Friday, February 20, 2015

Enbridge Energy (EEP) In Ascending Triangle Pattern

Enbridge Energy Partners (NYSE: EEP) is deep into a classic Ascending Triangle chart pattern.  The company reported mixed earnings on Wednesday, missing analyst earnings estimates by a penny, but beating analyst revenue estimates by $320 Million.  What moved the stock, though, was some very positive forward guidance.  They expect adjusted operating income to increase by 12% over 2014, and they expect their distributable cash flow to increase by 15%.  EEP's stock gained 1.5% in Thursday's trading, bouncing off the triangle's support line on very high volume.  With only 45% institutional ownership and with a 5.9% dividend yield, the stock does have some room to run.

For today's discussion, though, let's take a look at the stock pattern itself - an Ascending Triangle.  There are several very popular stock patterns that are watched by chartists, and this is one of the more reliable patterns that can be very profitable.

The ascending triangle stock pattern is considered a continuation pattern.  So in an uptrend, as EEP has been in for the past year, the pattern is considered bullish.  What forms the pattern is a very strong area of resistance - the top horizontal line on this chart - and a support line that has a distinct upward slope - the bottom line on this chart.

For a pattern like this, we want to see at least three touches of each trend line, and in this case, we have five of each.  Remember, a chart pattern is intended to give us insight into the behavior of traders.  The five touches of the resistance line indicate points where buying pressure has been exhausted, whereas the five touches on the support line indicate the points where selling pressure is exhausted and buyers are again interested in picking up the stock.  The entry point for that buying pressure continues to increase, hence the ascending pattern.

There are two ways to play a bullish entry on an ascending triangle.  For very aggressive traders, you can enter a long position when price bounces off the support line.  This gives the greatest profit potential, but it's also carries much higher risk since there's a well-defined price ceiling in the pattern.  An entry point for more conservative traders is to wait until price closes above the resistance line, providing an entry following the breakout.

According to Thomas Bulkowski, the well-regarded guru of stock pattern analysis, breakout is upward 70% of the time on a bullish pattern, and of those that do breakout, 75% of them reach their price targets.  That's not a bad average at all!  Be aware, though, that there is a pullback to just below the resistance line 57% of the time.  That, in fact, provides a third entry possibility since, if you miss the initial breakout, 57% of the time you'll have another chance to get in when the price breaks resistance a second time.

Setting a price target for this type of pattern is relatively straightforward.  Subtract the lowest valley in the pattern from the resistance line, and - for a conservative target - multiply that by 75%.  Add the result to the resistance line and you have the price target.  So using EEP as the example, it would be (40.50-35.00)*0.75 = 4.12.  Add that to the resistance line: 40.50 + 4.12 for a price target of 44.62.

For added confidence, we'd really like to see the breakout occur on high volume.  Now, the very high volume we saw yesterday was an excellent sign, but remember, that volume was driven primarily by EEP's earnings announcement.  I'd like to see volume above its 20-day moving average on the day of the breakout above resistance, as well.  Assuming, of course, this is one of the 70% that break upward.

As always, when discussing technical analysis, it's important to remember that the charts are telling us something about the behavior of traders.  This analysis alone does not replace the due diligence we still should do before entering a position.

Tuesday, February 17, 2015

Slight Decline in Housing Market Index Attributed to Weather

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) was released this morning, and showed a slight decline from last month's release.  Builder confidence for newly built single family homes dropped to 55, measuring a two-point decline.  The drop, however, is being attributed to the unusually high amount of snow that has blanketed much of the nation for the past month.

Despite the decline, expectations remain very optimistic for a robust building market in the US, once the weather situation improves.  Sales expectations for the next six months remained steady at 60, and it has been hovering in that range for some time.

Interestingly, the Home Construction sector has apparently reached that same plateau.  Take a look at the weekly chart of the sector:

Notice that it formed a wedge with a very slight upward bias starting in the spring of 2013.  The Sector is currently trading at its highs, at least through this decade, but it's showing no signs of attempting to penetrate that channel pattern.

I don't share the optimism being expressed in the Index.  Interest rates are currently low, but they will be increasing this year.  Home Construction appears flat to me, not increasing, and it's not showing any signs that it's ready to do so.  The question is what will drive those projected sales for new home constructions, since current behavior does not support the optimism.  The share of new homes being purchased by first-time buyers is at its lowest level since 1987.  Given the job market, lack of salary increases, and tight capital constraints being imposed on banks, don't expect this behavior to change anytime soon.

