Does Technical Analysis work on the OTCBB?

There has been debate about whether or not Technical analysis works or not on tiny microcap stocks such as those on the OTC BB. I am of the opinion that it does work, however I am also of the opinion that this tiny marketplace is not one to spend too much time on. It is definintely a very illiquid marketplace with much higher risk associated with it.

However, sometimes situations develop whereby an attractive enough chart setup occurs that it warrants mentioning. This is exactly that, an attractive chart setup. The downside is the liquidity issue. It is really horrible on the OTC BB market. Sometimes it can take 30 minutes or more just to get ‘into’ or ‘out’ of such a position. Despite the drawbacks, I seem to have found a very promising setup here.

The way in which I found this setup is very unusual. And maybe it speaks to the fact that a lot of stocks in general right now are moving on speculative merits only? A lot of small stocks that is. Whatever the reason, it is happening and I am reporting it to you.

Now back to how I found this little one… I was browsing through lycos live charts and there popped up a random chart from their server. It was indeed purely random. So there it was, and immediately after I saw it I knew it was worth investigating further. I have a good knack for this, simply looking at a chart very quickly and immediately ‘getting a read on it’. Kind of like you size up a person you meet for the first time.

Anyway, the chart is USTT and it trades on the OTC BB, the relatively illiquid and highly speculative ‘wild west’ exchange. Because I am a firm believer in technical analysis, it really does not matter to me what kind of stock, commodity or index I am analyzing. All the rules of technical analysis apply to each of them.

I have a little bit experience with the OTC BB stocks, so I know how to get a good read on them. I mentioned the liquidity issue above. This is true, yes. But sometimes there are periods that alleviate some of this drawback. For example right now I am seeing significant volume expansion on a number of them including USTT.

Actually the overall chart pattern setup on USTT is extremely attractive. If this were a large or mid cap stock, I would probably rate it a 9 out of 10. The pattern setup looks good to me because what you have here is a 7 to 8 month FLAT base (bottoming process) which is indication to me of accumulation. The high volume spikes within the green shaded area are some evidence of that accumulation. But then also, you have this based and accumulation building up right under a 1 year long resistance area. This one year long resistance area is indicated with the horizontal blue line. These two facts are very important in this analysis. Why? Because in my experience in technical analysis and reading stock charts over the years, this pattern identification is one of the most attractive stock chart pattern setups you can ask for. The reasons for this are simple. Number one, you have a stock that has shown us that it has completed its base during which there was accumulation. Then you also have an indication of a sign of strength with volume that takes price to a new level and holds that level. And, as you will see in the chart in the next paragraph or two, we also have an ascending triangle formation building on a nearer term basis ( a highly reliable chart pattern) right under the long term resistance line (long horizontal blue line). All of these factors together create a high probability breakout situation.

One other thing to mention is the weekly macd histogram. The weekly macd histogram shows a bullish divergence with price from the period of early 2004 until present. And, it also looks as if it is just about to crossover above the ‘zero line’ on the top half of the chart above. As I have said, I have seen these patterns many times before and I know from experience that they are high probability patterns. The fact that this is an OTC BB Stock does tarnish the setup a little bit, but nevertheless, in terms of strict technical analysis, the attractive setup still exists.

You can see from the next chart below more clearly the price pattern and the volume expansion as well as the ascending triangle. The dotted blue line represents the increasing demand meeting the fixed supply of the dotted red line. There is not much room left in the apex of the triangle, and USTT must either break down or up from this pattern. Heavy volume expansion would be the big clue that a breakout is in process. My forecast is that USTT will breakout upwards from this ascending triangle pattern.

It is also interesting to note that this company is somewhat of a play on the alternative energy theme I had mentioned in a previous post. Apparently they make an energy efficient vending machine accessory, saving buyers hundreds of dollars yearly. Another little hint about the speculative interest is the number of message board posts on USTT. I do not read or visit stock message boards, but in certain cases it is worth it for the sentiment side of the setup. The message board for this one at ragingbull.com has a high frequency of posts indicating ‘highly speculative fever’ if you will. While not mandatory, it is a useful indication of level of interest.

