Wednesday, December 10, 2014

Downside in Tesoro, as it plays catch-up to other refining stocks (TSO)

My last post back in May of this year proved to be on the mark, as Energy stocks topped out and have been on a steady decline as the drop in oil prices has gained momentum.

Not all energy names have been participating in the drawdown until recently, and the one I think that is on the verge of cratering is Tesoro.  Though management provided a very rosey forward guidance at their analyst day yesterday (see link, the chart technicals are still telling me that there is bearishness ahead.

Take a look at this 2 year chart of Tesoro.  There are typically 2 technical indicators I like to follow, which are the MACD and the CCI indicator.

The MACD helps us spot divergences, when price is moving one direction but the MACD is moving in the opposite. Price usually ends up resolving in the direction of the MACD divergence. For Tesoro, there was a Bearish MACD divergence from February - April 2013.

The CCI indicator, is a faster momentum indicator, and helps to spot price rejection zones. It also spots divergences, but can also be used for buy/sell timing signals. In March 2013, the CCI indicator flashed a sell signal when it broke below the zero line. From that point, TSO dropped from $57 to $47 during the month of April (-17% drawdown) as both momentum indicators went into bearish territory and eventually bottomed at extreme levels (see orange rectangles on the chart, when CCI dropped to -290, and MACD dropped to -1.67).

Fast forward to the more recent price action, and you can see that we have the makings of the same MACD and CCI bearish divergences, combined with a CCI sell signal a few days ago.  I forsee prices dropping to $71 in the next 2 weeks and possibly down to $66 if there's a complete gap fill down to $67-66 (which coincidentally would be a 17% decline in prices like Apr 2013).

Taking a look across Tesoro's peer group, you can see that all of these companies are cratering to the downside as both the price of Brent and WTI crude continue to fall.

From a valuation perspective, Tesoro's forward p/e of 11.95 is at a premium compared to peers VLO, MPC, HFC, PSX. Eventually, Tesoro's stock price will need to fall in line with its peers from a valuation perspective so it has that against it as well.  

All of these factors point to lower prices for Tesoro in my opinion.

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Friday, May 9, 2014

Could energy stocks be the next shoe to drop (XLE)

The massive flight of capital out of high beta tech and biotech stocks that we have witnessed over the past several months has actually coincided with a massive flight into energy stocks. See this chart showing a comparison of the MTUM (momentum etf) and the XLE (energy etf).

This 3 month comparison of energy to momentum stocks shows that they both were performing well through March 12, but then they began to diverge, and energy stocks ramped higher, while momentum stocks rolled over. XLE finished the last 3 months up 11% and MTUM finished down .5%. 

This is a great example of the flight of capital. You could make the case that money was rotating out of momentum or into energy stocks as energy stocks were trading at much cheaper valuations and the market suddenly began trading off of fundamentals and not off momentum. 

But, if there's one thing that this shows us, is that in the current market environment, capital is likely to flow back and forth between in favor and out of favor sectors as money managers attempt to seek alpha. 

I believe that the run up in XLE has been so robust, and happened so quickly that money managers must take profits while they see them, or to at least protect those profits using an options hedge. So, it's no a surprise when I saw several large XLE put trades yesterday - the Jun $93 and Jul $90 puts traded over 50k contracts, bought to open (meaning the trades have a bearish bias).

So, I think that XLE and the stocks in it are due for an imminent correction.  Signs of it are already showing in the last several days.  Valero (VLO) is one of XLE's largest holdings, and I like it for a bearish trade.

VLO's chart has some very bearish characteristics going on right now as well, which makes my case even stronger that a fall is imminent.  

1. Bearish MACD divergence from the March to April peaks. 
2. Bearish MACD cross over took place yesterday, indicating a sell signal
3. A 3 black crows bearish candlestick formation is about to complete, which is typically a reversal pattern. 

See my estimated price projections using the Fibonacci extension tool.  
Target 1 = $52.50
Target 2 = $48.70

The Trade:
Long VLO Jun $55 / $50 Put spread @ 1.63. 
Break/even or profit from the trade at June expiration if price is at $53.37 or below.

Tuesday, May 6, 2014

Land of the Rising Yen (FXY)

There are certain backdrops that I usually look to in deciding what kind of a trading environment we are in.  The cliche market environments are a risk on, a risk off, a trading environment (up/down). Many pundits in the last week have been saying that 2014 may look at lot like 2005, when the markets experienced a trading/sideways market environment after a robust period of growth from 2002-2004. I think that's possible, but I think that when you weigh a few important global macro variables, things to me look more like a risk off environment in the short to intermediate term.

