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Ivan Mutaftchiev
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Ivan Mutaftchiev has been managing accounts since 2002. Ivan searches the markets for profitable low-risk arbitrage opportunities such as mergers, takeovers, spinoffs and other special situations. Combining his dual experience in the investment industry and in the legal field, gives Mutaftchiev... More
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  • These 9 Stocks Have Bottomed and May become Future Leaders (FTEK, ACM, IRC, MXIM, UBS, AER, ORN,WTR, MVC)
    Thursday's higher levels of the markets hardly mean that the downtrend is over. Certain stocks, however, have formed solid bottoming formations and are unlikely to make new lows, barring a "black swan" event. The downtrend may be over for these particular stocks, but that does not yet signify these are buying opportunities. Consider these stocks a watch list from which strong advancers may emerge in the next few weeks.

    What makes a good bottoming formation. A downtrend is a series of lower highs and lower lows. How could a trader tell which low will be the last one ? After a while in a downtrend, a low will be seen where the volume of one day (or several consecutive days) and its price decline will be bigger than any other day's volume (and often price decline too) since the beginning of the downtrend. Traders call this "capitulation selling" and it is often observed at the very end of down trends. As the price declines day after day, some investors cut their losses and sell, while many others hold on hoping the stock price will rebound. Eventually, a price level is reached that is so low, that holders lose all hope and just dump their remaining stock. It is this final selloff that appears on charts with enormous volume and great single-day decline.

    Stocks that have formed recent capitulation bottoms are: AerCap Holdings (AER), Fuel Tech (FTEK) and Inland Real Estate (IRC).
    AER Daily Chart (NYSE:<a href='http://seekingalpha.com/symbol/aer' title='AerCap Holdings N.V.'>AER</a>)

















    FTEK Daily Chart (NASDAQ:<a href='http://seekingalpha.com/symbol/ftek' title='Fuel Tech, Inc.'>FTEK</a>)

















    IRC Daily Chart (NYSE:<a href='http://seekingalpha.com/symbol/irc' title='Inland Real Estate Corporation'>IRC</a>)


















    More examples of good capitulation bottoms are: ACM, MXIM, UBS, ORN, WTR and MVC. I have not included their charts as they are very similar to the charts above.

    It may sound counterintuitive that the last buyers from higher levels need to capitulate for the downtrend to end. But it was in fact the losing long-side traders who provided the fuel for the downtrend all the way to the bottom. They did so by selling their stock and thus pushed the price ever lower. It was also the buyers from higher levels who would sell their stock into every rally during the downtrend, trying to recoup at least some of their paper losses. Think of them as "motivated sellers" - they bought the stock at $10 and they hate to sell it at $6 today, but if they wait they will only get $4 tomorrow.

    In order to be sure that the motivated sellers are out of the way, a trader should look for a bottom where the volume traded was at least several times bigger than average. This would indicate that a large portion of the float has changed owners that day(s). The new buyers from these levels would need to see much lower levels still, for them to panic in turn and start selling. And since there is now almost no one left with a 10-20% paper loss and ready to capitulate at any sign of resumed weakness, the levels near this bottom will likely hold for a while.

    The emerging of a new uptrend. After a capitulation selloff the supply of shares to sell has dried up, but in order for a new uptrend to begin increased demand is needed. We need to see new buyers come in and buy the stock heavily. During the downtrend most of the volume would be on down days. Up days and rallies are usually small-volume, weak and anemic. If after the capitulation bottom heavy volume is now observed on up days, it proves that the bias of traders has reversed and a new uptrend is truly emerging. Notice that in all 3 charts above, the rally after the last low shows heavy volume to the upside for the first time since the downtrend began. This heavy buying is a bullish sign and sometimes stocks that have bottomed will continue ever higher from here. Most however will make a high soon and start pulling back.

    The retest of the lows. Most stocks that have bottomed and rallied a bit will soon return to retest the last low. This retest will hopefully be on small volume, confirming the bias is now to the upside. The retest may end well above the previous low (the capitulation low), thus forming a higher low. Or the decline may reach the previous low or even slightly lower before rebounding, forming a double-bottom formation. Once the stock begins rallying again, it is very important that the volume is heavier than during the retest.

    When to buy. After the price has retested the old low and it has held a trader can be confident that the downtrend is in fact over and an uptrend is beginning. Wait for the price to clear the first rally's high (the rally following the capitulation). If that happens with a big range day and with big volume, you can buy here as you would any other breakout.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Aug 11 10:00 PM | Link | Comment!
  • Technician’s Guide to Recognizing a Bear Market

    The recent Bear Move, that began in mid-May, has ended and the Bulls are in charge again. Of course, experts on CNBC are still advising investors to be cautious and not rush in, just like they were telling all of us a month ago to not be alarmed by a down day or two. Meanwhile, the S&P 500 declined 7% from its high close of 1363.61 on April 29th to the close of 1265.42 on June 15th. At that point effectively the market was up 0 % for 2011, with many stocks down 20-30% from their recent highs.

    Usually, it is at that moment of maximum financial pain, when many individual investors stop listening to advice that “things are fine” and finally dump indiscriminately the stocks they have bravely held through the decline. This “capitulation selling” is the reason why we often observe the heaviest volume at the end of a bear market.

    The individual investor is famous for buying at the top and selling at the bottom. But it doesn’t have to be this way. Monitoring a few simple technical red flags, would have warned anyone of the serious bear move in May so you could have closed your long positions (and even gone short) by mid-May and reenter the market last week (week ending Friday July 1st) as the market gave clear evidence the uptrend is resuming.

