Investing: Doing it Yourself Part 4 – Technical Analysis-II

In the 3^rd of these series: -“Investing: Doing it yourself”, I detailed a technical method / strategy of selecting stocks called bottom fishing. Part 4 focuses on another technical strategy- “Break-Outs”

Technical Analysis: Break-Out Strategy

At any given time, a stock is in one of three technical phases – up trending, down trending, or consolidating. When markets or stocks consolidate, they more or less trade sideways without a specific direction.  During consolidation, prices are confined to a defined range over a period of time (3-months, 6-months, 1 year, or over 5 years).

Classic Break-out Example: A look at Ford (F) in 2010

For most of 2010, Ford Motor Company (F) traded between $10 and $14.00. It respected a $4.00 price range, consolidating its 2009 uptrend, and then in October of 2010, a technical “break-out” occurred. Ford broke that 10 month range ($10.00- $14.00) to the topside (see chart) and within 3 months was trading above $18.00. A “Break-out” trader or investor will buy Ford on a daily close above $14.00. When a "break- out" occurs, the investor expects either continuation of an uptrend (or downtrend) or the establishment of a new range. The minimum exit target on an entry at let’s say $14.00 equals the length of the old range ($14 +$4.00). In other words, the minimum target price on the range break at $14.00 is $18.00 (the 2011 high is $18.97).

There are specific kinds of risks with “break-out" strategies with the biggest being something technical analyst call a “false-break”. In fact we had two false breaks in Ford in 2010 (March 2010 and April 2010). Prices poked through the $14.00 ceiling in both cases only to return into the old range the next trading day or two. For this reason, it is very important to “test the break”.  A real "break-out" is normally event driven. An event could be news release of significant revenue or profits above market estimates (Like in the case of Ford), announcement of a stimulus program that benefit the industry etc.  It is also best to buy a "break-out" on a pullback and not on the initial break. 

As in the case of Ford, I wouldn’t have jumped on Ford on that October break of $14.00. The "break-out" was confirmed with strong “follow through” as Ford rocketed to $18.97. A safer entry strategy is to wait for Ford to pullback to that $14.00” break –out” price and then enter for a 2^nd test of $18.00.   A retest of the old "break-out" price doesn’t always occur but it is better to miss the boat than to get caught on the wrong side of a false break.

Here‘s a summary of how to trade a break out.

• -         Identify “break-out” price,

• -        Validate "break-out" (was it event driven? is there sign of follow through?)

• -        Wait for a pullback towards "break-out" price for entry.

Quote of the Day:

 Friendship improves happiness, and abates misery, by doubling our joys, and dividing our grief -
Joseph Addison

Written by Isaiah Olateru, Founder & Chief Technical Analyst - Eternal Market Analysis

Eternal Market Analysis - 2011 Trades & Outlook

Eternal Market Analysis is NOT a trade alert service, does NOT trade or manage capital for third parties or on behalf of anyone.  The purpose of this Blog is to share our analysis and view point on Emerging Markets, ETFs, Currencies, Stocks and Commodities.

Trading securities involves high risks, with the potential for substantial loss of capital. Do not trade if you are NOT willing to risk up to all of your initial capital. Past performance is not always indicative of future results.

The S & P 500 is up about 13% YTD (as at Dec 28^th, 2010), the FTSE is up 11% YTD  the Dow and Nasdaq are also up double digits YTD. Major US indices are trading close to or above their 2 year highs. If you’ve had your money in stocks for the past 18 to 24 months, you probably reaped great returns.

Looking forward to 2011, many analysts expect the current US equity rally to continue as corporations are expected to keep costs low and see increased earnings as world economy continues to expand. I expect some segments to outpace other segments in terms of growth and some companies to perform much better than others.

Below are my 11 investments  for 2011.

1.       Duke Realty Corp (DRE):

Industry / Segment: Real Estate

Buy @ $11.30, $15.50 is the 2011 Target with a bold target of $17.00 in extension.

