I Like What I'm Seeing!

EEM showing rotation and is leading the bounce higher

XLK is breaking out and seeing strong rotation (INTC, GOOG, AAPL, MSFT)

XLP vs SPX is rolling over

TLT now testing outperformance support

SPX closing at yet again another all-time closing high, testing key resistance level

Weekend Update: Seeing Some Rotation

After last week's gut check for the market, the SP500 held its support and was able to bounce nicely back to retest the highs. We haven't set a new high just yet on this bounce and some of our concerning indicators simply took a breather this week, seeing no harmful technical damage. We also have not seen a lower low yet  in the S&P either, therefore the uptrend is still intact....Say it with me, "the trend is your friend". We need to continue to align ourselves with the current trend until we see a breakdown of prior lows. Right now my main focus will be on the 1538 price level, as long as that is holding I will continue to favor the long side of the market.

I have also redrawn the uptrend line from Nov to now. With the strong bounce last week I think we can say that the current positioning of this trend support is legit. Again though, we are mainly going to be concerned with the horizontal support at 1538 as our sell signal. I made some small additions this week in my accounts but nothing major. For me to get comfortable again, I will need to see this upper channel resistance taken out as well as the prior high being eclipsed. In context of the intermediate term trend, we are still being held within the upper boundary and struggling at this level. I think it would be a great sign if the S&P chops around above 1570 for a couple days and proves it can hold these levels, then it will be primed to move higher.

A few notable changes to our focus list occurred this week. Here are the updates:

PBW-Clean Energy

PBW  rallied strongly this week and was able to break above the right shoulder resistance of our short term  H/S Top pattern that we have been tracking for several weeks, effectively killing the setup (which is good!). Looking out at the longer term view, the key level now will be the $4.85-4.90 area. This level is prior support, now resistance from the lows in late 2011 and is the prior swing high from February. We are also seeing what appears to be an inverse head/shoulder setup forming. This is something I have alluded to previously as a possible setup, but now it seems to be forming nicely. If this breaks out our initial price target would be at the $6.35 level for a projected gain of 30%. This would also be a key trend shift in the clean energy space that could lead to much more significant gains in the future. Stay tuned on this one.

HAIN- Earnings Thursday May 2. After Market Close

HAIN has broken out of is 6 month consolidation base and inverse head and shoulder pattern. As you know, we have been waiting for this move for some time now and this week we saw strong action. With earnings due out Monday afternoon, it will be interesting to see how this pattern anticipates the announcement. I am a long term holder of HAIN and added to my position on the breakout Tuesday. I am currently holding 2/3 of a full position here and after earnings I will determine if I want to get fully invested here. If it weren't for their earnings release I would have gotten fully positioned this past week, but since earnings can be such volatile events, I am choosing to keep some powder dry just in case this doesn't come together as I had planned.

Excellent, excellent setup here! Stop below $59 and right shoulder low.

F- 

Ford announced a killer quarter this past week and shares are now breaking out above the 4 month downtrend resistance. This move is still in the early innings I feel as the intermediate term trend looks great. This was another position I added to this week.

DDD

DDD is attempting a breakout of the intermediate triangle resistance ahead of its earnings due out Tuesday. I added to my position on this breakout as well. As long as the uptrend is intact, I will be positioned strongly in this space.

As for the rest of our stocks to watch, not much changed this week. The winners are still holding trend and the laggards still have more work to do.

A couple interesting charts I have been watching and like very much at current levels are CSX and ARUN:

CSX

I have loved the railroad stocks for some time now (being a boy, I guess I have always just had a love for trains) and I have been looking for good setups. Looking at the long term chart of CSX, it has recently broken out of a big 18 month base and is consolidating perfectly just above $23. They also just reported a great quarter this past week. Strong buy long term but keeping a close eye on the $23-22 support level. I will keep you posted on this one as I recently initiated a position and think it will be a clear winner going forward.

