Monthly Breakout Watch

Before we get into our Monthly signal watchlist, we should address the elephant in the room. On Thursday evening Britain passed a vote to leave the European Union, Brexit as it has come to be known. I'm not an economist so I can't tell you all the possible scenarios that can come from this decision. All I can do is assess the market reaction and identify potential key levels for us to manage risk with.

When it comes down to money management, predictions, projections, and economic policy have little place in the process. As is often the case in the markets we can choose to be right, or make money. 

What I try to do with my investments are identify areas where momentum is turning. When momentum turns I want to participate. To do this successfully over time we have to make sure any losses that we accrue will be small and let our winners grow into strong gains. In order to achieve this we need to know the key swing points where monementum changes hands. 

SP500 Weekly

The SP500 declined -3.6% in Friday's session. That move alone likely caused many to act emotionally. While it's never fun to lose money, as long as we adhere to a successful process of cutting losses and running winners, over time we will come out ahead. 

As of this week's close the market remains above the recent weekly higher low and it found support at the rising 20 Week SMA. As long as 2,025 holds I believe the market remains on firm footing. Should 2,025 be broken to the downside the risk posture changes in my opinion; 2,025 is one of those momentum swing points. Above that line Bulls still get the benefit. Below however means initial support has failed and many trapped buyers exist above. This creates resistance and is often difficult to overcome. 

The Bulls need to step up in the face of this uncertainty and turn the momentum around. They will need to do so quickly as further downside could invite a flush back to the recent range lows. 

Prior to Friday's rout there were many potential breakouts forming as the market was near all-time highs. With the strong decline most stocks took large hits and moved back below breakout levels. This leaves us with a pretty limited list to watch as we head into the end of June.

I know macro news events are scary and we want to guess what will happen next. But to have success long-term we need to be as objective and unbiased as possible. Following the price action won't work every time, show me a method that does. The best we can do is observe reality and align ourselves with the trends that are in place. 

Large Cap 

Bearish 

+GILD

I've entered a Short position on this past week's breakdown. While Monthly signals are due to trigger this Thursday, Short positions tend to be more tactical and shorter-term trades for me. This looks like a substantial breakdown at major support and I am participating.

Depending on timeframe good stop locations are at $82.25, $84.12, and $88.24.

WFC

Wells is rolling over and appears headed for lower prices. Due to existing Short positions in BAC and C I will not take this signal, but it looks like a strong breakdown heading into Thursday's June close.

DIS

We took our girls to see Finding Dory this weekend. It, along with the opening short animation were adorable. I just can't Short Disney. They have been too good to me over my life. But this does appear to be headed lower. I would absolutely love to see this down near $60. This would be a stock to watch if a Brexit type panic brings it down along with the market. It's a favorite of mine long-term.

CAT

Could CAT roll over here and retest the January lows? I don't see why not. It hasn't broken yet, but after a 50% rally over the past 6-months another leg lower wouldn't be unheard of.

SLB

SLB is in a similar spot as CAT above. We've seen a snap-back rally in a long-term downtrend, those often resume in the direction of the prior trend.


Bullish 

+VZ

We will enter VZ on a Monthly basis should it manage to hold this multi-year breakout. A strong pivot low has formed at $49 which we will use as our stop.

It should be noted how resilient the stock was on Friday's selloff. While the SP500 lost 3.6%, VZ trimmed less than .5%. This appears to be a different situation vs the drop in August as it was dragged down with the broad market. Holding this breakout would be a very strong sign that money continues to move into this space.

+COST

Speaking of being completely insulated from a EU/Brexit breakdown, COST hardly blinked on the news. Down less than 1% on Friday it appears very stable even if things devolve across the pond.

Should COST manage to hold this breakout into Thursday we will take a position against this month's low at $148.55. A failure to hold that would suggest a failed breakout and we would want to step aside.

