The chart posted on my blog (www.smartbounce.ca/?p=2681) can help you identify potentially undervalued markets. I went through that list and made a few observations – presented on the charts below.
Be careful about buying into a declining market. Some compare buying a security that is in a downtrend to the act of catching a falling knife. Falling knives are dangerous to catch in mid-air. It’s usually better to let the knife hit the floor to avoid cutting yourself.
Like the falling knife example, it can be useful to examine prior losers to look for signs of basing, and the breaking of a down-trend. To identify potential buy-candidates from a list of underperforming securities, I recommend only choosing positions that have the following three traits:
- The market is no longer trending down (no more lower highs and lows)
- A base or consolidation pattern is established (some sort of a traditional bottom or consolidation formation).
- A breakout from that base/consolidation occurs. In other words, the last peak on the market is taken out with a new, higher peak. I call this a “neckline break”. This should be followed by several days or even a few weeks of support over the neckline–preferably with some volume to support it. Investors should not buy until a breakout is established. I’d encourage you to read my book, Sideways, for more information on how to identify base breakouts.
Here are three securities that are basing or consolidating and worth watching for a breakout- pay close attention to the above 3 rules as you review these charts:
The best example of a bottom base– Gas has been basing near $4/mmbtu since 2012 after a dramatic selloff from its 2008 high of nearly $14/mmbtu. A good way to play gas is through the US Natural Gas fund (UNG-US). If UNG breaks above $24, my 3 rules of buying into a former underperformer will have been met. Traders can buy and sell within the upper and lower boundaries of the base, while investors should be patient and wait for a breakout before committing.
Market Vectors Russia ETF (RSX-US) is forming a triangle. A break through $29-$30 may be bullish for this market.
India, which can be played through the iPath MSCI India ETN (INP-US) has had a 2 year lid– a break through $62 would be bullish.
IShares Mexico ETF (EWW-US) is forming a triangle consolidation on the daily chart. Should EWW break out through $68, it will have met my 3 technical breakout criteria mentioned above.
Upcoming events with Keith Richards
BNN television MarketCall tonight: Tuesday January 28th, 6:00pm EST. Phone in with your questions on technical analysis during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for Keith) to [email protected]
Oakville public library: Thursday January 30th, 7:00pm EST. Free admittance, Keith will discuss technical analysis strategies from his book Sideways
Orangeville public library: Tuesday February 4th, 7:00pm EST. Free admittance, Keith will discuss technical analysis strategies from his book Sideways
Any rules about how far they fall? I believe it was John Templeton who liked to look at those that were truly beaten down and forming bases. As in more than 90% off of highs. Those stocks have the best bounce potential after breaking out of bases
I don’t have any particular rules on how low a security or market can go–I just wait until the downtrend appears to be over via my “base” rule (no more lower highs and lows, and the last high takes out the previous high)
some people believe in Fibonacci numbers–I don’t have any faith in them, but you could explore them as potential retracement targets.
Hi Keith, I remember you mentioned Japan a while back, are you still following Japan. It’s having a hard time breaking out.
Japan’s ETF EWJ looks fine–it broke through $11, next stop should be $13-$13.50.
Many are saying they see a big bearish rising wedge in the S&P now. Should we be worried about that?
My view is expressed here: http://www.smartbounce.ca/?p=2654
Bottom line–lots of factors to suggest a correction in Q2 or on. But I don’t see a bearish wedge on the markets. Wedges are fairly “in the eye of the beholder” type formations–they are a little more subject to artistic interpretation. I have little confidence in that formation as a reliable bearish indicator. I’d rather rely on traditional trend following–a break of a last low = trouble. So far, that means 1870 or so on the S&P 500 needs to hold. A 1-2 day break would be acceptable.
UNG looks like it just broke above $24 today. For an investor, would you suggest waiting and applying the 3 day rule?
Yes, Gas looks great–wait a few days, then it will be safer to play it
I would be interested in your opinion of Norway ETFs NORW and ENOR. With its no debt, well funded pensions, oil rich economy it strikes me as a safe-haven currency play.
Can you please send that request to BNN for my MarketCall show tomorrow–specify its for me–thanks