Another interesting chart that has grabbed my attention this week is Aruba Networks (ARUN)

Another long term view here. ARUN looks to be putting in a sort of reversal pattern. Seeing that the neckline is slanted gives me some pause as the pattern isn't quite perfect, but needless to say the implication of a bounce from current levels could be big based on the setup. I also initiated a small speculative position here. Fundamentally ARUN could raise some eyebrows with traditional valuation metrics, but their EPS growth for the past 5 years has been strong and quarter over quarter was monstrous. They also sport very strong gross margins and no debt. Interesting prospect going forward.

While it is nice to have lots of cheery prospects on your watch-lists, it is always prudent that the overall market health is conducive to your portfolio allocation. As of the close Friday I am at a 50% long stock position, 20% treasury bonds, and 30% cash. While I put some money to work this week as the price action dictated, the TLT position held up very well while the broad markets rallied strongly. This has me slightly concerned mainly because historically treasury bonds and stocks have moved opposite to one another. This certainly doesn't mean they cannot move up together, but it should raise at least a yellow flag, if not a red one.

We will continue to watch how this bounce develops and if it can hold or not. If there is a major change to the current market environment this week, I will certainly let you know. The biggest things right now to watch will be the SP500 levels of:
1,538- current trend support and most recent low
1,597- current all-time highs for SP500

As long as we are between those levels, the market gyrations are simply noise and of no real consequence. It is a break from that range that will be important.  

Weekend Update: Is It Time to Get Concerned?

This week was the worst so far this year for the SP500. After making a new all-time high last week, markets retreated; the SP500 lost a little over 2%. While a pullback from the highs of less than 3% is really not much of a pullback, its the longest sustained pressure we have seen in 2013. What concerns me and many others are the signals the markets and the internals have been showing for the past couple months or so that continue to deteriorate. The SP500 also broke its key 6 month uptrend support this week, which is one of the primary signals I pay attention to in the markets. Its not possible to lose large sums of money in the markets until trend lines break. What I mean by that is as long as an uptrend is intact, higher prices continue to occur; the bottom never falls out until the uptrend fails. Once stocks break trend a couple outcomes are possible, the first an most hopeful is that the stock in question just bounces right back above the trend support and the up move continues. The second and most typical outcome is that the breakdown leads to a rollover in the uptrend and lower prices are ahead.

While I would like to hope that the market will recover and everything will be fine, that's not a way to invest and trade. Hope is not a strategy, so when a change of character occurs we must shift our focus and protect our accounts in the best way we see fit.

 


TLT confirms buy signal- Weekly Bar Chart

The TLT has broken out of a 6+ month downtrend and falling wedge pattern. The Relative Strength signal has confirmed the price breakout and the TLT has now outperformed the SP500 since early March. This move is being confirmed by multiple indicators I look at. Volume has been significantly picking up on the buy side since March, this shows accumulation of shares through large inflows of cash. Remember, we like to look at volume as it shows where money is moving in the markets, big volume moves like we have seen recently in TLT show strong interest in the underlying asset. The weekly MACD has also signaled a buy here and has followed through further from the initial signal. Treasury bonds tend to move opposite to the general market.

I have added a position in TLT in my accounts this past week.  I can use this as an opportunity to limit some risk in my accounts so I can remain positioned in the stocks that I still like (there are several right now).

I really hope that I lose money on this TLT position because that would mean the market moves higher from here, but I just am seeing too many things short-term to be concerned about. Another troubling development has come to pass over the past week. I'm referring to the relative breakout in the XLP vs SPY chart. Last week we were talking about a key level for the Consumer Staples vs the SP500 on its Relative Strength chart, this week that level was broken to the upside and is a bad sign.

