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A simple program that scans for triangle patterns can be a valuable tool for creating a map of where the market is headed. It is more of an art than a science, but science does play a part. The examples below are charts of the S&P 500 Index and Goldman Sachs.
S&P 500 Index(click to enlarge) GS - Goldman Sachs(click to enlarge) The first step is to identify triangles. Triangles are basically converging trend-lines showing a series of lower highs accompanied by a series of higher lows. Once the triangle is defined, the next step is to find the midpoint of the triangle to determine the triangle width. This width is key to determining extensions and secondary targets once prices break free from the triangle pattern.
Taking the width of the triangle and multiplying by 1.618 gives the value to be added to the high value of the triangle width. This same value is subtracted from the low. To obtain the secondary price targets, the width of the triangle is simply add to the top of the width and then subtracted from the bottom width value of the triangle. Secondary targets have a very high value of being reached, the extensions usually take time to attain.
In the examples above, the width of the triangle in the S&P 500 Index is roughly 80pts(1390-1310). This number multiplied by 1.618 give us a value of 129.44. Taking this value and adding it to 1390(1519.44) and then subtracting it from 1310(1180.56), gives the values to the extension targets. Taking the width of the triangle, 80pts, and then adding it to 1390(1470) and subtracting it from 1310(1230), then gives us the secondary targets of 1470 and 1230. These two values also happen to coincide with price targets developed using the opening range system for estimating swings in the market(red-dashed lines in the chart).
In the chart of Goldman Sachs, the width of the triangle is 25.40 points. This value gives us extensions of 274.75(233.65+(25.40 * 1.618) and 167.15(208.25-(25.40 * 1.618). The secondary targets are 259.05(233.65+25.40) and 182.85(208.25-25.40). This lower secondary target has already been reached. This example of Goldman Sachs shows a great example of the breaking down out of the triangle followed by a test to the original lower trend-line of the triangle. This is a great place to short if one missed the original break. The placing of a stop at the midpoint of the triangle is one method, however using a stop at the top of the midpoint of the triangle is another. Determining your stop depends mostly on your appetite for risk and the amount of time you can devote to following a specific trade. If you are willing to enter a trade and be stopped out multiple times, and not afraid to go back in, tighter stops can work. It varies greatly depending upon your trading personality.
When the market is repricing risk and trying to calculate the new earnings multiples for stocks in a slower economy, what better place to be than in a sector that doesn't have earnings? This is a statement that use to go around a trading desk I worked on back in the late 1990's. It has a ring of truth to it. If the valuations of growth companies seem to be in a flux of readjustment, then why not look for companies that have the potential of hyper growth. Companies that if one product shows results can go up 10 fold in a matter of months. This might seem like a strange way to invest/trade, but this process happens. Rotation out of semiconductors, and other electronics based technology, and into biotechnology has happened in the past.
The chart below shows the Nasdaq Composite Index. In the lower pane is a ratio between the semiconductor companies and the biotechnology companies. As this red line slopes upwards, biotechnology is outperforming semiconductors. This coincides with market weakness, as usually as the semi's go, so goes the rest of the technology market.
Nasdaq Composite Index (click to enlarge)
Now using this spread ratio of the semis vs biotechs is not a guaranteed way to make money. It can just mean that biotech companies are only going down 5% while semiconductors are going down 10%. Losing less than the market might feel like a moral victory, but that is just mental masturbation. The idea is not only to outperform the market, but to make money.
One company that has shown up on a filter is Oncolytics Biotech Inc. Basically this company uses viruses to target cancer tumors. This company has been on a watch-list for a while due to it having clinical trials in various stages. The best news would come out of positive results from stage III trials, but with the fast paced advances in medicine, the stock could have made a large move in anticipation of stage II positive news.
The President and CEO, Dr. Brad Thompson, will speakat the 10th Annual Bio CEO & Investor Conference 2008 on Monday, February 11 at 9:30 a.m. (ET). The conference, which is expected to draw more than 1,000 biotechnology and life sciences investors, will be held at the Waldorf-Astoria Hotel in New York City on February 11-13, 2008. There is no way to know if this will be a stock moving event, but it could give some clues into the success of some of the companies ongoing clinical trials.
ONCY - Oncolytics Biotech Inc. This chart shows that as ONCY broke above a small rising triangle, it has traded at a higher level on declining volume. This pattern is often a continuation pattern and could point to higher prices in the future. It is only a $2 stock, so while the move might be great on a percentage basis, the actually dollar amount most likely won't be much. This is however an exciting company, and their technology does sound like it could lead to other developments. It is worth reading about at the very least. The company webpage has a good not-overly-tech description of their approach. This is NOT a company that you load the boat on. It is most likely a 3-5 year cycle before anything they have will come to market. It is however an exciting area to follow, and if it does work, could pay off down the road. Oncolytics Biotech Inc. webpage.