    Technical Signs of a Bear Market. The best known rule of thumb for a down trend is a series of lower highs and lower lows. While this rule is as valid as ever, it sometimes takes the market at least a week or two to establish its next high or low for investors to evaluate. The rules listed here will usually give you a much earlier warning.

    • For the first time since the uptrend began, huge down days were observed.
    • While in an uptrend volume comes in on up moves and dries up on pullbacks; now the volume is big on down days and during down swings.
    • Most big move days are to the downside.
    • Big up-days are immediately reversed the next day.
    • Down legs last longer and the price moves farther, than during up legs.
    • Average down days will be common, often 2-3 in a row.

    Some of the above characteristics of a bear market may appear pretty commonplace, and so the investor is in jeopardy of not realizing their significance and failing to take immediate action. However a look at the complete lack of the above, during the weeks preceding the recent downtrend will reveal that a major change in market bias is in the works. Let’s see how the above list fared in the recent bear market:

    For the first time since the uptrend began, huge downdays were observed.

    This time we did not get a HUGE down day until June 1 (although we had plenty of big decline days.) June 1 was the biggest single day decline for 2011, and while it came too late to be an early warning, it was certainly a confirmation of a bear trend.

    While in an uptrend volume comes in on up moves, and dries up on pullbacks; now the volume is big on down days and during down swings.

    Note on the chart below how volume dries up during the short pullback during the second week of April; as soon as the uptrend resumes – volume increases. Now compare that to the volume from May 1st onward: As the price declines, volume actually increases ! As the market (SPYs) tries to rally on May 8th and 9th, volume drops ! The difference in volume is evident on the next decline and rally also. In general, the average volume on down days is bigger than the average volume on up days (compare height of red vs. black volume bars.)
    Volume study of SPY 3-month chart



















    Most big move days are to the downside.

    DJIA - Big Moves



















    Big up-days are immediately reversed the next day.

    Up days reversed


















    Down legs last longer and the price moves farther, than during up legs.

    For simplicity, I define a “leg”: a price move of at least 2 days in the same direction. A down leg can include an up day as long as it did not close above the previous day’s open, and vice versa. To make it more visual, I have enclosed each leg into a box.

    Legs of the Bear Move

















     

    Average down days will be common, often 2-3 in a row.

    Down days in an uptrend are rare and usually occur one at a time. It is normal to see several down days together during a pullback, but most if not all of those will be very small decliners. Seeing 2,3 or even 4 down days of average or big price decline in a row, however, can only mean one thing – Bear Market ! If you look at the charts above, you will see that the recent Bear was no exception.


    As we have seen, the recent bear market move was typical and easily recognizable from the start, given the right tools. Hopefully, the technical red flags described here will help traders and investors take swift action the next time the bears go on the offensive.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jul 07 7:39 PM | Link | Comment!
  • Twin Disc (TWIN) Makes New 52-wk High, Long Term Uptrend Likely Resuming
    Twin Disc (NASDAQ:TWIN) broke out through its recent price resistance levels at $30 on Tuesday morning on huge volume. The breakout is even more impressive, because it happened on a day when the general markets are pulling back on news of continued high unemployment and declining housing prices in the U.S. The move up follows the company's announcement yesterday in its Q2 of FY2011 report of increased sales, gross margins and profits over the same quarter of last year. TWIN is also increasing its quarterly dividend by 14% (from $.07 to $.08).

    TWIN's uptrend started in late 2010 when the price broke through the highs of a multi-week flat trading range, on October 14th. See chart below. Note the very tight range of the about one dozen days immediately before the breakout (Area A). A breakout from a tight range like this is often explosive as all the short positions in the stock were opened at nearly the same price levels, and if resistance is overcome, the shorts rush to cover at the same time. When the breakout did happen on the 14th (point B on the chart) it was not only explosive in terms of its price but was created by huge volume, indicating that the move was not just caused by a short squeeze but there were plenty of genuine buyers as well. The chart below is an equivolume chart, where each day's volume is represented by the thickness of that day's bar. Notice how wide the bar of day B (the breakout day) is, compared to any of the days preceding it.

    Since its October breakout, the price of TWIN has more than doubled going from $15 to $30 in just a few months. Therefore the consolidation witnessed in the last 2 weeks was healthy and much needed. It took the shape of an ascending triangle which is decidedly bullish for the stock. Also notice the price action on Monday (day D on the chart). TWIN opened right at the resistance level of $30, and was pushed back down ( to $28.50 and lower), as it should happen at a strong resistance level. However, at lower levels heavy buying emerged causing the price to climb back up and close not far from its opening highs. Compare this to the close of day C, which alerted traders that the uptrend was ending for the time being. The fact that so much buying occurred so close to the resistance signifies a change in attitude towards TWIN - the $30 price was no longer seen as a maximum level for its price.

    TWIN daily equivolume chart

    Tuesday's breakout happened on a day the general markets were pulling back. For that reason it is even more impressive that TWIN closed near its daily highs of $31.50. The breakout is valid and will likely lead to higher prices in the next couple of weeks and a continuation of the uptrend which started in October.


    Disclosure: I am long TWIN.

    Additional disclosure: Long TWIN as of Tuesday January 25th.
    Jan 25 2:10 PM | Link | Comment!
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