So in summary, USTT above .18 will probably launch into breakout mode for between 25 to 50% return potential.

P.S. I really don’t want to mention any more of these tiny ones for some of the reasons I mentioned above. But for now I am letting this one slip through, simply because of the unusual way it came to my attention. It did after all create a good story to write about…

P.P.S I am putting this post in the ‘Before and After’ category to see how this one shakes out. It should be interesting to follow up on.

Crude Oil

The energy sector and crude oil is going beserk. There is just no other way to say it and it runs along the theme which I continue to talk about which is commodities and energy. As of this posting, we can see that crude oil is in the process of doing a retest of the mid 50 level first achieved in late 2004. Note also that the price of crude since early 2003 is rising upwards steadily on a trendline arc.

A little testing action is likely in the cards here on this revisit of the mid 50 level. If and when we do break 55, it could start to send the price higher with an even more persistent fashion. I am basing this statement on the rising arc trendline which usually leads to some type of blow off. Either way, it needs a bit more analysis. But for now, we clearly have a retest. Many energy shares themselves are literally exploding higher at this point and pushing higher in very strong uptrends. I will post a few of these charts shortly. What more can be said? Crude oil and the shares are on fire!

It is a shame I did not put this post up earlier. It was in my charting program and is one I have been watching for many months. I did not post it up here earlier for various reasons but it is still good to point it out anyway even though it has already had quite a run.

ESLR is a solar energy company and I do believe that the alternative energy theme is one that will be important, probably very important for the next 10 years and the reason why I put it in the ‘Long Term Alert’ category. . .

If we are heading into an environment where we will have $100 + price of crude oil, then the economic viability of solar and other alternative energies is compounded. By the way, I do believe that eventually we will be at +100 per barrel of oil. I do not know exactly when, but I do believe this will be the case, probably before 2012. Incidentally, on the old version of this site I indicated the following in a report I did on May 13, 2004:

The daily chart of crude really does still look like a price chart that is in acceleration mode. My forecast is for 48 crude by August 2004. That would put the price right under the dotted blue channel line seen in the chart below. Crude Oil could go as high as 60 which would correspond to an RSI value of around 80. That price and RSI level would be consistent with the case of crude oil being in a major bull move here. For now though, the major obstacle and target remains 48.

Not too shabby eh?

As it turns out Crude Oil did precisely hit just around 48 by the August time frame of 2004. I made this forecast by the simple use of reverse trendlines on the price of crude oil chart. The old report is here.

Ok, back to alternative energy. As I said this to me is a very important theme to keep an eye on next decade. Imagine if every home in the United States had a bunch of solar panels on the roof? What would that be worth in dollars? I don’t have the answer to that question but I imagine it is a very big number, probably gargantuan number. But solar energy does not have to be the clear winner over the long haul. Maybe it will be fuel cells? Or mabye a combination of both? I dont know the answer to this either, but what I do know is that the early stages of any ‘new big thing’ typically appreciates the value of all the players regardless of whether or not they will be the proven long term winner.

You just have to look at lycos, yahoo, amazon and all the other dot coms.. everything was moving up then in the simple belief that it was the next big thing and that everyone would get rich if they just bought one of the players.. well as you know this is not the case at all. You had to be very selective and it is very very difficult to predict a long term winner.

Other players in this alternative energy space include Plug Power (fuel cells), Fuel Cell energy (also fuel cells but for very large corporate and government energy projects), Millenium Cell, and Ballard Power (Auto motive fuel cells). Incidentally many of the stock charts of the above look still quite ugly. Not enough basing yet to consider looking at… and the volume is horrible.