Duke Realty - DRE is a self managed real estate investment trust (REIT) with over 700 Rental properties as at Jan 2010.  REITs are attractive on the yield from dividend payout as they have to payout a significant amount of their profits by law. I like DRE a lot more than the other REITs because it has better upside potential (from a technical stand point) and hence has a greater growth yield opportunity. DRE has been trading in a range for the past 52 weeks; it made a 52 week low sometime in July at $10.19 and has been hovering just above the $11.00 mark all year.  The economic recovery in the US has been “homeless” and I see suppressed home prices into the first half of 2011.  This is a good buy ahead of a possible housing recovery in late 2011 into 2012.  Today, DRE closed at $12.31 but with housing still shaky , I expect a pullback towards $11.00 which has acted as support several times this year.  A range breakout in 2011 (a close above $14) will bring $17.00 into focus

I recommend an entry at $11.30 (A good strategy is to average in at $11.40 and $11.20) for a $15.50 target in 2011. 

Graph Software Credits: www.stockscores.com

2.       United Continental Holdings Incorporated (UAL):

Industry / Segment: Airlines

Buy @ $20.10, 2011 Target is $30.00.

United Continental Holdings - UAL is closing out 2010 as the best performer (YTD) in the airline industry with 80% price appreciation as opposed to 21.5% YTD performance for holders of JetBlue (JLBU) and industry darling – Southwest Airlines (LUV) with a 14.4% YTD performance. Recommending UAL after an 80% YTD performance appears risky, but UAL fits my trading strategy perfectly and the technicals point to further upside into 2011.   The treacherous winter, especially the December snow storms in the US northeast, Midwest and Europe will probably put a dent in 4th quarter earnings but any selloff should be seen as a buying opportunity. As at Dec 29^th 2010 (pre-open), UAL is trading at $23.25. I am recommending a “buy” at $20.10 for a $30.00 2011 target. From a technical standpoint, the $18.00 - $20.00 region has served as support since March 2010. Over the past 7 months, UAL made higher lows each time it pulled back to the support region signaling an intact uptrend.

While I am not a fundamental trader, the fundamental picture for airlines beyond the snow storm effect looks good. The healing global economy will translate to increased business travel budget and spending in 2011. Business travel is a significant piece of the Airline revenue and profit pie.

3.       ProShares UltraShort 20+ Year Treasury ETF (TBT):

Industry / Segment:  Bonds - Inverse

Buy @ $36,   $45.50 is the 2011 Target with a bold target of $50.00 in extension.

Eternal Market Analysis expects Bonds to be one of the least attractive investments of 2011. TBT is an exchange traded fund that has an inverse relationship with Barclays Capital U.S 20+ Year Treasury Index.  TBT bottomed out on a 1 year scale in September 2010 around $30.00, at the same time, we have seen massive cash flow out of bonds since September 2010. TBT now trades at about $39.00 (as at Dec 29, 2010).  From a technical perspective, the one year chart reveals $35.00 to be good secondary support and a good entry point.  We will play rising bond yields in 2011 with TBT with entry at about $36.00 and a 2011 target of $45.00. TBT can test $50.00 in extension if inflation heats up more and sooner than expected (we think this is a very likely scenario).

4.       Citigroup (C):

Industry / Segment:  Banking

Buy @ $4.25,   $9.00 is the 2011 Target with a bold target of $11.00 in extension.

I am looking at the 5 year chart of Citi and all I can say is…”times have changed”. Citi was trading at about $55 in 2007 and today after the biggest recession since the great depression, government intervention, massive dilution of shares and new banking rules, Citi sits at $4.77. The 5 year chart shows that Citigroup is a perfect “bottom fisher’s” candidate. The one and two year charts do show significant growth from its 2009 low of about $1.00. C is up 44% YTD and I believe Citigroup has more upside. Banks will find ways around the new banking rules, Citigroup also has leadership committed to cleaning out the bad loans that got it into trouble and fees from increased Mergers and Acquisitions, equity underwriting in 2011 should bolster revenue.    I recommend entry anywhere between $4.00 and $4.50. I good strategy is to “average in” at $4.50 and $4.00 for a full entry price of $4.25.  My 2011 Target is $9.00 but my longer term, 2012 target is $20.

