Jump outside the box with me

Wednesday, 16 January 2019
Melbourne, Australia
By Murray Dawes

  • Sifting through the noise

I have been given the reins for the next few weeks to brighten up your day or bore you to tears depending on your viewpoint. I’m looking forward to giving you my view on the state of play in the markets. You will soon find out that my way of looking at things is a bit outside of the box. So I will have to bring you along with me, potentially kicking and screaming, while I give you my perspective.

The first thing I need to say is that information overload is the enemy of the investor or trader.  There are a million things you could focus on each day to supposedly help you make clear decisions about growing your wealth or protecting it.

The daily economic release which came in just above or just below expectations…the comment from a CEO about the state of demand in their sector…the speech by a US Federal Reserve Governor that sort of sounded dovish but maybe not…the investment bank that just made a prediction for growth over the next year… 

Whatever it is, we are constantly bombarded by a never ending flow of information. And I’m here to say that the great bulk of it just creates confusion and ‘paralysis by analysis’.

So I will happily relay to you information about what Trump tweeted in relation to the China trade biff, but at the end of the day we don’t have a clue about how that situation will play out. So endless words predicting this or that is a lot of hot air.

If there are a million bits of information being thrown at you but only a few bits and pieces are worthwhile, how do you know what to discard and what to keep?

Once you have made a decision that Australian East Coast gas prices are going to be high for the next few years for example, how do you make money from that idea? What companies do you buy? When are you proven wrong in your analysis? When do you take profit?

There are so many questions that need to be answered and no easy way to answer them. There’s always a little bit of grey peeking through and it’s in the grey zone where your anxiety creeps higher and you can be thrown off course by a comment from an analyst or journalist that contradicts your own views. 

The reason I am first and foremost a technical analyst is because I spent a long while grappling with these issues. I have spent years studying macro-economics. I have an accounting degree and can pick apart a balance sheet and do ratio analysis on a business to flesh out it’s weak points.

But the more work you put in to fundamental analysis, the more assumptions you have to make about the future. And at the end of the day you may know a thousand things about a business but it is the one thing you don’t know that brings you undone. For example, if a CEO was embezzling money from a company for years and it is announced that the company is insolvent overnight, what use was your 20 hours of fundamental analysis on the company? 

So my own approach to sifting through the noise in search of the signal is to take note of large macro-economic news flow. Build up a picture of different sectors of the economy that I think may do well or badly over the next few years and then start a search for the companies within those sectors that have a strong or weak chart.

I can then go on the journey of reading through their annual reports and reading multiple presentations and analyst reports to get a sense of the company’s own set of opportunities and threats. But at the end of the day, it is the chart of prices that will help me to make concrete decisions about where to get in, where I am proven right, and where I am proven wrong. 

More on this in a moment. But first, the markets…


Overnight, the Dow Jones Industrial Average closed up 155.75 points, or 0.65%.

The S&P 500 gained 27.69 points, or 1.07%.

In Europe, the Euro Stoxx 50 index finished up 12.87 points, or 0.42%. Meanwhile, the FTSE 100 gained 0.58%, and Germany’s DAX closed up 35.88 points, or 0.33%.

In Asian markets, Japan’s Nikkei 225 is down 141.86 points, or 0.69%. China’s CSI 300 is down 0.088%.

In Australia, the S&P/ASX 200 is up 7.40 points, or 0.13%.

On the commodities markets, West Texas Intermediate crude oil is US$51.96 per barrel. Brent crude is US$60.50 per barrel.

Turning to gold, the yellow metal is trading for US$1,289.29 (AU$1,790.97) per troy ounce. Silver is US$15.58 (AU$21.64) per troy ounce.

One bitcoin is worth US$3,602.19

The Aussie dollar is worth 71.99 US cents.

Sifting through the noise

I wrote an article for you on 21 November 2018 that had a comprehensive analysis of a stock in the oil and gas sector that I thought was a good example of the process I use to source opportunities. If you want to read the article you can find it here.

There can be no greater way of showing you my process than following up on what has been said in the past and seeing whether my comments had some connection to the reality that followed. I need to state clearly though that I am giving no recommendations in relation to this stock in regards to where it is trading right now. I am just following up my analysis from last November so you can develop a greater understanding of what a technical analyst looks for.

In the interests of being transparent I will also state that members of my trading service have already been given a recommendation in relation to this stock as a result of the analysis that I gave a few months ago. In other words, I have followed through on the analysis that I gave and have advised members to purchase the stock with a clear set of entry, stop loss, risk analysis and target levels. 