Usually I trade pull backs on stocks, so it's against my nature to be outright bearish. I scanned the market today trying to see what stocks, etfs or currencies were going up and what was going down.

The thing that I saw rising the most were US treasuries and the Japanese Yen. When you see those things are the only things rising (gold was not even rising), then you know we are in a real flight to safety. When the yen moves, usually the first thing to react, and react in a very extreme manner, are Japanese equities. The relationship of the Yen to Japanese equities is typically an inverse relationship. The reason behind that is Japan's economy is highly dependent on exports, and an export economy thrives best when its currency is worth less in value than the importing economies (US, Europe).  Therefore, a rising yen will cause Japanese stocks to fall. If you recall early late 2011, Japan led US equities higher. I think they could lead US stocks lower next. So you could say that so goes the yen, so goes Japan, so goes the US.

Using the Japan iShares ETF "EWJ", as a proxy, and FXY as a proxy for the Yen, I've provided a weekly chart of the historical trading relationship of these 2. A few things I want to point out, which makes a bearish trade on EWJ a great trade idea here.

  1. You can see the inverse relationship between FXY (blue candles) and EWJ (green/red candles) very clearly in this chart
  2. Notice how on several occasions, the FXY made a cyclical top or a cyclical bottom one to 2 weeks before EWJ made its inverse reaction. 
  3. Note that FXY's current candle so far this week is a white candle that gapped above the prior close, and it could be the start of a major rise in the yen above resistance. Current value of FXY is $96
  4. There is a triangle consolidation pattern taking place right now in FXY, and a breakout from the apex could send the yen back to it's April 2013 high of $106
  5. All of this means that EWJ could be in for a fall from its current $11.14 level. 

The Trade:
Go short the EWJ on drop below $11
Target price = $10.20
Stop $11.50

Friday, May 2, 2014

Intercept Pharma (ICPT) is consolidating ahead of its May 7 earnings release

Intercept pharmaceutical is the top performing biotech stock this year, but you can hardly say that anyone could see that coming because in one day, back on Jan 9, 2014, it gapped up from $72.39 all the way to $231, and then hit a high of $497 the very next day!

That insane price movement was a result of ICPT releasing a report showing positive data from its drug obeticholic acid (OCA).  The drug is used to treat nonalcoholic steatohepatitis (NASH), and has potential to treat primary biliary cirrhosis (PBC). The estimated total market for OCA in the US is $4 billion, and ICPT could be on track to be the first mover in the market, which tends to lead to translate into becoming the major market share winner. Other competitors in the space are Gilead Sciences (NASDAQ: GILD  ) and Galectin Therapeutics.

Shares of ICPT have traded in a wild range since that breakout, having tested down to and through the lower bound of the gap support at $231 at one point in April, but managing to defend the gap, proving that $231 is formidable support as of now.

Earnings are coming up next week on May 7th, and we should expect to hear some business updates, and potentially updates on a timetable for FDA approval. For more information on ICPT's story check out this good summary article

Now on to the ICPT chart - I see some interesting things to point out:

  1. I see 2 symmetrical triangles, one that formed back in February, after the big gap-up, and another forming right now as price has retraced back down to the $231 support level.  These triangles indicate a period of consolidation, that usually resolve at their apex in a large move one way or the other. The current triangle is forming near $231, which makes me lean to an upward breakout at the apex, which should coincide with the May 7th earnings call. I project an upward price target of $332.
  2. CCI divergences have tended to predict price reversals, and I see a bullish reversal forming.

So here's the trade:
Long ICPT @ $258
Target = $332
Stop $231

Thursday, May 1, 2014

When Technicals outweigh Fundamentals: Weighing in on Aegerion Pharma (AEGR) shares

If there's one thing that traders have been reminded of over the past 6 months of seeing momentum stocks rally into a bubble and then sell-off and deflate, it's that stock prices can at times get disconnected from reality. It's the stocks that are the more recently public, and more speculative that are the ones that tend to see their share prices disconnect from fundamentals moreso than older, more established cash flow earning companies.

So, when you accept that these speculative stocks don't trade on fundamentals, then you become more willing to accept the fact that the stock trades more based on technicals. When I say technicals, I refer to stock price support and resistance levels, chart formations, short interest, volume patterns, and the like. You begin to see these types of stocks as trading vehicles and not companies.