Graph Software Credits: www.stockscores.com

5.       Oil Services Holders Trust  - OIH :

Industry / Segment:  Oil Services ETF

Buy @ $125,   $180.00 is the 2011 Target with a bold target of $200.00 in extension.

For most of 2010, oil ranged between $60 and $85. Ranges often never last forever and oil broke that range a few weeks ago and is now sitting comfortably above $90 (per barrel of NYMEX Crude).  While the Consumer Price Index (CPI) in the US is still low, I expect a surge in inflation in the later part of 2011. China, Singapore and many emerging economies are already battling inflation levels not seen in over 24 months. A few days ago, the United Kingdom Retail Price Index (RPI), and UK CPI printed 4.7% and 3.3% respectively; both are well above the Bank Of England’s inflation mandate. For the United States, it’s just a matter of time before Inflation reveals itself via the US CPI. With inflation on the horizon, commodities are a good bet. I expect oil prices to continue to rise in 2011 and one way to play the oil / commodities story is through OIH. OIH is a trust that holds shares of common stock of top oil service firms.  OIH’s top 5 Equity holdings as at Dec 29, 2010 are:  RIG -16%, SLB - 11.3%, HAL – 10.2%, DO – 9.0%, BHI – 7.7%.

OIH currently trades at $139.73 per share. Eternal Market Analysis projects a test of $180.00 in 2011 and $200 in extension.  I expect a slight pullback in oil and other commodities and a consequent pull back in OIH. The one year OIH chart also shows that we are close to resistance at the $145 level- another reason for a short to medium term pull back.   Long entry on a pullback to $125 looks attractive on a risk reward basis. Recommendation is for entry at $125.00 for a $180 target.

6.       Ford  - F :

Industry / Segment:  Automotive

Buy @ $14.75,   $18.00 is the 2011 Target with a bold target of $20.00 in extension.

I bought and sold Ford for a nice profit in 2010. I initiated a long trade at about $10.90 and exited when Ford hit $14.00. Ford (F) currently trades at $16.71 and is up over 65% YTD.   Looking into 2011, I see more upside in Ford.  The 1 year Ford Chart shows a good breakout play. For most of 2010, Ford traded in a $4.00 range, with range bottom at $10.00 and range top at $14.00. In late October however, Ford broke out from its 10 month range and closed above $14.00.  Breakout strategy traders know that after a breakout occurs, the projected advance equals the length of the old range measured from the initial resistance now turned support. Support for Ford moving forward is $14.00. From a technical standpoint, minimum target for Ford in 2011 is $18.00 (Length of the old range). Many fundamental traders will argue that $18.00 is too conservative and while I agree, the basis for this trade (like many of my trades) is more technical than fundamental.  I recommend a buy on pullback to $14.75 with a target of $18.00 in 2011.

7.       Dendreon Corp  - DNDN :

Industry / Segment:  Pharmaceuticals, Health, Medicine

Buy @ $35.50,   $42.50 is the 2011 Target with a bold target of $55.00 in extension.

DNDN is a very speculative play therefore, I suggest smaller position / sizing for this stock. DNDN fits well into my favorite “bottom fishing” strategy. With the Dow, S&P and Nasdaq all trading up today (Dec 29^th, 2010), DNDN is down. A look at the 1 year DNDN chart screams “Volatility” up to $55 and down to $26, and then $35. DNDN’s money maker is an early stage cancer drug that hangs on a US government decision balance of whether it will continue to get revenue from its users on Medicare. Past decisions have played out in favour of DNDN but the issue may be revisited again in the future. DNDN is nowhere near its 52 week high of about $55.00. I think the probability for significant growth in DNDN is higher than a decline (which will happen if the government pulls the funding plug via Medicare).  I talked about DNDN in my October 24^th article titled: Investing- Doing it Yourself Part 3 (see http://eternal-marketanalysis.blogspot.com/2010/10/investing-doing-it-yourself-part-2.html) where I used DNDN to illustrate the bottom fishing technical analysis technique. I expect DNDN to break $42 in 2011 and test the 2010 high of $55.00. DNDN currently trades at $35.87 which is a good entry point.  For a more specific price point, you can go long at $35.50 with a $42.50 price target and $55 in extension