The charts below of the major indexes show that after testing two standard deviations below their longer term linear regressions lines, some have broken down and rallied to test these previous support levels. The breaking of this lower 2-standard deviation like is a set to show a potential longer term change in trend. The bottom pane of the charts shows a Worden Brothers proprietary indicator called Money Stream. It basically takes into account price and volume to show accumulation vs. distribution. This indicator also shows some breaking of long term trend lines.
This first chart is of the S&P 500 Index. As the end of 2007 finished strong, the Money Stream indicator did not confirm the strength of prices trading over the 1500 area. As prices retreated to their linear regression line, selling intensified until there was a test of 2 standard deviations below this long term linear regression line. While the white line showing 1 standard deviation and the yellow line showing 1.5 standard deviations have proven to be support in the past, this 2 standard deviations below only proved to be a pausing ground for further selling. Now that prices have broked this level. It is important not to fall in love with any rallies. The rallies should be sold, as the longer term trend is now proving to be a headwind to trading from the long side.
S&P 500 Index (click charts to enlarge) This next chart is of the S&P 100 Index - OEX. This index is still trying to hold this 2 standard deviations below level. The Money Stream indicator confirms the weakness in prices. This index is slightly stronger that the S&P 500 Index, and this could be due to these larger capitalized companies have greater exposure to global economies and not being overly weighted with domestic banking and financial stocks.
S&P 100 Index -OEX (click to enlarge) The Nasdaq 100 Index -NDX is the index that is comprised of the top 100 technology related stocks. This chart shows that the -2 standard deviation level is holding as support for now. This could be the result of global demand for technology. China, India, and other growing economies are still in need of networking and technology infrastructure. This is not something that can be delayed because growth has slowed from 10% to 8%. Another factor that comes into play is as the United States economy slows, companies will seek ways to become more efficient, thus providing some some support for select companies. This does not mean this index is a total safe haven for over-all market weakness. For the time being it is still trading in the lower levels of its over-all longer term trend. Money Stream is showing a strong break, so being selective on individual stocks is key.
NDX - Nasdaq 100 Index (click to enlarge) This last chart is of the Russell 2000 Index. This is a broader index and it shows similar patterns to the S&P 500. The longer term trend in the Money Flow index also shows a break in trend. This does not mean that selected stocks are not going to have great days, it just means that stock selection is key and the over-all market is facing stronger headwinds.
Russell 2000 Index(click to enlarge) The next post will deal with scanning for stocks that diverge from the over-all trends in money flows and linear regression slopes from the larger indexes. These charts and indicators are from Telechart. Telechart offers a 30day free trial for their service. If you decide to take advantage of this offer from Telechart, email me at the button on the upper right for the setting I have used in developing these charts. The charts above are 3day bar charts. This means each bar consists of prices for three days. This has a smoothing effect on prices, eliminating one day wonders in the market. Telechart website can be viewed HERE.
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With the aging infrastructure, eventually there are going to massive public works projects to help stave off crumbling bridges and highways. This could be wrapped up into a type of stimulus package, but it probably won't be any time soon. Wylie Coyote is too busy giving us $500 rebates.
JEC - Jacobs Engineering Group (click to enlarge charts) Jacobs Engineering Group, Inc. provides technical, professional, and construction services to industrial, commercial, and governmental customers worldwide. The company designs and engineers modern process plants, including projects for clients in the chemicals and polymers, pharmaceuticals and biotechnology, oil and gas refining, food and consumer products, and basic resources industries; buildings, such as facilities for healthcare, education, and criminal justice markets, as well as other buildings for clients in the private sector; infrastructure projects, including highways, roads, bridges, and other transportation systems, as well as water and wastewater treatment plants, water resources facilities, and other plants and facilities; technology and manufacturing facilities for clients in the aerospace, automotive, defense, semiconductor, and electronics industries; consumer products manufacturing facilities; and pulp and paper plants. It also offers consulting services, such as performing pricing studies, market analyses, and financial projections in determining the feasibility of a project; performing gasoline reformulation modeling; analyzing and evaluating layout and mechanical designs; analyzing automation and control systems; analyzing, designing, and executing biocontainment strategies; developing and performing process protocols with respect to Federal Drug Administration-mandated qualification and validation requirements; providing consultation on proposed railway and airport expansion projects; and performing geological and metallurgical studies. In addition, Jacobs Engineering Group provides traditional field construction services, environmental remedial construction services, and modular construction technology services. Further, it offers operations and maintenance services, such as management and support services, including subcontractors and other onsite personnel. The company was founded in 1957 and is based in Pasadena, California.