That makes me turn my attention to a company called Aegerion Pharma (AEGR) that I know very little about, but what I do know is that the majority of its revenue come from one product alone = Juxtapid.

Juxtapid is approved for the treatment of patients suffering from homozygous familial hypercholesterolemia (HoFH). It was launched in the U.S. in late Jan 2013. Aegerion gained EU approval in Jul 2013, also gained marketing approval in Canada and Mexico. It will be launched in Europe on a limited basis in 2014. The company expects to start a therapeutic study of Juxtapid in Japanese HoFH patients in the first quarter of this year. Aegerion plans to submit the new drug application in Japan in the first half of 2015.

Pretty much all you need to know about the company's product in just one paragraph. Not a lot has changed fundamentally for the company over the past 6 months, as it has met its revenue estimates over the last 2 quarters. Yet the stock has fallen mightily in that time - from a high of $101 in October to a recent low of $40 on April 7th. Perhaps expectations for future growth have caused concerns? Either way, it's all speculation

So you can see my point that technicals seem to matter a lot more for this stock than fundamentals.  So let's turn to the technicals.

In the chart below - showing AEGR on a weekly time frame, you can see that the stock has had a series of free falls from $66.50 to $55 to $47 and to $40.  These price zones are very easy to spot on the chart. Simple supply and resistance principles at play.

Take a look at the volume frame. It's normal for volume to be high when price falls, and when we see volume decline it usually leads to a rally.  See how on several occasions, selling volume has been a precursor to counter-trend rallies on low volume.

You'll also notice that the chart pattern is a falling wedge.  According to a study ( by Tom Bulkowski, Falling wedges on average break out to the upside 68% of the time. Pretty good odds for a bullish trade from current levels.  A break above $47 (which is both a resistance level and the upper trend line of the falling wedge), would confirm an upward breakout from the pattern.

One other pretty interesting thing, is that the confluence of the upper trend line of the wedge, and the $47 price level fall on the same week that the next earnings release is scheduled, May 7th. An earnings release would create the necessary price volatility to force a break-out.

The final bullish factor in this story is that short interest is the highest that it has ever been in the history of the stock, with 5.25 million shares held short as of 4/15.  A high short interest is bearish, but whenever short interest exceeds 15%, it's considered excessive, and can lead to a short squeeze. Currently, short interest represents 19% of the float.

So here's the trade:
Long AEGR shares on a break above $47
Target $67
Stop $40
R/R ratio ~ 3

Tuesday, April 29, 2014

Solar City (SCTY) and Tesla (TSLA) - The Elon Musk Conglomerate

Fortune magazine came out with a great article in November of 2013, comparing Elon Musk to the late Steve Jobs, and if you haven't read it yet, you need to check it out. It was a great introduction to what made/makes both men such great innovators. The key comparison made was how they both had visionary consumer viewpoints, they both could envision what products can really make a difference in people's lives. Jobs popularized the personal computing and the modern day portable device, and Musk has found ways to run space exploration cheaper than NASA could, finally invented and mass produced an electric car with performance characteristics, and found ways to make solar energy available to residential consumers.

But the real skill they share was in determining how to source components and technologies that can holistically bring about these amazing innovations. An example, for Tesla, it was Musk's decision to create a critical mass of lithion ion batteries to power a car.  It had never been attempted before, but Musk knew it was the best way to create the amount of power that a car would need, yet still fit in a car chasis. This compares to Steve Jobs' decision to create a device that could play music and fit in the palm of your hand, as he challenged the traditional dimensions of hard-drive space and user interfaces to ultimately invent the iPod.

So, needless to say, I am a huge Musk fan because he's the closest we have right now to the spirit of Jobs' innovation.

I read this article ( the other day stating how Musk is one of the wealthiest entrepreneurs, with the majority of his net worth of 10 billion, tied up in his ownership in his 3 companies, Tesla, Solar City and SpaceX

It got me thinking, that these 3 companies are a virtual conglomerate, representing different business lines that Musk has in operation, and in theory, the success of one rolls over to help propel the success of the others. . It's not unlike a Honeywell or General Electric where sales and profits roll up to one ledger, and funds can be distributed to the subsidiaries. Considering how Musk's wealth has swelled over the last 2 years, we can use that as a proxy for how well the 3 companies are doing.

