Monday, January 12, 2015

Is Fire Eye (FEYE) undergoing a bullish change of character?

Fire Eye (FEYE) is a cybersecurity firm that has had its share of ups and downs (in stock price). The company has been spending tremendous amounts of money on R&D and is generating strong revenue, but has been very bad at meeting/beating earnings estimates. 2014 saw shares fall from a high of 97.35 to a low of 24.81. It's safe to say that investors lost their patience with the name, and I wasn't surprised to see steady selling in the shares to end the year as tax loss selling likely consumed trade.

But, I'm seeing some things in the stock since the start of the new year that I think bear notice, and make FEYE a strong speculative pick for the rest of the year.

  1. It's been a relative outperformer compared to the major indices, up 13.55% compared to the SPY (down 1.36%) and the QQQ (down 1.39%).  You could argue money is coming back into the name that left it for tax loss selling reasons at the end of 2014
  2. As option trading in the name is very active, implied volatility has been a leading indicator of trader sentiment in the stock. In the chart below, I note how the current rise in implied volatility  may be signaling the start of a bullish move higher 
  3. Finally, there appears to be a bullish butterfly harmonic pattern taking place, that would target the $40 price level within the next 20 days.

Monday, December 29, 2014

Potential Harmonic Patterns in Harley Davidson (HOG)

Exploring Harmonic patterns

Harmonic patterns have recently piqued my interest, so I learned more about them.  Here is an introduction to them that I've "borrowed from this esignal article", and subsequently will share my application of harmonic patterns to Harley Davidson's (HOG) chart.

Introduction to Harmonic patterns (authored by eSignal):

If you are new to harmonic patterns then you need at least a short introduction. Harmonic patterns are somewhat of an extension of the various reversal/continuation patterns documented by Robert Edwards and John Magee in their 1948 book entitled Technical Analysis of Stock Trends, currently in its 7th edition. A must-read if you are a trader, and probably more valid in today's markets than it was back in the 40's and 50's. These original price patterns include the head and shoulders pattern, rectangles, pennants, flags, wedges, etc., and they are just as effective and profitable (if not more so) today as they were when they were first documented.

Most of the harmonic patterns in use today came on the scene quite a bit later, but the very first harmonic pattern preceded Edwards & Magee by more than a decade. This was the Gartley pattern, named for the author (H.M. Gartley) who first documented the pattern in his book Profits in the Stock Market back in 1935. The Butterfly® pattern was developed by Larry Pesavento and Bryce Gilmore back in the early 90's, and later refined by Scott Carney . The 3 Drive pattern was revealed in Robert Prechter's book entitled Elliott Wave Principle, and most of the remaining harmonic patterns (i.e., Crab®Bat®5.0®, and Shark) were discovered by Scott Carney (founder of and in the last decade or so.

Harmonic patterns are effective not because they have mysterious or magical properties, but because they are a visual representation of market sentiment, the battle between the bulls and the bears, and they provide valuable insight and guidance as to what might happen in the near future. Harmonic patterns appear under all symbols and all bar intervals and these patterns continue to prove their worth time and time again.

While generic price patterns (i.e., the flags, pennants, wedges, etc.) are very visual in nature and can be spotted fairly quickly once you train your eyes to do so, the harmonic patterns are more complex and much harder to spot with the naked eye, especially when they are just beginning to form. Harmonic patterns require a series of events to unfold in a specific order and to a specific extent.

Applying Harmonics to Harley Davidson's current chart

I am not an eSignal subscriber so I can't benefit from its harmonic pattern identification software, but manually applied the harmonic rules to HOG. What I am noticing in HOG is that there are 2 potential harmonic patterns that are in play. One is a longer term, major time frame pattern (13-14 month pattern), and the other is a shorter time frame pattern (5 month pattern).

When attempting to decide if a harmonic pattern is in play, you have to decide if there are price reversals that each respect the criteria of one of the recognized harmonic patterns (Gartley, Butterfly, 3Drive, ABC, Crab, Bat, 5.0, Shark).  

Here's my chart of HOG:

I started with identifying Harley's shorter time frame pattern, which has the makings of a Bat or Crab (shown in blue on the chart below).  Price action so far meets the requirements:
  1. From A to B, price retraced approx 50% of the first move in the pattern (X to A)
  2. The move from B to C has not yet completed or signaled a reversal level, but so far it's retraced about 61% of the move from A to B. This is within the required AB retracement range of 38% - 88.6%. $69.44 is the line in the sand, and if HOG rises above that, it will exceed the 88.6% retracement, and invalidate the entire pattern
  3. Now comes the fun part, which is predicting the potential move down to point D from C.  For the pattern to be a bat, price would drop down to $56 (C to D would retrace the required 88.6% of X to A) by March (using an equal proportion of time bars from XB applied to BD). For the pattern to be a crab (dotted blue lines), price would drop down to $44. I see this latter outcome, as less likely than the former mostly because the fundamental story behind HOG is NOT overly bearish, and a visit to $44 would be a 2 year low in share price, which outside of major bearish fundamental change at the company, would require a serious market correction to happen.
Creating the longer term pattern comes next. The key to this is pairing it with the shorter term pattern in a way that agrees with that pattern. In the case of HOG, I believe I've found 2 patterns to be working "in harmony", pardon the pun.

Harley's major time frame pattern has the potential makings of a Butterfly (shown in pink on the chart below).  This pattern has less evidence for us to gauge validity, but so far meets the requirements:
  1. From A to B, price retraced 78% of the first move in the pattern (X to A)
  2. The move from B to C has not yet completed, but if the shorter term bat pattern's B to C move completes as projected, then the longer term butterfly will also successfully meet its required B to C move of a 88.6% retracement of A to B.
  3. Finally, the move from the potential C level back up to D targets $79.50, which would equal 127% of the move from X to A, and 161% of the move from B to C. The move would complete in July 2015 (using an equal proportion of time bars from XB applied to BD)
What I find very compelling is that these 2 patterns are predicting the same movement down to $56 in the short term (the bat's C-D move, and the butterfly's B-C move).  That confluence between the 2 patterns in my mind makes a strong case for HOG shares to trade down in Q1 to $56, and then make a bullish move the rest of the year up to $79.50. Barron's did put HOG on their top 10 investment ideas for 2015 - but bulls may want to heed my analysis here and wait for HOG to get cheaper in Q1.

The information contained in this web site is impersonal and does not provide individualized advice or recommendations for any specific user.
The commentary, analysis, opinions, advice and recommendations presented on this web site represent the personal and subjective views of the author and are subject to change at any time without notice. You should be aware of all the risks associated with stocks, options and foreign currencies trading, and should consult with your own personal financial advisor and conduct your own research and due diligence, including carefully reviewing the prospectus and other public filings of the issuer, prior to making any investment decisions.

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.

The information contained in this web site is impersonal and does not provide individualized advice or recommendations for any specific user.
The commentary, analysis, opinions, advice and recommendations presented on this web site represent the personal and subjective views of the author and are subject to change at any time without notice. You should be aware of all the risks associated with stocks, options and foreign currencies trading, and should consult with your own personal financial advisor and conduct your own research and due diligence, including carefully reviewing the prospectus and other public filings of the issuer, prior to making any investment decisions.

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