K.I.S.S.

Ironically enough, I’ve always been a huge fan of keeping trading as simple as possible. Many of the people I coach are somewhat stunned that I think that way considering I am such a big student of technical analysis. My experience has been that the more I learn about the complex, the more I am attracted to the simple.

Have you ever heard of Occam’s razor? It is the principle that “entities must not be multiplied beyond necessity”. The mainstream interpretation of this principle is that the simplest explanation is generally the correct one. That is essentially my belief in trading: Keep it simple.

Unfortunately, simplicity is just not how we are conditioned nor marketed to these days. We are flooded with indicators, signals and software programs in every way possible: TV, Internet, newsletters, etc. Let’s be honest, it’s what sells!

Well, I was coaching a student earlier this week that was struggling to put the trading pieces together. When I asked this student to show me one of their trades, and tell me why they made that trade, their reasoning had so many parts to it that it actually left me stumped. Since I always focus on a very straightforward approach, I asked the student to tell me what they were looking at on their screen. I found out that they were looking at something similar to what you see below:

Looks like a couple of elementary kids colored on it, doesn’t it? Now, don’t get me wrong; I will never claim that some of the more advanced technical tools available couldn’t add some “icing on the cake”. But, should it be the cake? My understanding of the markets has always been, “Price is King”, and “Price discounts everything”. So, shouldn’t price be the central focus, or the cake?

I asked the student to clear off all the squiggly lines and just simply look at the price. When everything was removed, this is what was left:

I’ve obviously added my own comments, but notice how easy this particular stock has been to trade over the last year. First, by simply identifying the $45 support level you could have made a nice trade in November. If not, a support buy could’ve been executed at $50 in January or February. Let’s say you are more of a break-out trader. Wouldn’t the break to a new 52-week high, through the $55 resistance, have been a great break-out trade? And finally, $60 has demonstrated its importance as both resistance in March and then support thereafter. Wouldn’t a buy at the $60 support near the end of June have made sense? By simply focusing on the price, would you have needed any of the indicators shown on the first chart? No.

The Tale of the Tape:  There’s a lot of great information and trading tools available to you that can certainly help you in your trading.  You just want to remember the pecking order: Price first. Price never goes out of style, and at the end of the day, it may be the only “indicator” you truly need.

Waiting for the most opportune times, such as I have outlined above, could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

Good Apple earnings bad for market?

Tuesday after the bell Apple Inc. (AAPL) topped analysts’ estimates yet again with the release of its latest quarterly earnings report. AAPL also raised revenue guidance above what Wall Street was expecting. Shares shot higher in after-hours trading.

AAPL said net income rose 78% to $3.25 billion, or $3.51 per share, from $1.8 billion, or $2.01 per share a year ago. In addition, revenue for the April-to-June period rose 61% from last year to $15.7 billion, making it the company’s highest quarterly revenue ever. Analysts surveyed by Thomson Reuters had forecast net income of $3.11 per share on $14.7 billion in revenue.
So, with AAPL’s earnings exceeding expectations, and the stock apparently ready to soar, will that be a good thing for the overall stock market?

While analyzing AAPL’s chart, and then switching to a chart of the S&P, I noticed and interesting correlation between the two charts over the past year. Could it be possible that what’s good for AAPL tends to foreshadow a sell-off in the market?

Please review the chart below with my notations added:

AAPL – 1 YR w/ S&P comparison

As you can see, I have noted each of AAPL’s last 3 earnings releases (blue). The top chart is that of AAPL and the bottom is a comparison chart of the S&P 500. Notice that in the case of all (3) earnings releases the overall market sold off to one extent or another shortly after AAPL’s earnings release. Generally, the sell-off began within a day or two of the release. As a technical analyst I am not as concerned with why this happens, rather just that it apparently does. However, AAPL is obviously a bellwether for tech, so might it simply be a case of “buy on the rumor, sell on the news”?

It appears that the S&P tends to rally for a day or two after the release of AAPL’s earnings. So, where might the S&P be if it rallied today?

