Beauty is in the eye of the beholder they say. And whilst in some sections of society judging something, or someone, by their looks is frowned upon, thats not the case in the financial markets.
Which could legitimately be described as a rolling beauty pageant. In which thousands of contestants, continually jostle with each other, to attract a trader's attention.
Those contestants are individual instruments within the markets, be they indices, stocks, bonds, FX rates, commodities or ETFs. Not to mention the myriad of derivative products over the same.
Traders cant hope to review each and every opportunity that presents itself to them - after all there are more than 5000 listed stocks in the US alone.
No time for sleep
Running a slide rule over those stocks every day would be an impossible task.
Even if you decided not to sleep you would need to cast an eye over 208 stocks an hour.
Of course, we can apply filters to cut that list down, by, for example, limiting our search to stocks over a certain price or market cap value, or, just those that trade above a daily volume threshold and so on.
Alternatively, we could limit our review to the constituents of a given index or sector.
For example, the S&P 500. Though if you‘ve done the math you’ll realise that still means reviewing more than 20 stocks an hour.
One of the reasons that the Dow Jones 30 index came to prominence was that 30 was a manageable number. And in the days before electronic computers, traders could just about work out the hourly changes in the index, through manual calculation and mental arithmetic.
On basis of two minutes of calculation per stock.
A different world
In the modern world, we benefit from having an incredible amount of data and computing power at our fingertips, that’s accessible 24/7, from almost anywhere in the world.
One of the immeasurable benefits of that is the ability to instantly draw detailed charts of a security or instrument, over a wide variety of time frames and chart styles, which contain enormous amounts of information, that can be conveyed instantly and visually to traders.
Of course, that implies that we know what to look for and that we can interpret the data contained in the chart.
With that in mind, I thought it would be useful to look at an example of a chart and discuss why that chart looks interesting to me.
An attractive chart?
The chart in question is a daily 6-month candlestick plot of Salesforce Inc (CRM) see below. The chart contains the stock’s daily candles, and its 20 and 50-day Moving average lines, drawn in green and orange respectively. And it has been annotated with a downtrend line drawn in blue.
Since mid-August 2022, the price of Salesforce had trended lower and the blue downtrend line describes the top of that trend. During that period, the 20 and 50 day moving averages also moved lower, and once again these lines described or tracked the general price action.
A change in behaviour
However, by late December Salesforce’s stock price had stopped going down and began to move sideways in what is often called a period of consolidation. On the 29th and 30th of December, the price started to explore a move higher, and as it did it closed above the 20-day moving average, something it hadn’t done in over a month.
That change in behaviour is notable in itself, but what happened next is even more interesting because the 20-day moving average began to pick up and moved higher, tracking the now rapidly increasing price of Salesforce.
Which, by Mid January was testing at, and then through the 50-day moving average.
Having broken above that line Salesforce then tested and broke above a downtrend that extended lower from the early August highs.
Finally, on the far right-hand side of the chart, the 20-day moving average crossed up through its 50-day counterpart, a sign of rising shorter-term price momentum, often referred to as a “golden cross”.
Unlocking the potential
I believe that charts, such as the one above show traders, the potential in a particular set-up, at a given moment in time. The key word here is potential and to use a physics analogy
What could release that potential and turn it into kinetic energy or movement?
What’s required is a catalyst which can be defined as a substance that increases the rate of a chemical reaction, or a person or thing that precipitates an event.
In the markets, a catalyst can also be thought of as any new information that changes trader sentiment towards particular instruments or assets.
In the case of Salesforce, there are two possible catalysts on the horizon, firstly its next earnings release, scheduled for March 7th, is a little over 6 weeks away.
Closer to home, however, is news that the activist hedge fund, Elliott Management, has built a multibillion-dollar position in the company.
Elliott is renowned for lobbying management boards for the realisation of “ shareholder value“ in its investments. And it has even engineered takeovers and buyouts of its target companies in the past.
Elliott’s intentions have not yet been made clear but given that Salesforce has lost $170bn in market value, from its peak in late 2021, it seems likely that Elliott will agitate for change.
If you take a chart which contains changing price action, trends and behaviour, and then introduce two possible catalysts into that equation. Then, to my mind, you have a very interesting and attractive set-up indeed.
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