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The indicator that Wall Street will follow this week





The important SMA10.


The SP500 index, the most representative and important of the NYSE, has been sinking more than 9% this October, losing near all YTD gains. The Nasdaq is also a loser, having its worst month since 2008. Some ideas and reasons for this sell-off, I outlined in this previous post. Now, this week, Wall Street' trader's eyes will be on a specific technical indicator. It is the 10-month simple moving average or "SMA10".

The 10-month SMA indicator is equivalent to the well-known and widely used 200-day SMA, given that 10 months of sessions equals almost 200 trading days. The great advantage of the monthly is that it gives a cleaner signal and reading, free of so many false signals of breakouts, pullbacks, and whipsaws that are usually presented in a daily candle chart. It is not infallible, but the 10-month SMA helps to filter out all the 'noise'. It's well known that banks and financiers use it and make their investments in the stock market based on their signal.

This indicator is for be used in indices trending up or downward, and its strategy is quite simple, almost elementary: buy (or hold your position) when the candle closes above it. Each monthly candle of the chart begins with the opening of the first day of the month and is completed with the closing of the last monthly session, in this case this Wednesday 31. The key is to know if the current sell-off continues and the SPX closes below its SMA10 at the end of that day. Only 3 sessions remain and today SPX is near 100 points below it (2,658.69 vs 2,754.07).

If it happens, it is almost certain (there are no fixed rules in the trading world, only historical data) that the market will enter a correction, instability phase, so it's better to stay out of it. Exit all long-term positions, until price cross it upwards. See in the chat below the accurate sign that this indicator gave during the last crisis of 2001 and 2008. It avoids many headaches and shattered portfolios applying this very simple strategy.

It is not an infallible index (there is none) but it is reliable enough to avoid catastrophes in a portfolio. The EMA10 pointed out the two last major Wall Street crises and the best moment of return.








As a corollary, say that this indicator is applicable if you want to go long in any stock or etf. It is enough to see the entry/exit signal that it gives to proceed.

Finally, an alternative idea for trading in November (assuming the SPX below the SMA10), is through the volatility, which moves in opposition to it, doing it through the VXX ETN, or with the triple speed 3X UVXY, for lovers of higher risk-reward. My usual strategy this volatile days is first buy hedge through VXX calls, waiting for the rise in volatility before the sell-off arrives, and at that moment finance the purchase of SPY puts.


The current crisis in emerging markets was also signaled by the indicator. Since May, its EEM index closed the month below its SMA10.

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Following AMD, SQ, TWTR, VMW in October




Brief comments and ideas of stocks that belong to my Watchlist. Today the SPX is, technically, in a 2-day slow recovery, but still below its key simple moving average 200, with many bearish signals. Let check some Nasdaq stocks:

1. Twitter TWTR, $32.36


Twitter TWTR: usually its uptrends are short but strong. Its daily chart confirmed MACD bull divergence today, when its EMA13 (black line) slope turn up.


2. Advance Micro Devices AMD, $17.75



AMD in free fall since dissapointing earnings. Friday down 8% and testing the key support SMA200, for first time in six months. My swing trade if no rebounds: short.



3. Square SQ, $71.43



Square SQ testing short-term downtrend channel in its 10-min chart. Take care: today it has been made a huge 400k insider selling. In my radar for Monday.

4. VMWare VMW, $145.02


VMWare VMW testing its SMA200, and well oversold. Waiting next MACD bull crossover. If happens, is the sign for a long entry.

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Nasdaq stocks for this week: AMD, DBX, PYPL, VMW




1. Advance Micro Devices AMD, $25.04

- Its next earning report (Oct 24th) need to be convincent for investors. Nvidia NVDA is again turning strong in the cryptocurrency and gaming markets and Wall Street is reacting to this, giving down AMD price to the important 38.2% level of Fibonacci and with its first MACD bear crossover since April.

- Is increasing its volatility to levels of 90%, making this stock better for daytrading or swing trades. A bit dangerous for invest long.

- I'm neutral this week until Q3 earning.


2. Dropbox DBX, $23.49

- My favorite file-sharing application since it appeared 10 years ago. What makes it special is its ease of use, intuitive and elegant, that served as a model to its giant competitors: Google Drive, Microsoft OneDrive and Apple iCloud. What keeps her alive in the face of these monsters, is its accumulated prestige over the years and its focus exclusively on file-sharing.