Following the theme of Brexit "safe" stocks the remaining few watchlist names should be able to hold up well in the face of European unrest.

UPS

GOOGL

SBUX

Due to the drop on Friday, many other potentially bullish setups fell by the wayside and will now need a big recovery to even be viable by the end of July. For now we are sticking with what we have and only looking to add risk in the best possible groups.

Utilities and Staples continue to have bullish trends due to their higher yields. With this week's news Fed Fund Futures posted a 0% chance of a July interest rate hike and actually a chance of a rate cut at the next Fed meeting. This will keep rates low and demand for higher yielding equities strong.

Bonds and Metals appear in fine shape as well. Commodities in general should hold up fairly well if the Dollar remains weak, which is a definite possibility given the current trends in place.

Banks are the clearest loser out of this deal. Most are now rolling over following violent throwback moves into broken prior support. While my call (view post here) for a decline was a bit early, it seems the next leg lower is now in motion.

Biotech also remains one of the weakest overall groups. Attribute any reasoning you want to it, be it high valuations, political pressure, etc. But simply following the price action will tell you what you ultimately need to know.

-In a nutshell the market remains in a long-term uptrend as well as an intermediate term uptrend. Volatility has returned as the resistance at prior highs has held once again. All we can do is try to position ourselves in the direction of the money flow. Currently that means high yielding/defensive stocks, US focused companies, metals/commodities, while Shorting Banks and Biotech.

A Few Stocks Poised For More Upside

SP500 Daily 

First things first, if you only remember one thing from this post, just focus on 2,025 as the key level. This is the ballgame folks, its right here. Above 2,025 the Bulls are in charge and new highs are within reach. Below, the range continues where another move back through 1,900 is likely.

A breakdown appears to be the low probability trade in my opinion. For those who think this rally will end just like the last one I believe crucial differences exist from the October rally:

-Sentiment is worse as most are now caught in the cycle of "what goes up must come down". On November 5th, AAII Bearish Sentiment was at 18.6%. For the 1st week of June AAII Bears were at 29%. After the recent pullback Bearish Sentiment has risen to 37%, the highest number of Bears since the February lows. The last time 37% of respondents were bearish was the week ending February 19th. The market then rallied 200 points over the next 8-weeks.

-Uptrend participation is higher currently than it was late last year.
In October the number of SPDR Sector Top 10 stocks > rising 20 WMA was 39 out of 90. Currently the number is at 69 of 90. The breadth is reaching an intial overbought reading, but in 2013 and mid 2014 there were readings in the 79-81 range. This means 81 stocks out of 90 of the largest SP500 stocks were trading > than their rising 20 WMA's, which is my definition of an uptrend.

In strong markets we want participation from a broad group. This shows the market is supported by many stocks' momentum rather than a select few. Thinner markets are more prone to breakdown, as we saw after the October rally. Currently the health of the recent uptrend is much stronger than the previous instance.

-The October rally peak was immediately followed by a series of lower lows/lower highs

-The currently rally has not set a lower swing low, and is now pulling back from a higher swing high.

 -Uptrend remains intact...ABOVE 2,025.

-Something bearish to report is that the latest swing high was met with a divergence in momentum vs the April high. Price made a higher high but momentum (MACD) made a lower high. Some could be looking at the April and June peaks as a potential Double Top formation. I agree this is possible, but again for this to confirm price would have to fail the swing low at 2,025.

-To refute that slightly, the MACD remains above the Zero line which suggests the uptrend remains intact.

-Overall the structure remains positive, attitude toward the market continues to be skeptical, and the Federal Reserve is currently Easy. Despite all the reasons that the market should be crashing, its not. The SP500 is only a couple percent below its all-time high. 

With what I consider to be a positive trading backdrop here are a few stocks I like should the market cooperate in the near future:


WYNN

The weekly view above shows a positive base development. I see a clear Inverse Head/Shoulder formation which confirmed with this week's higher closing high. By moving above the April highs there is now a confirmed higher low as well. The 20 WMA is below price and rising and above the 50 Week SMA for the first time since 2014.

