Q1 in the Books

The month of March is now behind us and with that the close of the 1st Quarter. As most know January began with a swift plunge down -11% in the SP500. That was followed by a +13% rip to bring us back to even at the end of the Quarter. While the market has gone effectively nowhere in 2016, it hasn't been without its drama and opportunity. In fact the corrective period has set up many very strong Monthly charts.

Last week we wanted to watch how the market handled another test of its 20 Month SMA. Alas it finished in an impressive manner and is now firmly back above this long-term average price.

SP500 Monthly

It is my general thesis that when the SP500 is above its 20 Month MA good things tend to happen. Conversely when the market is below this line bad things tend to happen. This isn't a perfect strategy, but it more often than not keeps you on the correct side of the trend.


With the close of the 1st Quarter I thought it would be a good idea to review some of the best looking long-term charts in the market. Let's look at each of the 9 major Sector ETF's top chart (my opinion) in each group.

Top monthly charts in the 9 major XL sectors:

XLP- KO

Note this chart shows without dividends calculated into price.

Regardless of dividends included or not, this stock is making a monster breakout above its prior all-time highs from the late 90's. KO has built what appears to be a rounded base/Cup-Handle formation. I do own this stock and continue to build a long-term position.

In sympathy to this move in KO, PEP is making a solid breakout of its own and we added it to our Lg-Cap Portfolio this week.

Entering PEP

KO and PEP trade mostly the same. What is good for one is good for the other. PEP has formed a solid base over the past 18-months and is now resuming to the upside. We are giving this a little more room than we may need to, but that is due to the monthly chart and the location of the rising 20 Month MA. This average has been strong support for the stock during its rallies in the past.

XLK- MSFT

Our other new entry this week also boasts a strong long-term chart. After consolidating its rally from 2013 the stock has continued to press higher.

The Weekly view shows a very clear retest of the prior breakout and now follow-through above the January swing high. We will put our stops below $50.

XLU- AEP

 AEP has a massive base breakout in motion. The stock retested these prior, multi-decade highs and has since resumed to new highs.

XLV- UNH

Every time UNH has pulled back since the '09 lows it has found support at the 20 Month MA. Will this time be any different? I don't know, but I don't have to guess. Just stick with it until it fails.

XLI- HON

Honeywell has a robust breakout in motion following a year-long consolidation. Why are we not in this name here? I don't have a super answer for that, other than previous breakout attempts have failed and the market is stretched...? I know, not a great answer.

I guess what I would want to see would be for this breakout to hold and show follow-through. Like the MSFT example, we didn't get in on that initial breakout either. We just bought some time and let it prove itself. That's what I want to do here as well.


XLY- LOW

Lowe's was my favorite chart heading into 2016. After a strong breakout-reversal, the stock has held its ground and is now pressing higher. Should this return to new highs it would qualify an important "Turtle" rule: that an entry is only taken if the prior trade signal failed. Meaning if the most recent breakout signal failed but then held its support and resumed higher once again, the subsequent move had more significance than the first.

The theory being:
1. Initial breakout buyers get stopped out on the failed move
2. Those same buyers sell but the stock doesn't continue to decline.
3. New buyers establish positions with the shares purchased from bulls who were shaken out.
4. The real breakout occurs and continues as so many disgruntled traders refuse to give in and buy the stock back at higher prices.
5. Reluctantly over time those buyers are dragged back in which leads to the stability of the new trend.

The hardest thing to do in the market is buy back into a stock you were just stopped out of. You simply don't want to be proven THAT wrong. First you were wrong when the signal failed to lead to profits, then you were wrong for thinking it would go lower following your exit. Next you don't want to admit (even though your initial thesis is now being proven correct) that you should chase at these higher prices.

The psychology can be fascinating. Now that I think about it this sounds a lot like my HON justification above. We were stopped out of HON after a marginal profit and it has now turned back higher without me. I justify sitting on the sidelines because of any number of reasons. You see where this goes...

If LOW breaks out soon I would consider that a powerful signal.

XLF- SPG

SPG is by far the most constructive looking Financial in the XLF here. The Monthly view shows it closing at new highs. This is one I'm watching closely as the REIT stocks are red hot.

XLB- SHW

SHW shows an incredible trend. It loves to flag and rally. Similar to UNH above, just keep running while its there.

XLE- PSX

Considering the total mess that is Energy, PSX continues to trend higher following the spin-off in 2012. If the group could really find its true low this would be a great spot to look for an opportunity.


The clear leading groups are now Staples, Utilities and Technology. With the additions of MSFT and PEP our portfolio is largely positioned toward that strength.

Heading into the 2nd Quarter our Lg-Cap Portfolio is now 50% invested and 50% Cash. We remain Long FB, GE, AEP, PCG, PM, SHW, UNH, MSFT, PEP. Short GD. 

Due to the length of correction many charts are setting up substantial bases. How these bases break will be our road map going forward. There are many names that remain constructive and a resolution higher would present a strong buying opportunity. While others appear vulnerable to a downside resolution and would be good short candidates. 

With the recent volatility we've seen in the markets over the past year you should be in no hurry to act in either direction. We continue to have large swings, and for all but the most nimble, being patient remains a fine strategy. Yes you will miss out on some of the action, but we aren't here for action. We are here to grow our accounts by identifying strong risk/reward setups and managing risk over time.