Market Pullback and Energy Opportunities in COP and BP?

Set stops and look to take some profits at sign of weakness – a couple of signals are popping up for a slight brake right now $$ – 11:25 AM – 9 Feb 12 via web

That was my tweet from Thursday, February 9, 2012.

The signs that I was referring to are located in the following two charts. The divergence over the past month is very clear on the charts below as the transports are showing weakness in comparison to the industrials. I am not calling a market reversal or downtrend but I am seeing some exhaustion among the leaders and major market averages. Recent gains need to be digested before moving higher (if that’s where 2012 is headed).

Oil has become a topic of interest with gasoline prices across America making headline news on a daily basis. With crude oil pushing higher, above $100, I have become interested in two dividend plays that also present solid technical charts.

ConocoPhillips ($COP – $73.36) operates as an integrated energy company worldwide. The company’s Exploration and Production (E&P) segment explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids.

The company has a market cap just shy of $100B, an annual dividend of $2.64/3.60%, 65% held by institutional investors and a P/E of 8.17x. A move to new highs could catapult the stock well into the $80 range (along with that dividend). The company has been experiencing an increase in net income, year over year revenue growth and a solid record of earnings growth. One could argue that the ideal entry is closer to the 50-d moving average.

BP p.l.c. ($BP – $47.62) provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. Its Exploration and Production segment engages in the oil and natural gas exploration, field development, and production; midstream transportation, and storage and processing; and marketing and trading of natural gas, including liquefied natural gas (LNG), and power and natural gas liquids (NGL).

The company has a market cap of $150B, an annual dividend of $1.92/4.03%, 10.68% held by institutional investors and a P/E of 5.90x. A move to new highs could push the stock back towards pre- “Gulf of Mexico” disaster levels (along with that dividend). The company has been experiencing increasing net income, growing revenues, reasonable debt and future potential with new contracts and repaired brand image.

As with $COP, an ideal entry for $BP is closer to the 50-d moving average but we are targeting these stocks as value plays considering their dividends and low PE’s.

InvenSense Inc – INVN

InvenSense, Inc.
$INVN – NYSE

INVN is up 20% since my first tweet on January 5, 2012 which followed a 9% gain that day from $10.90. The stock is up 33.43% since January 1, 2012 and 77.20% since the IPO on November 16, 2011. It’s a young IPO moving on strong volume with a small float and a very interesting (in-demand) technology.

The ideal buy point for this young chart pattern is $11.95, $0.10 above the high of the left side of the base, see chart below. The stock is currently extended from the buy point so please be patient and wait for a new setup or a pullback on lighter than average volume.

I do not own shares as of this post but I am looking to get in based on the analysis above. The stock shot up too quickly before I was taking it serious. It now has my attention. Note that the stock closed down 1.85% on Friday and after-hours trading had it down another $1.13 or 8.50%.

INVN Tweets in 2012:

  • January 5, 2012 | $11.11: $INVN http://stks.co/1mSk Young IPO up 9% on vol 277% larger than ave. Interesting technology
  • January 9, 2012 | $12.19: $INVN crushing it lately, targeted last week. Up 10% on vol 78% larger than ave to new all time high. Great technology.
  • January 9, 2012 | $12.19: $INVN http://stks.co/1qYZ Making a move on volume
  • January 10, 2012 | $12.99: $INVN http://stks.co/1rhQ Tack on another 6.5% with volume 156% larger than ave
  • January 12, 2012 | $13.54: $INVN http://stks.co/1tyE A 22% move this week, as of noon Thursday. Small float, great technology.

Per Yahoo Finance:

InvenSense, Inc. designs, develops, markets, and sells micro-electro-mechanical systems (MEMS) gyroscopes for motion processing solutions in consumer electronics. The company delivers next-generation motion processing based on its advanced multi-axis gyroscope technology by targeting applications in video game devices, handsets and tablet devices, digital still and video cameras, digital television and set-top box remote controls, 3D mice, portable navigation devices, and household consumer and industrial devices.

It sells its products to manufacturers of consumer electronics devices, original design manufacturers, and contract manufacturers through direct sales organization and non-stocking distributors worldwide. The company was founded in 2003 and is headquartered in Sunnyvale, California.

Key Financials 2011:
Current Period (Quarterly) 10/2/2011 vs. Prior Period 7/2/2011
Cash (Bank Funds): $57,740,000 vs. $44,877,000
Total Assets: $102,312,000 vs. $84,150,000
Total Equity: $82,431,000 vs. $69,320,000
Sales (Income): $43,034,000 vs. $35,627,000
Gross Profit: $23,662,000 vs. $20,618,000
Net Operating Income: $14,799,000 vs. $11,731,000

Period (Yearly) 4/3/2011 vs. Prior Period 4/3/2010
Cash (Bank Funds): $38,075,000 vs. $35,269,000
Total Assets: $70,746,000 vs. $54,450,000
Total Equity: $59,141,000 vs. $35,000,000
Sales (Income): $96,547,000 vs. $79,556,000
Gross Profit: $52,900,000 VS. $43,483,000
Net Operating Income: $21,478,000 vs. $21,971,000

The Gold Climax Top: Down nearly 20 Percent

August 21, 2011: A Gold Climax Top?

