the Yuppie Pig

It's once again time to make those resolutions that seemingly are never kept! Which is why I don't make them. Usually, I can find enough reasons throughout the year, to convince myself of whatever it is I want to believe in, at that time anyways. But if I did have a resolution to make in regards to trading/investing; it would be this. Take the easy road. If the trend is up; don't fight it. If the trend is down; also, don't fight it.



Happy New Year's to all - and good trading in 2010!

I thought it would be interesting to show some of my technical analysis first hand, as the chart develops over time. It's late December 2009, and the market has been trending clearly higher for months. Here is a counter trend setup which I will update and follow so you can see my thought process. What I will do, is update this specific post with new charts and commentary as it progresses. Either to the point of being stopped out, or hitting an objective price target.

Without further adieu, here goes...

December 30, 2009

TJX is a discount retailer that's trading at fairly lofty valuations. (I will add fundamental analysis later - but for now, this is more of an exercise in technical analysis)

The has some bearish features which I have annotated on the chart below.

One of the first things I look for, in a short candidate is overhead supply. In early December, TJX reported numbers that did not impress the street for whatever the reason. For technical analysis, what is important, is that there was significant selling that day. Institutions with large size wanted out. Now, typically, all of the big funds can't all pile out all at once, which creates a supply of stock above this level. If they want to get out, they will take any rally to sell some stock. We can see that about a week and a half later, the stock rallied to its 50 day EMA, and bounce off. To me, this looked like a continuation of the selling by large institutions.

Now that we have established this as a short candidate, lets look at the specifics of the chart pattern itself. I will note some of the obvious - a declining RSI, MACD, and Stochastic. These are all momentum/oversold/overbought indicators. By themselves, I don't often find these as good reasons to either buy or sell on their own. What I see now from them, is that the RSI and MACD are showing negative momentum, however, they are in oversold territory where a bounce may occur. The declining OBV is also showing stronger selling volume compared to buying volume.

What is most important, is price action. So, let's look at the stock price action itself. I've drawn a pretty clear downtrend line from its recent high at $40.51. This is going to serve as an initial stop price area should we enter a position. I've also drawn a small uptrend from the lows early in December. This is forming a pendant triangle pattern of which the stock may break out of, in either direction. In the end, since it is price that determines if we make or lose money, the direction of the break must be respected.

Stepping back a bit, we can also see a clear support price at about $36. Each time the stock has touched $36, it has bounced and reversed up. There is also a minor support just above $34. And finally, at about $32 we saw a strong impulsive breakout back in July. Another thing to note is that in the past couple months, the stock has been stagnant from about between $36 to $40. This $4 range ($40-$36) is an objective measurement for a new target should the stock break down below its support level of $36. Taking $36-$4, we have an objective target price of $32 which coincidentally is at the lower support level.

The idea is that once $36 is clearly broken, there will be even more supply above the stock as anyone who has purchased the stock in the last three and a half months, is now showing a loss and will be trying to "get back to even" at prices above $36. This should provide some natural protection to our short.

So there we have it. The stage is set. A short candidate with a price target of $32. All there is to do now is to execute on a trade.

There are two basic ways to do this. The first is to simply enter a sell stop limit order below $36. Once the stock begins to trade below $36, a short (betting the stock will fall) position can be created. I would then immediately set a buy stop order above resistance at say $38. This limits the loss to about $2. Depending on how tight you want your stop, you might give it some room or tighten it. Usually, if I have a lot of short positions already, I will use a tighter stop. If it's my only short position, I will give it a little more room to move. I always consider my portfolio as a whole.

The other way is really the same, but a little more aggressive. You can enter the short position now, and have a stop as in the example above, or you can also create a sell stop limit order below the smaller uptrend line from early December. Typically, I would do this if I already had other long positions in my portfolio and I wanted a bit of a hedge.

So for now, I'm just going to assume I have the position to keep things interesting. Stay tuned while I update this example over time....

January 1, 2010 - Not much has happened, but here is my take on the weekly chart in Part 2 of this series

1. Account Types: When it comes to picking a broker, the type of account must match the type of capital you are using. For example, if you want to add some stocks to your tax sheltered retirement plans, you will need a broker that offers that type of account. In Canada, that is typically your RRSP account. Otherwise, if you are just starting out with some extra money not in an RRSP, they opening a regular account works great. I use both, and manage each very differently. I'll also talk a little about margin accounts further below.
   
2. Cost: Every time you place a trade, you are going to incur some transaction fees. Don't forget that when you buy a stock, you are going to have to eventually sell. If the cost of the transaction is greater than your profit in the stock, you are still going to lose money. If you plan to frequently trade and/or scale in and out of positions, this is going to be an extremely important factor in your long term performance. For example, if you're transaction cost is about $25 for purchase and another $25 dollars for a sale; using $5,000 for a single position, you're going to need to generate profits of 1% every time to just break even. In the long run, this is really going to negatively impact performance. If you plan to make only one or two transactions a year, use large capital size and focus on long term investing, then this is fine to use. In Canada, costs typically seem to be excessively high for small individuals, but I'll suggest some alternatives further below to help bring these costs down.
   