What is growing is the construction of rental apartments and condos, and its to those that first-time buyers are going and it's also where the aging home owner is going.  When you look at the number of homes for sale, and in this area the number of For Sale signs in each neighborhood is astonishing, it's quite apparent that there's a significant migration within the current housing market.

Now, that's not all bad news for the housing sector, nor is it bad news for the home suppliers and construction companies.  Whether or not a home is new, a buyer moving in immediately wants to put their touch on it. That's great news for companies like Home Depot and Loews that do well whenever homes change ownership.

The point is, don't rely on New Home Sales numbers to gauge the health of the construction business.  There was a time prior to the housing bubble when that was a significant measure of the sector, but the behavior of the consumer has changed and we, as traders, must therefore adapt.  A better measure would be New and Existing Home Sales, published monthly by the National Association of Home Builders (NAHB).  I also really like the Remodeling Market Index, which is also produced Monthly. This report is a great indicator of how the consumer is behaving, and it drives the performance of a number of industrial and cyclical corporations.

We are in a new post-housing bubble market, and the metrics we used prior to the bubble bursting no longer apply.  As traders, we need to adapt to the behavior of the consumer, and at present, that consumer is moving into condos or rental apartments, not necessarily new homes.  There's profit to be had here if we're willing to adapt to the new metric.

Monday, February 16, 2015

Greek Stalemate Continues

Despite the optimism expressed late last week, talks between Greece and the other EU Finance Ministers broke off after only four hours today.  The talks had been expected to run well into the evening, but were deemed pointless after Greece flatly rejected the EU proposal of a six-month extension to the bailout.  The effect on the markets tomorrow is uncertain, and we'll be watching the Asian markets overnight for some indication as to how US equities and bond markets will react.  (US markets were closed today for Washington's Birthday, known popularly as Presidents' Day.)

The next major milestone in the sage will come on Wednesday.  That's when the European Central Bank (ECB) will decide whether or not to continue their emergency lending program to Greek banks.  Without that program, Greek banks have less than 14-weeks of solvency remaining.  They are hemorrhaging deposits at the rate of over €2 Billion  ($2.27 Billion) per week. In just three months, the banks will not have the collateral needed to obtain loans from the Central Bank, although the real crunch will come in late March when Greece faces some heavy loan repayment requirements.

Part of the problem appears to be a question of semantics.  Greece is willing to accept "six months of credit" however they will not accept a six-month extension of the bailout.  Economics Commissioner Pierre Moscovici expressed his frustrations, saying "We need more logic and less ideology."  The EU officials were dismayed last week by what they portrayed as a total lack of preparation on the part of the Greek finance ministers, and they question whether or not the young government understands the seriousness of the situation.  For now, the EU feeling is that Greece is putting political concerns ahead of the dire economic needs facing the nation.

The ball appears to be in Greece's court since several ministers were quoted as saying that further talks would require Greece to request a bailout.  A separate but equally contentious issue remains over the austerity programs that were tied to the original bailout.  Greece is on record as proposing a halt to those austerity programs as part of any new agreement, however the EU - especially Germany, their largest creditor - wants none of that.  According to German Finance Minister Wolfgang Schaeuble, Greece has "lived beyond its means" for a long time.  Neither Germany nor the rest of the EU are willing to continue to provide bailout funds without proof that Greece has learned to manage its debt.

Polls in Greece appear to put some pressure on the young leftist government to reach a compromise.  68% of Greeks seek a fair compromise, while only 30% advocate standing firm against the EU.  An astonishing 81% want Greece to stay on the Euro.

There is growing fear that the failure of the debt talks will lead to the imposition of strict capital controls.  There's precedent for that.  In 2013, Cyprus was forced to close the banks for two weeks while capital controls could be introduced.  With the Greek banks closed next Monday for the first day of Lent in the Orthodox Church, there's fear that the ECB could impose such restrictions as early as next week.

For now, it's back to the game of brinkmanship.  With an inverted yield curve and the yield on short-term Greek bonds now in the upper teens, time is not on Greece's side.  They are facing the total collapse of their banking system in a matter of weeks, and the only bargaining chip left in their arsenal is an agreement to remain in the Eurozone.  The further this goes, however, the less valuable that chip will become.  With the Greek banks losing close to €300 Million per day, the prospect of terms favorable to Greece are diminishing by the hour.  