- After your recent IPO this 2018 at $ 29, today you are near your minimums at $ 22.

- Already issued its two first reports and were very successful: growth 27% YoY, Cash Flow> $100M. Its November earnings will be key because its guidance and operating margin has been raised, both good signs for investors.

- Technically, I keep an alert at all time low, waiting for its Q3 earnings, for my first buy in this stock.



3. Paypal PYPL, $87.23

- Its very important the data of 9 million additional active accounts for the last quarter. This generate nice growth numbers in revenues, income and earnings.

- Its Venmo social payment application gets stronger every day, and its new "smart payment button" is a good innovation for the platform and very useful for its costumers, despite Square SQ and the success of its "Cash App" this year. Venmo, in the future, probably becomes the most profitable payment solution for the company, making PYPL a buy in the long term. I'm holding my position, open after last earnings.

- Today, despite the early sell off of the market, PYPL maintains its strength (+2%) and can break its weekly resistance at $86.25. I see this stock, at the end of the year, towards its recent all time high at $93.70.


4. VMWare VMW, $144.96

- Now, as all the technology sector XLK, is in a profit-taking period.

- With great numbers in revenues, EPS and cloud license sales, VMW is a buy in the long term. Guidance for 2019 also show growth rates. Its usual price corrections comes when Dell, its parent, post unclear news of merger between both companies. Be careful with this detail, using a tight stop loss.

- Technically, its chart is testing the key moving average 200, completely oversold. I'm looking for a rebound after today markets sell off and a bull crossover in the MACD, for enter long.


Click to enlarge.

AMD, weekly chart: touching important Fibonacci level, now in "value zone". One of the most popular and trade stock in Wall Street.

DBX, daily chart: showing its performance since IPO. I have it on my radar because I basically trust in the quality of its products.

PYPL,10-min chart: near to break week resistance. Its Venmo application is the future of this company, and the reason to hold my position.

VMW, daily chart, testing key support at SMA200. Great cloud service company, trade carefully because of Dell partnership.

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My Stock Watchlist for October 2018




On my Thinkorswim trading platform, I manage several watchlists, differentiating them according to the instruments it contains. There are stocks, futures, ETFs, sectors, and indices.

The ETFs watchlists usually keep the same symbols in time, having sectors, countries, commodities, both at 1X normal speed and 3X triple speed. Indices, sectors, and futures are also fixed, covering the main index and commodities in Wall Street and major foreign exchanges, the usual managed by all traders.

Those that change permanently (usually weekly) are the symbols of the stock watchlists.

I divided them into two groups for follow-up: Main, which I follow on a daily basis, and Movers, important stocks to follow due to news topics, popularity, unusual volume in shares or options, huge changes in price or volatility. Over time, appears a new, disappear other, some ascend to Main, or vice versa, according to the importance they are acquiring, in my opinion.

That a certain stock is in these lists does NOT mean any BUY or SELL recommendation. My suggestions and ideas regarding these stocks, in which I'm long, short or neutral, I do in this blog through the "Watchlist Update" or "Stocks to Watch" posts. And mainly through Twitter or StockTwits, which are much more friendly and dynamic platforms for these cases. I enjoy getting feedback from traders there, or in my GMail. Please feel free to contact me.

Finally, review my previous post "Spirit of this Blog", a kind of declaration of principles of it.


October Stock Watchlist:



Click to enlarge.
Images taken in October 18th, 09:22 EST
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Uber and the future of the Unicorns




The IPO (initial public offering) of Uber Technologies, even without a defined date, promises to be the most attractive next year (valuation $120B), as they were Snapchat SNAP,(2017), Alibaba BABA (2014) or Linkedin LNKD (2011). And it is that the famous application for private transport, already present in almost 600 cities around the world, is extremely popular, required, valuable and, therefore, full of demands (mainly of nonconformist users and other formal taxi services) and competition in many countries (Lyft, Curb, Didi, among other apps), all copying the same principle. Even Google GOOG, is developing its product, relying on its acquisition of the popular Waze, and its upcoming developments of autonomous driving, something that Uber has also focused its latest efforts.




