Stock data from Yahoo

Here is a sample of data that is retrieved from Yahoo! for MDCO, on the Nasdaq. This is the data source that I use for the short interest scan.

Income Trusts – Addendum to Natural Gas

This is a follow-up to the “Investing in Canadian Securities – Consider Natural Gas” post of about a week ago. First of all, let’s make one thing very clear. I am not suggesting you should buy anything. I am only proposing that, if the circumstances are good for you, there might be a place in your portfolio for natural gas stocks some day, and if that is the case, look at the income trust asset class as a means to get there.

As an addendum to that previous post, I wanted to show you the price relationship between oil and natural gas. The chart below shows the ratio of the price of oil to that of the price of natural gas over the past 10 years. Based on that history, we can calculate that the average ratio was 8.5 times (the green horizontal dashed line). We can also calculate the standard deviation of that relationship (a statistical number which measures the volatility around the average) and project two numbers which will help us better understand the history. These numbers are the blue line at a ratio of 10.8 and the black line at around a ratio of 6. The science of statistics now allows me to say that 2/3 of the time, the ratio was between 6 and 10.8. It also means that 1/3 of the time, it was outside of that volatility band. Now look at where the ratio is currently, 12.63 times. It is a law of nature that the relationship will eventually “revert back to the mean” and could even drop back below the black line as it did in 2001 2003 and 2006.





The probabilities for a return to the mean are quite high. It’s only a question of time. We just don’t know how we are going to get there. We can build different scenarios:

-1- The price of Oil drop precipitously and the price of Natural Gas is stable or up
-2- Or the price of Oil stabilizes and the price of Natural Gas rises.
-3- Or the price of Oil keeps rising but the price of Natural Gas rises even more.
-4- Or …
On the one hand, if you believe that generally oil service stocks in the US lead the price of oil, then the following chart suggests that oil may go down.




One the other hand, the US Oil fund is at a critical stage, smack on its long term downtrend line (S-18). Will we have a breakout or will that be too much resistance (remember, the pro usually start selling short right at the downtrend line)?



Nothing changed with Natural Gas prices this week, so there is not need to update the charts.

However, if we look at a monthly chart of Natural Gas and Oil, as many fundamental analyst might postulate, it is in our rights to assume that the price of a commodity follows its long term growth rate in consumption, subject to some cyclicality due to seasons, weather, brightness of the moon (?!) and so on.

If we draw a long term trend line as shown below, and then a parallel line above which contains most of the price action (the art part of technical analysis), besides finding patterns, we can evaluate the position of the current price with respect to the long term growth rate.
I will let you draw your own conclusions.

Natural Gas


Oil



Finally, I have drawn the Fibonacci retracement lines if only to confirm a point. The standard interpretation of these lines goes like this follows.

When prices correct, they usually move down to the minimum 38% line. Most of the time however, price move down by about 50% of the previous up move (the $51.03 December 07 was slightly above the $48.49 projection for Oil). Finally, the 62% price line is generally considered as the “make or break” line. It is the ultimate support line. If that breaks, then it is expected the stock/commodity will continue downwards towards the initial price ($17.12) or a 100% correction which then puts in jeopardy the trend because the previous low may be violated.

The lines are a nice tool to use. However it must be used with a grain of salt. For example, does anyone believe Natural Gas could go back to the summer 2001 low of $1.88? I just don’t think so. But there again, I did not use the Fibonacci retracement lines as prescribed by pure technical analysis doctrine. I cheated a little bit. Do you know why?

The Word
Therealword@gmail.com

Panic?

Here is Cramers take, one thing for sure, he is passionate.

Meanwhile, back at the ranch, the stocks I (Another Brian) purchased (TSX) on Monday July 30, NEM, TKO, QUA, EQN, are holding up pretty good with all this panic going around.

For another look at where the market sits, visit Stockbee and check out his market monitor.

Thanks to "The Word" for his recent posts.

Income Trusts – Suggested week-end reading.

Next week I intend to start covering Canadian income trusts. However, I will assume you know the basics and so here are my suggested readings for the week-end:



-1- A quick primer can be found here at Wikipedia




-2- Here is a free web site which does a good job of covering income trusts.




-3- And finally, a list of income trusts which are part of the TSX income trusts index.




For each stock in the index, you will have access to some very interesting fundamental information. My favorites are:




(a) The company’s profile




(b) News




(c) Insider’s trading – late but still useful.






(d) … and for entertainment only the forum…

NAL Oil and Gas gave a good quarterly report a few days ago. I intend to start with this trust next week.

Full Disclosure: I bought an initial position today and my position can change anytime without notice.

A very well known technical analyst (he appears on ROBtv from time to time) once said on his web site that income trusts cannot be evaluated technically because of their high yield. I totally disagree with that statement and intent to demonstrate the opposite view over the course of the next few months.

Using technical analysis alone is not enough. At the very least, you need to follow the fundamentals of any company you are considering investing in. Many people only use one or the other. My training has taught me to use both.

