A P&F Breakdown on Valeant Pharma:

One of the best charting tools is the Point & Figure – there are several reasons to never ignore a P&F signal - one being unlike the popular MACD, its use is not widespread. What advantage is there in seeing a MACD signal when MILLIONS of traders and investors see the same thing at the same time?

Our chart today is health care component TSX listed Valeant Pharmaceuticals International, Inc. (VRX)  plotted on a point & figure (thanks to Stockcharts.com) – where we can see the potential breakdown of support at the $126 range or about $116 in US dollars. I would suggest if VRX trades down to $114 (US) the longs should take the money and run.

What are the shorts thinking?

Once again we look for a potential “Short Squeeze” opportunity which is a situation in which a heavily shorted stock or commodity moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the stock – etc, but also to see if there is a contrarian opportunity.

At July 15, 2014 I looked at the top 20 stocks with the greatest short sale increase over the past 2-week period. There were 5 energy stocks, 6 financial stocks and 6 material stocks – the rest were industrial and health care. So materials are the most popular short sale sector – the unpopular Teck Resources Ltd (TCK.B) was on the list

Our chart today is materials component Teck Resources daily plotted with two moving averages and money flow numbers plotted on a momentum histogram – with all paining a bullish picture. Another study – not shown – is Teck plotted above the broader TSX60 index clearly displaying a positive relative perform vs. the TSX60 Index. Yes there could be a contrarian opportunity here.

Secular Trends Reviewed

Last week I attended the Canadian Society of Technical Analysts annual meeting in Toronto (CSTA) who had Mr. Ray Hanson, who has not spoken publicly to the Society in over 10 years, as a keynote speaker – topic – “The Secret Life of Spreadsheets.” I attended to see if Hanson would make a long-tern prediction on the capital markets.

Hanson was the guy who – in about 1987 - took over the original RBC Capital Markets (RBC) respected Trend & Cycle Department that was created by the team of cycle legend Ian S. Notley and Donald R. Stark – who were famous for their long-term predictions.

I still have a number of their (Notley & Stark) brilliant 1980 through 1984 Trend & Cycle publications which I still review to-day. Their great top down calls ranging from calling the bond market “the buy of a generation” to predicting the re-structuring of the huge American multinationals and the early transition from the “old” economy to the “new” economy are the stuff from which legends are created.

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I think it is the goal of most technical analysts to go out on a limb and – like Notley – make one correct long term forecast that may impact generations of investors and money managers – so I reviewed my presentation at the CSTA Annual Meeting in Toronto June 24, 2009 “Secular Trends in Stocks and Stock Sectors” just to see if I was on track to making a relevant long term forecast.

There I defined a Secular Trend to be A long term trend (12 to 20 years) that contains a series of bull and bear cycles – hence the term “Secular Trend” - a secular up trend will contain at least 5 bull and bear cycles – and - a secular down trend will contain at least 3 bull and bear cycles. I went on to detail the current 2000- 2009 secular down to be a Global Event with low Sector Correlation and two sector Granddaddy Bears (technology 2000 – 2002 and financial 2007- 2008) with a Probable Rotational Conclusion

One of several original charts was displayed – see the clip of Amazon and Taiwan Semi dated month end June 30. 2009 clearly setting out a final and third final cycle in their secular bears – I was predicting a break from here out and up to new highs. Other names displayed were Cisco, Texas Inst and the biotechnology index.  

 

The next chart is clip of Amazon and Taiwan Semi dated to-day and as we can see both have broken up and out of their secular bears – I have left the original support / resistance lines in place. Other names – among many - breaking out of their secular bears are INTEL Honeywell and Microsoft.

Almost forgot – a clip from the Hanson presentation, “Gross National Product is the official index to assess prosperity – but GNP measures only activity. It measures neither prosperity nor well-being.” – Well, you had to be there.

 

Gold – Long Term Analysis:

Below is a clip from a recent Getting Technical Market Letter Interim Update July 10, 2014 GT1440 – a technical look at bullion using about 15 years of monthly data.

