LG-Cap Portfolio Reveiw: Entering Lowe's (LOW)

We saw a strong snap-back rally this week and the SP500 is once again just below all-time highs. The resiliency of this market has been incredible. Its had every reason to crumble, yet it digs in and reverses back higher.

A notable development also occurred: the slope of the 20 WMA for the SP500 turned back positive for the first time since the week of August 14th. My trading data suggests new trades have a much higher probability of success when this trend has a positive slope. As the saying goes, "the trend is your friend". Meaning the pull of the general market will cause most stocks to advance with it. We want to be aggressive when the odds are tilted in our favor and it appears we are in a more favorable environment. As long as the broad market is above this line and its slope is positive, good things tend to happen.  

While this is an improvement do note that should weakness follow in the near future this slope will turn back negative and we will have to adjust again. The way I prefer to adjust is by either increasing or decreasing the size of new positions. When markets are trending higher I want to step up my risk and buy more. When markets are trending lower I want to scale back risk and size smaller.

SP500 Weekly

We continue to see large weekly swings, I believe this will be the case for some time, especially if we remain below the highs at 2,135. The 20 WMA just turned positive so there is a suggestion that we could keep pushing higher. A potential scenario I'm watching involves some digestion of the recent October surge, setting up a bullish formation that could then propel the markets to new highs.

This is what Bulls would like to see:

 The strongest scenario I can see would be more sideways consolidation for the next few weeks. Ideally we would see price move sideways in a tighter range just below the highs (within the pink box). For a sustainable rally to occur it would be helpful for a new "higher base" to form just below resistance. Also it would be helpful if any weakness finds support near the 2000 area.

Some back and forth between 2135-2000 would create a "right shoulder" to a potential Inverse Head/Shoulder pattern and would provide bulls the ammo needed to breakout, and hold new highs. 

While we await the next move in the indices, setups continue to form and trigger. This week we have a new entry in Lowe's (LOW). 

+Entering LOW

Lowe's reported earnings this past week and after an initial decline, the stock ripped back to new weekly closing highs. Volume expanded on this week's move which engulfed the trading range from last week. 

The weekly chart shows a strong base formation that also has the look of a Cup/Handle pattern. We have seen similar setups in the past for Lowe's and each led to substantial rallies. 

For risk management purposes we want to be long above the recent swing low at $70. That sets up a solid risk/reward as previous rallies off comparable bases have led to nearly 100% moves. We are risking less than 10% to make potentially 100%, that's a fine trade in my opinion. 

Our other holdings continue to be quite strong as well: 

COST

Costco blasted off to new highs this week and seems to be resuming its uptrend after a couple weeks of consolidation. It's now quite extended above its moving averages so a pullback wouldn't be unexpected soon. 

With the new high we can trail stops to $146.

LMT

Lockheed had another strong week and also pushed to new highs. We can trail stops to the breakout level and swing low at $207.50. 

FB

FB remains in a strong position.

GOOGL

Google had a great week rallying to new highs. Similar to COST, it is quite far from its longer-term support. We can trail stops up a bit to the bottom of the breakout consolidation at $639. But we still need to give this room to pullback without being shaken out. 

GE

GE is maintaining its vertical move, I expect a pause coming soon. A pullback to the $28-27 area would be normal and healthy. 

Short AXP

American Express made lower lows once again before rallying into the end of the week. This remains a dog and rallies continue to be faded. Soon we will be able to trail stops to around $75, but it's a bit early yet. 

Long US Dollar

Not much to say here with regards to the Dollar. I believe it's in a new secular bull market, so this doesn't need to be an immediate move. It remains poised for further upside in the future. 

We are now 40% invested and 60% cash. Should we see continuation in the markets and new highs, our allocations will increase fairly quickly as many stocks are setting up for potential breakouts. Here are a few to watch:

UPS

BA

CMCSA

ECL

BAC

AIG

A breakout to new highs for the SP500 will likely trigger many, if not all of these setups. Until that happens however we need to be patient and wait for the market's signal. This is the most constructive posture for stocks since early in the year, some leading names have already emerged to new highs, but many are likely to follow if the recent strength can hold.

Thanks for reading
-ZT