Markets on the move

Several weeks ago I reported on the large reverse divergence between price and the momentum of the price that was setting up on the VectorVest Composite of the UK market. This reverse divergence is sometimes called “hidden divergence” or a “slingshot”. The divergence tends to precede a fast move. Basically price makes a rising bottom while the momentum of price charts a falling bottom.

The reverse divergence on the Composite is shown below and it made me quite positive about the market over the past few weeks.

david-1

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Note the rising bottom made by the price between the referendum low and the low of a few days ago. Then look down to the MTI and you should easily see that it has made falling lows between these dates. That’s the divergence and I have traded the concept in all markets and in all time frames. I traded the setup this week on the h4 chart of oil and talked about the trade in an interview at Tip TV which is recorded on this blog. Reverse divergence is a continuation pattern and predicts a continuation of the trend. The setup is a leading indicator and in technical analysis those are in very short supply. That’s why I feel the setup is vitally important.

During the past week the short term trend of the LSE turned up and after the close of trading on Thursday the underlying trend also turned upwards. In VectorVest speak the trend situation is now Up/UP. During the week the DEW market timing system also turned positive. I have marked the DEW signals on the above chart.  A DEW signal which is preceded by a large divergence (5 months in duration is large) adds significantly to the probability of a strong move into the end of the year and beyond. The stock markets of the world seem to be saying that a ¼ point interest rate hike in the USA is either not going to happen or not going to matter. We shall see.

My position in Carnival is looking much better than it did last week. I particularly like the technical situation in Sopheon. The chart is shown below in my normal format. The price is charted in the form of candles and the valuation indicated by the green line above the price. The share is trading well below the VectorVest valuation and in my Unisearch to find these share I stipulate a value/price input of greater than 1.2.david-2

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Below the price window I chart earnings per share (EPS) as the blue line. In the words of Ben Graham “EPS is the engine that drives the share price”. I like to see an EPS plot that’s rising linearly from the bottom left to the top right of the window and in Sopheon that’s the case. The company has increased EPS from a loss making situation to 20 pence per share over the last year.

As the earnings came in the share price moved strongly northward and then moved sideways in a continuation pattern to “catch its breath”. The pattern charted is known as a pennant and within the pattern is a strong double bottom. I have noted over the years that the best moves from a double bottom don’t occur at a market bottoms. Strong moves occur when a double bottom is charted after an initial upward price impulse as is the case in Sopheon. The share seems to have broken the trend line defining the pennant and should be poised for a high percentage move.

Technical analysts use a technique called a “measured move” to calculate a target for the projected move. Simply they look at the last directional move (called the flagpole) and add the height of the flagpole in pence to the breakout level. In this case if you do the sums the technical target is around 500 which is similar to the VectorVest valuation. For once the technical and the fundamental agree.

Please remember that the Relative Safety of Sopheon is less than 1. This indicates that risk should be monitored carefully and diligently. It’s a small company in an exciting growth phase and the share looks excellent. However there can easily be a myriad of surprises and hitches along the path.

Hastings also ticks all my boxes. The upside was capped recently by a director rebalancing his portfolio. He still remains a significant shareholder. My template shows the share is undervalued and the EPS growth is linear and strong. Technically the share has broken upwards from a symmetrical triangle pattern which is positive. The next hurdle is the 52 week high and above that there should be a strong move. The chart is shown below.david-3

David Paul

December 9th 2016

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Trends are down on the UK VectorVest Composite

The US jobs number came in as expected at around 180000 new jobs created with the jobless rate falling a tad to 4.6%. The reaction on the indices to this was hardly   noticeable and all eyes are now peeled on the Italian referendum on Sunday 5th December. The popular press are referring to this as Renzi,s gamble and the outcome could have a destabilizing effect on markets worldwide. I will once more allow your weekend papers to fill in the details.

The short term and underlying trends on the VectorVest Composite UK are both down and the advice from the front page of VectorVest to sit on your hands is wise. I bought a few shares in Carnival and Ab Dynamics in addition to the shares I held through the US election based on the Green Light Buy signal in the last 10 days. The Green Light Buy is an aggressive buy signal and as you will have seen the trend has not followed through. Ab Dynamics is holding up exceptionally well but Carnival has pulled back with the index and I suppose with the increase in the oil price. My stop is in place (the VectorVest calculated value) and I will execute this stop upon a close below the level without thought. If the stop is executed it will be a loss of around ½% of my portfolio and I can live with that. It was my plan (and still is) to add to both positions as the trend on the Composite was confirmed by the DEW and in due course a new Confirmed Call. At the base of my ability to become consistent in markets is the belief that I MUST be in a bigger position when I am right than when the market proves my analysis wrong.

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In trading it’s the difficult things to execute emotionally that makes the money. Getting out of losers quickly and adding to winners may seem simple and straightforward advice but 95% of investors and traders do exactly the opposite. They snap at their winners and add to their losers. Sometimes it works, but sooner or later you will keep adding to a Marconi that fell from 13 pounds to zero. I have spoken about “Zen in the Markets” by Eddie Toppel in the past in this forum. If you haven’t read this little book then it’s time to put that right over the holidays. The book shows you how to get out of your own way.

I am holding JD Sports, Sopheon, Trifast, Ab Dynamics, Hastings, Carnival and Cranswick.

Sopheon has broken upwards through a down sloping trendline that was acting as resistance over the past weeks. If the general market can right itself in the run up to Christmas then this share looks particularly good for a high percentage move. Many experienced analysts argue that the Santa rally has already occurred so let’s trade the market and follow the advice on the front page of VectorVest.

My favourite scan on Unisearch simply looks for undervalued shares that have a high Earnings Potential (RV in VectorVest speak) that are breaking to new highs. My turtle search (named after a group of traders who used a breakout strategy to enter trades) finds these shares automatically. Out of the search the John Laing Group is of interest. I haven’t done anything as yet and won’t until the advice on the front page of VectorVest shows some green at least.

John Laing Group plc, formerly Henderson Infrastructure Holdco (UK) Limited, is an originator and active investor and manager of greenfield infrastructure projects. The Company operates through segments, including Primary Investment, Secondary Investment and Asset Management. Its Primary Investment segment includes costs and cost recoveries associated with originating, bidding for and winning greenfield infrastructure and renewable energy projects. Its Secondary Investment segment includes investment returns from and growth in the value of the Secondary Investment portfolio, net of associated costs. Its Asset Management segment includes fee income and associated costs from investment management services in respect of both the Primary and Secondary Investment portfolios and in respect of John Laing Infrastructure Fund (JLIF), John Laing Environmental Assets Group (JLEN) and John Laing Pension Fund (JLPF) portfolios plus fee income and associated costs from project management services.

The chart of John Laing Group is shown below using my normal format. The price is shown as a candle chart with the valuation above the price as the green line. In a window below the price is the earnings per share (EPS).

david

The share was revalued by VectorVest over the past quarter and is now trading well below value. EPS is rising and is up by a third during 2016. Technically the share is charting an ascending triangle after a strong advance with the price pushing strongly at the resistance formed by the top trendline defining the triangle. With a positive general market and a break upwards from the triangle a move from the present 275 to 350 looks highly probable.

Please remember that the LSE is within a down/down trend and that stops should be watched carefully and no new positions should be taken until this changes.

David Paul

December 2nd 2016

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