Leaving the Island

An Island Top, one of the most reliable patterns, occurs when a upward trending price "gaps" above a specific price range and then is confirmed when the price "gaps" down below to the original range. That “island” that is created can be made up from one day or a cluster of days (formed by several bars rather than one) which is a much more powerful signal. The island cluster would look something like this example:

With that in mind, below is the chart of the 20-year Treasury bond ETF, TLT. As you can see, TLT was in a confirmed uptrend and gapped up on June 27 and spent the next 58 trading days above the gap (encompassed within the red box). Last Friday, Sept 9, you can see price gapped below the box and through the up gap of June 27, creating an island.

Island tops have an historical success rate of 77% with an average decline from the successful formations of -21%. While nothing is guaranteed, this pattern's high probability outcome if validated with follow through in the next few days, the market’s concomitant rise in volatility and poor seasonality is a warning that bond holders are likely in for some near term pain

Gambling on Higher Prices

For those not aware, Las Vegas Sands Corp., LVS, develops, owns, and operates integrated resort properties across Asia and the US. A few of their more well-known are The Venetian Resort Hotel, The Four Seasons Hotel, The Plaza Casino, and The Sands all in Macau, the Marina Bay Sands in Singapore and The Venetian Resort Hotel Casino, The Palazzo Resort Hotel Casino, and Five-Diamond luxury resort on the Las Vegas Strip. The company’s integrated resorts comprise accommodations, gaming, entertainment and retail facilities, convention and exhibition facilities, celebrity chef restaurants, and other amenities.  

Their stock had a rough time of it after topping in early 2014. Notice that price and momentum diverged just before it peaked forming an overbought divergent high, the warning a correction was due. And quite the correction it turned out to be as it fell more than 55% peak to trough, bottoming almost 2 years later in January of this year. Notice during this time how price stayed below the 200 day moving average once it crossed in June 2014, testing and then failing it once in June 2015.

Like the bearish divergence that formed in 2014 warning of a price reversal, a bullish oversold divergence formed at the bottom of the correction in January of this year, again raising the warning flag of a potential reversal. Since that time, price has moved above the 200 day moving average which has just started to curl north. The bullish reversal was confirmed with the formation and breakout above the inverse head and shoulders pattern. While I am cautious here on equities in general as we move into a seasonally weak period, if the market wants to go higher the upside target for LVS is back up near the prior highs, above $70.

August 2016 Charts on the Move Video

August was about as much fun as listening to Rozanne Barr sing the National Anthem. Me thinks the next few months are going to make up for it. What do you think?

https://youtu.be/LqELoI7Yon8

Solar Flair

As I evaluate solar technologies and vendors for an installation in my home, I was interested to see the shift in US electricity generation in the first half of the year. It’s hard to believe that just 5 years ago coal had a 40% share in power generation. The relentless cost declines, government subsidies and capacity increases for both wind and solar are now very much a part of coal’s current declines. Combine that with the learning rate of renewables should add further downside pressure on coal, estimated to fall to the low 20-25% with wind and solar picking up the slack for a combined 15% by 2020.

The technological advances have pushed efficiency's into the low 20% making solar installations nearing a 5-6 year ROI. While solar for the home becomes more cost competitive and an increasingly better ROI, you can’t say the same for solar stocks. TAN, the solar ETF is down 90% from its inception date.

For now and until things change most of your eco-friendly investment dollars appear to be best utilized in your home rather than your portfolio.

Additional Downside Likely for Mining Stocks

For the first time since the January bear trap reversal, precious metals mining stock ETF, GDX, is showing weakness. After forming bearish divergence the index recently broke its (dotted green) uptrend line and last week created its first lower low. While not a swing sell signal, these warnings cannot be ignored and should act as a wake up call to the bulls.

If I read end of week action correctly it does not look as if this correction has run its course. If not, the first line of support below is the $24.5 level and beyond that if we get a much bigger flush, $22 seems like a very important level as both the 50% Fibonacci extension from the January bottom and the 200 day moving average reside in that area. Regardless of where price eventually finds support, our bullish outlook will only continue if, on the next bounce higher, we go on to make a higher high. If not, that will be signal to take profits in at least half the position and look for further directional clues.