The rally this year in Consumer Staples has been very very strong. In 2013, the XLP has finished higher 16 out of 18 weeks. Typically stocks don't move straight up forever, seeing that Staples have been such a winner year to date, it would seem reasonable to see some profit taking at some point soon by investors. A pullback by the Staples would usually signal a "risk on" type of trade and the general market would rally. However in this case, where the majority of money coming into and propping up the general is flowing into the Consumer Staple sector. Since Staples are leading this market higher, a sell off of the Staple stocks would in my opinion further fuel the downside momentum. We are in a tricky spot in terms of maintaining the broad stock market rally. Unless the money flows from the Staples into some of the lagging offensive sectors (healthy sector rotation), the market will likely be under pressure in the near future.

It will be very important to watch how other sectors that have lagged over the past few months perform when traders begin to sell the Staples. We will continue to watch this space closely.  

Russell 2000 Index

A reason I am still quite hopeful about the prospect of higher prices in the future for stocks comes from this index's performance and breakout to all-time highs.

As you can see from the weekly Russell 2000 chart is still well above its prior all-time highs and a pullback to the $860 level would still be considered very constructive behavior. When markets rally small caps typically lead the move higher and tend to start gaining momentum prior to the large caps and SP500. Likewise when the market is slowing and weakness is building, the Russell will often provide the "canary in the coal-mine" as it were, hinting to a broad market weakening. The Russell's strength against the SPY underwent a sharp decline the first week of April and has continued to under perform since. I would expect the Russell to find support near that prior level of resistance (860-870 area) which would be almost a 6% pullback from current levels and 10% from the highs. That would still fall into the "healthy pullback" category and should be bought. We will have to wait and watch to see how this plays out.

As for our watchlist stocks, there was little change in status. The most notable happenings were:

AAPL

 

AAPL broke to the downside under the 3 month trading range this week and continues to see lower lows. Also of note, anyone hoping the base was finally forming during this holding period, needs to acknowledge that we still have not seen a higher high yet. The bounce we saw and were tracking the outcome on last week, was still a lower high than the previous high set in the early part of trading range. One last tidbit here, I have noticed that the sentiment is still not nearly dire enough yet for a bottom. I receive daily email alerts from a popular blog site for my watch list stocks and seriously, 75% of those articles/blogs are covering AAPL....Still way too many people trying to pick a bottom in this thing.

PBW

The Clean Energy fund has managed to hold off the bearish looking top formation and has been trying to stabilize. The trading action still shows weakness due to the consistent lower highs/lower lows since the peak in mid February. Even this false breakdown rally failed to get above the right shoulder before rolling over again. This is not set up to be holding anything more than a base position at this time. No trading or adding to current holdings right here. Lets see how this plays out.

CMI

CMI broke down below its prior support level this week and looks vulnerable here. Stay clear of this space for now as well.

Its not all doom and gloom out there! There are lots of stocks that I feel are either set up really nice right here or in grave need of a pullback. Some prospects to check out this week are:

HD- needs to pullback significantly for another good entry
ABT- Same as HD, we need to see some nice entry points before loading up more
ROST- Ross Stores seems to be righting its long-term uptrend recently and is flagging nicely after a huge pop.
GOOG- After reporting a very strong quarter on Thursday shares surged $35 on Friday and the bounce occurred at very solid support. I think this one goes higher.
PPG- Also announced a great quarter on Thursday and has now broken above a 2 month downtrend resistance on strong buy volume. Big uptrend here!
ENB- After running to the upper range of the uptrend channel, a pullback is needed for better entry.
HAIN- Seems poised to pop on their earnings announcement due a week from this coming Monday. Its still in its holding pattern, but it looking set up to make a big move should results impress.
F- Ford is testing uptrend support and seems to be waiting for its earnings report due Tuesday before market open to determine its next direction. Do know that news tends to surprise in the direction of the current trend. Seeing that Ford's sales have been so strong recently and the fact that the trend has been steadily higher for almost a year now, favors an upside surprise to this quarter's numbers.
Big Banks (JPM, BAC, WFC, GS, etc)-are testing key support levels here and its do or die time for the financials. A breakdown here and the market continues lower. As go the banks, so go the markets.
UNH- Retesting a breakout of a one year trading range. Great buy above $58.