Gold – The Long Term - The price of bullion remains in a long term up trend as displayed by our 15-year monthly chart - See chart - The long 2011 through 2013 A-B-C type correction is now complete – having found support at the long term primary trend line. The new bull would be confirmed on a monthly close above 1400

There was a Caveat::

We need the BMO Junior Gold Index ETF (ZJG) – upper chart -to trade above $9.50 and we need the iShares S&P/TSX Global Gold Index ETF (XGD) – lower plot - to trade above $13.50 to confirm their respective bulls

Back Testing Moving Average Trading (2)

Just to review - the ultimate objective is to determine one of three conditions – is it going up? Is it going down? (and) When will it stop doing that (when will it turn)? Some technical studies will lead – like momentum, relative performance and divergence. Some are coincident – like trend lines and some lag – like moving averages. Simple moving averages are popular but they are lagging trend-following studies and should be used to confirm a trend and not to make a trading decision. This time we look at multiple SMA crossovers.

I did more back-testing on the S&P500 using a two simple moving average (SMA) cross-over – in this case a 5 and a 15 period with the difference smooth by 3 and displayed as a histogram. The trading was on the long side only – sell on a negative histogram and buy back on a positive histogram. The objective was the beat a buy-and-hold strategy over the same period.

The 5/15/3 SMA cross-over monthly from 3/29/1991 to 7/11/2014 - buy and hold got us +424% and SMA cross over trading got us +537% over the same period. We had 6 profitable trades out of 6 signals for a perfect trading record.

Conclusion – we know that signals based on price and SMA crossovers generate multiple false signals – but signals based on two or more SMA crossovers generate reliable signals – in this example having us avoid the 2000-2002 and 2008 bears using long term monthly data. Our long term S&P500 chart displayed here clearly plots the 5/15/3 histogram with the buy & sell zones.

Back Testing Moving Average Trading:

The technical analyst will use various studies in their work – but the ultimate objective is to determine one of three conditions – is it going up? Is it going down? (and) When will it stop doing that (when will it turn)? Some technical studies will lead – like momentum, relative performance and divergence. Some are coincident – like trend lines and some lag – like moving averages. Simple moving averages are popular but they are lagging trend-following studies and should be used to confirm a trend and not to make a trading decision.

I did some back-testing on the S&P500 using three simple moving averages (SMA) – a 20-day, a 50-day and a 200-day just to see if we could trade on the long side only and beat a buy-and-hold over the same periods. We would sell on a price close below the SMA and buy back in on a close above the SMA.

The 200-day SMA – from 6/30/2006   to 7/11/2014 - buy and hold got us +55% and SMA cross over trading got us +51% over the same period. We had 6 profitable trades out of 16 trades.

The 50-day SMA – from 12/7/2012 to 7/11/2014 – buy and hold got us +39% and SMA cross over trading got us +24% over the same period. We had 7 profitable trades out of a total of 11 trades.

The 20-day SMA – from 11/23/2012 to 7/11/2014 – buy-and-hold got us +   40% and SMA cross over trading got us +17% over the same period. We had 11 profitable trades out of a total of 25 trades.

Conclusion – In and out trading using simple moving averages in an up-trending market is a failed strategy because when we move to cash the market continues higher without us – so we buy low, sell high and buy back even higher. In a down-trending market we sell high, buy low and sell even lower. Next time a look at SMA crossovers.

Are the shorts wrong on Bombardier?

Once again we look for a potential “Short Squeeze” opportunity which is a situation in which a heavily shorted stock or commodity moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the stock – etc,,,

At June 30, 2014 I see that Bombardier Inc (BBD.B) was number two on the list of largest short sales at 56,571,356 shares, up 9,284,819 shares from two weeks ago. Once again we need three conditions that could have the shorts change their minds and decide to cover – or buy back in. We need – lots of shorts, strong relative performance vs. a relevant index, and finally the stock must be out-of-favour.

Our chart today is Bombardier Inc. daily plotted above the broader TSX60 index – and as we can see by the lower relative perform lines the relative perform is bottoming vs. the TSX60 Index. Note also the series of higher lows from February to date. The Bomber like the C-Series – could surprise on the upside.