So here is the chart of ESLR. As you can see it had a huge reverse head and shoulders pattern which has to this point resulted in a nice new trend and breakout. That huge reverse head and shoulders pattern also morphs on a larger scale into what appears to be a rounding bottom formation . The growing volume supports this overall pattern. The slow upward arc that defines the rounding bottom pattern (not drawn) should provide longer term support for ESLR. Recently the stock had a big move on improved margins and expansion plans and is a very high risk entry. Will likely see eventual pull back to the rounding bottom upsloping arc. ESLR could be a ‘longer term play’ as long as energy prices remain high or head higher. I do believe though that the Japanese are getting into this space as well. Also Siemens and General Electric… Plenty of competition for this tiny little company.. but still as I mentioned earlier, in the early stages, a rising tide lifts all boats…

I would not be surprised to see ESLR at 13 by the end of 2005, early 2006.

Peace.

Im out.

P.S. I have plenty I want to say about GOLD… And plenty of charts that say a lot about Gold too… I don’t know exactly when I will get them online but watch out for them, they will yet again be in my own humble opinion, WHOPPERS. :grin:

Forex Trading:

The Australian dollar has been a powerhouse. And no wonder, they are very resource rich country. It appears that currently the AUD/USD is doing a retest of .7900 level .
Near term chart looks quite attractive to me. Up sloping arc trendline showing demand and possible cup and handle?

For now must still consider this strictly a retest of .7900 and make no assumptions. However if arc trendline support holds, then possibility exists of breakout of .7900 level.

the chart is shown below:

tc

Here is another copper stock although it is much less attractive situation than was mentioned in my previous post.

This one is tiny, not very liquid which is a huge disadvantage and at the moment does not show a very attractive risk / reward in my opinion. But the reason I am showing it is for the simple reason that it in 2003 it did show a very attractive set up as shown by the green arrow in the chart…

That was a very attractive set up at that time and I do remember looking at CTQ and studying its overall pattern. The reason why it was such an attractive setup was because of its long flat base which was notable about 5 years long. If you ever see a security with a long FLAT base of that duration it is always a good potential situation for the future.. it may take many years to develop into anything but is still a good situation to keep an eye on. The long basing period is a great area of cause in price and provides ’support’ for an extended move. This situation currenly is also present in the long term price of silver. Long bases are a good thing. Although they do not appear to be too exciting they are worth watching just like those cheetahs watch their prey in the African desert.

But again, CTQ currently shows no major attractive set up. The real story was when it was at 1.00 back in 2003. But even then, probably not worth giving too much credit to because of the horrible liquidity. Indeed, non liquid stocks can be the worst types of securities. I am pointing out CTQ though because it is a good example of a long term basing stock which grows into a persistent uptrend.

The current price action shows that it has likely done a ’shakeout’ and will try to climb back into its trading range. If it is able to accomplish this, then it implies that it will try to take out the 3.90 area.

This one is probably only worth considering if it is able to clear 4.00 with BIG VOLUME and volume sustains itself.. otherwise not worth it.

Peace. Im out.

tc

I received an email about a week ago from a loyal reader. I was late in responding, but am glad I checked my email because it led to a pretty good analysis which you are about to read right here at Online Trading. I thank him for writing me because it led to this write up. So credit in part goes to him…

What I am talking about is the commodity COPPER. This post sort of follows a theme I am on recently which is commodities. If you visit Online Trading regularly then over time you will realize a few important things, one of those things is that commodities is and will continue to be a big story. Why? Well the answer is simple. The previous 20 years saw a love affair around the world for paper. Paper assets that is… Stocks and bonds come to mind.. Dow Jones Industrial average, Nasdaq… these are the paper asset kings.

During that same 20 years…

the world hated things, or commodities. Commodities were sold off and considered unimportant, not necessary and having no great value. Gold, Silver, Copper, Zinc… all these things were sold off and ignored…

But now we have come full cycle and a reversal of sorts is taking place. Commodities are now getting the upper hand. This does not necessarily mean that stocks and all paper assets are going to plunge into a bear market. The reason I say this is because even if there is an aggressive inflation stocks themselves can be inflated and while it may appear that they have a very high value, in reality it will not be so significant because of inflation itself. For example, even if the Dow Jones Industrial average goes to 20,000, it could very well be that a dollar bill at that time is only really worth 50 cents. Get my point?

