How Oxbury Could Have Made You Money From Simple Chart Studies

Generally speaking, the purpose of these Charts of the Week articles is to teach you to objectively review a given chart and make a sensible decision as to whether it’s going up or down … or whether more time must pass before you can make an informed decision.

Hopefully you’ve learned about the numerous indicators we’ve highlighted, and found our efforts to cover various market sectors helpful. We’ve consistently used examples from standard websites such as Stockcharts and Bigcharts so that you could apply your newfound knowledge to the stocks you follow without buying expensive software or data.

But we’re sure you’d be interested in hearing that we’re actually making profitable trade calls in these articles.

For example, take a look at the July 18 chart we posted for beleaguered mortgage giant Federal National Mortgage Association (Fannie Mae, FNM), a privately owned and run government sponsored enterprise (GSE) of the United States which is now under the conservatorship of the Federal Housing Finance Agency (FHFA) due to extreme financial difficulties.

The takeover has been described as “one of the most sweeping government interventions in private financial markets in decades,” and one that “could turn into the biggest and costliest government bailout ever of private companies” by The Washington Post in a September 7th article.

So if you’re paying taxes to the U.S. government, Fannie Mae is going to be sucking dollars out of your contributions for quite some time to come … ouch!

However, if you’d taken our suggestion to short FNM at or slightly above its July 18 closing price, you could have not only dampened the recent announcement of financial pain but also made quite a bundle of cash. Specifically, we suggested waiting for a failure to close strongly over Tenkan-sen and Kijun-sen (the blue and red lines) used by the Ichimoku Kinko Hyo indicator shown above. With FNM at $14.14, you were in valid short territory if you were so inclined.

Unfortunately, Stockcharts has stopped offering this particular indicator and so a detailed analysis is out of place in this article. You can instead refer to our earlier article http://72.52.241.13/index.php?option=com_content&task=view&id=121&Itemid=4
, if you’d like to see a full explanation of the five lines used to construct Ichimoku Kinko Hyo.

How Fannie Mae Gave Up 93% Profit

So how would that late July short at $14.14 (or better) look right now? Let’s take a look:

It was pretty much all downhill. In fact, if you covered at $0.99 (the most recent closing price) your $13.15 return from $14.14 would have been an amazing 93%. In fact, you might have done even better than that by shorting as high at $18.36 in the days immediately after our first FNM chart. That’s an outstanding return for a six week speculation.

Sadly, we can’t show you exactly how the most recent price movements looked in relation to the earlier Ichimoku lines as (to our knowledge) this indicator is no longer available on any free charting service. As soon as we find an alternative free provider, we’ll let you know.

Adventures in Banking: A Gap Up in JPM

JP Morgan Chase & Co. (JPM) is well-known to pretty much every investor as a banking leader. The company has assets of $1.8 trillion, 180,000 employees and operations in more than 60 countries.

We previously commented in our late-July article [Jack, I can't find the link for this on the site, can you track it down if possible?] that JPM had gapped up within the last two weeks. There was no price action between $36 and $38 and we reminded readers that gaps are usually filled in during future price action.

We therefore suggested that JPM would drop decisively below that 50 day moving average and fill in the gap. Here is the chart we examined:

In that article we were also discussing the MACD indicator and how crossovers of the MACD line with its nine day EMA were significant, as were any crossovers of the zero line by MACD.

JPM had been trending down rather strongly – MACD works best in trends – so we felt a trend-oriented indicator fitted that particular article best. But what happened?

A 14% Gain in One Month

JPM did indeed fill in that gap in the $36-$38 area. In fact, it dropped as low as $35, giving you a nice return on a short you could have made anywhere along the 200 day moving average. (Generally speaking, the closer to a major line or level you can make a trade, the better.)

For the sake of argument, let’s say you shorted at $42 as there was a great deal of price activity there and the price failed to break that moving average — surely a bearish sign if there ever was one!

Covering at $36 at the bottom of the gap resulted in a nice $6/share profit or just over 14%. After that, you had an opportunity to go long.

But before we discuss that long signal specifically, we should remind you that MACD is a good indicator only during major trends. When the price starts to chop around, MACD is usually late and often gives poor signals. You can see that MACD did in fact cross over and drop below the zero, but the zero line crossover came to late to be of any real use to you as a trader.

That’s why it’s helpful to have an oscillator on a chart as well, as we’ve done for this example.

CCI Works Well in Price Channels

We’ve used the Commodity Channel Index (CCI) on this chart to illustrate that as a trending indicator becomes ineffective, an oscillator comes into its own (and vice versa).

The assumption behind CCI is that prices move in cycles, with highs and lows coming at periodic intervals with approximately 70% to 80% of CCI values falling between -100 and +100 on a given chart. Movements above +100 and below -100 identify overbought and oversold levels. Divergences between the price and CCI can also be used to identify reversal situations.

When JPM reached $43 and $42.85, you will note that the CCI failed to set significant highs. This was additional confirmation that the price was going to drop.

But CCI worked even better to call a subsequent bottom. A new low was made at $35 but this was not confirmed by CCI. At that point you could have chanced a buy at $36 although this was a bit risky with the 50 day moving average looming overhead.

You would have been better off waiting until late August when that moving average was decisively breached, with the added bonus of MACD crossing the zero line and CCI crossing its mid-point as well. At that time, you would have waited until a pull back to the 50 day moving average. A buy at $38 was quite possible with a subsequent sale at the 200 day average (or $42) due to historical resistance.

A $4 (10.5%) profit in two or three days is nothing to laugh at, is it? But … should you go short now?

We’d suggest waiting for a definite break through either of the moving averages combined with a CCI signal. CCI is telling us to go short but at the moment the price is too far away from the 200 day moving average. Be patient and wait for the price to come to you.

And don’t forget that a decisive break above or below that moving average channel could signal a new trend. Forget your preconceptions of where prices “should” go and watch for the market to tip its hand!

Good investing,

Nick Thomas
Analyst, Oxbury Research