Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Major Breaks Up (by Springheel Jack)

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I love channels. They give structure to a trend. They deliver good entry and exit levels. They're dependable, though to be used with caution like any other technical analysis tool. The current SPX rising channel is of long enough duration, and steep enough, that it should contain the current wave up until we get confirmation that the wave has finished through the channel breaking down. I was therefore not at all happy to see that SPX closed slightly above the SPX rising channel yesterday:

If SPX had closed at the top of the channel rather than slightly above it I would very confidently be calling for a retracement today. As it is I think a retracement is still likely, but the odds of a further upside breakout have increased considerably. The rectangle target at 1220 SPX was made yesterday, so that at least is no longer in play.

My short term ES channel broke up yesterday and I've had a hard look at ES to determine the current structure there. We have an almost identical channel to the SPX channel on ES, and that channel has not broken up, with an exact touch at yesterday's high:

My slightly more cautious call for a retracement today therefore gives the following levels on ES:

  • 1220 – 1222 – Strong resistance at upper channel trendline
  • 1202 – 1204 – Retracement target at mid-channel line (and recently short-term channel upper trendline)
  • 1183 – 1185 – Strong support at the lower channel trendline

Longer term what was left of the technical bear case received another severe battering yesterday and to my eye there isn't much left. The SPX 200 SMA on the weekly chart was broken convincingly, which was powerful bull market confirmation, and one of the last hopes of the bears, that financials would drag the market down, was also largely demolished in a single dramatic daily candlestick yesterday. XLF managed to break both the declining channel from April and the rectangle in a single day yesterday, and the rectangle target is now 16.9, which looks undemanding given that is still below the April high:

USD has now finally broken triangle support, though there has not yet been a break on a weekly basis. We'll see if we get that today. I have a decent quality declining trendline on the daily chart that I posted yesterday but looking at the weekly chart, my next declining support trendline would be hit in the 60 area, which is (cough) something to think about:

The bears are complaining that this bull market is an artificial construct based on a huge and unsustainable wave of government borrowing. I agree completely, but I think that's missing the point. All bull markets in recent years have been wild moves up based on fantasy and fraud, and this current bull market is built on even finer sand than the last two. My long term view is that we're in a steep reversion to the mean declining channel from the first bubble in 1995 – 2000, and that this current bull market is simply a return to the top of that declining channel. Here's the long term chart of the SPX adjusted for CPI and you'll see what I mean:

Looking at that real terms SPX chart I'm getting an upside target for the current bull market in the 1450 area, and I think we're going to make it to that target. We won't make it there in a straight line, and after we reach it I'm expecting the current bull market to end with a bond crisis to end the current wave of government borrowing, and an equities bear market that will be consequently uninterrupted by keynesian interventions. Until that time we should just buckle up and enjoy the ride.

I did a post in August going through this scenario in some detail. The short term gartley pattern leg down I was looking at then didn't play out, but the rest of my projection for this bull market is still valid and you can see that here.

ES, EURUSD, Republicans Break Up (by Springheel Jack)

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Looking at Bloomberg this morning I see that the Republicans have convincingly won Congress and reduced the Democratic majority in the Senate by at least six seats. That might well be a good thing, even from a Democrat perspective, as the last Democrat President Clinton also had a lacklustre first two years and only really came into his own as President after the Republican landslide in 1994. What it means in practical terms though in the next two years from a market perspective, is that the main and possibly only tool for the US government to 'fine tune' economic policy is likely to be quantitative easing by the Fed. We should expect a lot more of it as Obama seeks to pump up the US economy in preparation for his re-election run in 2012.

SPX has been bumping up against a key resistance level in the last few days, and that has been the 200sma on the SPX weekly chart. That was the trendline that marked the peak in April this year and it is at 1194 now, slightly below the SPX close last night. A cross of this trendline with confidence will place the last cherry on top of the already bullish larger technical picture here, and a break of this level with confidence now should eliminate the possibility that we will retest the IHS neckline at 1130 before playing out to the target at 1244:

During trading hours yesterday SPX bumped up against resistance, but didn't break it, and the rectangle was intact at the close:

After hours though ES broke up over 1193 and rose as high as 1196.5 before chopping sideways between 1191 and 1194.5 overnight. It isn't confirmed until the rectangle is broken during trading hours, but I'm inclined to treat the rectangle as broken, and I'm expecting further upside later this week with the next real resistance at the April high:

EURUSD broke up from the declining channel shortly after I published my post yesterday. I'm expecting a retest of the broken channel trendline within the current rising channel before the next move up to challenge the October high. If that then breaks, and USD breaks triangle support, then the prospects for USD look very bleak over the next few months, and though we could see support at the last two big lows over 70, my next declining support trendline is in the mid-60s:

I'm expecting a big move on SPX soon, at the end of this week or the start of next week, and I'm expecting that move to be against the trend of the rest of this week. That trend looks as though it will be up over the next three trading days, and so we could rise to a significant high over the rest of the week, perhaps near the SPX April high at 1220. If we see weakness at the start of the session today I have channel support for ES in the 1178-1180 area, and that would look like a very good long entry if we reach it. If we should reach the upper trendline of the ES rising channel on Friday, resistance will be in the 1211 to 1213 area then.

Rare Earth – A Long Term Investment

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Rare earths are a group of at least 15 elements within the Lanthanide series (see Wikipedia for a good overview: http://en.wikipedia.org/wiki/Rare_earth_element).   These elements are relatively abundant in the earth's soil but are found in higher concentrations in certain locations.  For those of you who like chemistry – I’ve highlighted them in yellow:

Rare earth periodic table 

Demand.  The use of rare earth elements in modern technology has increased dramatically over the past years.  Rare earth elements are now incorporated into environmentally-friendly technologies (e.g. compact fluorescent lighting, hybrid cars, etc.), new digital devices (iPods, iPads, disk drives, etc.) and various military/industrial applications.

REU 

Supply.  China controls 95% of the global rare earths market, with 45% of the global supply coming from China’s Baiyun Obo mine in Inner Mongolia.  In recent years, the Chinese government has shuttered a number of other rare earth mining operations and imposed a range of export restrictions on rare earths, with the aim of ensuring domestic supply is sufficient to meet expected domestic demand (or for monopolistic control- you decide).

Given the tightness of supply and the belief that new demand has recently strained that supply, there is growing concern that the world may soon face a shortage of the rare earths.

Bubble?  The Investopedia article (linked below) notes that “although rare earth prices could stay high for a while (mines do not open overnight), new digging and new alternatives are likely to put an expiration date on this bull market.” 

My current favorite stock on this space is Lynas Corporation www.lynascorp.com (see the ZH article, below)- I believe them to be significantly undervalued medium-to-long term.  Lynas trades under the symbols (LYSCF) for the common, and (LYSDY) for the depository receipts. 

Lynas5yr 

July to October this year looks a little too exponential for my taste, so I’ll be waiting for a significant pullback. 

In addition, I’m also watching a rare earth ETF that began trading today: (REMX) from http://www.vaneck.com/funds/REMX.aspx.  I like the weighting:

REMX 

I might go with my eggs in the same basket philosophy and consider REMX when that time comes.

Further reading:

http://www.bloomberg.com/news/2010-10-22/rare-earth-in-blackberry-to-prius-underscores-alarm-over-supply.html

http://www.bloomberg.com/news/2010-10-21/rare-earth-contention-in-u-s-japan-overlooks-china-s-2006-policy-signal.html

http://www.bloomberg.com/news/2010-10-21/molycorp-lynas-may-add-to-gains-as-china-restricts-supply-of-rare-earths.html

http://stocks.investopedia.com/stock-analysis/2010/5-Could-Be-Bubbles-Waiting-To-Burst-CRM-VMW-CTXS-LOGM1020.aspx?partner=YahooSA

http://www.zerohedge.com/article/sorting-through-chaff-lynas-best-rare-earth-play

Possible ES H&S Forming (by Springheel Jack)

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ES bounced off the possible H&S neckline yesterday and bounced to make the right shoulder for that pattern. If that's going to continue to form then I'd expect ES resistance in the 1186-8 area to hold today:

It could still go the other way of course. The current (green) rising channel on the SPX 60min chart held yesterday with a pinocchio down through to touch the H&S neckline. If we reach the neckline again that should break that rising channel. While that channel holds though the next rising channel upside target is in the 1210 SPX area:

If we did see a break up through 1200 SPX, that would be a very major resistance break. The 200 weekly SMA for SPX is sitting at 1194.20. That trendline was the resistance at which the SPX failed in April and from a technical perspective a break up through it would be the cherry on top of the already impressive bullish technical case that we are seeing at the moment. Here it is on a thought-provoking log chart of the SPX since 1980:

We haven't yet reached my EURUSD declining channel target at 1.36. Within that declining channel we have a short term support trendline which I'm thinking may be the lower trendline of a short term declining channel. If so, then we have reached the top of that channel at 1.386 overnight and it is currently being tested. I'm expecting that to hold, and it will be worrying for the short term bear case if it doesn't, though I do have an alternate declining trendline at 1.393 that would be the obvious resistance level if 1.386 doesn't hold:

We have a sloping H&S forming on gold which I'm watching with interest. The neckline's currently in the 1310 area and the target would be in the 1240 area:

Downside of Using Stops (by Drew)

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Two ways I try to improve as an investor are reviewing past investing decisions and reviewing constructive criticism. I’ll be doing some of both below.

Back in January, I placed an Altman Z”-Score pairs trade, shorting Trico Marine Services (TRMA) and buying an equivalent amount of Oceaneering International (OII). I had found TRMA on Short Screen’s screener, where it was listed at the time as one of the 25 most financially distressed companies among those with a share price above $5.

As we noted in a recent Seeking Alpha article, Short Screen uses the Altman Z”-Score to rank the non-manufacturing stocks in its database, and the original Altman Z-Score to rank the manufacturing stocks; then Short Screen combines the results into one list, ranking stocks according to their distance from their respective distress thresholds. That article stated the original Altman Z-Score Model:

The Altman Z-Score Model: Z = 1.2X1 + 1.4X2 + 3.3X3 + .6X4 + 1X5

Where,

X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = Earnings Before Interest and Taxes / Total Assets
X4 = Market Value of Equity / Total Liabilities
X5 = Sales/ Total Assets

Scores below 1.81 indicate risk of bankruptcy within the next two years; scores from 1.81 to 2.99 are a gray area; and scores of 3 or higher indicate an absence of financial distress.

The problem with applying the original Altman Z-Score model to non-manufacturing companies is that the fifth term, Sales/Total assets, tends to vary widely among non-manufacturing companies. Because of this, the Altman Z”-Score model eliminates the fifth term. It also weights the first four terms differently:

Altman Z”-Score Bankruptcy Model:

Z” = 6.56X1 + 3.26X2+ 6.72X3 + 1.05X4

Where,

X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = Earnings Before Interest and Taxes / Total Assets
X4 = Market Value of Equity / Total Liabilities

Scores below 1.1 indicate risk of bankruptcy within the next two years; scores from 1.1 to 2.6 are a gray area; and scores greater than 2.6 indicate an absence of financial distress.

On Short Screen’s screener back in January, TRMA showed a distance from distress of -1.23, consistent with its Altman Z”-Score at the time of -0.13. Looking for stronger companies in its industry (offshore oil field services), I found Oceaneering International (OII), which had an impressive Altman Z”-Score of 9. I shorted TRMA at $5.31 per share and bought an equivalent amount of OII at $64.70. I set 9.5% trailing stops on both sides. A couple of weeks later, I was stopped out of OII for a loss of 9.5%. TRMA was down 16% at the time, and I decided to cover it there, closing out the trade for a modest 6.5% gain.

A couple of days ago, I looked at a blog post of mine where I had embedded a chart of TRMA versus OII. I noticed that the chart for TRMA stopped abruptly in September:

The chart ended abruptly in September because the stock symbol for Trico Marine Services is no longer TRMA, but TRAMQ.PK, the “Q” indicating that the company is in bankruptcy. This chart uses the new symbol:

In hindsight, I made two mistakes there. The first was in using stops. The reason I did was that I knew expert short sellers such as Tim Knight and William O’Neil tended to use tight stops. But as short sellers, those investors are driven mainly by technical analysis. I do take basic technical analysis into account when I invest, but the Altman models are primarily based on fundamentals (save for the numerator in the fourth term of both models, market value of equity).

Dr. Paul Price noted that and offered this constructive criticism: since I was shorting companies based primarily on their fundamentals, and since fundamental factors can take several months or to play out, it didn’t make sense to get stopped out of a position based on short-term share price fluctuations. Seeing the gains I left on the table by closing out this Altman Z”-Score pairs trade too soon underlines Paul’s point. Going forward, I won’t be using mechanical stops on these trades.