8.        USD JPY,   ProShare UltraShort Yen ETF - YCS

Industry / Segment:  Exchange Traded Funds, Currencies

Buy @ $15.80,   $21.50 is the 2011 Target with a bold target of $25.00 in extension.

Spot Currency Traders: Buy ½ Lot of USD JPY at 81.00 and another ½ at 79.00; average entry at 80.00

This is a pure short Japanese Yen play against the US dollar as I expect the Yen to weaken in 2011. In the spot currency market, USD JPY is the dollar-yen currency ticker symbols.  A lower USD JPY means stronger Japanese Yen; the US dollar is the Base currency. USD JPY currently trades at 81.75 which is very close to its 15 year low (15 year high for Yen strength versus the US Dollar) – See chart below. I tried to buy USD JPY pair twice this year via my currency trading platform and I was stopped out both times for a loss.  

I prefer to play the projected Yen weakness versus the US dollar  by trading USD JPY via a spot trading platform.  There is high leverage in spot currency trades (up to 50X) so if you are new to spot currency trading, I’ll advise you play this trade via the ETF - YCS.

Spot Trade Plan

For spot traders, defining a stop, (your risk) as you enter the trade is key due to higher leverage. The trade plan is to go long ½ a lot of USD JPY at 81.00 and another half at 79.00 for an average entry of 80.00.  I recommend a stop at 73.90 which represents 610 pip risk. Upside target is 95.50 and 97.50 for an average exit of 96.50. This is approximately 1650 pip profit potential so the reward / risk ratio is attractive. Spot traders - stops should be moved to 82 once USD JPY exceeds 90.

ETF, Stock Trade Plan

For the majority – non currency and spot traders, you can invest in Yen weakness versus the dollar via YCS. YCS is an ETF that can be bought and sold via your online stock brokerage account (like scottrade). YCS currently trades at $15.84.  I recommend an “average in” entry strategy with first entry at $15.50 and second entry at $15.00 for an average of $51.25.  2011 target is $21.50

9.       Research in Motion  - RIMM:

Industry / Segment:  Technology

Buy @ $50.00,   $75 is the 2011 Target with a bold target of $80.00 in extension.

I first bought RIMM in 2009 at about $40.00, I rode it up to $75.00 but sold it  at a lower price on a stop out when it sold off on the news of  security issues and potential usage ban in India, UAE and Saudi Arabia. . Most of the issues bugging RIMM have been cleared and prospects of bans and usage restrictions are very dim moving forward.  I plan on rejoining the RIMM party again in 2011 and I’m seeking entry at $50.00 –an area of secondary support. 2011 target is $75.00 as the value of RIMM’s security platform is unrivaled and the Playbook (planned rival to the Ipad) is scheduled to launch in early 2011.

10    Technology - QQQQ

Industry / Segment:  Technology Fund

Buy @ $49.50,   $75 is the 2011 Target 

QQQQ is a well known NASDAQ tracking fund and is very liquid. It has had a good run this year since bottoming out around $42.50. I believe it has more room to run and a high probability of testing ten year highs at the $75 region in 2011 or 1^st quarter of 2012. QQQQ holds tech stocks like Apple (AAPL – 20%), Qualcomm (QCOM – 4.7%), Google (GOOG – 4.3%), Microsoft (MSFT – 3.9%), and almost 3%  of its holdings in Oracle. The 5 companies just outlined above represent QQQQ’s top equity holdings. QQQQ trades at $54.77 (Dec 29^th, 2010) and is very close to 1 year and 5 year resistance at $55.  This resistance zone is quite significant and highlights the probability for a healthy pullback before creeping further north.  The 5 year chart shows first significant support at the $48 - $50 region. An extended pullback should find support at around $44 - $45.  I am recommending entry at $49.50 for a $75 target in 2011 to early 2012.

