"Know Your Edge, Style and Time Horizon"

As we continue to find ourselves in highly correlated, news driven markets, a number of prior leadership names are breaking down or at least showing signs of weakness ( i.e. CRM, LULU, GMCR, NFLX).  Despite having a laundry list of names, many swing trade breakout plays have also been few and far between, in terms of sustainable trending moves.  However, as I have been going through my nightly screens for the past couple months I am noticing a higher proportion of high dividend names continue to emerge.  Many of the same names are at or just below 52 week highs.

Amidst an environment in which treasury yields continue to narrow, and markets tread in a largely trendless fashion, it seems reasonable for investors to hide out in high yield, “defensive type investments.”   A look at the chart of TLT provides further evidence to such a thesis.

Regardless of the rationale and whether or not the aforementioned reasoning is sound, I think it is increasingly important to be cognizant of one’s time horizon, and mindful of where money is flowing.  As a greater proportion of the high dividend names hit all time highs, it is becoming more important for longer term investors to be cognizant of charts/the momentum mindset and traders to identify their time frames.  From an investment point of view, one must understand that momentum traders are often attracted to names with great relative strength, at or near all time highs.  However, they do not have a fundamental allegiance to the names, and as a result can “flush” a name just as quickly as they bring it to new highs.  Rather than passively buying and holding, longer term investors must be mindful of the difference between momentum driven price action and fundamentalist factors.  On the other hand, as a trader it is important to define one’s time horizon prior to execution.  Even though a name may yield 5-6% (relative to 0 on cash), does not take away from one’s primary edge upon entering the position, which is a result of technical analysis. 

Using a combination of technical analysis and fundamental reasoning to structure an investment thesis is one thing.  However, structuring a trade through technical analysis and then rationalizing it later via fundamental reasoning results in inconsistency and often hardship.  Although rationalization through inconsistent reasoning is never a good idea when managing an investment portfolio, in my opinion recent developments can make such a mistake even more damaging.

The Difference a Week Can Make

I recently posted a bunch of "good setups" I saw this past weekend.  Coming into the week I thought we had a chance to compile some semblance of constructive price action.  However, with a 40 or so stock watch list I watched every name either barely breakout and reverse hard, or never breakout at all. In conjunction with a lack of actionable setups working higher, I see "leader" after "leader" breaking down rather than breaking out.

Coming into the end of the week, I don't see very many opportunities to the long side that fit my style.  In an environment of news driven markets with limited to no trend I think it is prudent to at least be cautious (shouldn't be anything new to most).  On the other hand, does this mean that I think the SPY is going to 50 or Europe is going to self implode? I have no idea, and frankly I don't believe it is my place to provide a crystal ball prediction.  I have levels defined, at which I define my risk just like everyone else.

On the other hand, it seemed reasonable to follow up on the names I had been watching and relay the message that they did not work.


Trade em well and enjoy the holidays.

A Few of the Many Nice Looking Charts

In going over my scans I came across an awful lot of nice looking charts so far.  I thought I would share a few here.  Enjoy

A Comparison of "High Flyers"

Over the course of the past couple of months a number of high flying momentum names have quickly fallen off a cliff.  Most recently was Green Mountain Coffee, which had been forming a longer term head and shoulders topping pattern prior to breaking down as illustrated below.

Following a worse than expected earnings call, the company proceeded to breakdown below the neckline, and has not looked back since.  A great illustration of how important it is to get off the train when momentum breaks.  For further illustrations of the power of broken momentum, I would refer you to $OPEN, $CREE, $JVA etc etc.

More recently I have been watching Salesforce.com ($CRM) which has been a powerful momentum leader of the past couple of years. However, some of the more recent earnings call have not been at par with the street's expectations. As illustrated below, $CRM is also forming a very similar head and shoulders pattern to that of $GMCR.

 Furthermore, there are clear signs of institutional distribution in both instances on the right side of the pattern.  In addition, the insider activity in $CRM of late has not painted a pretty picture either (do your own digging).


Just an observation, take it for what it is worth.