Two for the Bears

While Tuesday seems to have confirmed we put in a short term tradeable bottom in stocks, it does not mean ALL stocks. Remember what we invest in is not a stock market but rather a market of stocks. There is a big difference! It means some can (and do) move counter to the direction of the indexes (what most refer to as the stock market). Today’s blog post is about two companies that look to have topped and are set up for future downside

My first is Restaurant Brands International, QSR, which is a Canadian-based fast food company. While you may not have heard of them you have likely heard of their franchises, Tim Hortons, Popeye’s Louisiana Kitchen and Burger King.  As you can see in the weekly chart below, price has broken its red long-term uptrend line while creating bearish RSI momentum divergence (upper pane). For long term readers, the look should be familiar by now as this is stock has topped and begun to rollover, with price sitting below a falling 200-day moving average. A break below the green horizontal support points to a target of T1, an important level of past support some 12% below.

My next bearish “opportunity” is a company you have likely heard of before, Hilton Hotels (H). The daily chart of H shows another example of a stock that has temporarily topped. As you can see it made 3 (failed) attempts to get through that ~$81.5 level. Notice how on the first two attempts price fell to $75, found support and then went on to retest $81.5? But yesterday, that $75 support level failed to hold and price slice right through without a pause. Notice also how the first test of $81.5 created negative RSI momentum divergence warning of a correction or reversal? If the bulls cannot regain control, and I mean real soon, the pattern points to a target at T1 below. Notice also that same level is an open gap and where the 200-day moving average currently resides. This is a great example of a confluence of signals at or near the same level. When a confluence occurs it provides a much higher probability the target in question will be hit. Finally, if the stock has much more momentum to the downside and T1 does not hold, T2 is the next likely target for buyers to step in and stop the decline as it is acted as an important level in the past and it sits just below the other open gap in price.

Bad Catsup Update

About 6 months ago I wrote a post about the potential decline in Kraft Heinz stock (KHC) titled Bad Catsup.  Here is what the chart of Kraft looked like at the time of the post.

As you can see below, it is playing out as expected from the bearish rising wedge pattern as it has fallen by more than 20%. For those that shorted the stock on the break below the wedge, congratulations.  Don’t become complacent though, because the next few weeks/months may challenge your resolve. With price sitting below support level S2 and being very oversold (see RSI momentum in the upper pane), it would not surprise me to see a rally back up to the underside of S2 while the bears take a rest and the bulls try to take control driving prices higher. Any retest and failure to break higher is in line with the thesis of a much bigger decline ahead with S3 as a likely target, some 30% lower. A retest and hold above S2 is a signal that short-sellers should consider exiting the position and booking their profits.

Economic Demise Ahead?

There are some that believe a tightening yield curve is a harbinger of a bad economic times ahead, with a good possibility of the economy failing into a recession. If this were true, the chart below should be of concern as interest rates are in their tightest range in many years.

The fact is, the correlation between tightening rates and economic weakness is poor and provides little to no edge if used in making investment decisions. What does matter though, very compellingly, is when the yield curve inverts (short term rates are higher than long term rates), something we are in no danger of seeing happen anytime soon. Until that occurs (and it is worth monitoring because of its very high negative correlation to stocks), recent interest rate cks), recent interest rate activity is reflecting FED activity and forecasts, not economic demise.

No Butts

No Butts

Altria Group’s stock, MO, (renamed from Philip Morris in an attempt to shed its past litigation baggage), the world’s largest producers of cigarettes had a great run as you can see in my chart below. It rose almost 130% from the start of 2014, topping out in June of last year after creating negative bearish momentum divergence. Since that time, price has broken its uptrend line and currently sits under its falling 200 day moving average. All signs you don’t want to see unless you are positioned short.

To add to the bearish thesis, it has formed a huge two-year head and shoulders topping pattern. If this pattern confirms and eventually plays out, it points to a target down around the $43 level, some 28-30% lower than where it is today. Volume plays an important role in confirmation of these patterns. While it’s not absolutely necessary, as they unfold, an inclusion we would like to see is volume increasing during the decline from the peak of the head to the neckline, decreasing during the advance of the right shoulder and finally increasing during the decline of the right shoulder. Check, check and check. The bears are salivating at this one.

So what we have is one of the best technical analysis setups I have seen of late but I have little conviction in what price is telling us is in store.  Why? I have learned shorting stocks while the market is in an uptrend is a wonderful way of donating your investment capital to someone smarter than you. It doesn’t mean this won’t play out without a decline in the overall market, but rather the odds of success will diminish rapidly. Either way, I will circle back around in a couple of quarters and see if there was anything we could learn in retrospect.

At Extremes

As you can see in last Friday’s close of the Fear and Greed index below, sentiment is at an extreme with fear dominating investor’s emotions.

And why shouldn’t it when we see/hear headlines that help stir the po.

“Wall Street tumbles on trade war fears; tech, financials weigh.”

“Dow drops more than 400 points into correction, posts worst week since January 2016”.

“NASDAQ 100 Plunges 7.3% in a week, most since August 2015”.

The good news is we are getting very oversold on the daily time frame and I expect we see a tradeable bounce soon (as early as this week), likely marking the end of this decline. This correction will likely end below February’s low and mark the end of the “C” leg, of the ABC pattern where I expect to see an oversold, divergent low formed. Strong declines, like powerful thrusts higher are typically ended at sentiment extreme readings like we have now. Being at 7 does not mean it can’t go lower in the near term, but a reading under 10 has me very interested in looking to deploy capital on a reversal trigger. One of the best gauges on how to invest/trade profitably is to do just the opposite (at extremes only) of what the crowd is doing.

The not so good news is the market character has changed with this decline. As such a “v” shaped return to prior highs that dominated much of 2015-2017 pullback action is probably out of the question. The change in character is not necessarily bearish, but definitely is no longer aggressively bullish. It’s a time to take the foot off the accelerator, invest with caution, optimize your portfolio (hold strength and sell weakness) and wait for the market to show its hand. Like the 2015 consolidation, I expect this to be a lengthy grind sideways where few things are trending and the only investors making money are the liars and RTM (reversion to mean) traders.

Consolidations follow trending periods and as such, we are due. I hope I am wrong on the expected length of this consolidation because there is no way to make money while in a sideways, sloppy, chop. They have a nasty habit of testing investor's convictions. As they say “if they don’t scare you out, they will wear you out.”