Anyway, the first chart is of the commodity copper and is a very powerful chart because it speaks volumes about the state of the commodity trading market. First, note that the price of copper has generally been in a bearish sideways trend or basing pattern for about the last 14 years. This fact alone is very significant because it makes a statement about risk/reward and what to expect in terms of future activity in this commodity.

Very important to note is that the copper price broke out above its long term resistance with volume making the breakout valid. The two trendlines I drew near the 150 level show what looks like a rising wedge . A rising wedge is somewhat of a tricky technical pattern because it can have either bearish or bullish implications. I would say it much more 50/50 type pattern than an ascending triangle for example. But, sometimes you have to make exceptions and need to dig further for more analysis to make your conclusions… Probably experience and time is what helps here. If you look at enough variables, then you can come to a more sound conclusion about what copper will do…

Lets look for some other hints. Aha! Well one of them is that the CRB index has recently broken out to a new high after a long basing pattern. This is indeed a pretty big hint. What else.. hmmm. Well another tiny hint is in the most recent combined continuous copper contract volume shown for the most recent month (February) in the first commodity copper chart above. The volume is hinting that copper wants to move and break out north from this rising wedge pattern. Indeed, in my experience, when a commodity or any stock or index for that matter breaks out north from a rising wedge, it is usually a pretty big and persistent move. It is quite scary too and hence the phrase ” climbing a wall of worry”.

This second little chart to the left is a close up zoom in of the actual rising wedge pattern of the commodity copper. The pattern is quite clear and easily identified. Technically, the upward slowing lines depict a gradually weaking demand situation. That is the dictionary definition in terms of technical analysis. But again, experience and a closer look at the commodity chart tells us maybe something else is going on.

Lets look at yet another chart and zoom in even closer. This chart is similar to the one I received from the reader mentioned at the beginning of this article. This is a much closer zoom in on the last 6 months or so and what we see here is an ascending triangle pattern. Isn’t that quite fascinating? The commodity copper chart at first glance shows us a possibly bearish situation. But then, looking closer at the chart in search of the truth we see that in the near term a very bullish technical analysis pattern exists. Indeed, not only is the pattern bullish, but it has already shown signs of an early breakout with volume. So, we have a smaller time frame very bullish and reliable pattern WITHIN a ’so-so’ technical pattern. Another good clue for us in determining where the commodity copper is going.

Any more clues? .. Hmm.. What? You say you want another clue ? Let me see if I can oblige…

Aha! Yes, there is another clue dear friend and this time it comes from the S&P 500 index. Do you see that rising wedge on the S&P 500 index? Note how it broke out north of the rising wedge. This is a good, no not good, more like great example of how a rising wedge technical analysis pattern can turn into a very bullish situation. I remember specifically near the end of 2003 that many who study technical analysis were quite bearish at the time. I must admit I too was quite cautious during this time because I saw the rising wedge pattern and could not help concluding that indeed the pattern had some good potential for bearish implications. But it did not happen, it proved many people wrong and broke out north. Everyone became bullish during the period of that breakout, extremely bullish. And that marked the euphoric peak for almost a year in the S&P 500.

Now, the S&P really has nothing to do with copper. I just wanted to show you a good example of how a rising wedge, normally feared, can turn into the exact opposite and very bullish situation!

So the clues to me are enough at this point to say that I believe the commodity copper will break out north from this rising wedge pattern and do so in quite persistant way. This is what my experience in chart reading tells me.

This chart to the left is of an actual commodity based copper stock. If you like stock charts and you consider yourself to be a pretty good technical analyst, then this chart will probably get your attention. It is a dream stock chart and a great example of how once a powerful trend sets in motion it is not likely to stop. Powerful persistent uptrend. The reason why this commodity based copper stock moved with such persistance is for no other reason than because the commodity copper price had its own very powerful upward rally in late 2003. This stock actually started moving before the upwards explosion in the commodity copper. This was definitely an very powerful online trading opportunity to those who were early and smart enough to identify the trend before it actually happened. So what is the name of this stock?

Don’t worry I will tell you shortly, because the price action to the left only covers the period ending in 2003. There is another huge developing story with this stock and it is based on the commodity copper.

