High on POT

No, my title is not referring to cannabis but rather the world’s largest fertilizer company Potash, NYSE symbol, POT.

My favorite (and one of the most statistically effective) breakout patterns is that from a rectangle.  If long enough in duration, this type of consolidation allows most sellers to rid themselves of their shares leaving only buyers and those who are still short. This is an environment that can have incredible upside potential as buyers step in bidding the price higher while shorts are squeezed, a very potent breakout combination.

As you can see in the weekly chart below, POT bottomed in January while RSI momentum formed bullish positive divergence, providing supporting confirmation a likely bottom was in place. As you would expect due to the strength of the decline (~55%), it took a long time (almost a year) for the majority of sellers to exit and a potential reversal to appear. Price broke out of the blue rectangular box last week with conviction. While it was on higher volume, I would have preferred it be higher. Based upon this, It would not be unexpected price to fall back to the upper boundary of the rectangle and test it as support before it takes off higher to its pattern target some 17.5% higher in the weeks/months ahead. Beyond the pattern target, real resistance does not come into play until the 25-27 area (which is where I expect it to finally go) providing an upside potential of over 50%.

I’m Here to Collect $93k

While not tops on the list (that honor goes to Alaska), California has the second highest public pension unfunded liabilities totals, estimated at $1T (yes you read that correctly it is one trillion dollars with a T). Which, as it turns out, is approximately $93k per each CA household. Oh, and by the way, this is up $15k since 2014 alone. Bad investment returns apparently are to blame. 

I’ll pause here and let that sink in. Every household will be responsible for contributing $93k to meet these commitments!

The bottom line is that either the pension payouts will need to be lowered or taxes will need to be raised to meet the obligations (or some combination thereof). Which do you think it will be? Do you have your checkbook handy, just in case? And no, there is zero chance we will be able to “grow our way out of the problem” so don’t go there. And unlike Social Security, California will not be able to print money and bail out the system like the Government can and will likely be forced to do with Social Security.

Much of the blame for this mess rests squarely on the “experts” who, when establishing the annual funding levels, used an investment rate of return that was unrealistically high which helped keep contributions to a minimum throughout the years. Their model may have been reasonable some 40-50 years ago when the pension systems were established but not in a dynamic, changing world. The most frustrating thing about this mess is that it is not a new revelation as it has been known about it for years (and decades).  But rather than address the issue, those same experts and politicians just kicked the can down the road. So if you ever wonder why, under most circumstances I recommend tapping into your pension as soon as you have access because it is my belief most pensions will fall short of being able to meet their full obligations for the reasons above. As such I am a full believer you should take what you can while you can. As Stevie Guitar Miller sang, “Take the Money and Run”

To read more on this future crisis go to  

http://www.kersteninstitute.org/blog/stanford-universitys-pension-tracker-pegs-total-california-pension-debt-at-1-trillion-or-93000-per-california-household-in-2015-up-19-from-2014

November 2016 Charts on the Move Video

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

https://www.youtube.com/watch?v=5RAyR4f2oiE

It’s a Matter of Interpretation

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.

A Picture of Perfection

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.