There are lots of interesting prospects out there right now which is why I am currently positioned 40% stocks, 20% TLT, and 40% cash. My stock positions are small and many as I am trying to ease into some good setups that I'm seeing. The 20% position in TLT is some protection I purchased in case the market in fact trades lower and my prospects get squashed. If the market goes lower I will still gain from my TLT position. I feel good with the 40% cash holding here as I can move in either direction should I need to. I can add to my prospects if they turn out to become winners, or I can add to my TLT position should the market deteriorate further. The TLT position allows me to take a shot at some decent values I am finding in the market and still covers some of the downside risk I am exposed to at this tricky moment.

Be cautious yet opportunistic out there. We need to be nimble in our positioning and mindset at this current time. We want to be able to capitalize on value, but most importantly we need to limit our downside risk.

Relative Strength: How to Pick Winners

Now that we have discussed the theory of Relative Strength analysis, lets take a look at the practical application of this idea.

We are going to be using Relative Strength to separate the winners from the losers in the market. What is so great about this kind of analysis is that it can be done in seconds. After a brief tutorial you will be able to look at any stock or fund or commodity, compare it to the SP500 or whatever asset you choose to match, and you will know it your stock is beating the benchmark or not. Very simple, cut and dried, and massively effective for your investment returns.

Lets take a look at a quick example of how we would compare two competing stocks:

1. Open a chart of one of the stocks in freestockcharts.com
2. From the "price history" tab select comparisons
3. Enter the symbol for the stock or index you wish to compare the stock to.
4 Click ok

Here I have done this with the price chart of Best Buy and compared it to Amazon

What this chart shows is the relative price performance of Best Buy vs Amazon (in white). This shows that over the last 8 years Best Buy's shares have gained 24%, while Amazon has grown by nearly 600%!
If anyone out there thinks Best Buy is a better choice for your portfolio, then you should just stop reading now and give all your money to someone else to manage for you. Yes there will be those who want to buy the beaten down Best Buy because its "cheap". Let me tell you that long term returns do not support that thesis as a successful investing strategy. The stocks that perform the worst tend to continue to perform the worst. Sure there are those that come back, but its much fewer than is acceptable for out sized returns. A stock that has been under performing its peers for more than 5 years is not getting cheaper, its getting worse and it will most likely end badly for the laggard.

Here is another example of this type of comparison

This is a look at Black Berry (formerly RIMM) vs Apple. Even after Apple's "crash" this year, it has managed to outperform by more than 2500%! Please don't try to be a hero and buy BBRY down at these levels. Just buy some Apple after this very generous sell off and sleep better at night.


The other way to compare stocks to each other is to use the Relative Strength chart from the freestockcharts.com indicator menu.

1. Choose your stock of choice
2. Select "Add Indicator"
3. Scroll down to "Relative Strength" and click

You will see the Relative Strength sub-chart below your normal price chart. The default is your stock compared to the SPY fund (fund that mirrors the SP500 index). When the line is moving up, your stock is outperforming the SP500, when its moving down its under performing. Very effective and yet the most simple indicator to choosing consistently winning stocks. If your goal is to beat the market (which mine is) this is the only indicator you will need to follow.

Just in case anyone thought I was giving Black Berry a raw deal by comparing it to one of the best growth stocks in our generation, here it is compared to the SP500 with our new indicator. Clearly the the relative performance in BBRY has been terrible since the 2008 peak; you would have been much better off just buying the SPY.

So here is where you want to apply this tactic into your investment ideas. Choose a stock you have interest in and after having looked at their company's financial standing, you are more or less confident they are not headed for bankruptcy. Then compare its long term performance vs the SP500. If its outperforming the SP500 over that period of time, then it passes the test and you can consider purchasing the stock for your portfolio.

