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A few clients in the US have begun to ask questions about Integrated Investor and how they might incorporate integrated techniques into their own trading. As with most shares it is quite simple to demonstrate the effectiveness of this approach in a real world example. I have chosen Carolina Group (CG) listed on the NYSE because it is in the defensive (inelastic sector) of tobacco products and our economic indicators would have been telling us to seek defensive plays.
Primarily, the sector is flagged as one which might offer outperformance in the deteriorating economic environment through late last year. You can clearly see the movement in a well defined channel and the progression through the series of Elliott Waves. Practitioners of Gann techniques may also note a 270º price repetition from the previous main range and expect resistance to price. The rise in the share price and position trading could easily be taken using any trend following technique.
Chart 1
click chart for more detail
However it is not this rally we are interested in, in this instance. As the price has risen, the relative value of CG has begun to decline. From the fundamental aspect (given to us by the lowest chart) it is clear that the current P/E ratio has begun to outstrip the historical P/E ratio. For more detailed information on these lines and how to read this chart, please just refer to my previous articles on the subject. Suffice to say, the blue line is returned from a calculation based upon the day’s closing price divided by earnings. The red line is based upon the P/E ratio of the share as of the end of the year.
Technically, we can also see some strong signals to sell or actively pursue a put or short position. The TAPP has been achieved and the oscillator is clearly showing divergence with the upward price trend. A Wave 5 Sell can be initiated according to your trading rules.
If we regard the chart from the current day, it would appear that we have turned full circle.
Chart 2
click chart for more detail
Now the current P/E is much lower than the historical, clearly telling us that CG is cheap relative to its historical prices. This helps us quickly identify value and has been included in the automated Integrated Investor scans. It is now important to wait for a technical trigger to open a long position. A break of the price channel coincident with a TAPP event and oscillator divergence (I like to also use Bollinger Bands as per the Integrated Investor value scans for extra confirmation) gives enough evidence that the share is approaching a technical bounce. Again, according to your tested trading plan, you can now initiate a long position.
In the world of the blind, the one eyed man is king. In the financial markets, he who sees more earns more.
Stay Sharp
John Jeffery
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