FLR - Fluor Corp. Fluor Corporation, through its subsidiaries, provides engineering, procurement, and construction and maintenance (EPCM) services worldwide. It has five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services, and Power. The Oil & Gas segment offers design, EPCM, and project management services to upstream oil and gas production, downstream refining, and integrated petrochemicals industries. It also provides consulting services ranging from feasibility studies to process assessment to project finance structuring and studies. The Industrial & Infrastructure segment provides design and EPCM, as well as consulting, planning, structuring, engineering, and construction management services to the transportation, mining, life sciences, telecommunications, manufacturing, commercial and institutional, microelectronics, and healthcare sectors with respect to new construction and refurbishment of existing facilities. The Government segment provides project management services to the United States government, focusing on the departments of energy, homeland security, and defense. The Global Services segment offers operations and maintenance, small capital project execution, site equipment and tool services, industrial fleet outsourcing, plant turnaround services, temporary staffing, materials and subcontract procurement, and construction-related support services. The Power segment provides EPCM, program management, start-up, and commissioning services to the gas, solid fuel, nuclear, and plant betterment markets. The company also operates independently and as a subcontractor, providing unionized management and construction services in the United States and Canada. Fluor Corporation was founded in 1912 and is headquartered in Irving, Texas.
CBI - Chicago Bridge & Iron Chicago Bridge & Iron Company N.V. operates as an engineering, procurement, and construction company worldwide. It offers conceptual design, engineering, procurement, fabrication, field erection, mechanical installation, and commissioning services. The company's projects include hydrocarbon processing plants, liquefied natural gas terminals and peak shaving plants, offshore structures, pipelines, bulk liquid terminals, water storage and treatment facilities, and other steel structures and associated systems. It serves various industries, including oil and gas, petrochemical and chemical, power, water and wastewater, and metals and mining. Chicago Bridge & Iron Company was founded in 1889 and is based in Hoofddorp, the Netherlands.
SGR - Shaw Group Inc. The Shaw Group, Inc. offers engineering, technology, construction, fabrication, environmental, and industrial services to various companies worldwide. The Fossil and Nuclear segment provides project-related services, including design, engineering, construction, procurement, technology, and consulting services primarily to the fossil and nuclear power generation industries worldwide. The Environmental and Infrastructure segment designs and executes remediation solutions involving contaminants in soil, air, and water. It also provides project and facilities management, and other related services for non environmental construction, watershed restoration, emergency response services, outsourcing of privatization markets, and program management, as well as operations and maintenance solutions to support and enhance land, water, and air transportation systems. The Energy and Chemical segment offers project-related services, such as the design, engineering, construction, procurement, technology, and consulting services primarily to the oil and gas, refinery, petrochemical, and chemical industries. The Maintenance segment provides its clients with reliability services, turnarounds and outage services, capital construction services, tank design construction and maintenance, insulation, painting, and scaffolding services. The Fabrication and Manufacturing segment supplies fabricated piping systems. In addition, The Shaw Group supplies nuclear plant designs, licensing, engineering services, equipment, fuel, and other products and services to the owners and operators of nuclear power plants. The company's customers include multinational oil companies and industrial corporations, regulated utilities, independent and merchant power producers, governmental agencies, and other equipment manufacturers. It markets its services through an in-house sales force and through independent contractors. The company was founded in 1987 and is headquartered in Baton Rouge, Louisiana.
Updated S&P 500 Chart S&P 500 Index 3-Day Chart with Linear Regression and Standard Deviations
This picture brings to mind the recent actions of congress trying to "help" the economy. It seems like a good idea at first glance, but with every action there is risk and an equal and opposite reaction. So much that comes out of congress seems to equate to running full speed into a dark room without even thinking of turning a light on. What ultimate good does giving a $500 dollar rebate do to help the economy? It is in reality putting a band-aid on a bullet hole. Here in Southern California energy bills have gone up significantly, I can't even imagine what the heating bills are like for a retired teacher living on a fixed income in the Mid-West. When people are making a choice between paying for prescriptions or paying their heating bills, $500 doesn't offer a solution but only a delay in dealing with problem.
In the stock market when a company returns money back to shareholders it is called a dividend. This a great quality of many companies, but it is not a quality equated with growth companies. If the best thing a growth company can do with profits is return it to stockholders, then this company will slowly cease to become a growth company. At the same time the federal government is returning money to "shareholders", it is letting states slide on inspecting bridges and other infrastructure. This is a delay in looking at an area that can cause growth in a troubled economy. Passing a funding bill that addresses aging infrastructure is an area that would provide jobs and domestic growth. Returning $500 dollars that is most liking going to be either used to pay existing bills or spent at Walmart is not going to do anything to solve long term problems for the country or for individuals. What ever percentage of these refunds spent at Walmart, might have just as well been sent directly to China. After all they are the 13th defacto Federal Reserve District.
Updated charts of the S&P 500 Index. The first chart shows the linear regression chart used in earlier posts. This a chart which each candle represents three trading days. This is a method of smoothing data. All charts can be clicked to enlarge.
This second chart covers the levels using the opening range of the first three days of the year. Yesterday was a strong volume day, but with today's unemployment number anything could happen. The upside target is now the base of the opening range. If we reach this area, it will be important to follow the volume in the market.
One additional chart shows the same S&P 500 chart as above, but with a moving average of the advance-decline line. This can be used to spot divergences and also overbought oversold conditions.