Saturday, February 14, 2015

The Slow Stochastic and the Dow Industrials

One of the technical indicators that I really like to use when charting stocks is the 14-period Slow Stochastic, developed by George Lane in the 1950s.  The concept behind this indicator is the theory that prices tend to close near their period highs during an upward trending market, and conversely, they tend to close near their lows during a downward trending market.  The Slow Stochastic will oscillate between 0 and 100.  Generally, chartists consider a security to be oversold - potentially giving buy indications - when the value is below 20, and they consider it overbought - potentially giving sell indications - when the value is above 80. 

The indicator provides two values, and thus two lines, on the chart.  The first line, the %K line, charts the closing price of a security as a percentage of its relationship to the high and low of (in my case) the 14-day period of he stock.  The second line, the %D line, is a 3-day Simple Moving Average of the %K line.  There are several ways to interpret the Slow Stochastic, and I tend to use all of them in conjunction with several other indicators and chart patterns.

Please note!  The indicators (like the Slow Stochastic) do not drive stock price.  They are merely tools by which we are able to understand the actions of traders, and therefore assess if those traders are pumping money into a stock or taking money out of a stock.  The indicators tell us something about the sentiment of the traders, not the health of a company.  In using these indicators, we attempt to determine if - based on trader activity - a price is likely to rise or fall over a given time period.  Indicators are a starting point, but not an end in themselves, and no indicator's buy or sell signals alone will replace the due diligence needed on the overall fundamentals of the security you are seeking to trade.

Here are the signals we can interpret from the Slow Stochastic indicator:

%K / %D Crossovers

Visually, these will jump out at you with a quick glance at the chart.  When %K crosses above %D it's a bullish signal, and conversely, when %D crosses above %K it's bearish.  Like most oscillators, though, you can't rely on just this one signal for buy and sell orders.

%K Crosses above 20 or below 80

This is one of my favorite signals since it has a higher tendency to produce winning trades.  When the %K line crosses from below 20 to above 20, it generates a buy signal.  When it crosses from above 80 to below 80, it generates a sell signal.  Now, be careful here.  As a general rule, I will only take signals in the direction of the prevailing trend, and for that I like to use the slope of the 50-day closing price's Moving Average.  If that slope is increasing, I only take buy signals.  If it is decreasing, I only take sell signals.  Note:  Many traders don't wait for %K to cross back above 20 or below 80.  I do, because I've found that it increases the chances of success despite getting you into the trade one or two periods later.

%K Divergence

This doesn't generate buy or sell signals, per se, but it's a very good early warning signal that a trend may be reversing.  A bullish divergence would be indicated if prices for the security are reaching lower lows, but the %K line is reaching higher highs.  It's an indication that price action is about to reverse and warns us to be alert for a good buy signal.  On the other hand, a bearish divergence would be indicated if price is achieving higher highs, yet the %K line is dropping to lower lows.  It's a warning that a bullish trend may be exhausted and a decline in price is imminent.  In this case, we watch for a good sell signal to either close a position or to open a short position.

So what does all this have to do with the Dow Industrials? Well, let's take a look at both the daily and the weekly charts for the Dow.

Dow Industrials Daily Chart

Look at the time period starting around October 27th.  Closing prices for the Dow were on a very steady upward slope.  The Slow Stochastic, however, was on a downward slope in overbought - above 80 - territory.  The warning signs should be blaring since that's a classic bearish divergence.  Sure enough, the second week of December, the market took a nose dive.  Did you notice that, just before it dove, we had a bearish %K/%D crossover?  You can see the red line - %D - crossing above %K just as the price started to plummet.  That's warning sign number 2.  The final warning came when %K crossed below 80 and, well, you can see what the price action did after that.

So where are we are right now?  The Slow Stochastic is solidly in overbought territory.  %K is above %D and still trending up, but since this is a bound indicator, we know that can't continue much longer.  We don't have any divergence yet, though, so other than being in overbought territory there's nothing else in the Stochastic that would have us concerned.  (A glance at the actual chart also looks pretty good, although we're trading in the upper 20% of the Bollinger Band which is where I start looking for sell indicators.)

But now let's take a look at the Weekly Chart:

Dow Industrials Weekly Chart

As I've noted in the past, the Dow's been trading in a very nice upward channel, bound by the blue resistance line you see on the chart and the 50-period moving average (in red) as support. Let's look at the Slow Stochastic using the 14-period indicator.  The recent down weeks in the market pulled the indicator out of overbought territory and you can see the subsequent (temporary) drop in price.  (Remember, the slope of the 50-period moving average is up, so I'd ignore any sell signals here.  Tighten stops, or wait for a good long entry, but there's no way I'd go short on any security showing that strong an upward slope.)  The Dow bounced very nicely off support again, and we have a very nice bullish crossover following the close at the end of this week.  Looking at the lows of the Stochastic, they are forming a nice upward trend line as well, matching the price action of the lows, so there's no divergence, either.

