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.

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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.

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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 Paul

December 9^th 2016

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