I can’t let you know what those levels are or when we entered the stock as that information is reserved for paying members. Please note that this is not an official recommendation in this service.

Senex Energy chart from November 2018 article

chart image

Source: CQG Integrated Client
Click to enlarge

I will repeat the analysis that I gave in the article here so you can follow along if you didn’t read the article at the time. If you haven’t read my articles before it’s necessary to point out that the ‘buy zone’ of a wave is a 75–87.5% retracement of the wave in my model:

Senex had a long term downtrend in place from 2012 to late 2015. You can see the major waves that I have traced out for you on the chart above. The most recent down-wave in the downtrend had a high of 0.47c in April 2015. 

As long as prices remained below that level the long term downtrend was theoretically in place.

Conversely there was an uptrend developing from the lows reached in late 2015. You can see the waves that I have traced out on the chart and I think it is interesting to note that in this uptrend we have already seen three retracements into the buy zone of the previous up-wave before turning and rallying again.

Prices managed to bust up through the high made in April 2015 in August and September this year, so we now have our ‘hint’ that the long term downtrend is potentially over. But we don’t want to buy that breakout above the hint. As you can see prices have had a dramatic fall after the breakout occurred on the back of falling oil prices, government interference and a poorly received quarterly report.

Now all we need to do is wait for a move back into the buy zone of the most recent up-wave in the uptrend (the green rectangle in the chart) and then wait for a confirmation of a buy pivot in the weekly or monthly charts…

The buy zone range is from $0.27c to $0.31c and the current price sits at $0.415c. So the buy range is 25% below the current price. That’s quite far away and we may never get the opportunity to buy in the perfect spot. But I am willing to wait and see what happens from here due to the overall bearish moves that are happening in equity markets and the oil price which plummeted last night.

So now let’s look at an updated chart of Senex Energy [ASX:SXY] and compare it to what was said last November.

Senex Energy chart on 16 January 2019

chart image

Source: CQG Integrated Client
Click to enlarge

Since I wrote the article Senex Energy sold off in a straight line to 26.2c at the end of last year (less than a cent below the low of my ‘Buy Zone’) and has bounced 27% to a high of 33c last week.

Does the above mean that Senex Energy is out of the woods now and will proceed to rally much higher from here? Not at all. There may still be more volatility to come and with some bad news the price may plummet further. 

The point is not to know what the future holds because no one knows that. The point is to use knowledge of how prices move to find areas where strong support should manifest if an uptrend is to continue.

You could have loved the stock up at $0.50c and then at $0.415c when I wrote the article. The long term fundamental story hasn’t changed since then, despite oil prices flying around. You could have made a sound case fundamentally to buy the stock at $0.415c and been sitting on a 37% loss within a few weeks. Would you have dumped the stock in disgust if that happened?

Rather than focusing only on a big picture view of where you think things may be heading, it pays to unravel exactly what you are trying to achieve. In my case it is to enter stocks that I like long term. But I do it in a way that enables me to be free carried at the earliest opportunity. So if I were to be stopped out of the position, I’d be certain that I am definitely wrong from a technical perspective.

By using my method to analyse how trends develop and how they change direction, I was able to avoid entering the stock at much higher levels and consequently the pain that goes with sitting on a dud position. If initial targets are met in the near future, it would mean that our time being exposed to a full position is kept to a minimum and we would get a free look at what happens from there. 

Stress levels drop dramatically once the initial profit has been taken on part of the position and stop losses are adjusted to a breakeven level. From that point on you shouldn’t care too much about what happens. It may be annoying to get stopped out of the position down the road and have no winnings but at least your initial capital is protected. If you want to ensure you make some money on the trade you can always place a stop loss at a higher level to ensure there are some winnings to add to the kitty.

Trading and investing decisions may have a broad fundamental overview but the nuts and bolts of creating exact decisions needs something more. If you are relying on gut feeling and reading articles trying to sort the wheat from the chaff you will end up getting tossed around by the breeze. If you aren’t managing your risk effectively you will remain full of anxiety and will make the wrong decision at the wrong time.

So I look forward to writing to you each day over the next few weeks, but I hope I will spend less time yapping about things that don’t matter and more time pointing you towards a way of seeing markets that can lessen the confusion and increase your capacity to make decisions with confidence.

All the best,