Note: There will be times where you have an idea that is just so good you can't let it slip by regardless of its rampant under performance and you have no choice but to buy this dog of an asset. Just please make sure you don't allocate too heavy a position toward it. Blind speculation is ok as long as its kept to a reasonable level, no more than 10% of your total portfolio)

Here are a few of the winners I like for my portfolio:

Enbridge (ENB)

This thing is just a pure beast of a stock. I guess someone has to transport all that oil.

3D Systems (DDD)

DDD has been a monster over the past 3 years and I see 3D printing technology as a game changer.
Apparently I'm not the only one!

Cummins Engines (CMI)

While CMI hasn't been super over the past 2 years, the overall performance has been stellar.

Now, just because these stocks have done well in the past does not guarantee that they will continue in the future. But using the concept of Relative Strength in this simple way will generally keep you on the right side of the trade.

One last important aspect of using this method is understanding that things can change; when things change we have to change with them. Luckily (and I will expand on this further in the next post), the "Relative Strength" indicator will give you a definite signal that a shift is underway.

Lets revisit our Black Berry chart for a minute to explain. Things weren't always so bad for this tasty little phone company.

After trading between $17 and $35 per share from 2004 to 2007, the stock went parabolic increasing to  over $150 per share. That rally created a spectacular gain for anyone invested in the stock and everything seemed peachy. Then in 2008 the stock crashed along with the broader markets and gave back nearly all of its gains from the previous 2 years. Now, if you were a Relative Strength investor, and were on the conservative side you would likely be inclined to hold onto those shares through the bad times that came. In late 2008 when the stock bottomed out, you could have drawn in your relative strength trend line (shown in white) connecting the lows from 2006 and 2008; you would still have an uptrend in out performance and now would know exactly when that trend breaks. Sure enough that trend did break about 18 months later and signaled under performance at a price of about $70 per share. If you had held onto the stock from the original purchase, you would have made a cool 350% on your investment.

However if you had chosen not to follow the "out performance" sell signal in the middle of 2010 (the trend support being violated) you would currently be losing roughly half of your money. That's a 350% gain vs a 50% loss...And that is with a very conservative trend line being drawn. If you were a little more trigger happy, like I tend to be, when the stock went straight up for a year I would likely have adjusted my trend line to lock in some of those outrageous gains. Following another simple trend line, the out performance ended in the 3rd quarter of 2008 and the trend line was broken at roughly $115 per share. That would have been an excellent signal to trim some position and take profits.

Sure it's easy to go back and look at charts in hindsight and see what we should have done. But I tried here to use an objective view of how this strategy can be implemented in actual practice. Would we know to exit right at that point? maybe not. Likely our emotions would have been running wild and we may have done something different. The point is that after using history as a guide and implementing this in real-time, I have found that it is a remarkably strong signal generator, both on the buy side and the sell side.

The purpose of using relative strength is to try to identify where the strong parts of the market are and moving your money away from the weakening areas and toward the stronger areas. Keeping yourself aligned with the strongest groups will surely help you on your way to investing successfully. Many individual investors don't invest wisely, whether its because of their mindset about the markets or the hot tips from that spamming penny stock ad that keep popping up in their email boxes. But those lost souls would improve their returns significantly, right off the bat, if they stuck to buying the strongest stocks in the market.

In the next post I will continue deeper into performance trend reversals and trading setups that I use everyday in my own portfolio management strategy.

Weekend Update: What I'm Watching This Week

The SP500 finally was able to break out above its all-time highs this week and closed out nearly 1% above the 1,576 prior high, at 1,589. All in all it was an impressive week for stocks and now we need to be looking for confirmation of the breakout from sector groups and individual stocks.