Please review the chart below. The chart is from a previous newsletter of mine:

S&P – 1 YR

I have added the recent down trending resistance line in blue and the 50-day Simple Moving Average (SMA) in red, which has also been acting as resistance. After yesterday’s somewhat surprising market rally, the S&P stands just 5 points away from its 50 SMA, which is just slightly below the down trending resistance. Is it possible that after AAPL’s release the market is setting up for yet another sell-off?

Not so fast though! There is one slight difference between the (3) previous AAPL earnings releases and the latest one: The market was in a rally mode during the previously released AAPL earnings reports, but in the midst of a 3-4 month sell-off currently. Could that make the difference and break the trend of positive AAPL earnings = market sell-off?

The Tale of the Tape: There has been a recent trend of market sell-offs after AAPL earnings releases. However, this sell-off tends to start a day or two after the release. If that trend were to continue and the market were to have a slight rally after AAPL’s latest earnings release, the S&P would approach (2) very important resistance levels. At that point, one might want to raise protective stops on long positions in preparation for a potential sell-off or look to enter new short positions.

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT

Housing down, improvements up?

With yesterday’s National Association of Home Builder’s (NAHB) monthly reading of builders’ sentiment about the housing market sinking to 14, it is starting to become clear that the housing market is not getting better anytime soon.  The 14 reading is the lowest level since March 2009. Readings below 50 indicate negative sentiment about the market and the NAHB index has been below that 50 threshold for 51 consecutive months. At 14, the index shows that only about 1 in 7 builders have a favorable view of the housing market.

Unfortunately, with sales reports this week on new and previously owned homes in June widely expected to show the housing market remaining weak, conditions are not likely to improve anytime soon.  While most economists do believe that the overall economy is unlikely to dip back into recession, analysts are not expecting housing to recover for quite some time.  So, what might be a potential slow housing sales trade?

There tends to be the belief that when home sales drop, home improvements increase. Although I am never a fan of trading on “belief”, I definitely agree with letting the chart do the talking. One of the home improvement retailing stocks that I follow is Tractor Supply Company (TSCO). TSCO operates retail stores under both Tractor Supply Company and Del’s Farm Supply.  They also operate a Website under the name TractorSupply.com. Its stores are located in rural communities and offer a wide range of products including hardware and seasonal products, lawn and garden power equipment, truck, towing and tool products, work & recreational clothing and maintenance products for agricultural and rural use.

Please review the chart of TSCO below:

TSCO – 1 YR

As you can see, TSCO has been stuck in a range between $60 and $70 over the past 3 months. This stock has also been stronger than the overall market over this same 3 month period in the way that it has not created the same “lower-lows” that the overall market has.

While TSCO has been holding strong, the homebuilder’s stocks such as LEN, KBH and TOL have broken drastically lower. So, it would appear that the idea that home improvement retailers might do better than builders during tough economic times could be true. Also, did you notice the jump in TSCO’s stock about a week into July? That jump was do to TSCO raising it’s earnings outlook, which are set to be released on Wednesday.

If TSCO’s earnings are received well, might the stock finally break up through the $70 resistance? And if the earnings are a dissappointment, could the $60 support be broken?

The Tale of the Tape:  TSCO has been stuck in a $10 range between $60 and $70 over the last 3 months. They have raised their earnings guidance and the stock could be poised for a breakout, or a breakdown. Although I would never want to be in the stock before the earnings are released, I would definitely want to see how the stock reacts to the company’s earnings report. If the stock breaks through the $70 resistance, entering a long position with a stop below $70 could be a nice trade. However, if the stock were to break its $60 support, you could short the stock instead with a stop above $60. Another potential trade might be a buy at $60 if the stock appears to be holding that support. Once again, a stop below the entry of $60 would be advised.

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

Trading Goldman Sachs

After the closing bell yesterday the Securities and Exchange Commission (SEC) said that it had reached a $550 million settlement with Goldman Sachs Group, Inc that will resolve its lawsuit against the firm. This is obviously good news for Goldman Sachs the company, but how does that translate to the stock?