The only warning signs on this chart, in fact, is that we are approaching the resistance line once again, and we're trading in the upper 10% of the Bollinger Band.  Whether or not we bounce off resistance and head back down or whether we break through resistance and surge upward will depend on the geopolitical situation as well as the economic indicators released in the coming weeks.  Earnings season is essentially over until late March and April, so we won't have earnings announcements pushing the market for the next couple of months.

One last item to note, though, is about the use of any indicator to analyze a market index.  Remember that the index - in this case the Dow - is based on the price action of the stocks that comprise that index.  In today's age of computerized trading, however, the technical analysis of the index itself is used by traders to gauge whether or not they should take some profits in the stocks that comprise the index or whether or not to enter new positions within that index.  Never forget that it's the price action of the underlying securities that drives the index - and thus drive the indicators that we use to analyze that index. 

Wednesday, February 11, 2015

Greek / EU Agreement in Principle - Almost, Sort of, Maybe

According to the various financial news wires, sources in Brussels have reported that Greece and the EU have reached an "agreement in principle" related to the outstanding debt issues that have dominated the news for the past month.  These sources state that the details are still being worked out, but are expected to be finalized and signed on Monday following an agreement that Greece would remain under the terms of the EU bailout program.

You could hear the FX, Bond, and Equity markets all breathe a tremendous sigh of relief following that breaking news.  Treasury bond yields improved, equities futures improved, and the Euro gained against the US Dollar all on the word of an unnamed source that an agreement - minus the details - had been reached.

Is the market setting itself up for disappointment and the significant drop that always follows?  Quite possibly.  Barring other news, there's a high likelihood that equity markets will surge, especially in Europe, and that may well flow into the morning session in the US tomorrow.  The greater the surge, though, the greater the potential for a significant drop heading into the weekend or on Tuesday if an actual agreement fails to manifest.

Such a failure is very possible.  Despite the optimism coming from this unnamed source, both Greece and the EU were very quick to dismiss any such agreement in principle.  Other sources involved in the negotiations stated that no agreement had been reached, which, barring any details, is certainly true, however they floated the idea that the existing terms of the bailout could be extended.  It's very likely that that is indeed one of the offers on the EU side of the table, and given the hard-line stance taken by Germany in recent weeks, that could be viewed as a concession.  The likelihood of Greece accepting it, however, is very slim.

It's important to remember the results of the recent Greek election.  There was a very clear mandate from the people in support of the Syriza platform, and the fledgeling coalition government will be under extreme political pressure not to accept terms that are in direct opposition to that platform.  In fact, an unnamed representative of the Greek government was very quick to dismiss the bailout extension idea as a non-starter. 

So how optimistic should we be regarding the "agreement in principle" news?  Without any details surfacing, I'd be very cautious.  As additional information comes out of Brussels, there's a high potential for significant volatility, at least until there is word from both sides that they have truly reached an agreement.  Remember, Monday is a holiday in the US and the equities markets are closed.  I will be keeping my trades very short term, and will look to close my short-term open positions before the weekend.  The true deadline to settle the Greek debt issue is still two weeks away, which leaves plenty of opportunity for political brinksmanship from both sides of the bargaining table.  Be sure to factor in that volatility when you line up your trades tomorrow.

Tuesday, February 10, 2015

Greek Market Action Impact is Slowing

Several conflicting news reports came out in the overnight hours and during the morning trading session, and both reports created some minor fluctuations in the US market.  Of interest, though, is that the fluctuations truly were minor.  The first report provided some hope of compromise on the Greek Debt situation, and indeed the US market was up a solid 100+ points in early trading.  Reports had surfaced that Greece would get a six-month extension to pay off its debt, and that provided a bit of market optimism given the looming February 28th deadline for compliance.

Mid-way through the morning session, however, German Finance Minister Wolfgang Schaeuble threw a large barrel of ice-water on that notion, stating that any claims of an extension are false.  The market reacted by pulling back all of its gains since the open, and briefly traded flat.  Very briefly.  Almost immediately, in fact, the market started to trend back towards its early highs.

As of this writing, however, the market is back up nearly 100 points, despite WTI Crude being down 4.25% for the morning.  To all appearances, the market is now shrugging off both the Greek situation and the very volatile price of oil.  What is likely is that the impact of both have already been factored into a market dealing with these issues for the last several months.