Signs are pointing towards a possible climax run for $GLD but please note that this may only be the beginning. Climax runs can push stocks and commodities to extreme levels with parabolic shapes at nearly 90 degree take-offs. Gold is starting to make a similar run, right now!

Well, Gold is now off 16% from that climax top post in August and more than 19% from the ultimate top which is within 1% of a confirmed bear market for the metal.

More important is the recent chart pattern which resembles a Dow Theory Breakdown or 1-2-3 breakdown. This pattern suggests that Gold has further downside.

I don’t know what 2012 will bring but for now, I continue to remain bearish on Gold, especially considering the strength in the US dollar.

With that said, this is the market and things can change in a day so stay tuned to my daily twitter updates (featuring charts and 140 character analysis).

Identify the Primary Market Trend using The Dow Theory

The correct determination of the direction of the primary trend is the most important factor in successful speculation (trading and investing). The primary trend (also referred to as movement) is the broad basic trend generally known as a bull or bear market lasting a period of time from less than a year to several years. The primary trend is the most important of the three movements discussed within The Dow Theory.

The Dow Theory also includes movements such as the secondary reaction and the daily fluctuations. I am not interested in daily action because these short term movements are typically unimportant.

Edwards and Magee said:

“The Dow Theory is the granddaddy of all technical market studies” and “It is built upon and concerned with nothing but the action of the stock market itself (as expressed in certain “averages”), deriving nothing from the business statistics on which the fundamentalists depend”

The purpose of this post is to highlight the Principle of Confirmation which states that The Two Averages Must Confirm. The authors note that this principle has often been questioned and is the most difficult to rationalize of all the principles yet it has stood the test of time.

They go on to say:

“the fact that it has “worked” is not disputed by any who have carefully examined the records. Those who have disregarded it in practice have, more often than not, had occasion to regret their apostasy”.

Please repeat the following rule several times and learn it, understand it and trade by it:

“What it means is that NO valid signal of a change in trend can be produced by the action of one average alone”.

Here is a chart from the 4th edition of their book Technical Analysis of Stock Trends, published in 1957

Now take a look at today’s Dow Jones and Transports. Do you see any similarities?

Of course you do, the Transports have not confirmed the change in trend along with the DOW. In fact, the $DJIA is now back below the resistance line after this week’s negative action.

Many traders on StockTwits, Twitter, blogs and TV (if you still watch financial television) are miffed about the action of the market over the past several weeks, particularly the past week. Well, the trend hasn’t confirmed so the risk is still high that the so-called “leaders” are setting up for failure or head-fakes.

I’ve started to sound like a broken record with my Dow Theory tweets but if it is fact, it is fact. As traders, we must be patient and wait for the confirmation before loading up on new shares. A trend change may still occur but we must cast a shadow of doubt until both averages confirm.

If you don’t want to listen to me, a lowly stock blogger, at least listen to what Robert Rhea said in 1932:

“The movement of both the railroad and industrial stock averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading.”

Please note that “railroads” have been replaced with “transports” in today’s world.

Trading can essentially be broken down to managing risk and as Victor Sperandeo stated, “market forecasting is a matter of probabilities; the risk of being wrong is always present”.

So why tilt the risk against you if history shows us that both averages must confirm for a sustainable change of trend to take place. It’s a wacky world out there but the rules haven’t changed so wait for the confirmation before jumping in with both feet.

Market observation from Thursday, November 17, 2011: The NASDAQ has now flashed four distribution days since the start of the month. This is a red flag and a signal to lock in profits and sell losing positions before they grow in size.

Continue to follow me on twitter for daily tweets, charts and links to great articles.

Market Bottoms: Using New High & New Low Extreme Readings

The New High – New Low ratio (NH-NL) has been very accurate over the years when it comes to forecasting major and/ or pivital market lows. It typically logs extreme readings when the market is exhausted. That makes complete sense because most market participants have exhausted all the selling from their portfolios and holdings.

PLEASE CLICK THE IMAGE TO SEE FULL SIZE GRAPHIC:

I can’t confirm that the recent extreme readings of the past week are forecasting a market bottom until the NH-NL ratio turns positive again. The key, please pay attention, to these extreme readings is when it is followed up by the ratio venturing back into positive ground! See the blue arrow examples on the chart. This confirmation signals a MAJOR market reversal.

When that happens, that’s when the confirmation for loading up on equities is ringing loud and clear. But, you may ask, how do we jump in earlier than this confirmation because a good portion of the move is already underway when this finally takes place.

Well, you look for a market reversal within one or more of the major market indexes along with a follow-through day, roughly 4 to 10 days later. A follow-through consists of a major index such as the $COMPQ, $DJIA or $SPX advancing 2% or more on volume larger than the previous day, preferably above average as well. When two or more major indexes follow-through, the signal to start initiating positions has arrived.

Tuesday was day 1 for the most recent “attempt” for a market reversal (even if it’s only short term). We now wait patiently before taking new positions for a follow-through day, beginning tomorrow (day 4).

Stay tuned to see what happens. I am sitting in cash waiting for a signal.