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. 

The Wider the Base …

The Dow Jones Transportation index apparently was not invited to the all-time high stock party and as has been both lagging and dragging on the overall market. Stock market bulls would like to see some of the lagging sectors begin to participate and catch up to technology which has been doing most of the heavy lifting pushing the market higher. A good place to start would be the transports and it looks as if the airline stocks may be setting up to cooperate and pull the transports higher.

As you can see in the chart below, the airline index, $XAL, rallied strongly, peaked last December and has been in a tight consolidation for the last six months, forming a bullish cup and handle continuation pattern. This consolidation has allowed the December overbought high to unwind. Notice also how far price got extended beyond the red 200 day moving average in December, another indication it needed a breather. 

\While the pattern’s upside, if played out, points to a 10-12% gain which isn’t bad, what has me more interested is the width of the consolidation base. The old saying the wider the base, the higher in space indicates the potential for a much bigger run, should the market have more gas left in the tank and the transports play catch-up.

Major Changes for Investors Ahead?

Is the secular US stock performance trend coming to an end. If so it has major implications for investors. I tackle this possibility in the latest video

https://youtu.be/9xHrx5sYTQg

Will JP Morgan Lead Banking Stocks Lower?

The chart of JPM below mirrors that of the banking sector ETF, XLF. A tremendous rally off of the Trump election, enough to create a very overbought condition closing out 2016.  Since that point, it attempted to rally after a small pullback and actually reached new yearly highs in March.  But on that push, negative momentum was formed and the stock has been grinding lower ever since. As you can see JPM has gone nowhere (dead money) for the past 6 months and has formed a bearish head and shoulders reversal pattern.  If the pattern were to play out its target is labeled T1 on the chart some 12% below todays close. T2 is a support level of significance if T1 does not stick and the market continues to sells off.

As investors in any region of the world, we always want to see banking stocks in healthy up-trends, making higher highs. While JPM’s price is still above a rising 200 day moving average, it formed a new intermediate term lower high and lower low warning of a potential trend reversal. Any play out of the bearish head and shoulders pattern would make huge dent in the bullish case for banking stocks. 

As goes JPM, so goes the banking sector.

It’s important to know that head and shoulders patterns which are over-hyped up by the financial media’s lack of understanding of technical analysis and constant need for headlines. When these patterns do actually play out they are a thing of beauty and can be quite profitable for those short. But the fact is these pattern either don’t materialize or fail the majority of the time. Why? its because historically stocks have spent 70-80% of the time either moving sideways or higher and this pattern is a marker for stocks moving down. Back to JPM, from a purely mathematical standpoint we have higher statistical probabilities a decline will NOT materialize. Nevertheless whenever these patterns develop they should not be ignored as they are a warning sign and we need to be concerned just in case it turns out to be one of those 20-30% possibilities.