Specific to Greece, there will almost certainly be a compromise brokered at the last minute.  With a GDP the size of the state of Missouri - there are 22 states with a higher GDP than Greece - there's relatively little concern that Greece alone can have a significant impact.  Rather, the true concern is how Italy and Spain will respond should Greece ultimately leave the the Eurozone.  Compared to Greece's $283 Billion GDP, Spain weighs in at $1.358 Trillion, and Italy tips the monetary scales at $2.071 Trillion.  Their economies are significant, and there's a very real concern that, should Greece leave the Eurozone, they could soon follow.

Greek Defence Minister Panos Kammenos outlined a "Plan B" yesterday, although it's doubtful that this is truly a viable plan.  According to Kammenos, if no compromise is reached, Greece would seek financial aid elsewhere.  "It could the United States at best, it could be Russia, it could be China or other countries," he said.  The phraseology suggests that he has not yet explored these options with the countries in question, so for the moment it's pure speculation - and possibly political rhetoric - on his part.

It's doubtful the US would jump into this mix, potentially antagonizing European allies, and Russia is in no financial position to bail out anyone.  Stronger ties between Russia and Greece would be interesting politically, but it's doubtful that Russia would be willing or able to open their already strained coffers to purchase those closer ties.  China is a possible financier that does have the ability to bail out Greece, but would they be willing to do that when there is so little potential gain from the deal?  China is heavily dependent upon exports, primarily to Europe and the US. Greece adds little to that mix, and a Chinese bailout could be perceived as a slap to France and Germany - the two primary antagonists in the current Greek saga.

Wednesday is the day where it should get interesting.  European finance ministers are meeting in Brussels tomorrow to review the situation, and Greece is expected to put new proposals on the table at that meeting. 
Greek Finance Minister Yanis Varoufakis is expected to detail what's being called "10 surprise reforms" which are expected to replace many of the austerity measures that were part of the original agreement.  (The new government was elected on a platform that included the elimination of the current austerity measures.)  He is also expected to request a bridge program that would keep the government solvent while they work on a revised debt deal.  So far, that has been rejected by Germany, but it's possible it could gain traction when all of the finance ministers meet tomorrow.

It appears that the new government is simply asking for time to assess the mandate of the latest election and reconcile that with their obligations under the current bailout agreement.  It's not an unreasonable request, and it would appear that the actions in today's stock market agree that some type of compromise is highly likely.  Tomorrow should prove interesting, especially if Germany continues to take a hard-line no-compromise stance.  In the end, though, I do expect a solution that reworks the terms of Greece's bailout, implements the new reforms, and allows Greece to remain in the Eurozone.  Anything short of that benefits neither Greece nor the Eurozone.

Monday, February 09, 2015

LMCI Comes in Weak at 4.9

The Fed released the January Labor Market Conditions Index this morning.  The LMCI, as we discussed yesterday, is comprised of 19 separate economic indicators that provide insight into the health of the job market.  With Unemployment continuing to fall and with optimism in last month's non-farm payroll index, expectations were high that today's LMCI number would continue to show improvement.  In yesterday's post, I said that I was looking for a value of 6.8 or higher to demonstrate strength in the labor market.  Well, we fell far short of that value.

The LMCI for January dropped to 4.9, a decline of 1.2 points off December's 6.1 value.  That drop confirms what we've been saying for some time, that the labor market is not as healthy as the unemployment number would lead us to believe.  In fact, the decline in January confirms the falling Participation Rate which is now at its worst level since the late 1970s.

What the low values in the LMCI are telling us is that, despite a drop in the Unemployment Rate - which I've already categorized in previous posts as a meaningless number - the other aspects of the job market are in terrible shape.  Hours worked per week continue to drop.  Wages continue to drop and annual merit increases are barely keeping pace with inflation.  Benefits, especially health care benefits, continue to skyrocket in costs to the worker.  The number of workers that are leaving the workforce prior to age 65 continues to increase.

Now, it's doubtful that the LMCI is having much of an impact on today's market decline.  As of this writing, we're trading near the lows of the day, but the entire day has been down due almost entirely to the standoff between the Eurozone and Greece coupled with the extremely poor trade numbers released by China last night.  Those two global constraints are having a far greater impact than the little known LMCI is likely to cause.

What we as traders need to take from this, though, is the warning that the labor market is not at all healthy.  We need to keep a very close eye on Average Weekly Hours, Average Hourly Earnings, Hiring Rate and Quit Rate, and Hiring Plans.  These will give us a much clearer view as to the conditions of the average worker in the US.  I'm expecting all of them to continue to worsen in the short term.