The shocking news in 2017 in this unicorn (start-up with a billionaire valuation) perhaps the most renowned start-up of its genre, was the departure of its CEO, founder, Travis Kalanick, forced to resign by the shareholders, in a case that recalled Steve Jobs and Apple. This time, the reason was accusations of sexual harassment and discrimination in the company, and it is understood that Uber shareholders want an early change of image of the company. In my opinion it seems a somewhat drastic and yes, it has caused a stir because close to its 1,400 employees demand their return in an operational position (still belongs to the board and with weight in it).

But, delving into the subject, what is the real future of these companies called unicorn? It is known that these billion-dollar start-ups grew from 2013 to fall in number last year to increase the scandals around them. In addition, the convenience of staying in the private market far from market regulations, and seeing the poor performance of Snapchat SNAP in Wall Street, makes many of its CEOs hesitate to take the crucial step towards IPOs.

Our collaboration with Toptal allows us to publish this detailed analysis of Toby Clarence-Smith on this subject. It's introduction:

Between 2013 and 2015, the number of Unicorns (private technology companies valued at more than $ 1 trillion) exploded from 16 to 140, marking an incredible growth in valuations and positive sentiments towards the risky financing industry.

But after a tumultuous 2016, in which scandals, sales of parts of its capital, more comments from cautious investors emerged and many have questioned the validity of the sector's valuations. With this fall, 2017 seems to be the year of decisions for the Unicorn Club.

An analysis of the trends and the factors that possibly trace the course of the coming year show that expectations that seem to be more realistic may be unfounded. In fact, prospects for private technology companies have a great chance of improving.

The number of unicorns decreased in 2016, but their valuation continues to rise.
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Sell Off: factors behind the correction




As all market sell-off as the present, the analysts begin to look for explanations to it. Which main force is behind it, and if this trend will continue. Yesterday SPX dropped 3.3% and today 2.06%, causing it to break the important SMA200 level that for months had become invincible and caused successive rebounds when it price reached it. The Nasdaq COMP had its worst session in 2 years, dropping 4.1%. And VIX volatility skyrocketed to levels of $ 25, which did not have in months. There are some factors that have accumulated over time, and that have led to this expected correction. I throw some ideas about it.

SPX today below the three main moving averages and the Ichimoku cloud. This time it did not bounce on the SMA200, as he was doing for months, a clear bearish signal.






Trump and the dollar: short and long term


It is not new the complicated relationship that Trump usually has with the FED, simply in these days it is reaching its highest peaks. His phrases generally scare Wall Street and this time they did more than ever. His statement 'the FED is going crazy' try to influence them, because he believes that the interest rate is going up very fast. With inflation already at 2% Trump may be right to want less Rate Hikes, despite the fact that the FED ensures that there are three years of growth for the US economy.

On the other hand "I want to pay the debt" says always Trump. He is also right. It is impressive that with the two Obama governments the Federal Debt size near doubled, reaching its current total of $ 21 trillion. Although in the short term the debt allows economic growth, in the long term, while it grows with interest, it can become unmanageable. The Debt/GDP ratio grows and debt holders can request payments at larger interest rates. By decreasing the attractiveness of Treasury Bonds, it would further increase its interest rate, slowing down the economy.

For me, it is clear that Trump needs a low dollar in the short term to stimulate strong exports to China and thus appease the effect of tariffs. And in the long term to alleviate the debt and not become unplayable in the future.

It is impressive that with the two Obama governments the Federal Debt size near doubled.





TNX Benchmark above 3%



The yield of the 10-year Treasury Bond TNX has far surpassed the important resistance of 3%, confirming the break of the downward channel of many years and approaching the psychological 3.25% level. And we know how sensitive is the stock market to these increases. However, TNX has been correcting for two days (today it closed at 3.13%, helped by low CPI inflation data) and despite this, the market succumbed again today. There does not seem to be justification for the sell-off, on the contrary, it may be that the bonds are already acting as a refuge, in addition to gold. Incredibly, one of the causes of panic on Wall Street, the rise of TNX, became a safe haven in just a couple of sessions, because today the bonds went up. My forecast is that, after this sell-off, this yield will continue its rise to 3.5% in order to give steep to the yield curve that is flattening in excess, not consistent with a strong growth economy where no recession is seen insight.

TNX in bull field since the break of the downtrend channel a year ago, confirmed with the MACD reinforcement. After this sell off, its path to higher yields is free.




