Ok, so the title is a pathetic play on Italian-American grandmothers everywhere who overtly try to shove “death strands” (aka pasta) down our throats.

But we aren’t here (today at least) to speak about how foodstuffs made from modern wheat are poisoning our society.  No, I want to talk about Magna International (MGA) and how it is close to flipping from a “watch” to a “buy”.

Yesterday the stock gapped higher only to sell off throughout the session.  I’m okay with that, as this could lead to a much higher probability setup whereby I can initiate a position upon a break of this range that seems to be forming between 53 and 54.

Looking at the weekly shows that over 51 could be considered a low volume area.  Additionally, price stalled just over 54 (much like yesterday) on the attempted rally back in July 2011, which adds a little extra punch to my conviction to get long this stock on a break of this range (should it form constructively).

Should this happen, my target (and position sizing) will be based on a move to the highs from early 2011 around 62.  Should we get there, I will take profits and let whatever I have left ride into the void.

Keep an eye on this one, you know I will be:

-EM

The other day I posted a watchlist of stocks that I am monitoring following “The Fly’s” bullish call on housing here in the “United Steaks”.  My watchlist was distilled using Price by Volume analysis, and as is the custom, target buy prices were established.

Reader “Narwahl” posed the following question in the comments section:

“How much potential upside before they hit resistance after they’ve reached the volume pocket? Specifically phm.”

Excellent question.

Coincidentally, PHM provides us with an interesting example.  In viewing the charts, there really is not what I would consider to be a traditional “volume pocket”.  A traditional VP moves from a region of high volume nodes into a region of low volume nodes then back into high(er) volume nodes.   Instead, PHM has a near volume “void” from the current price (20.49), all the way to all-time highs, which reside around 48.

Don’t believe me?  Take a look at the monthly and weekly charts:

Since this example is a bit unorthodox, I will try to answer “Narwahl’s” question through hypothesizing what I think these volume profiles signify.

In a ‘normal’ volume pocket scenario, I would typically define “potential upside” as where the volume pocket returns to a heavier volume node in the profile.  One thing that I have come to appreciate about using the volume pocket to analyze price is the ability to gauge a potential price target.  Obviously, this is an ideal circumstance, but by using the volume profile, you can see where, historically speaking, buyers and sellers have reached a state of agreement on price (as evidenced by longer bars on the volume profile).

In a stock like PHM, clearly there is very little in the way of what could be considered proper “value” of the stock from the current price all the way to 48.  From a strictly Price by Volume perspective, there is limited resistance all the way to the top, so when determining my buy point, I set the 2005 high of 48.22 as the top end of my range.

Sure, this may seem like an preposterous proposition, but there were shares of stock that were transacted at that price and every price in between, so simply saying “you’re being ridiculous, it could never return to that level” is, in my opinion, a bit short-sighted.

Remember, in areas with limited volume history, there is little in the way of rational valuation.  There exists a limited supply (historical volume) high demand (momentum).

Nevertheless, from a volume profile perspective, the chop in mid 2007 which found support in the mid 26’s and was rejected around 29.5 would provide a conservative “first target”, but the bump in volume in that region is still minor compared to even the smallest volume bar in the ‘base’ from 3-17.

Lastly, I need to mention: keep in mind that using Price by Volume to define support and resistance is a dynamic process.  As more shares of a stock trade at a certain price the volume profile will change to reflect these transactions.  So, what a volume profile looks like today will likely be very different from what it will look like 1 month, 3 months, 9 months, etc from now.

Bottom line, with my buy point set at 21.90, I am willing to let the price come to me to try and get in on the “meat” of this move.

As always, if you have Questions/comments, feel free to ask, we’re all trying to learn here.

-EM

aka CBI has entered the thin air of the low volume void.

My previous analysis of Tempur-pedic (TPX) and Redwood Trust (RWT) focused on stocks that had formed low volume nodes (LVN) in areas that were thinly traded in the middle of their historical pricing structure.  Today’s look concerning CBI is quite different from those two.  Here is the weekly showing nearly 10 years of price and volume data:

The only meaningful resistance remaining is represented by the two blue arrows found in February and May of 2008.  Above 50, I foresee a push to all time highs in the low 60’s.  While it is not likely to get there in a single swift move higher (i.e., stairs up, elevator down), there is little in the way of historical pricing equilibrium in this area to stop an advance.

My initial buy point is around 49.50.  After that, I’m ideally looking to add chunks of shares and go the distance to an all-time high.

-EM

In yesterday’s watchlist update, I mentioned that Redwood Trust Inc. (RWT) was within 2% of my initial buy point.  After reader “bobbin4apples” sarcastically commented about how useful said update was, I figured it was time to take a peek under the hood and hopefully provide some clarity about why I’m interested in buying some shares in this company.

This will be similar to my analysis of Tempur-pedic (TPX), however this time I would like to start with a view of the daily chart.  This is backed out to show us the last two years of trading:

Here we can see that price initially stalled as it bumped up against previous resistance from early 2011 at 17.  This can also be seen in the volume profile on the left…as there was a a ‘bulge’ of volume that existed and was expanded upon when the stock meandered back and forth in this area throughout most of December.

So we can conclude: “wow, this stock looks like it’s taking off to all-time highs”, right?  As Lee Corso is apt to say: “not so fast my friend” (I actually ran into Lee in an elevator at the Biltmore Hotel in LA when he was there for the USC/Oregon game in 2010).  Now, let’s take a look at the weekly chart.  This will give us nearly 10 years of price and PbV data.

Wait.  What?  So this company was obviously taken to the woodshed along with most other REIT’s in 2008.

However, since then what has taken place could be viewed as the formation of a massive (4+ YEAR) bottoming pattern.  Clearly, we have broken above the area of volume resistance and are now into the crisp, clean air of the low volume vacuum.

Currently my by point sits at 19.40 (which also coincides with the high from the bottoming formation, seen by the magenta arrow).  Instead of jumping in immediately upon a break from a high volume region into a low volume region, I instituted the placement of a buffer to avoid getting shaken around by possible resistance.  This modification was instituted because I am looking to catch the ‘meat’ of a move, not every single single tick from the bottom to the top.

If this stock can clear 19.5, what is to stop it from going to 30?  Sure, one could say “common sense and logic”…and that would be a reasonable hypothesis.  But we are also entering the “no logic” zone where demand far exceeds supply.

This being an REIT, there is likely going to be a decent dividend…which at these prices, RWT yields around 5.3%…so we have that going for us as well.

I hope this helps to provide some insight into the the stocks I’m maintaining on my watchlist.

Yes, these trades will take time to materialize and are not going to light your hair on fire with excitement.  Maybe this shit is boring you to death…and that’s fine by me.  I’m here to make money, not to entertain you with high-speed cocaine-addled trading.  Check back in with me in December and we’ll see what I was able to accomplish.

I had enough hair raising excitement in 2012 to the tune of beating the shit out of my account balance…so I have decided to take a much more conservative and patient approach in this new year.

My best to you all

-EM