Commodity based stock trading is definitely a unique form of market analysis. With individual stocks you analyze their fundamentals, their technicals and other factors to determine their future price movement. But with commodity based stocks you must carefully analyze the underlying commodity itself as a means of predicting where the stocks in that sector will go. It certainly offers a different angle and approach, but can be quite profitable if you know what you are doing.

Ok enough of elaborating on this one. It is time to move on to a more longer term view of the stock that has shown an amazing uptrend during the commodity copper’s breakout.

And the winner is…

FCX, or Freeport Mcmoran, is the winner. That is the stock depicted in the larger chart above and in this smaller chart next to this text. This is a commodity based copper mining stock. Indeed this commodity based stock chart looks very attractive to me. On a scale of 1 to 10 with 10 being the most attractive I would rate it a 9. I rate it this high because the three blue arrows indicate a pretty reliable reverse head and shoulders pattern that has sustained itself on the longer term uptrend. Major bonus points for doing that! Also, read carefully my analysis in the paragraphs above this one. What did I talk about? The commodity copper and how its pattern and trend indicates a high probability that it will break out north in probably persistent fashion.

To me, the writing is on the wall. The overall FCX chart pattern combined with the evidence on the commodity copper shows a high probability situation that FCX will breakout north from its reverse head and shoulders pattern. The price objective is 60 based on standard technical analysis measuring methods.

I will revisit this story in a future posting. To be notifed exactly when I do revisit the story, be sure to add Online Trading to your KLIPFOLIO or enter your email address on the box on the homepage that says ‘enter email here’. For now, let the trend be your friend and the price be on your side…

TC

P.S. Wow, this was a whopper of a post.. I really don’t know if I can keep the posts coming in so long… Maybe better to have them in bits and chunks, short and digestable, don’t ya think? :smile:

I apologize, but I must have accidentally deleted a previous posting on here which was a highlight of the steel stock TONS I profiled on January 28th, 2005. I don’t know what happened to the article and it is a shame I lost it because it was a good read and quite a good analysis.

Anyway, I don’t have the article anymore, but if you want to see the stock chart which was included in the article you can since I was able to keep it…

TC

You’ve heard me talk about commodities and inflation. And you have also heard me mention the natural gas stock NGAS. The fact that the CRB index has broken out, and crude oil is moving fast and furious seems to indicate for the moment anyway that commodities are hot, very hot.

I believe that the Natural Gas Commodity Trading stock NGAS is ready to make its move on 2/25/2005. I also believe that the Natural Gas Price chart is building up for a breakout.

The Natural Gas price chart has broken a downtrendline with volume. What more can I say? It is starting to look bullish. And based on my analysis I see that NGAS the stock is ready to breakout, probably Friday morning. The virtual trade here is entry between 5.20 and 5.30 with stop loss set at 5.00. The objective is about 6.8. This looks like a very attractive set up to me with. Assuming entry at 5.20, maximum downside risk here is -3.8%, with first potential upside of about 30%.

All I can say is that commodities are on fire. Not all of them, but plenty of them are. You just have to know where to look and be picky.

The chart of the natural gas commodity trading stock is shown below:

TC

The commodity research bureau index, a good leading indicator of future higher inflation has done the unthinkable. It has avoided a bearish divergence, and instead formed a bullish symmetrical triangle. A couple days it broke out of that symmetrical triangle in what I believe is an elliott 5th wave UP.

I am no elliottwave expert, but I do know from experience that if it is an elliott 5th wave up, it could be a very fast and persistent move up. I am simply amazed at the ability of the commodity research bureau index to show a consistent powerful uptrend. There was the potential where I have drawn the red arrow all the way at the top for the commodity index to break down in a bearish divergence. However it did not happen! That is what bull markets are made of. Yes, a bull market in commodities!

Note also that the RSI or relative strength index is in breakout mode after 2.5 year consolidation!