What happened this week? I mean last Friday's Jobs Report was pretty bad from most any angle and this Friday's key earnings releases from JP Morgan and Wells Fargo were not amazing. Yet the market has shrugged this off and pushed to new levels. It was most likely helped by a renewed confidence in the Federal Reserve's easy money policy. The idea that QE will be ending soon, is really the last fodder the bears have right now to slow this stampede. After seeing the March Jobs numbers it appears that an end to the Fed's easing is a long ways off. The Bank of Japan announced their own version of QE in a very aggressive central bank decision this past week which no doubt was a tail-wind for our markets as well. Everyone is drinking the Kool-aid now and the race to dilute each's currency is in full gear. Yet Gold continues to be under pressure and in fact closed the week below a major, MAJOR support level.

If you are not in this market in some way then you are missing out. The free for all is well underway and you might as well grab what you can. One day the music will stop and this may in fact end badly (it always does right?), but it is not ending now so you might as well get in the game. While it may seem that the market is too high and moved too fast, remember the saying that markets can remain irrational longer than you can remain solvent. In fact the sentiment poll of the AAII, individual investors are more bearish on stocks right now than have been seen in many years. Sentiment is an interesting thing in that is has a solid record of being a contrary indicator  meaning when investors feel the most excited about stocks the market is nearing a top and the opposite when they are most worried. Interesting thoughts to ponder.

Today I will be sharing what I will be watching closest in the coming week. I really want to focus on a few key things:

Sector Groups: Russell 2000 Index, XLP, TLT, XLK and GLD
Individual Companies: AAPL, HAIN, HD, JPM and F


Russell 2000 (RUT)

Was this week's bounce in the small caps just a throwback to retest the trend line failure, or seeing that it closed back above the 20 and 50 DMA's, was it a legitimate stabilization of the current trend? We will need to keep an eye on the prior high and low. A break above the 960 level will cure all ills while a close below 910 will be a very bad sign.

XLP Consumer Staples Relative to SP500 since 2011

Probably the most interesting chart I have discovered recently is the relative performance of the Consumer Staples XLP vs the SP500 and what happens when the triangle resistance is tested. This chart has major potential implications for the future direction of the rally. The key here will be whether the pattern holds and Staples fail to breakout above downtrend resistance, or if the XLP does in fact breakout this time. Take a look at the correlation to the SP500 when the resistance is tested and fails!

Triangle resistance indicator since 2011:

Each peak in relative strength created a massive buying opportunity.

October 2011- Marked the bottom of the SP500 from Euro crash
December 2011- Sparked rally from December-April
July 2012- Marked bottom of "Sell in May and Go Away" year
Dec 2012- Completed the bottoming process before our current market rally
Current - ???

Is it crazy to think that another big run is just beginning?

 Gold- GLD

Is gold signalling "no fear in sight" or is QE really coming to an end? As I mentioned in the intro, all the bears really have left in the tank is the contention that the Fed is going to be tightening policy and shifting away from QE very soon. Gold, along with being a fear trade, is suppose to reflect future inflation concerns. Being that the Fed is printing money hand over fist it would make sense that Gold would be rising sharply due to the massive stimulus. However, the market is a forward looking mechanism and could be beginning to price in the end of QE. Hard to say whether its a strong US Dollar, the end of QE, or the lack of fear in the market, but gold is certainly trying to tell us something. We will have to watch and see what other hints we get from the yellow metal and other key sectors around the markets.

TLT

TLT is bouncing after a pullback this week. Relative strength is showing a short term uptrend and I would like to see this roll over soon. Figuring Treasury Bonds is very tricky right now as it is being dramatically altered by the Fed's purchasing practices. Just remember that Treasuries typically trade inversely to stock prices, so higher bond prices are a bad thing.

XLK

Tech is key in my opinion for the next leg higher. Investors will look for value and tech has been beaten up. Watch how earnings come in for the big cap companies (INTC, AAPL, IBM, GOOG). A better than expected outlook and they could be ready to lead the way. With Staples, Utilities and Health Care ripping, the so called safe havens are getting a bit frothy. I think a reasonable place people will turn for dividends and relative out performance would be the large cap tech stocks. Don't ignore tech just because it is currently out of favor.