Graph Software Credits: www.stockscores.com

 United States Natural Gas Funds, LP - UNG

Industry / Segment:  Natural Gas, Commodities

Buy @ $5.50,   $11.00 is the 2011 Target 

Unites States Natural Gas Fund (UNG) is an ETF that tracks Natural Gas and commodities. From a fundamental standpoint, this fund / ETF tracks commodities rather inefficiently.  I am not a fundamental trader / investor. The technicals of this ETF are very attractive and fit perfectly into my “bottom-fishing” strategy.  UNG currently trades at about $5.84; the 52 week low is $5.20 so it is trading very close to its 52 week low. I believe the probability of a significant downside move from current price is low. On the other hand, probability of a test of the $11 zone in 2011 is higher on projected rise in inflation and increased commodity prices. This is a potential 100% growth play. UNG was trading at about $60.00 in 2008 and could well exceed my $11.00 target in 2011. Recommendation is for a long entry at $5.50 just above the 52week low for a 2011 target of $11.00. Aggressive and longer term investors may hold some position for a longer ride.

Overall outlook for 2011 – Gold, Silver, Commodities, Equities, Bonds, Treasuries, Emerging Markets:

Gold & Silver: unclear

Oil, Natural Gas , Copper and other Commodities – Bullish

Equities: Overall Bullish (Bearish on Chinese and Brazilian Equities)

Bonds:  Bearish

Emerging Markets: Flat-to-Bearish on China, Bullish on Mexico, Africa and the US

US Treasuries: Mixed

2011 Outlook Summary:

On February 25th, 2010, I wrote an article titled “Gold Rush” see . http://eternal-marketanalysis.blogspot.com/2010/02/gold-rush.html.  At that time, spot Gold had just broken above $1200 and traded up to $1220 zone and had started to pullback. I recommended a “Buy” in anticipation of a pullback to the $1017 region. The pullback in Gold was very shallow and never made it back down to my entry points. That trade plan is now invalid. Today, Gold trades north of $1400. The upward move in Gold has been “vertical” and very impressive. In 2010, the IMF sold over 400 tons of Gold into the market and with such massive supply, Gold didn’t skip a bit. Looking forward, Gold has the word “bubble” written all over it which makes it a very scary commodity to buy. Gold has risen not just due to inflation but due to distrust of currencies especially the safe haven United States Dollar. Gold’s value is buoyed by a temporary appeal as the “best” currency out there.  Well, the store of value reason for Gold’s advance will not stand the test of time because Gold is very finite in supply, not very divisible and simply doesn’t have characteristics of money. It is also very volatile.  I project a sell-off in Gold but I don’t know when (2011, 2012?).  I also think, like many bubbles, the sell off will be vicious and relentless.  Can Gold continue to go up in the near term? Yes!  but the risk of a correction is high, very high. My recommendation is to stay on the sidelines and watch this one.

Silver has more commercial purposes than Gold but the run up in silver in my view demands a correction (significant but milder than Gold).  Eternal Market’s outlook on Gold and Silver favors the downside at some point but our 2011 outlook is unclear. A 32% retracement of the 2010 advance in silver will cause me to reevaluate but until that happens, I will be watching.

The prospects of higher commodity prices in 2011 going to 2012 is very high (versus current levels) due to inflation or inflation expectations.

For equities, I expect overall US equity growth in 2011 with some pullbacks during the year to chase out “weak hands”. Price entry is very important in navigating those pullbacks (see 2011 picks).  The Chinese equity markets are not doing great right now and I expect Chinese equities to under perform in 2011. China continues to tighten and stocks don’t do well in tightening environments. I suggest that investors be selective in the emerging markets they invest in 2011.

Rising US interest rates will pressure Bonds.