Semi-log vs. Linear scale charting:

Why do you always use a semi-log scale in your charts? This is a question I always get during a teaching session. Usually the students are industry pros who surprisingly are not clear on the choice between a linear or semi-log (percent) scale.

The old rule among technical analysts used to be if the data doubles use a semi-log scale but now many will use a 50% price range before the switch from linear to semi-log. I always use a semi-log - see the Air Canada chart example.

On the lower linear scale it appears the advance at B is greater than the advance at A which is not true. The above semi log clearly displays the A & B advances to be about equal in price change. Also never draw trend lines on a linear scale. This is a common error even among CMT’s that should know better.

Non confirmation of the NYSE advance / decline line:

Just to review a clip from the Getting Technical market letter - Interim Update December 4, 2013 GT1417 – page 2 – “A Probable Short Trading Correction”

“The Advance / Decline Line (AD line) is one of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal.

Clearly that observation was 20 days ago – and now here we are with the S&P500 at all time highs and the NYSE A/D line (see chart) still not confirming the recent advance. This is a sign of thinning leadership.  Reducing into the current bullish stampede may be prudent.

Selling into strength

Yesterday’s big rally on the Dow to 16167.97 - UP 292.71 points or 1.84% was a new record high. The Dow is also up 146.95% from its Bear low of 6547.05 hit 3/9/2009. The S&P500 also closed at a new all-time high – but the NYSE advance / decline line did not confirm the current bullish stampede. I will display a chart – next post.

Here at GT we are selling our CDN Multi-National selections of April 26, 2012 that has returned about 63% to date. A clip from a Getting Technical letter Interim Update December 18, 2013 GT1419 TSX Comp 13335 DJII 16168 – “Cyclic peaks in many Stock sectors suggest we sell into the current period of seasonal strength.”

And:

“Canadian Multi-Nationals - We take advantage of the current bullish stampede into equities. It has been a great 20-month run but with all components at long and intermediate term cyclic peaks - we liquidate all positions - only laggard Bombardier could be retained. The final returns will be based at the close of December 24, 2013

I bought a gold stock yesterday:

There is a difference between trading and investing. For trading I don’t usually buy gold stocks because I think you get more opportunities in the small cap technology and health science names,

However yesterdays price behaviour in the CME Feb gold contact and the price behaviour in many of the gold miners was a compelling divergence signal. The metal was down sharply and yet many of the miners were about to close up on the day. I bought some B2Gold Corp. (BTO) just before the close at $2.15 for several technical reasons. The weekly chart (I rarely use dailies) displays several positive technical signals – first of which is the higher weekly price and the double bottom. We also have an intermediate cycle trough and the money flow numbers – while not compelling did not break down. If the price posts a daily close under the lowest low of 10-weeks ago ($1.98) I am gone.

A trading top in the NYSE advance / decline line:

A clip from the Getting Technical market letter - Interim Update December 4, 2013 GT1417 – page 2 – “A Probable Short Trading Correction”

“The Advance / Decline Line (AD line) is one of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal. The upper plot (see chart) is the S&P500 and the lower plot is the NYSE A/D line. Some worry now as the A/D Line is just now breaking DOWN below the resistance peaks of May, July and Sept.”

Summary: This is a trading call and should be ignored by longer term investors.

Note the S&P500 close of 1795 on the December 3, 2013 chart and at the close today the S&P500 was 1782. If that lower trend line is extended through year-end the downside target is only about 1750. That is not a lot of downside but just enough to scare Santa away this year.

Riding the Natural gas bull:

A clip from the Getting Technical market letter - Interim Update December 6, 2013 on natural gas: “Colder weather helped raise the price of the front-month natural gas futures contract, which has increased on ten consecutive trading days from November 19 to December 4. This has pushed near CME contract above the February through June 2014 contracts suggesting a short term over-bought condition. However, demand for natural gas could become significantly higher in December and January, when natural gas demand for residential and commercial heating increases. In any event – money is flowing into the natural gas producers – we should have some exposure” (see selections)

How not to play the natural gas bull: According the Horizons, “The Investment Objective of The Horizons BetaPro NYMEX Natural Gas Bull+ ETF (HNU) and the Horizons BetaPro NYMEX Natural Gas Bear+ ETF seek daily investment results equal to 200% the daily performance, or inverse daily performance, of the NYMEX Natural Gas futures contract for the next delivery month. The HBP NYMEX Natural Gas Bull+ and Bear+ ETFs are denominated in Canadian dollars, as the US dollar exposure of the underlying index is hedged daily.” (All that work for a management fee of just 1.15%).

Our natural gas vs. HNU chart sets out the returns from the Feb 17, 2012 peak to date with the upper plot up by 44% and the lower plot down by 41%

YTD through October the HNU has returned a negative (20.6%). The continual NYMEX Natural Gas contract has returned a positive 6% and the equity related BMO Junior Gas Index ETF (ZJN) has returned a positive 37%.

How to play the natural gas bull: If you’re bullish on the outlook for natural gas go with the BMO ZJN or do some stock picking among a basket of the gassy producers.