Stock Buyback "Blackout"



Another apparent cause for the current sell-off is the "blackout" of stock buybacks, that is, the impediment to companies from repurchasing their shares two weeks before the end of the quarter. However, this is not official: some companies have it planned and they do it legally. With companies as the largest buyers of stocks, it is very difficult for the SP500 to go down so that millions of sales will occur. The corporate buyback reinforces the price and reduces the number of shares available, making it more prone to increases.

While I consider the stock buyback the main reason why the US Stock Market rises while the rest of the world fall, I do not think it is a reason for the present sell-off, because this did not happen in the previous blackouts of this year. Maybe if, the repurchases have reached their top, with a record of $ 680B only in the first half of the year, projected to $842B until the end of the year. Artificial growth that at some point will end.


Companies record repurchases of its own share is the main factor that keep the US Stock market in all time highs.



Technical correction


We are in the expected technical correction? I think it's most likely. The technological sector XLK has been requiring it for a while. It's completely overbought and it seems to be a profit-taking what is happening. And this carries the rest of indices and sectors. Tomorrow Friday, all traders' eyes are in the SPX chart recent break at the SMA200 average support. If it does not bounce firmly in the next days, you can expect a greater fall, of the unpredictable end. If bounces, probably we would have the usual Christmas mini-rally next months.





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The VVIX / VIX ratio in all-time highs





Today the VIX, known as the 'fear gauge', which measures the frequency and intensity of changes of the SP500, closed near to its multi-year minimum, at $ 9.79, fifth consecutive day below the $ 10.00 level, demonstrating passivity (or permissiveness, or complacency) of the current market, faced with events like yesterday's. What happened was that the repeal of Obamacare (one of Trump's key proposals, which moved Wall Street upwards when they were announced months ago) failed in the US Senate, suggesting that the next big goal of its plan, the tax reform, it can have the same outcome. Even so, the SPX was not aware of the matter, raising 0.54% to $2,473.83, a new all-time high.

On the other hand, the VVIX index measures the volatility of the VIX volatility index, it is also at a minimum, since both indices travel together. However, if the ratio between the two is plotted, we see that it is at historic highs. That is to say, never a market so calm, so little fearful, as the present.


The ratio VVIX / VIX in maxima tells us that the frequency and intensity with which the VIX varies, it is extreme.



The concern to a sell-off is evident, the big investors understand this and they begin to look for coverage for their assets, taking advantage of the very low value of the VIX of the market.

Natixis Global Asset Management, an excellent reference blog, proposes an interesting trade based on time combinations of SPY puts options and VIX calls. First buy hedge through VIX calls, waiting for the rise in volatility before the sell-off arrives, and at that moment finance the purchase of SPY puts. Later I will detail this strategy.




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Stocks to Watch: AK Steel $AKS, Ubiquiti Networks $UBNT



1. AK Steel Holding AKS, $4.83.


Background:

When Trump took office in 2016, one of the industries that seemed to will have the best growth was construction. In those days the confirmation of the execution of the border wall with Mexico favored several stocks and etf of the sector: construction companies, cement companies, machinery, Mexico. Several of them followed in my watchlist, even today: Lennar Corp LEN (one of the largest construction companies in the USA), Caterpillar CAT (the giant of machinery, the Big Cap that advanced the most in 2017) or IShares Mexico EWW (etf that follows the Mexican market). Among the construction materials, the steel stood out. remember it was one of the industries hardest hit after the recession of 2007. The rebound that had since November 2016 with the remembered 'Rally Trump' and its plan 'Rebuiding America', for 3 months, was spectacular, near a 100% rise.

Within the small capitalization companies on Wall Street, there is an attractive one in the steel sector: AK Steel Holding. I follow in my watchlist this company and its peer US Steel Corp X, because their prices tend to move in line. When there is marked divergence between both is when I pay special attention. (This is a nice way to follow a company: comparing it with a very close peer in its industry). This happened in May 2017: after a short technical correction, the price of US Steel continued to grow to 10-year highs until the end of that year, while AKS faltered. So, it stopped being attractive at the expense of its pair, but enter to my radar.

What happened this year, it is already known: in March, the first news of the tariffs that US would apply to imports of steel and aluminum was given. It was the beginning of the Trade War that continues until today. The company prices began to zigzag, sinking in August to $4.00, its 52-week lows.