AAPL

1-hour bar chart

Which way does it go? Momentum indicators suggest buying interest. This will be a huge part of the overall tech recovery. Watch Earnings April 23rd. Currently we have conflicting patterns on the short term charts with Head/Shoulder formation (in red) and an inverse Head/Shoulder (in white). Key levels are $419 support and $440 resistance.

HAIN

Nice base forming here. Still waiting for the breakout though. A close above 62.50 is what we are looking for.

HD

A relative strength breakout is just underway. This thing might shoot straight up from here! That would actually make me concerned of a blow off type move. It was upgraded Friday morning with a new price target of $85 by Piper Jaffray. I held my nose and bought back into this beauty on that mid March pullback...I will add to my position on the next dip as well.

JPM

JPM posted earnings this week beating estimates and showing strong EPS. However the stock initially traded lower and close slightly down for the day. I sold half of my position heading into the announcement and will be looking to add to my current holdings on a breakout above key resistance at 49.50. I would also look to add shares on a pullback to trend support around $46.

F

Ford seems to be getting some mojo back and has broken out above downtrend resistance after bouncing strongly on key uptrend support. I added to my position on the Jobs Report Friday sell off and luckily that marked a near term bottom and now it seems poised to rally into its earnings date on April 26th. Relative strength is confirming the breakout giving us more confidence that this move is for real. Love the stock here! Just be mindful of the Earnings related risk in just over a week.

Weekend Update: The Good, The Bad, and The Ugly

The markets traded slightly lower this week, down just over 1% for the SP500. The lows for the week were caused in response to the March Jobs Report that showed slower labor activity than expected. On Friday morning, after the report, the SP500 sold off  to 1539, however that initial surge was stopped right at key support at the 1538 level and bounced strongly into the close. Market participants are still showing the strong desire to buy the dip, and that kind of demand will keep prices firm as long as its present.

While we must respect the aggression from the dip buyers, there are other areas of the market that are still showing ominous signs. As long as the key uptrend on the S&P can remain intact, things will be fine. If that trend gives way though, it will cause some definite concern. We will look at the sectors again today to see what the underlying "vibe" is for the market right now.

The key trend support here nearly coincides with the 50 DMA as well. I am a big fan of the 50 DMA,  it is one of the most important indicators I use, and when its pointing up like this I'm a happy guy! So as long as the low at 1539 holds the uptrend can continue. After reducing a few positions this week and getting stopped out of a few others, I was down to my lowest holding in some time by Thursday afternoon (which was more lucky than good I think), holding only about 2-1 cash to stocks. When the market sold off on Friday, I was curious to see how the support would handle the move. When it stabilized I decided to take a shot at a few stocks that I had reduced earlier and added to a few positions. I am now back to a 50% invested position, with my eye on the exits if 1539 fails to hold. Or an eye on adding more if we can clear above some nasty overhead resistance that the market has been dealing with for the past month. Don't over think it, its still an uptrend...can't really get any more simple than that. Continue to buy into weakness like we saw on Friday. When the trend changes, we will change with it.


The Good News

XLF

Some good news from this week was the fact that the Financials were able to stabilize at critical trend support  . Initially the trend and 50 DMA were broken early Friday morning, but were then able to catch a bid and rallied nicely into the close. With the major banks announcing earnings over the next 2 weeks i think we will see a continuation of this bounce into those announcements. Also shown here is the relative strength trend and that just tested support and bounced Friday. There was no breakdown in terms of relative strength and this also makes me feel that this is another "buy the dip" situation. Some ways to play this, I recommend JPM, WFC, BAC. Just an FYI, JPM and WFC announce earnings this Friday and BAC announces Wednesday 17th...Be careful buying new positions and holding through an earnings announcement, it is usually a good idea to reduce risk into an earnings report just because it is more of a gamble to buy a bunch right before the announcement.

XLY

Along with Financials, Consumer Discretionary has been a strong, offensive leader for this rally. This is another space where buying the dip seems best here. Good ways to play this space are HD, TWX, and F.