3. Execution: This really matters if you plan to be a short term day-trader or swing (intermediate-term) trader. I can tell you from experience, that if you see a price you like but can't get it, it's quite annoying. Overall, I think most brokers have reasonable execution for small investors as the handling and routing of orders are now all done electronically.
   
4. Functionality: As you learn more about trading, functionality is going to become more important to you. Things like real-time streaming quotes, the ability to enter buy-stops and sell-stops, combination spreads, etc, are going to matter. These types of things are less important to long term investors, and much more for short and intermediate term traders.

1. The Big Five: You know who they are. And you don't really have a choice. In no particular order, TD, CIBC, Royal Bank, Bank of Nova Scotia and Bank of Montreal. (let me toss in ATB and National also) The Big Five pretty much have a dominant position here. Since everyone has at least one of their main accounts with these institutions, it only makes sense to also have your brokerage with them. The advantage with them, is that they easily integrate with the rest of your banking. The disadvantage is their cost and functionality. Small accounts frequently cost $25-$30 per trade. That's excessive in my opinion. However, you can reduce this amount if you have sufficient assets with them. I think some of them offer $10 trades if you have over $100k of net family assets with them. So, this does help. They also offer a range of account types from regular trading to tax sheltered (TFSA) and retirement (RRSP, Pension) accounts. For the long term investors with decent sized capital, I think these are okay to use.
   
2. Interactive Brokers (IB): My personal favorite. First of all, it's disadvantage is its lack of retirement and tax sheltered account options. (as far as I'm aware of today) But it greatly makes up for it, in terms of its cost. At $0.01 per share (min $1) it makes trading non-penny stocks very inexpensive. Going back to my example above using $5,000, say for a stock trading at $50; this is only going to cost $2 in total transaction costs. That's a mere 0.04% instead of 1% needed at one of the big five. Need I say more? IB also provides a great trader interface (in comparison) with streaming quotes, charting, and other features. However, for the streaming data, you'll need to purchase the data feed from the exchanges. It's free if your total trades in USD is over $30 a month (which is about the cost of one trade at one of the big five), otherwise it is about $10 per month. Note that it is possible to trade without purchasing the data. You can get a real-time quote from a different source, and simply enter the bid/ask in your IB system. For short and intermediate term trades not using a special account, I highly recommend IB. The required minimum (about $10k) might be a bit high for someone opening their first trading account, but it is worth it.
   
3. Questrade: This is a relatively new entrant which offers lower prices ($5 dollar trades) and also has the specialized tax sheltered and retirement accounts the big five offer. I haven't used this one before, but I wanted to offer it as a suggestion for those wanting to do some short/intermediate term trading, but only have capital from a specialized account.

I also want to mention ThinkorSwimCanada and others. I don't have personal experience with these brokers, but they will likely have similar features as above. As I learn more about them, I'll be sure to update this article. Or if you have any first hand experience with them, please let me know, and I will add it to this article.

For those of you who decide to use one of the lower cost discount brokers, I wanted to warn you ahead of time, that (if you are at all like I was) you will likely be a little "trigger happy" with the low commissions and make more rushed decisions. I found that once I had access to low cost trading, I churned my account much more than necessary and likely to the detriment of my long term performance. Regardless of the cost of the trade, your reasoning for buying or selling needs to be sound. I know... easier said than done.

Once you have figured out what type of trader/investor you are, and have picked your broker; get it funded; and you are armed and ready to trade and invest!

I'm going to track Green Mountain Coffee Roasters (GMCR) as one of the secular growth names I follow. It operates two main segments, but its single serve k-cup market is what interests me here. The firm has a combination of high secular growth, high market concentration, high margins and reasonable price for growth. (2009-12-28)


I'll "initiate coverage" at accumulate. (buy on any pullbacks) The stock currently trades at about $73 per share, with earnings of about $2.10 for calandar FY2010. (I think this might be a bit low) Growth has been exceptional which I am applying a 30 multiple. At 1x the growth rate, my low end valuation is at about $63, with a high end of 1.5x the growth rate at about $95 per share in one year. I'm leaning towards the high end of the range for two main reasons. 1) Continued growth and expansion of the k-cup market, and 2) expected excellent keurig machine sales this holiday season resulting in a surge of k-cup sales in subsequent quarters. What I want to see this coming quarter is high machine sales and likely lower gross margins. Keurig sales are key. Clearly, I am not early in this name at this price, but there should be more gains to come as this market develops with a behemoth in this growth coffee niche.