Fundamentals:

a) In favor: in the last months there are good news for AK Steel that make us think that the worst is over. The company had three successive upgrades in less than two weeks: Morgan Stanley, Merrill Lynch and Clarksons Platou, all with "buy" and targets between $ 5 and 6, justifying all of them in the rise in steel prices due to strong demand this 2018 and projected for 2019. If we add to this a repurchase of the shares by its own CEO Roger Newport, undoubtedly, these are good signs.

b) Against: the high debt of the company. Accumulated after many years of red numbers (that were in general for the entire steel industry) its debt is so huge for a small cap (AKS Market Cap $1,500M), and now also expanded with a recent and risky issuance of shares. In addition, a risky CapEx investment (capital expenditures) for $ 153M for improvements to its steel mills. While this shows the confidence of its directors in the future of the company, this high leverage will be, for some years, its main concern.


Technicals:
As I always say, when the fundamental analysis is aligned with the technical, it's when you can have a good point to enter long. After reaching the "psychological" support of $4.00, the stock had an excellent September (almost 11% up). The stock went through the "value zone", the best time to invest according to the theory of Alexander Elder, between the exponential averages 13 and 26. In addition to this, appears a bull crossover in its MACD near the zero line. AKS still maintains a high short interest (26.3%) that makes it attractive in bouncing weeks.


Idea:

I believe AKS is a buy in the long term. The price of steel has already assimilated the Trade War and can begin to improve despite the latest news such as the probable increase in salaries in the sector. The best long entry point is when the price return to the value zone, which probably occurs in the next few days as the market is in correction due to the aggressive increase of the 10-year bond TNX, in 7-year highs, that affects all Wall Street industrial sectors.


Click to enlarge.

Support at $ 4 is powerful because its multiyear. AKS is 4 weeks rising and today the stock is testing the SMA200 (not show in his weekly chart).





2. Ubiquiti Networks UBNT, $91.87


Background:

One of my favorite stocks in the last 6 years since I 'discovered' it, is Ubiquiti Networks. I remember I bought stocks in 2012, a few months after its IPO, when trades at $ 28 and had a heavy pullback to $9 the following year and despite that I kept my shares, because I trusted the quality of their products and the skills of their CEO Robert Pera, ex-genius of Apple and today jealous guardian of the constant growth and profitability of his company. UBNT specializes in products and solutions for networks, internet, wifi, and radio, based on high technology and affordable price, its infallible formula until today. Its technologies, such as UniFi or AirFiber, have international recognition and are capable of bringing the Internet and radio to almost anywhere in the world with great technical support behind them.

Ubiquiti is characterized by its volatile evolution since it goes public. Despite accusations of falsification and class actions, in its early years (even it was considered "a fraud" by the popular short seller Citron Research in September 2017), it has the ability to overcome all these avatars until it arrived a week ago to its all time highs, and even make its first payment of regular dividends ($0.25 per share) in its last earning, replacing a aggressive stock repurchase plan that Pera had been carrying for a couple of years when its price was low. Both good signs can mean the next months of growth and consolidation as a serious company, in case there were doubts.


Fundamentals:


Today Ubiquiti is already a Mid Cap ($6,800M), with good accounting numbers: cash flow and rising sales every year, low short-term debt, profit margin higher than its peers like Finisar Corp. FNSR or Palo Alto Network PANW. Finally, its EPS earnings growth is superior to the industry. No problems here.


Technicals:

Despite the good fundamentals, from my own experience, I suggest taking extreme care in trading this stock: their pullbacks are very extreme when they occur (for news such as the aforementioned or technical corrections). This due to its low float of 74M that exposes it to these abrupt movements. Therefore, it still has a high short interest of 32%. Careful use of tight stop loss and exit strategies should be mandatory in your trade.


Idea:


Ubiquiti is a company to invest (not trade) in the long term. These days has been correcting strongly since its all-time high ($ 101.33), testing the lower band of Bohlinger and the SMA50. I suggest waiting to see how it faces both supports to think then about going long. If you are prudent with this stock you can expect many satisfactions.

Click to enlarge.

Ubiquiti is still above the 3 main moving averages, and the Ichimoku Cloud. The correction from its highs is strong so its scope must be well evaluated before entering long.

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