We saw a clean breakout on Friday in a weak overall market. The stock made the highest daily closing price since August of last year. It should be noted also that while the market has been weak over the past 7 trading days, WYNN traded in a sideways consolidation and broke out to fresh closing highs Friday.

In terms of Relative performance vs the other major Casino companies WYNN has crushed LVS and MGM since the February lows.

The next major resistance should come in near the gap at 130.48. That would be a reasonable target for those looking to measure risk/reward on this entry signal. A move to $130 sets up almost 30% upside potential from here.

 I'm currently Long WYNN

JOY

At the most basic level of analysis (which you know I prefer) JOY has turned the corner. JOY is trading above its rising 20 Week SMA for the first time since 2014. Following a two-year period where the stock fell from $60 all the way down to $9, it has now formed consecutive higher lows and higher highs.

Also note the general trend action over the past 2-years. From 2014 until the lows in January 2016, any rally formed a bearish "flag" pattern and resumed lower once the short-term trendline broke. This pattern occurred several times during the decline providing many opportunities to either exit trapped Long trades or initiate Short positions. However since the bottom at the beginning of the year we've seen the "bear flags" turn into "bull flags" which is indicative of a positive trending environment.

Trading Volume has changed dramatically in the last year as well. There was a substantial escalation of selling pressure in the 3rd and 4th quarters of 2015. Sellers were capitulating as huge numbers of shares were sold into and near the ultimate lows. Heavy selling by itself doesn't mark major bottoms. Setting a permanent low requires heavy buying. Fortunately for JOY buyers have been flooding in. Volume has been much higher on rallies than on declines so far in 2016, this shows accumulation by major holders and is the kind of action you want to see when a major bottom is being created.

We will be continuing to take bullish action on rallies and looking to add to positions as the stock consolidates and resumes higher.

Measuring JOY against its primary competition CAT and DE, you can see the huge discrepancy in performance since the February low. Granted JOY has been much more volatile, but if you can manage the swings it offers much more upside than its peers.

I'm currently Long JOY

FCX

For the first time in 2-years FCX is pulling back to and holding its rising 20 Week SMA. I believe the trend is turning higher here and substantial upside appears likely. The recent consolidation comes after a monster run off the ultimate $3.50 low from January. It is now creating a bull flag formation and this could very well also be the final construction of a Right Shoulder in a larger Inverse Head/Shoulder base.

We are still awaiting confirmation of this thesis as a trade through the yellow downtrend line triggers an initial entry. Then a breakout above $14.40 sets in motion the large bullish pattern.

Momentum via the MACD is also now holding above the Zero line for the first time in 2-years. A resumption in price soon would suggest longer-term momentum has turned positive and the ensuing rally could be fierce. The base pattern itself targets a move to near $25 which would be a nearly 40% upside move from the $14ish breakout level.

I will be taking action on a close above $11.60 and breakout over trendline resistance. A move above that triggers initial positioning and I would be even more aggressive on dips occurring above the $15 neckline area.

For now patience is the best course as nothing has been confirmed just yet for our thesis. Yes the stock has rallied sharply off the lows. But its not necessarily about where a stock has been, its more about where its headed next that matters to us. To me it appears the major secular trend is shifting and a new bull market may now be only in the early innings. 

LOW

Lowe's has had a nice pullback/shakeout of the recent base breakout. This week saw a sharp move back into the prior trading range only to find support above a rising 20 WMA and rally right back to close above the breakout resistance.

The Daily chart shows the throwback in more detail. As you can see prior resistance has become new support. Should this week's low fail to hold on any further weakness it would be a sign that the breakout is in real trouble. But if price remains above this level its a bull market, breakout mentality.

