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II Insight 

April 2011

Global leaders in Technical Analysis since 1947

     

Welcome to the April edition of the Investors Intelligence insight. April is traditionaly a strong month for the financial markets, but it rolls into the slack summer seasonality period - oft quoted in the UK market as "sell in May and go away. Stay away until St Leger's day"*. Thus, investors are torn between hanging in on the bull market for further gains and a more defensive stance.

In this month's edition we have some useful insights and ideas for you, including John Gray's note on how to use High Pole and Overextended P&F formations, plus Jackson Wong with a great long-term trade idea on the JPY.

We hope that you find a few useful nuggets in this email. As ever, we welcome feedback. Please feel free to drop us a note at analysis@investorsintelligence.com. Meanwhile, if you have any friends or colleagues that would benefit from this email, please feel free to forward it.

Have a great spring!

Mark Glowrey, Investors Intelligence London

* For readers who might think that British stockbrokers are a religious bunch and have a strong knowledge of saints, this is not the case. St Leger day is not a saint's day - it refers to the St Leger Stakes horse race, which is run in mid-September.  

Small-cap stocks, technology and emerging markets reassert
 
Up until recently the emerging markets, a “risk-on” leader, was breaking down on a relative basis.  Such weak performance was threatening the bull market argument. However, like Technology and other higher beta areas which are covered below, the emerging markets turned tail at the final hour.
 
The past few weeks have seen renewed strength from the group. Against the S&P 500, the iShares MSCI Emerging Markets ETF (EEM) bottomed in February just above two-year support. The ratio is now rallying hard and reasserting the primary relative uptrend that started in late 2008. That action is supportive towards the overall bull market.
 
 
Mid-March technology, represented by the NASDAQ 100 (NDX) briefly popped beneath key moving average support against the S&P 500. This relative deterioration was a concern, however it soon recovered and in doing so reasserted tech's long-term outperformance since the bear market lows of 2008.
 
As long as this relative uptrend remains in force we like technology and only a break of the recent relative low would place a big question mark over the bull market case.
 
 
Another high-beta area to wobble on a relative basis were the small-caps. However, their brief relative retreat at the start of March by the Russell 2000 (RTY) was soon reversed following the tragic events in Japan. The sector is largely domestic and experienced inflows following concerns over the global economy. That rotation enabled the small caps to soar on a relative basis. They have broken out to their best level versus the S&P 500 in almost 25 years! 
 
Outperformance from this group is extremely supportive of the current bull market and only a violation of the rising trend channel out of the 2008 nadir would indicate cracks in the bull market.
 
Alternative Exit Points on P&F Charts: High Poles and Overextended Reversals Down

Point and figure (P&F) charts provide a simple, yet disciplined method of identifying current or emerging trends in stock prices. They have no time axis and only move when prices change. P&F charts map out the relationship between supply (created by sellers) and demand (created by buyers) at different price levels. When demand outstrips supply (more buyers than sellers), stock prices rise and this is depicted by a column of Xs on the chart. Conversely, when supply outstrips demand, (more sellers than buyers) prices fall and this is depicted by a column of Os on the chart.
 
One of the many advantages of P&F charts are their clear buy and sell signals. The charts also always show stop loss levels where the opposite signal (trend reversal) would occur. Sometimes stocks show an extended move after a breakout and that can be dangerous - in such an event the P&F stop level will some distance below the market price
 
In those cases it would not be prudent to give back the entire advance by waiting for the trading to pull all the way back down and break a prior low for a P&F sell signal. Depending on the strength of the rally we have two additional formations to use as exit points, a ‘high pole' and ‘overextended reversal down'.
 
For a high pole signal a P&F chart on a buy signal must show a rally at least 3 Xs above a prior up column. At that point you count the entire X column and divide in half. Any chart pullback (column of Os) greater than this is called a high pole and suggests selling. A high pole doesn't forecast a further large decline, although that is possible. It does point to upcoming sideways trading and a P&F sell could occur around the current level. The price action in Acme Packet is a good illustration of this type of signal.
 
 
 
Sometimes a stock stages a strong vertical move that shows 15-boxes or more without interruption on the P&F chart. Will call that action ‘overextended' and in some cases it can continue 20, 25 boxes and more. In all of those cases the P&F sell stop is far, far away and even waiting for a high pole formation pullback would require giving back substantial gains. In cases of ‘overextended' rallies we suggest to take at least some chips [50%] off the table on the first chart reversal down. Because that needs three-boxes to occur some wiggle room is allowed for before you exit. We watch for these signal on both the upside and the downside. Overextended moves up we call "spikes"; overextended moves down we call "tails". The recent move in China Life Insurance is a good example of such a "tail".
 
Subscribers to Investors Intelligence stock services can access numerous daily signal scans, including Hi/Lo Poles and Overextended P&F on the website at www.investorsintelligence.com .

And finally - a once in a decade trading opportunity?

From time to time, trading opportunities are presented in the market which have very high probabilities of success. Often these are long-term scenarios, involving enevitable social or political changes. We believe that last month's G7 intervention in the JPY was such an event. 

Jackson Wong (Investors Intelligence London office) has covered this event, and the ramifications of it in one of his thematic reports - titled "Far from the Crowd". Here are the main points:

  • G7 governments intervened in the Yen market on the 18 March (G7 Statement). This is the first multi-lateral currency intervention since September 2000.
  • The rarity of these events makes them significant and important, with long-lasting impact on the target exchange rate.
  • The process will be a length one and the trade needs to be carefully managed.

The full document, which shows additional arguments for this trade can be downloaded here. We will be playing the JPY from the short side for some time to come in the Investors Intelligence Foreign Exchange Model Portfolio. If you would like to stay in touch with our entry, exit and adjustment points on this thematic trade, sign up for the FX Hotline.

Win a year's subscription to the Advisors Sentiment report

Last year we were approached by a major Hollywood studio who were putting together a film featuring some stock market trading scenes. The producers wanted to use genuine research material in the trading scenes to add authenticity and asked Investors Intelligence to supply hard copy material and website access.

That film was released last month as Limitless - staring Bradley Cooper, Robert De Niro and Abbie Cornish. We decided to make an office trip to the movies and thoroughly enjoyed this tale of a man who, through his new-found powers starts to make a killing on the markets.      

With this month's edition of the Investors Intelligence Insight, we are offering the chance to win a year's subscription to the Investors Intelligence Advisors Sentiment Index. To win, you will first have to see the movie. Keep a sharp eye open during the early scenes where Bradley Cooper's character is trading from home. During this scene, a copy of the Chartcraft chartbook is clearly visible in his apartment. Can you tell us the exact position of this Chartbook (clue; it's not on the desk!)

Send in your answers (only one per respondant please) to  limitless@investorsintelligence.com. The first three correct answers will receive a year's free subscription to our Advisors Sentiment indicator - an investment timing tool possibly even more powerful than the one described in the film!

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US Sentiment holds the key
The Advisors Sentiment Survey continues to provide advance warning of major market turning points.  
The analysis and data regularly feature in the international financial press as a key indicator of market reversion.
Examples of these articles can be found on Barrons, NY Times, and Investor's Business Daily.
Read what CNBC said about the biggest switch in sentiment for 7 years.
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Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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