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Charting Asia
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Every now and then we are forcibly reminded not to try to outsmart the market. The market is always right, even when we think the market is wrong. Pharmaceutical company Roche is a fine example of the gap between perception and reality.
With a world gripped with fear of a rapidly spreading flu, it makes sense to think about investing in pharmaceutical companies. We can reasonably expect to see a link between demand – world wide flu outbreak – and supply – companies that ramp up production of flue drugs.
This isn't really outsmarting the market, but it does give an opportunity for the market to outsmart us.
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Let's switch from a fundamental analysis to a technical analysis of a pharmaceutical company like say, Roche. Let's use a chart to decide if our thoughts are reflected in the activity of the market. In particular we want to look for evidence of a rally and a potential change in trend direction from down to up, or the continuation of an established uptrend.
The Roche chart shows none of these characteristics, apart from a short lived rally around the time the flu news was breaking the headlines. This is driven by investors who buy first and look at the chart later.
The dominant feature of the Roche chart is the long-term downtrend. It is well defined with the Guppy Multiple Moving Averages (GMMA) display. Even the rally to 190 was not enough to cause compression in the long-term GMMA. This tells us investors were committed sellers. The continuation of this spread in the long-term GMMA confirms investors are not buying into the flu-led recovery form this downtrend.
The second important feature is the equilateral or symmetrical triangle. The exceptional volatility that developed inside the equilateral triangle pattern suggests confusion and concern.
This pattern of indecision broke strongly to the downside. The downside pattern target near 122 was achieved after five days of plummeting prices. This is not a good sign in a downtrend unless you are trading short. The rebound has been relatively weak and is showing evidence of a retreat and retest of the target levels near 122.
It may take more than a world wide flu epidemic to lift this price and change the trend. There are four important barriers to any genuine long term sustainable trend recovery.
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The first is the resistance at the lower edge of the long-term GMMA, currently near 156. Second is the resistance from the upper edge of the long-term GMMA currently near 168. Third is the mid point of the equilateral triangle pattern currently near 170. Finally, above this is a well defined consolidation area around 189 to 197. This is a combination of strong resistance barriers and they reduce the probability of a long term trend change.
These features suggest Roche offers some interesting rally trading opportunities rather than a longer-term change in the trend.
Buying into this chart is not a panacea for portfolio ills. It reminds us that the link between fundamentals and market pricing is often very tenuous. Of course this is an old lesson for those who brought into gold miners and oil producers only to watch their stock pick dramatically underperform the gains shown in the underlying fundamental commodity. Good chart analysis stands between ourselves and the consequences of trying to outsmart the market.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at . We welcome all questions, comments and requests.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.
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Data is a real-time snapshot *Data is delayed at least 15 minutes