Technical Analysis: S&P500 (SPX), REIT (IYR), & Copper Charts

We wanted to take our periodic look at some broad market charts real quick to see how the market is trending in the near-term. We use technical analysis as just one of the many tools in our investment toolbox as it helps tell us the "how" and the "when" behind entering and exiting stocks, while the fundamentals tell us the "why." (If you want to learn more about technical analysis, we'd advocate checking out the resource we've compiled of recommended technical analysis reading).

As such, we're going to take a quick peek at charts of the S&P500 (SPX), Copper ($COPPER), and some REITs (IYR). We have selected these three charts because the S&P is representative of the entire market, copper is often seen as a leading economic indicator, and REITs have caused quite a stir lately with their robust rally despite weak fundamentals.


Copper

Firstly, we'll start with Copper. Kevin has interestingly pointed out that Copper has been forming a symmetrical triangle pattern. As you can see with the red trending lines, a break of the trend in either direction can trigger a large move. Since the bulk of the recent action in Copper has been upwards, we'd expect this trend to continue. However, you still have to monitor things carefully as it could very well break to the downside.

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As we mentioned earlier, we monitor Copper since it is often looked at as a leading economic indicator. If things are being built globally, they more often than not require copper. As such, it has become a 'tell' if the economy is recovering or not. As you can see above, the metal has been trending upwards for the entirety of 2009 pretty much, which could be a favorable sign. The ultimate test is now a breakout above the recent resistance.


REITs (IYR)

REITs are a touchy subject because there is so much research out there illustrating what a deathpit they will be in the years to come. Yet, they have rallied right in the face of those claims due to equity offerings and dilution out the wazzoo forcing massive short covering. The crux of the REIT matter is that many of these companies have massive debt loads and maturities coming due in the next few years. Couple that with the fact that overall, they are seeing declining FFO (funds from operations, a popular metric in REIT land), and increasing vacancies in their properties. If their cashflow is slowing and they have a lot of debt coming due, how will they survive? As of now, their plan seems to be to dilute shareholders with equity offerings to shore up their balance for the near-term, with no real long-term solution as of yet. So, with that in mind, let's take a look at the chart. We'll be using IYR as our proxy since it is the overall index.

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As you can see, REITs have been ripping higher over the past few months. We've outlined the uptrend with the light green lines. Each time the rally sells off, it finds support and continues higher. However, as we've illustrated with the bold red line at around $36, IYR definitely has some overhead resistance. Not only did IYR fail at that level the last time around, it also is an area of resistance from back in late 2008. Lastly, you've also got the 200 day moving average (downtrending thin red line) acting as resistance at around $37.50 as well. Overall, REITs have rallied hard but will have to rally even harder to breakout of this tough range. The lower bold green line illustrates the support IYR has around $22.50. So, it has essentially traded in a range of $22 to $36 over the past 6 months. Look to buy at the bottom and take some profits at the top. If it breaks out above all the resistance we just mentioned, then look out as this thing could really rocket higher.

Take note though, that we aren't really counting on this happenning. After all, the 200 day moving average is in an extreme downtrend, and rightly so. IYR overall is downtrending over longer time frames and the recent rallies have merely brought it back to its trendline resistance where it has typically sold off. So, we would wager that shorting IYR around $36 would be a prudent bet, allowing yourself the flexibility to then get long if the name breaks out above all the resistance. The trading range has definitely outlined a line in the sand for you to play with.


S&P 500 (SPX)

The market is struggling to break through its 200 day moving average, which is coincidentally the same level as the high for the year, made earlier this year in January. As we've twittered before, this area makes logical sense for some selling to take place. (By the way, make sure you're following us on twitter for market updates that we don't post on the blog). We've seen a massive rally and profit taking is not only healthy, but long overdue. This area also is a logical place as a starting point for the next big move, in either direction. If the market continues to fail at resistance, it could setup a big move to the downside. However, if it blasts through yet another area of resistance, it would mean we're going even higher. Point being, this could be a pretty important level.

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As such, it's time to practice the art of flexibility. But, that's nothing new, as we've been preaching that for a while now. In this whacky market, you've got to be flexible and nimble. Use the technicals to help guide you as to where the market will be going in the near-term. While the fundamentals are obviously still dreary, you have to respect the market action or you'll get your face ripped off. Case in point: the market rallying 16% over the past 3 months despite no real signal that we've solved our problems. And, as illustrated in the chart we posted last week, the market has had some wild swings over the past 2 years.

Irrationality is often the name of the game in the markets and you have to abide by her rules. After all, the market can remain irrational longer than you can stay solvent. That saying has stood the test of time for a reason.

So, it's certainly time to wait and see what the market brings us. No matter what direction she heads, we've got a solid gameplan now due to a quick check on the technicals. We also recently posted up some technical analysis on Gold if you're interested as well, as it looks like the metal could be building some support currently. And, last but not least, don't forget to check out our recommended reading list: Technical Analysis edition if you're looking to hone your chart reading skills.

Trader Dennis Gartman Says Watch Base Metals (Copper) As Leading Economic Indicators

We just wanted to post up a quick update in regards to Dennis Gartman's latest ideas and positions. Dennis Gartman says he has survived this mess because he is a hedger. We track him on the blog because he is long something, and short something against it (or vice versa). We run our portfolio in a similar manner and believe that if you're going to try to run a hedge fund-esque portfolio, you truly need to be hedged. So many funds these days have employed leverage and have ran such concentrated portfolios with 'all-in' bets that they have deviated from the original defintion of a hedge fund. We hope to highlight what a hedge fund should be in the true sense of the word. (Like Steinhardt, we like to keep it old school). Gartman is a noted trader and publishes the Gartman Letter. To get a better idea as to his style, view his rules of trading as well.

