Long-Term – Page 91 – Slope of Hope with Tim Knight

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.

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

By springheel_jack - 15 years ago (03, Nov 2010 5:54:45 AM)

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

By Tim Knight - 15 years ago (29, Oct 2010 2:27:19 PM)

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:

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.

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.

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:

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

Possible ES H&S Forming (by Springheel Jack)

By springheel_jack - 15 years ago (28, Oct 2010 4:27:30 AM)

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)

By Dpinsen - 15 years ago (26, Oct 2010 7:41:05 AM)

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.

The US Dollar and Equities (by Springheel Jack)

By springheel_jack - 15 years ago (21, Oct 2010 5:21:58 AM)

I've been watching the US Dollar carefully for weeks, predicting a bounce or major reversal at the lower triangle trendline. I've been watching /DX, which is generally a very good proxy for USD, and hasn't diverged much in the past when I've been watching it. I was therefore surprised to see yesterday on $USD that my target trendline for a reversal had already been hit. Here's how that looks on the weekly $USD chart:

The triangle target is in the 86.5 to 87 area but there is another target to consider as well. On the $USD daily chart I have a perfect declining channel and the lower trendline was hit at the same time as the triangle lower trendline.The target for the upper trendline of that declining channel is in the 80 area. Here it is on the $USD daily chart:

Now it's hard to be a USD bull at the moment. There's a lynch mob baying for the dollar's blood and it's led by the guardians of the currency at the Fed. That's not an ideal situation and the triangle may well break downwards. It is definitely something to bear in mind though and you can see the importance of USD to equities from the second chart where I've divided the USD waves to show the complex correlation with equities. These divide into four possible states as follows:

USD in wave up, equities in wave down:

As we were between the equities top in April and the first bottom 180 points below in early June, and also between the January top and the February bottom. The two were in sync and the equities moves down were very fast.

USD in wave down, equities in wave down:

As we were between the first hit of 1040 SPX and the interim low at 1005 SPX. Equities are fighting against the USD wave down and downside progress was slow and broken by numerous strong rallies.

USD in wave down, equities in wave up:

As we were from the end of August to the middle of October, and between the February low and the April high, with the two back in sync and so fast moves up in equities.

USD in wave up, equities in wave up:.

As we were in December with equities fighting the USD move up and making a little progress up with numerous retracements, and as we may be now if USD has bottomed, and until we make the next equities interim top.

So where does that leave us this morning? Well it may not say anything useful this morning at all. We could go on to hit the $USD declining channel lower trendline again shortly and I have a reasonable looking IHS on EURUSD that has an immediate target at a new high of 1.425:

We may therefore also hit my triangle lower trendline on /DX if this continues to play out. That target is at 75.75 of course. GBPUSD is pulling in the opposite direction to EURUSD this morning though EURUSD strength may carry it up regardless:

That's not what I'm expecting to see today however. On balance I'm expecting EURUSD to reverse and for USD to have a good day while equities have a bad one. Everything looks ripe for an equities fall today if resistance just overhead holds. If that resistance breaks though, then I have an immediate target of 1200 on ES that I'd expect to see hit today or tomorrow. My line in the sand for seeing that is a new high on ES at 1182.5. If w're going down then a break of 1173 will open up an immediate target of 1165 and if that breaks then we could well see a drop to 1140.

This finely balanced situation is nicely summarised by the ES 60min chart, where you'll note the nicely formed IHS indicating to 1200. The rising blue trendline is short term support at 1173, the 1165 target is at the higher declining red trendline, and the 1140 target is at the lower declining red trendline:

There is a matching situation on Dow, with resistance at 11,100 and a descending triangle indicating to 11,335 if that resistance is broken with confidence. This should break one way or the other early today so one way or the other it looks like today should be interesting.