I'm currently Long LOW and will be looking for further upside to confirm my bullish thesis. Consolidations above the $77 breakout would be opportunities to increase positions and trail stops. 

GE

GE staged a textbook bullish consolidation into the rising 20 WMA and is now breaking higher. This kind of action makes our movements very straight forward and simple. We want to increase positions on this move and can use this week's low as our stop. A weekly close below that swing point would invalidate the additional bullish thesis and we would take a more cautious posture. Above it however the stock remains in a higher high/higher low uptrend. We want to be aggressively long above this confirmed breakout.

 The Daily candle chart shows the sentiment behind this new breakout. It appears while the base consolidation was under construction, the multi-month downtend line was broken. The Right Shoulder low came on a retest of that trendline breakout. The ensuing price action appears very bullish to me. Tuesday was the igniter of the move; the wide body nature of the trading range nearly engulfed all of the action back to late May, the previous 13 trading days. There was then upside follow-through Wednesday but strength was sold and appeared to be looking to reverse the new breakout. Early Thursday GE got taken lower by almost 2% but then managed to close all the way back through Wednesday's close. My suspicion is this "reversal of the reversal" likely trapped a lot of Bears and they used Friday's morning decline to close out those losing short positions. Friday, once again in a weak market managed to close back near its highs and > than the 50 DMA.

Putting a stop at Thursday's low seems like a good way to play this shorter-term. Should the stock trade back lower and through the reversal low it would be a sign of great indecision. In that case I would rather let someone else figure out which way it go and step away from the action.

I am currently Long GE

-Note: Many of the above stocks have higher volatility. Be sure to know ahead of time what you are getting yourself involved in. If you trade JOY be ready for swings of 3-5% on any given day. You must size smaller and either keep stops very tight or step back a little bit. We must always use protective stops. Regardless of how positive we may be on a position, anything can and WILL happen in the market. The best we can do as participants is identify strong risk/reward scenarios and position ourselves to profit from those setups. Should those setups fail to materialize and reverse against us, it is our responsibility as risk managers to notice the change and adjust accordingly.


If you like what you see above, do know that I am making available to regular readers to provide this kind of factual evidence on any of your individual holdings or stocks you may have on your watchlist. Should you like a personal rundown on a certain position (ZenTrends style) send me an email at ztanalysis@yahoo.com. I am willing to provide this service at a small fee for my time and labor. If you are interested shoot me an email and we can discuss specifics further.

Thanks for reading
-ZT

Short-Term Swing Trades Review

This week I would like to review my recent shorter-term swing trades and exactly how I manage a day like we had Friday.

The recent rally has been very profitable, I hope you have experienced it as well. But as they say "stocks take the stairs up, and the elevator down". The past few weeks displayed this action perfectly. 

As is always the problem, traders want to avoid "profit givebacks" like we saw Friday. Everything is going along great and then wham. All that you worked for over the last several weeks is halved in a day. Now there is no magic way to deal with this and some are better at it than others. The fact is that it will happen over and over again, this we need to be able to handle. 

As a trend trader I have grown quite used to the idea of giving back some gains at the end of a move. Note that I didn't say "I like giving back gains" but rather it happens all the time and it's a fact of life. No one (well almost no one) can consistently exit at the exact tops and bottoms. 

However I have found that success doesn't hinge on how much profit I give back, but rather the limiting of losses. If you keep losses small (really small) the amount you lose at the end of a strong move will not dictate your P&L. 

The basic premise is be absolutely ruthless with positions showing losses and run the rest. Most of the remaining trades will stop out for modest gains, but a couple will be big winners that end up making your system very profitable. Let's take a look. 

I'd like to review the action going back toward the 20th of May and evaluate my current holdings that either survived or were stopped out in Friday's volatility.