Back in March, we noted that Gartman was long cheap retail and short malls. He has recently been out listing his preferred positions for spring time. Over various media appearances we have noticed a few recurring messages. Gartman wants to be long: copper & Alcoa (AA). Gartman wants to be short: the Japanese Yen (forex or FXY).

In terms of copper, Gartman uses this base metal as an economic leading indicator. We've written in the past that Gartman likes to use the Baltic Dry Index and the Transports as signs we are recovering economically. When these indexes start to shoot higher, it is most likely a positive sign. (And, the Baltic Dry Index had shot up, only to recently taper off). Not to mention, the transports have seen some bullish action the past few days with a steady uptrend and now some consolidation into an ascending triangle. This pattern typically likes to breakout to the upside. But, as always, be nimble and play a break of the trend in either direction. Our man Stewie posted up this chart last night:

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He treats copper in this same regard and thinks that a rise in base metals signals to him that economic growth could be making a comeback. Gartman notes that after a long period of decline, Copper has been increasing. As an indicator, he likes to think of Copper as a Master's degree in Economics. He also goes on to say that you can monitor all base metals as a collective whole for the PhD in Economics. Gartman prefers these commodity indicators to raw economic data, citing that these metals moved downwards long before the data signaled weakness in the global economy. This makes perfect sense, as these metals are used for the construction of physical objects that are often used in infrastructure and other global growth sectors. The metals are definitely leading indicators, while often raw data (such as unemployment figures) are lagging indicators. As you can see below, Copper has definitely been moving much higher the past two months:

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Turning his focus to the Japanese Yen, Gartman has focused on being specifically long the Canadian Dollar (forex or FXC), the Australian Dollar (forex or FXA) and short the Japanese Yen (forex or FXY). He is in these positions under the notion that commodity prices will get stronger and he wants to own the currencies that will benefit from this (due to commodity exports). He dislikes the Yen because of Japan's large status as a commodity importer. Interestingly enough, Gartman has also stated in the recent past that he sees Gold becoming the world's second reserve currency. Time will tell if drastic change such as this is necessary.

Copper Disconnect

Today, we saw a disconnect between the price of Copper and one of the world's leading copper producers Freeport McMoran (FCX). Copper futures have been rising steadily the past few days and are approaching overhead resistance, looking to breakout. Yet, during this rise in copper prices, you will notice that the copper producer FCX got beat down in the market. So, we seem to have a disconnect here. Take a look at copper futures and you'll notice an area of strong overhead resistance. If it breaks this to the upside, copper could really take off. We're talking about a multi-year ascending triangle building here.Then, compare this with FCX and you see a tale of two charts. FCX is now bordering on its 200 day moving average and I like it down here. Technically, the stock has been in a long uptrend and are a direct beneficiary of high copper prices and growing copper demand. And, to top it off, FCX has the added bonus of exposure to molybdenum, a metal hardly anyone knows about. Also, I would be remiss if I didn't mention that Atticus Capital has a large stake in FCX. Atticus is the 13th largest hedge fund in the world based on assets as recently catalogued by Alpha, which I posted about here. And, you can read more about Atticus Capital's portfolio holdings in the 13F analysis I did here.

Even if the selloff in FCX continues, I'm buying here because 1.) copper prices are high and look to go even higher, 2.) FCX is one of the best copper producers out there and benefits from higher prices, 3.) they have exposure to molybdenum, 4.) it is cheap on valuation as it trades at only 13.1 times trailing and 8.6 times forward earnings, 5.) they still are cranking out operating margins of 42% and a return on equity of 20.4%, AND 6.) each time the stochastics have reached oversold levels, FCX has presented us with a buying opportunity. And, that's exactly what is about to take place. If you look at the chart of FCX below, you will see the green circles on the main chart highlight the buyable dips. On the bottom of the chart, you will notice those buying opportunities coinciding with oversold stochastic levels.So, the action we saw today was very puzzling to say the least. There was a clear disconnect between the price of copper and the copper producer FCX. I believe this is due to the fact that we have reached the stage in the market sell-off when even the market leaders get taken behind the woodshed and beaten. All the weaker sectors have already sold off and now it is time for the strong sectors to be taken down. After all, we're in bear territory. We saw this same scenario play out a few months ago when energy, commodities and the like all saw massive selling. And, after massive run-ups, we're back to the rinsing cycle of the rinse and repeat strategy. Watch FCX as it should provide a solid entry for a longer term investment. We may see continued selling due to the fact that hedge funds and the like are seeing redemptions and have to scrounge up cash to give back to their investors who want out. And, when you're short on cash, you have to sell your winners, which is exactly what they're doing.

Copper prices are rising and are close to really breaking out. Although Freeport McMoran Copper & Gold Inc has the word 'gold' in it, don't let that fool you. Copper is their game. Toss in the fact that they have exposure to molybdenum (think steel alloys) and this miner truly has exposure to some booming industries. Take advantage of the disconnect here between FCX and copper prices. FCX benefits from these higher prices and yet hedge funds and the like are forced to sell their winners due to redemptions. Their loss is our gain.