US $

The Dollar took a bit of a hit this week and broke its 2+ month trendline. Usually a weak Dollar is a good sign for stocks. Now we will just have to see if it continues to weaken or bounces back


The Bad News

TLT

This one is good and bad, depending on your time frame, so i think its important to look at both. Remember the TLT typically moves opposite to the stock market.

The Good- There is a long term bearish pattern beginning to take shape in the TLT. I'm seeing what looks like a potential Head and Shoulder Top pattern. This would be a great sign for stocks for a year or two to come if this in fact forms and fulfills.

The Bad- Short term and the only confirmed  price action we have seen is the breakout from the downtrend channel and the huge gap up TLT saw in response to Friday's Jobs Report. This action only reinforces investors general distrust for the rally at this late stage. Relative Strength is also confirming the short term breakout. If the scenario I have created here plays out in any reasonable manner, it would seem that this will trade up to about the $126 level and create a short term bearish outlook for stocks. But the move should top out relatively soon and then would setup the long term move lower as the price action may suggest. A rally and break above the highs at $132 would kill the potential Head and Shoulder setup and likely be bad for stocks going forward. We will be watching this space closely as we move along.

XLV

Having a strong Health Care sector is not terrible, its just not exactly the group we want to see leading the rally. Health Care is usually a defensive group and when defensive groups lead it signals that the end of the rally is near. To be fair, this space has lead the entire time and is the year to date best performer of all the sector groups. Not a huge negative, but not the best either.

XLI

Industrials have broken below the 20 and 50 DMA's as well as the uptrend support trend. Prices closed well off the lows Friday afternoon, but this is not a positive sign for risk investments. Relative strength has foreshadowed this rollover for some time as it went below its trend support right at the beginning of March. If you followed the relative strength trend breakdown, you would have gotten out at a very nice price, near the highs.

XLB

Materials have shown similar weak action. Prices are flopping around just under trend support and clearly this is a group that has underperformed the market in general for some time. Relative strength has been in a steady downtrend for 2+ months.

XLE

Energy broke down hard to start the week. It also managed to close strongly Friday afternoon, but the general price action has been relatively poor for a month now. Again following the relative strength trend breakdown would have provided a great signal to move away from this space in mid March.

The Ugly News

Russell 2000

Now for the real ugly stuff! This is a chart of the Russell 2000 small cap index. When this index is outperforming the market it shows a strong interest in risk taking by investors. Small cap stocks by their nature are more risky and generally outperform during strong market moves and underperform badly during downturns. They also tend to be a "canary in the coal mine" so to speak in terms of trend reversal. The real key here will be whether it can hold above its prior low around 900.

XLP

The Consumer Staples continue to kill it and have just broken above a 7 month relative strength range resistance level. This breakout will be one to watch because when staples really start to outperform the market, the likelihood for a broad market pullback goes up considerably.


XLU

Utilities are similar in market sentiment to staples with their relationship to risk assets. When Utilities are rallying and leading, its typically bad for stocks.

XLK

And lastly, yet another bad sign for risk assets is this formation by the Technology sector. Having under performed for this entire rally, tech has just broken down from its 6 month trend support and is building a large Head and Shoulder Top pattern. This is still a long ways from fulfilling, but the recent breakdown could be signaling more weakness to come. The major test will be the neckline support around $27. I'm still a believer that this space can turn around and surprise everyone and a breakout above $32 would be very bullish for stocks going forward. Don't ignore this space!


Clearly there are some mixed signals present in the underlying market internals. That's why I have been content to hold around 50% in cash and wait for some of these troubles to resolve themselves one way or another. For now, I recommend holding lots of cash but also look to opportunities in Financials, Discretionary,  Health Care, and Staples. These are where the strength in the market is right now and as always I look to invest in strength and sell weakness.

Stocks to consider on this pullback:
JPM, WFC, BAC, HD, TWX, F, HAIN, DDD