This is likely to be the most explosive leg up for this commodity trading index. Are you putting the puzzle pieces together? Inflation + Declining Long Bond + Higher Rates…

TC

Here are a few observations on a homebuilding stock. In particular I am talking about Ryland Group, a home builder. Even if you have only followed finance or the stock market occasionally over the last few years, you probably have heard about how great the real estate boom is. And yes, there were also plenty of predictions out there about a real estate top among other things..

Well, tops are certainly difficult things to predict with any sort of precision…

But if you can build up enough evidence to support your case, one that is based on either technical analysis or fundamental analysis then you might have a fighting chance. This analysis is going to be quite brief. And maybe I cannot even call it a real analysis per say, but rather a few observations I wanted to make after gathing up some data in recent weeks.

Here is a question for you.. “What do Yahoo and Ryland, the homebuilder have in common?” Probably not too much in a business sense. One builds homes, the other is online and in the advertising biz. Well perhaps they have nothing, or almost nothing in common now, but I do believe they may have something common in a few years time…

What am I talking about?

I will tell you in a minute.

First, take a look at this image below. Do you use yahoo email? Or maybe you browse the yahoo online network a lot.. well then chances are you have seen the image below. Actually it is an ad run by “Lower My Bills dot com”, the online mortgage finance company… These ads have been relentless in my yahoo email account and quite distracting I might add. It is part of the reason why I switched to the google email address you see at the bottom of this web page (Yah!). I was swamped with LOADS of junk mail anyway. And this is also the reason why the best way to get updates to the Online Trading Forum are through KLIPFOLIO

That pig you see above this text is huge. Period. Indeed, it is the longest, fatest pig I think I have ever seen! And it is to be seen all over the internet. So what is my point..? Well, a long fat pig may be a fairly good psychological indication of excess greed. And as we know the stock market, while a great place to speculate in, does not deliver un-ending riches to anyone forever. It has a nasty habit of reverting back to the mean. It also has a nasty habit of cycling just like the planets do all year round.

The chart you see to the left of this text is the long bond. The esteemed Steven J. Williams posted an extraordinary editorial on a possible long bond crash here. The KEY that the long bond is faced with is that down slanting blue trend line or resistance. This large formation is an infamous symmetrical triangle that is winding up for a big move. It is likely that it will be a big move but that it will be a slow motion big move culminating in a selling climax. Keep in mind that the chart is a quarterly price bar chart, so clearly, it takes TIME for things to change with that chart.

It is looking like the most current quarterly price bar may indeed turn out to be a bearish shooting star that failed right at the upper blue down trend line resistance. Could it be that the long bond is now ready to go into a death spiral downwards spiking rates higher and forcing the Fed to be much more aggressive with rate increases? Its possible. It is definitely possible in my opinion. Credit for this bond crash scenario goes to Steven J. Williams. He was the one who identified this possibility. The next year certainly is going to be interesting.

This next chart is a side by side comparison of the home building stock chart RYL or Ryland Group, and on the right is Yahoo. I am sure you remember the 2000 peak in many of the dot coms. A lot of them were faced with a situation of expanding and hiring too aggressively combined with a downturn in economic demand for their products and services… Might such a repeat situation now start with Ryland Group and other home builders? Well again, it certainily is a definite possibility. Home building companies that are expanding too rapidly, creating too much inventory of new homes, and leveraging themselves too much are at high risk. The Ryland chart on the left is a yearly price bar chart, note that if Ryland closes the year 2005 right about where it is now, it would in my opinion be a very bearish indication for 2006 for this stock. It would create a yearly shooting star and set Ryland up for a plunge into 2006. The other thing that is worth noting about the Ryland chart is that it seems to me at least it has used up most of its cause. This kind of move is unsustainable without some kind of consolidation.

Indeed, if the Fed were to start an aggressive campaign of raising rates to try to defend the dollar what is going to happen to the homebuilders?? I think you know the answer already. It will be interesting to see how this all shakes out.. But I believe the writing is on the wall.. I am going to step up to the plate and make the fearless forecast that we have seen the peak in Real Estate as of the date of this post. :razz: So there!

TC

P.S. Ooops, I almost forgot. One last image I forgot to put up that sort of puts the icing on the cake for this articles scenario.. I will let you read into it..