The Word
Therealword@gmail.com

Investing in Canadian Securities – Consider Natural Gas

I believe that market conditions dictate the longer term strategy one must orchestrate independent of opportunistic (perhaps momentum driven) daily trades that we must execute in order to make a living every day. This bull market has been alive for a more than 4 years now, so that there will be a time it moves into a decelerating phase Three to six months later, it will be confirmed by an economy that is “contracting”. We may be in that higher risk zone right now. But market timing is beyond the scope of this article. Besides, the “market timing” community is so full of “experts” that I prefer to avoid that crowd and focus on something else.

Investing in Canada means that you are investing in natural resources. Natural Gas is such a resource which is very different from most others because its price is not determined by World consumption but by North American supply and demand. Fundamentals may not be favorable to higher prices in the very near future (the storage count is up, where are the hurricanes and major heat waves this year?), but technicals do lead you to think outside that box. When I reviewed commodities this week-end, I came across this old friend who had a story to tell me.

Legend:
Dark Green line = Long Term Bullish Up trend line sloping upwards at a 45 degree angle
Light Green line = Short Term Bullish Up trend line sloping upwards at a 45 degree angle
Red line = Bearish Long Term Down trend line sloping downward
Light green horizontal line = Support line
Blue horizontal line = Resistance line

The price of gas is trading around $6.00 right now and that is a very important price for a Point and Figure (P&F) analyst. It establishes a double bottom, but wait a minute, perhaps it’s the right shoulder of a Head and Shoulder (H&S) pattern with a neckline of $8.00! The three green arrows depict de S/H/S formation. If this is true, then the price must not trade at $5.50 or below because that would be a breakdown which would negate this H&S formation. However, we know that two specific events could happen. The first one is that if the price trades at $7.50, we will have a “Reversal into a column of X”, a suitable entry point for an investor. Next, if the price hits $8.50, we then have a H&S neckline breakout and P&F measuring techniques would provide for a minimum target price objective of $12.50 (Orange lines). As of today, that looks like a nice “Value” proposition.




Now that I have identified a longer term potential investment, the next step is to look at a traditional chart. Below we have a weekly chart. You should not be surprised that it also shows the H&S formation. But for me, it is clearer on the P&F chart. Using traditional price objective techniques, a breakout would project a price of $12.52, the same as the P&F projection.

The second most important factor that I use in my investment process is relative strength. Typically, I will own a security only if its performance is better than that of the TSE Composite Index. I may write about that in a forthcoming article. In this chart, I use relative strength (see low panel of the chart) to be aware of the critical natural gas to oil price relationship. As shown on the chart:

-1- Natural gas has been underperforming Oil since December 2005 and,

-2- The relationship is currently at a three year low!




We are smack in the middle of earnings season, so we must address the “fundamental risk”. There are two that we must be aware of.

-1- The first is earnings surprise risk for gas companies. The best way to evaluate that, is to use a 12 weeks moving average of price in order to figure out the average price companies received during the past quarter. The blue vertical lines correspond to the end of the quarter for most companies. The intersection between the vertical lines and the blue moving average (blue arrows) is a good guesstimate of the price companies received during the quarter. It appears to me that the average price was higher this quarter compared to the 1st quarter. If the cost structure has not increased, other things being equal, earnings should at a minimum be equal to last quarter or slightly better. In fact, natural gas prices increased 16% while oil prices decreased 9% during this 2nd quarter.

-2- But we all know that the market is looking at future earnings. It is clear that the average price this quarter is lower than the second quarter and that is what the market is focusing on right now. The right shoulder needs an urgent upswing from now to September 30 in order to reverse the average price received by companies. If that happens, on volume, hang on to your hats because both fundamental and technical analysts will identify the opportunity at the same time!

Earlier I mentioned that the investor’s entry price might be at $7.50. If you are more short term oriented, then you should use other “techniques” to figure out your entry price. The legitimate question might be: How do you participate in such a potential recovery? That should be the subject of a forthcoming post. Let me give you a hint: Income trusts anyone?

The Word
therealword@gmail.com

Something new in Canada

Why?

I decided to do this blog after I got frustrated with the pattern day trading rules that govern the US markets. Basically, it does not allow excessive day trades for account under $25,000. I'm not there yet so I decided to stick to the TSX. Canadian markets are not faced with such craziness.

Who?

I'm not a big time trader expert trader but my belief is that emotions drive the market and the individual. Technical analysis can be done by anyone with a monkey brain. My approach to this blog is not as eloquent as "The f'n Fly" or pornographic as the Trading Goddess, or as technical as Alpha Trends, or as insightful as Trade Guild, or as torturous as Suck My NASDAQ. Don't get me wrong, I read all this shit every day.

What?

I'll post a screen shot of my scans every night. You do the thinking. I'm not providing target or stops, just the stocks that fit the criteria. Why is this of any value to you, the poor trader who doesn't have 25K? Because there is limited resources on the net to scan the TSX. You can't scan for "The Rocket", "The Crash", the MA breaks without passing out money to some billionaire firm.

Even Stockolicous doesn't allow Canadian stocks, what are we, the USA's red headed step brother?