncle Buck is signaling it’s moving higher and investors would do well to keep a close eye on their investments. Strong currency moves, especially in the world’s reserve, can have nasty implications for those caught unaware.
What a difference a week makes. In last month’s video I was talking about US small cap stock being rejected and rolling over at prior highs which was not a good sign for US stock bulls. I lamented “In bull markets you want to see small cap stocks leading” not lagging. Then Trump happened. Every talking head, prognosticator and market pundit was wrong. This is a great example (and one to memorize) of the markets will almost always do the thing that people expect least.
Notice in my weekly charts of the US small cap index, IWM, below, spiked up on huge volume and blasted right past the past troublesome (blue horizontal) resistance area. Notice also how price formed and inverse head and shoulders bullish reversal pattern which has a projected upside target in the 155-160 zone above, some 30+% higher.
Not only is this bullish for small caps but also for all US stocks in general. As always there will be some laggards but this sign combined how the market is trashing bonds, is telling us we may be on the verge of seeing that shift from public to private asset investing finally begin its take off.