Well, news of the settlement seemed to be received well by investors. Shares of Goldman climbed more than 4% yesterday and today they are currently up another 2%.  So, should you jump in the stock now, and if so, which side of the trade should you be on?

Below is a chart of GS (Goldman Sachs) for you to review. The chart is from June 2009 until June of this year. I wanted to highlight an important price for this stock.

GS – 1 YR – June ’09 to June 2010

As you can see, $150 has often been an important price to this stock. Prices such as $150 tend to be important to most stocks anyway, but it is very apparent with this GS stock. Once GS broke above the June 2009 resistance at $150 it became a strong area of support in January/February of this year. After breaking below $150 in April, the stock fell lower as expected. Now look at the present day chart of GS:

GS – 1 YR

Since bottoming at $130 earlier this month, the stock has slowly rallied higher. Yesterday’s SEC settlement has sent the stock shooting higher. So, being that the stock is back at the $150 level, wouldn’t we expect it to act as resistance? If the stock were to break above that level, wouldn’t we expect the stock to go higher again?

The Tale of the Tape: GS is approaching a key level at $150. If you believe that the stock will not break higher, or it doesn’t appear to be able to, this would be an excellent time to enter a short position with a stop above the $150 level. However, if the stock breaks above that key $150 level, entering a long position with a stop below $150 would be the higher probability trade.

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT

No bottom in sight for housing

Well, it seems like the news on housing just keeps getting better. Yesterday the Mortgage Bankers Association (MBA) reported that the number of mortgage applications for home purchases had dropped to its lowest level in 14 years last week. Application volume for mortgages fell a seasonally adjusted 3.1% for the week ending July 9, compared with the week before, pushing volume to its lowest level since December 1996 according to the MBA. Now, I’m not sure what all that means for the future of housing, but it sure doesn’t sound good!

According to the MBA’s weekly survey, applications for mortgage refinancing fell a non-seasonally adjusted 2.9% for the week ending July 9, compared with the week before. Also, refinance applications were almost 79% of all applications. The MBA survey covers about half of all U.S. retail residential mortgage applications and has been conducted since 1990.

I can think of one possible reason for the plunge in purchase applications: The disappearance of the home-buyer tax credit? It’s quite plausible that the tax credit pulled a lot of sales from future months into the recent past, thus we’re losing would-be home sales now.

Another note of interest: The home-buyer tax credit expired at the end of April, right when the stock market started it’s current sell off. Coincidence?

Below is a chart of the XHB that I posted last month when new and existing home sales dropped to record lows. The XHB is the SPDR Homebuilders ETF. This ETF is a way for investors to invest in the housing sector, somewhat similar to a mutual fund. Specifically, this ETF is a collective investment in industries, such as homebuilding, building products, home furnishings, home furnishing retail and home improvement retail. This ETF is also a great way to gauge the market’s “thoughts” on the housing market. As you can see, the market seemed to have been already anticipating the wonderful housing news we’ve been getting as of late.

XHB – 1 YR (As of June)

Now, take a look at an updated view of the XHB:

XHB – 1 YR

I made notation of when I showed the first chart and my belief that there was a short opportunity on this ETF, or on individual home building/retail stocks. Well, doesn’t it appear that there might be another chance to enter a short position now? On the other hand, what would it tell you if the XHB breaks through the down trending resistance line (red) that I have shown on both charts?

The Tale of the Tape: The XHB had broken down from its up trending support (blue) back in the beginning of June, which pointed toward lower prices. That has in fact happened. Now, the XHB has a strong down resistance line (red), which it is presently sitting at. As with the last time the XHB hit that resistance, the highest probability trade at this time would be to short either the XHB or individual homebuilder stocks such as TOL, LEN, KBH or others. You could also look to short housing retailers such as TSCO. If you decide to short the XHB itself for a more conservative trade, you would want to set a stop above that resistance line. If instead the XHB were to break above that resistance, you could then start looking for long positions in the same stocks or the XHB!

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT