Two Notable Breakouts

While the broader indexes were choppy and non-committal, two markets broke out above long-term resistance to new highs last week. The first inside the US, the biotech sector, IBB, had tried to get above the $300 level at least 4 times in the past year and a half and failed each time. Apparently the fifth time was the charm as it surged almost 10% last week on huge (>3x) volume. This has room to run as it used a rising 200 day moving average as a trampoline.  $340 should provide near term resistance but if this has legs the rectangle pattern target is $360 and above that, the prior $400 high.

The second breakout occurred in the Taiwanese stock market. This chart below goes back 21 years so the fact their market broke out above this level on its fifth attempt is more confirmation of investors (current) desire for risk assets. Whether this is due to the lack of interest in bonds or just an extension of this bull market only time will tell. Regardless, a break to all-time highs in such an important financial market as Taiwan can be viewed as extremely bullish. 

When looking at alternative markets, it’s important to view them in context of the US and global indexes. It makes no sense to commit financial capital unless the alternative can outperform your current holdings. In the bottom pane of the chart below is the plot of the Taiwan market against the SP500.  As you can see it has been in a steep downtrend lagging the SP500 since 2009 by 50%.  What should stand out is the ratio has bottomed and has made (ever so) slightly higher highs and higher lows, signaling a high probability the downtrend has ended and a reversal is at hand.

The End of Fruity Pebbles?

Ok, I have to be upfront.  This post is not about the end of Fruity Pebbles cereal but I had to come up with something to grab your attention with a title that read “Lower Prices for Post Holdings Stock” (the maker of Fruity Pebbles, Shredded Wheat, Raisin Bran, Honey Bunches of Oats, etc.)

As you can see in the chart of Post Holdings, POST, below its stock has risen some 190% (peak to trough) since its last major bottom in Oct. 2014. After first topping in July of last year it made another attempt to break that $88 level and failed creating a double top in April of this year. Since then, price has broken below a (now) falling 200 day moving average and just last week has pierced the (blue) multi-year uptrend support line.  All of these point to the likelihood for ongoing weakness into the summer months. $71 is an important area of support where POST is likely to find at least a temporary bottom and the chance for a reversal if I am correct about weaker prices ahead. As always, if we were to get a correction in the overall market, POST be in for a much bigger decline and the $55-$57 zone (T2) would be its next likely home as that is the double top pattern downside target.

One last point of disclosure … I have a (negative) thing for POST. It’s nothing against the company or products (well, I never did like their Smurfberry Crunch) but rather its stock. You see back in 2014 I did an almost perfect call in identifying the bottom of the 2014 decline and went long the stock.  What’s not to like about that you ask? I eventually got shaken out of the position on its first major pullback and ended up with a measly 30% return for my efforts, missing out on most of its 190% gains. My mentorstaught me to never invest with emotions so hopefully I have demonstrated overwhelming evidence that my current short entry is based upon technical reasoning and not a desire to get even.

Gluten Free Investing

The past 5 years investing in most commodities has been a losing proposition (unless you were short). Of course there will almost always be a handful of exceptions to every broad generality in addition to the counter-trend bounces that nimble traders could capitalize on in every commodity during any long term decline. Wheat has been no exception as you can see in its chart below as its price has fallen almost 60% since 2012.  Whether this is due to the general price deflation in commodities we have seen or people shunning wheat due to the gluten free craze we will never know. But its recent activity has grabbed my attention.

Not only did price break above the 5 year downtrend but has formed its first higher low and has held above a newly rising 200 day moving average. A close above the blue horizontal line would not only indicate a break out from significant resistance but would also create its first higher high. Both of these signals are required for a putting in long term bottoms and the potential eventuality of an invest-able trend reversal. While these would be constructive developments there is still a short term headwind that may delay any near-term breakout as we can see in the seasonality chart below.

Over the past 5 years, the next two months of July and August have been some of the weakest for the price of wheat as only one of those years have had higher prices at the end of the month than at the beginning. So, is this a showstopper?

As with virtually every investment opportunity, if you are doing a complete analysis there will always be risks and arguments to be made against committing your capital. For me, price is first while everything else is a confirmation indicator only.  So, regardless of whether seasonality is a head or tailwind I will only be adding wheat to my portfolio if price first breaks above the area of strong resistance indicating it’s safe to enter the water as the bulls are in charge … at least temporarily.

This One’s for Bruce!

One of my dear clients who had a personality that had its own zip code (and sadly is no longer with us) used to call me up regularly and remind me there was a ton of money to be made in “sinner” stocks and to make sure he owned a lot. To him, “sinner” stocks were those companies providing “booze”, “gambling” and “cigarettes”. He also mentioned “prostitution” but I never had any luck finding a public company to fit that bill for him.

Today’s post is about a Melco Resorts and Entertainment, MLCO one of Asia’s biggest gambling/entertainment companies serving Hong Kong, Macao and the Philippines.  As you can see in the chart below, after forming a double top with divergent momentum back in early 2014, its stock was relegated to the unloved investment bin by traders as it fell more than 70% (peak to trough) over the next two years. But since that time it has had a chance to form a very nice, wide base indicating a relief in selling pressure. Price is now above a rising 200 day moving average and sits just under a major resistance zone, while momentum is in the bullish zone.  IF this breaks out to the upside, it looks as if it could have a long way to run, assuming the broader market cooperates. I have some reservation as It is very extended from its 200 day moving average and as such I would love to see it pullback/consolidate soon. The fact price sits just under a major resistance zone makes this a logical place for it to rest. Either way, I find this a compelling opportunity and would be looking to enter it on a “confirmed” move above major resistance.

If you are particular in the types of investments you own, “sinner” stocks like MLCO may not pass the screen.  If not, this one’s for you Bruce (R.I.P).

Chicken Anyone?

Back on March 1 I wrote about the charts warning of higher beef prices possibly throwing a monkey wrench into your summer BBQ plans.  At the time the cattle sub-index was trading at $65 I wrote …

Interestingly, a break and hold above the (blue horizontal) neckline will be technical confirmation the pattern is in play and the upside target is right back where it was at my original post in 2015, $80.

Here we are 4 and half months later and the upside target was reached as you can see in my chart below. With the upside target met, I would consider banking partial or complete profit on this trade. As you can see, it is forming negative momentum divergence which, once confirmed, warns of weakness ahead. We have to be open to the idea that a break and hold above the 80 level provides ample argument another push higher is probable, creating a possible second divergent high. If that were to occur and I did not take profit on the entire position, I would highly suggest doing so.

Those that followed along, congratulations.  Cattle seems to be an excellent market that tends to follow its technical set-ups. As such, I would expect cattle to provide another opportunity on the downside, once this current move has exhausted itself. But until that happens you may want to look for a cheaper protein source for your 4th of July party.