Building on that conglomerate theme, I also have observed that the stock price movements of Tesla (TSLA) and SolarCity (SCTY) have been pretty correlated. In fact, they have tended to hit resistance and found support at the same time as each other. And we seem to be lining up that way right now, with SCTY finding double bottom support, and Tesla finding support at a prior support/resistance zone in their respective stocks.

From a technical indicator perspective, SCTY is flashing a bullish divergence on the CCI indicator, while price finds support, which is one of my favorite setups, making now a great time to buy.

Both SCTY and TSLA report earnings on May 7th as well. So now may be a good time to get long shares or long call options of SCTY or TSLA.

Take your pick as to which one you favor most, but for this article I will profile SCTY.

SCTY short interest has been declining heading into the earnings report, as the number of shares short dropped from 10.7 mill to 9.6 mill.  Could be a sign that bears are stepping away from the stock. The wall street consensus estimate is calling for 51.86m in Revenue, and a loss of .73 cents per share.  SCTY has beaten revenue estimates the last 4 quarters, and beaten earnings estimates the last 3.

One thing that kept Apple on its bull run for a long time was always that mystery behind what Steve Jobs might come up with next.  A sort of elusive, magically quality, that always kept Bears at bay, and I think that Musk has it going for him as well.  It's the what I'm calling "Musk Mystique", which I think will propel TSLA and SCTY much higher from here despite all of the bears calling an end to the mighty bull run for growth stocks lately.

The Trade
Long SCTY @ $53 heading into the May 7 earnings report.  Possible upside to $75 in the next 3 weeks.

Thursday, April 24, 2014

A more recent market bubble comparison than 2001... Apple in 2012

"Chicken Littles" out there calling for a major crash because we seem to be in a market bubble like the 2000 dot com bubble do not scare me.  Partly because I have not seen any direct technical comparisons, nothing concrete except that that period of time seems the freshest in their minds.  Well, there have been more recent market bubbles since then - you could say there was a housing bubble that eventually led to the 2008 market crash. That one was quite unique though because there was a systemic problem that caused going concerns to banks and caused a market crash mostly due to drying liquidity.

I think a more appropriate comparison may be the way that Apple made its amazing bull run from Jan 2012 to Sept 2012. Now that was a momentum bubble if I ever saw one - almost all traders eventually started to believe that being long Apple could not be wrong. Then of course, the rug was pulled out from under the stock when it started to miss estimates and their product unveils started to lack a sense of "innovation."

Here's a chart of Apple during its boom and bust phase.  

A few things I want to point out: 
  1. I've drawn 2 fibonacci tools - one that shows the fib retracements from the rally start to peak (horizontal lines), and another is a fibonacci time series that begins from the peak (vertical lines).  The time series actually had some predictive power, as it roughly timed countertrend upward price reversals at the 34, 55, 89 and 144 time zones.
  2. In the bottom frame, I have a MACD indicator, which I also overlayed a fibonacci retracement tool on from the peak to the trough in the MACD. Notice that the MACD bottomed out at the 34 time zone, and momentum made a quick move higher, reaching the 50% retracement of the MACD drop from the high.
  3. Notice how the rally at the 34 time zone, bounced price (upper price chart frame) off of the 38.2% fib line, and eventually lost steam when price reached the 61.8% fibonacci line, making that the time to exit the countertrend rally
Now, I want to show you how the same MACD bottoming action that happened for Apple, could be happening to several momentum stocks right now, and we may see a countertrend rally soon in these names.

See the charts below for NOW, YELP, DATA, FEYE and NOW. Their price declines are currently lined up with the 34 fibonacci time zone, and their MACD lines all appear to be troughing after steep declines, just like Apple 2012. Keep in mind that this bounce off the MACD bottom is likely to be short lived - expect for it to only last as long as the MACD rises to its 50% retracement.  But for now, I think we are in the beginning phase of this reactionary momentum bottom, and that means potential for some very solid gains over the next month in all of these names:




There's no guarantee that the stocks will react the way that AAPL did, but I think if you believe that we just saw a bubble get popped in these names, then you can use AAPL's bubble popping in 2012 as a script for how price may recover.

Here's a table comparison showing the number of calendar days it took for AAPL to reach its peak compared to the other stocks.  Notice how some stocks have actually been rallying almost as long as AAPL did (261 days for Apple). 


Good luck trading these names. Know that there will be several counter-trend (bear market rallies) in these names before the real bottoms are made, but areas to expect upside reversals could be found in the fibonacci time zones of 34, and/or 55.  It was not until the 144 time zone until Apple saw its bottom made.