Lg-Cap Update: Entering Costco and Lockheed

Markets continued higher this week. We have now seen a 150 point rally in 9 trading days. There is also a lot of talk of a Double Bottom formation.

Depending on how you were taught pattern structure some may say the confirmation is based on the closing price of the swing high, while others would say it has to break the highest point. If you use closing prices, the pattern is in motion. If you use the highest intra-day price, we are now testing the neckline. Either way can't rule out this scenario, as constructive price action has occurred at initial resistance areas (i.e. 50 DMA, prior range closing high, VIX < 20)

However the intermediate-term trend remains negative. SP500 weekly view:

 Price is now approaching the declining 20 WMA for the first time since the breakdown in August. Seeing that this average has been strong support for the entire bull run, I would expect it to act as resistance on the way back up. This will be a key level to watch.

Another item of note is that lagging sectors have been leading on this latest rally and are also nearing their declining 20 WMA's:

Energy (XLE) Weekly

 The Energy ETF has tested the 20 WMA during this decline a couple times. The first test failed quickly while the second test briefly broke through, but soon resolved lower. It will be interesting to see how this third test is handled. By my basic wave count it appears we are seeing a potential wave4 rally and that a wave5 decline will likely follow.

Materials (XLB) Weekly

Materials haven't quite tested the 20 WMA but have rallied furiously over the last two weeks. The XLB has gained ~15% since the low last week and remains in a strong downtrend.

When lagging sectors lead a bounce within a downtrend its often a sign of overall weakness. Only time will tell if this rally is met with sellers, but risk remains elevated.

The bounce has been strong and some new signals are triggering, however we still remain below the prior trading range from most of 2015.

SP500 Weekly YTD

The big test for this market will be this prior support, now resistance at 2040-2060 

The recovery is dragging most kicking and screaming back into the market for fear of missing another end of year rally. This is occurring likely just in time to rollover again, fooling the majority who are convinced the correction has run its course. 

 While there are new entry signals being given, risk remains elevated in the intermediate term. As long as the 20 WMA is declining, and especially while price is below that level, rallies remain suspect. Because of the heightened risk, all new positions require smaller than normal trade sizes. What would normally be a .5R size per trade, is now a .33R size until trend conditions improve. There has been progress but we still aren't there yet. 

Our Lg Cap Portfolio is entering two new positions: Costco and Lockheed Martin. We also remain short AXP. 

Entering COST

Costco has been on our watchlist for some time due to its intriguing base setup at all-time highs. This week the stock saw strong upside action to close at the highest weekly closing price ever. We can place our initial stops at the low of two week's ago and rising 20 WMA at $142. This has been a key inflection level for the stock within the trading range for the last year. I think the stock sets up well above that area.
 

Entering LMT

Lockheed is in a similar spot as Costco above. Its another stock that we have been watching as its base was largely left intact despite the wide ranging bar from late August. The stock then consolidated tightly at that upper end of the range and this week made new all-time highs. In a market full of uncertainty, this is the best signal we can receive. A new high tells us more upside is likely over the intermediate term. We will use the low from two weeks ago as our stop at $199.

Short AXP

 AXP remains below our $78 weekly stop level despite the strong rally in the market. It is once again testing the underside of its declining 20 WMA and the overhead supply level. Below this area I have no problem remaining short the stock.

The current price action in the market suggests we should put on a couple starter Longs for the first time in a while. We will do that, but we still remain in a roughly 75% cash position. Our new Long entries bring our allocations to 15% Long, 10% Short, and 75% Cash. 

When the market is under pressure it is best to remain patient and let opportunities come to us. There are still very few setups showing healthy price action. The recent rally helped that a bit, but there is much more work to be done before the "all clear" signals are in place. 

Many have been very quick and confident to call a bottom with this current action. But as long as large overhead supply exists and major moving averages are above price and declining, the market will likely be volatile and challenging. 

The bottom line is we need to stick to our system's signals, but until more consolidation repair is done the market remains vulnerable.

Thanks for reading
-ZT