“Teck”nical Analysis

The chart of Teck Resources, TECK, is a great example of how one of the basic principles of technical analysis, support and resistance, works.  As you can see in TECK’s daily chart below, price attempted to break above the $25.5-$25.8 zone 4 times before it eventually broke out to the upside in December of last year. While it is referred to as resistance, it is really just referring to the fact that there is an abundance of shares available at the price that investors want to unload. Before prices can work higher, those shares need to be absorbed and be less than current demand.  The basics of TA are based upon simple supply and demand levels (like almost all markets).

Once price moves above the line it changes from resistance to support. Support is just another term used when speaking of demand. Notice how on the chart above price eventually broke above the resistance/support line, peaked, reversed course downward and then found support (demand) right at that same level where they originally broke out? This should not be a surprise as it is something that occurs regularly and why paying attention to these zones is critical. It is another great example of a back test of support. It also provides those that missed buying the original breakout another opportunity to get into the position. More importantly, investors in TECK now have an easy way to manage risk. If the stock fall should at a later date below this original resistance/support line, it would be your signal to exit the position. Not only does it make managing the position easier as it provides a framework and set of rules, it insures any loss because you are wrong, will be very small.

The fact TECK formed an inverse head and shoulders reversal pattern, has broken out and held above support suggests that if it plays out, the upside target is around $37, some 40% from the breakout level. With momentum in the bullish zone and price above a rising 200 day moving average, I find TECK a compelling investment opportunity. My only hesitation, a fundamental one that I must ignore, is if the upside target is to be met, oil prices will need to rise substantially from today’s levels. While this may occur, my read on the current oil market is that over-supply should be the problem for the near and foreseeable future.  As such, until demand picks up, prices should be well contained and may contain the rise in TECK.

Does Diversification Matter?

When markets are rising diversification can help investors from putting too much money in the wrong places. On the flip side, performance will always be just average and those who are able, can outperform.

But, unfortunately when it matters most, as markets decline in earnest, diversification fails. The chart below shows how correlated an in lock step the global markets are when in a steep decline. If you are looking for the solution to manage portfolio risk, diversification does little at the times it is needed most. As such, you better have a plan.

January 2018 Charts on the Move Video

January - in like a lion and out like a lamb. Volatility is back what's it mean for the markets in the short term? This and a look at parabolic blowoffs in this months Charts on the Move video which can be seen here

https://youtu.be/U8bZ_fex0rQ

Uh Oh

It should be no surprise to anyone bond yields are rising. What may be of surprise is that we MAY have just turned the corner and entering our first bond bear market in more than 30+ years.  As you can see in the 5-year weekly chart of 10-year US Treasury bond yields that we just broke out from a rounded base which target projects up to 2013’s high water mark, labeled T1.

While this chart may not look as if it has formed a bearish reversal (bear market), turning to the much longer-term view of Treasury 10-year rates we see they have broken and closed above their downtrend line for the first time in 30+ years. Breaks of downtrends are interesting but carry less weighting without higher highs and higher lows being formed. Without them, its more than likely to turn out to be just a counter-trend bounce.

While this is definitely a HUGE yellow caution flag, my interpretation is that until they break and hold above (not just rise up to) 2013’s peak, I would not be overly concerned. Why? Because virtually everyone is aware (the FED has been telling us they will be raising rates for eons) and the smart money is positioned accordingly. Markets move most when most involved are surprised, which is not the case here. As such, I fully expect the market to do exactly what you would expect it would do when everyone knows what is coming … the exact opposite of what is expected. So, until this reversal question is finally resolved, because of bonds effect on other investments, there are potential major changes on the horizon. I don’t need to say it but we are in interesting times and investors need to keep a close watch on what unfolds with intermediate and longer-term bonds in the weeks and months ahead.

18 Years Later

Coming from the industry in my prior life, semiconductor stocks have always been a sector I follow closely. Their heath is a good proxy and gauge of investor’s willingness to take risk. The semiconductor ETF, SMH peaked after its parabolic run-up during the dotcom boom, the same boom that turned into a bust laying waste to pets.com, webvan.com and etoys.com (RIP). SMH finally bottomed during the 08 –’09 financial crises, losing more than 85% of its value from the highs. In 2015 during the markets one year consolidation, SMH formed a huge base (under the red horizontal) from which to launch higher. That huge cup and handle pattern has a target around the $100 level (the blue horizontal line), which just so happen to be where it reached this week and back 18 years ago.

With price sitting well above its 200 day moving average and massively overbought, it needs a rest. As such I would expect to see consolidation (or dare I say even a pullback) in the upcoming days/weeks before it shows its hand on whether this prior resistance level will put throw cold water on the current rally-to-the-moon party. In an ideal world, price would slice right through that critical area of resistance and not look back and the path of least resistance considering the strength of this market.