Overview (from wikinvest)

Green Mountain Coffee operates in two business segments: stand-alone Green Mountain Coffee Roasters and Keurig. The majority of Green Mountain Coffee's revenue is derived from over 8,000 wholesale customer accounts located primarily in the Eastern United States, serving supermarkets, specialty food stores, convenience stores, offices, hotels, restaurants, universities, and food service customers. Wholesale customers resell the coffee both in whole bean and ground form for home consumption and/or brew and sell coffee beverages at retail locations. Through the acquisition of Keurig, Green Mountain Coffee has a presence in the premium quality, single-cup brew market. Keurig sells single cup brewers along with coffee and tea in K-Cups produced by licensed roaster partners, who package coffee and tea in the patented K-cups in 11 gourmet brands and in over 130 varieties. The roaster partners pay Green Mountain Coffee Roasters a royalty when the K-cups are shipped. Keurig sells the brewers and K-Cups to both wholesale and retail markets.

Secular Growth

Purely anecdotally, Keurig machines should have good secular growth. It's pricing is well below a Starbucks coffee (cost over time) and yet, still has that appeal of being something higher end. It also plays well into the growing "staycation" and home entertainment themes. As you can see below, revenues have been growing nicely for several years.


Business Model

The Keurig portion of the business model uses the tried and true Gilette Razorblade model. Buy the low margin machine; come back again and again for the high margin k-cups. Green Mountain K-Cups are offered in about a dozen or so brands giving the customer the "illusion" of differentiation between suppliers. But the reality is that Green Mountain has all but monopolized this niche sector of the coffee industry with the acquisition (pending approval as I write this) in Diedrich.









Prices for the Keurig machines typically have ranged from about $100-250; which should be in the ideal gift catagory sitting above a boring old coffee maker, but not as expensive as a high end expresso machine, yet still novel it its own way. This should be in the sweet spot and ideal for the holiday season this year. Keurig machines also appear to be selling quite well on Amazon.com. (and we know they are moving merchandise this year!)

Here's their single serve brewer which was high on their list of items this holiday season. Yes - you can buy it right here from Amazon!







Competitors

While Green Mountain is clearly the 900 lbs gorilla in this niche, I'm unsure how long they will be able to maintain that dominance. While there is certainly room for competition in this growing pie, new entrants are obviously not a positive for the stock. Building these single serve coffee machines have a low barrier to entry although I am uncertain at this point, regarding any patent based barriers. In any event, the key to maintaining market share for Green Mountain is to build exceptional quality machines that last.

Other info

And while I know there are plenty of mixed emotions on Cramer, this segment does provide some information on the recent drama with Diedrich. (for which I have a hard time swallowing that the stock was mere pennies earlier this year)



Watch for more updates to this entry. I'll try to keep the chart fairly up to date, and datestamp any updates as this company develops over time.

Dec 26, 2009:

Looking back over the years, I've often wondered exactly how much technical analysis played into making gains or losses in trading. Without a doubt, I know that the broader themes have scored me the biggest wins, and a lot of the short term momentum trading has probably made plenty for my broker. For me, I'm not quite sure. But I do know, it certainly does help when it comes to risk management. I'm sure there are plenty of "investment themes" which I considered which have long since been forgotten that would have hurt me, had technical analysis booted me from my position. In the ultimate search for alpha, I do think it's a requirement, especially in today's HAL9000 market.

Keeping in line with that premise, here's my technical take on the market today, as we head into the last trading week of the year. Yep, we have a breakout on perhaps the most easily dismissed week of the year. Nevertheless, in the end, price action is what P&L is ultimately measured on; not the quality of the rally.


In my eyes, 1120 is the new base so we shall see how the end of the year treats this level. A measured move given the consolidation suggests 35-40 S&P500 points of movement out of the pattern. The intellectual side of me finds this whole rally suspect, while the impatient and manic side of me responds with - "who cares? the trend is your friend!". The latter has been proven right again and again. So, I'll stick with individual names which show good price action and underlying fundamentals given what I believe to be more choppy trading next week and into early January, but in reality, probably just means more up, up and away price action. For now, the 60 minute chart is indeed in an uptrend. As long as this is in place, I try to keep stops tight on short positions and look for breakouts for increasing long positions. Should the market pull back into the range and especially if it breaks its uptrend, I'll be moving into short positions.

What I might do instead of posting new threads, is that I might periodically update this same blog entry. I'll keep all of the older text and charts, just so that I can see what I thought at the time, what happened, and what I actually did. So look for this thread to get an occasional date/time stamp 'bump'.

It's late on Christmas day, and everyone has settled down, stuffed with food. I'll take the moment to thank the trading gods for the money I've made, and the "education" I've paid for. Coming in the new year, 2010, I'll be focusing less on day to day technical analysis which tends to dominate my thoughts, and more on specific stocks and longer term themes. These tend not to change very often so I'll actually me able to write more on these topics. Of course, I'm sure the short term swings will warrant some attention! I consider myself a short term momentum trader, and a macro/growth investor. I like things most when they intersect.

Merry Christmas, all!
RMJ