Closed Positions 

Coming into Wednesday I had a nearly full portfolio. Which was great, right? But I noticed something funny with one of my holdings on Wednesday:

SWN (+15%)

I entered the stock when it broke through base resistance at 12.60 on 5/25. As per my rules I trimmed 1/3 of the holding after a 20% gain in the position on 6/6 at 15.19. The stock had maintained a steady trend of higher highs and higher lows since its initial breakout. Then Wednesday morning I noticed the stock was trading weakly while the SP500 was making higher highs. SWN proceeded to tank -7% on the day and closed on the lows. I had trailed stops to the 6/3 swing low at 14.29 which was broken with zero defense from buyers.

Fast forward to Friday and we can see where the stock ended up:

Granted SWN rallied 6% Thursday (yes I felt like an ass watching it rip), but it then proceeded to implode in Friday's weakness by -11% and closed nearly $1 lower than our original exit. Chalk one up for sticking to the plan!

On Wednesday I also entered a new breakout in CNX which immediately reversed against the entry and we were stopped at the close of that same day:

CNX (-4.99%)

 While its never pleasant to have a new trade face plant immediately, it can be a strong signal that something is changing under the surface. As you can see following our exit at 15.06 the stock proceeded to drop another -11% in two trading days. Another High Five to keeping losses small!

It turned out this "hint" of weakness Wednesday was a precursor to a profit taking spree for the rest of the week.

A big winner over the past couple weeks stopped out Friday as well. Just as SWN and CNX were a precursor to future weakness, TBPH tipped off the recent rally on 5/20 as the market set a "bear trap" reversal. 

TBPH (+16%)

We entered the base breakout on 5/20 at 19.71. On 6/2 we captured 20% upside, as well as retested the prior highs and therefore removed 1/3 of the holding. The next 6 trading days the stock moved sideways and then failed to hold above prior support Friday, signaling our exit.

The next two losses were completely avoidable on my part:

TTS (-4.74%)

It appeared TTS was staging a solid base breakout on Wednesday (see "buying into profit taking" above) but then gained no traction and Friday's reversal squashed any upward momentum that may have been remaining. Take the lump, the lesson, and move on.

SHW (-1.15%)

Sherwin was another late breakout in an overbought market. It proceeded to immediately drop below our entry point and Friday followed through lower, stopping us out. The loss was very small in this one which I like. While it could still be a viable setup candidate I stick to the rule I learned from Peter Brandt: close any trade that is not profitable at the end of the week. SHW qualifies as that currently.

Note: I only apply this rule to short-term trading. I remain a SHW Bull long-term and do hold positions in the stock based on the larger timeframes.

FANG (+1.5%)

 FANG is a great example of giving back gains in a winning trade. Right out of the gate the stock rallied. We entered on 5/24 at $88.15 and within the week it was trading at $94. We then sat patiently through a consolidation, which was then followed by another rip. This new high allowed us a good place to trail stops to and run a potentially very profitable trade.

Following the strong rally on 6/7, 6/8 popped higher from the open but then traded lower the rest of the day. That reversal (on Wednesday again) was the first sign something might be up. Thursday consolidated for most of the day but then moved lower to finish out. Of course Friday was a non-stop skid to fill the open gap and close below prior support.

When all was said and done we closed out for about $1 per share. This is a tough one because you want to let a winner run as far as possible, but at the same time it sucks to watch open profits vanish like that. If there was an easy way to remedy this I would like to hear it. I've tested taking gains at 5% intervals, 10% and so on. But if you get a very good trend, a trend that can make your month, by the time you accumulate a substantial % gain the holding has been reduced 3 times or more and it barely is enough to matter. You need those few large trends to pay for all the small losses. By constantly culling your winners its impossible to snag those larger trades.

The fact is being a trend trader you have to live with moves like this, they happen more often than not. Where the big gains are recorded are in the select few that really move. Keep initial losses small, and let the rest run. Its the best we can do.

Open Positions (currently 50% Long exposure)

MKTX

Open gain +6.33%

UNP

Open gain +6.03%

ABMD

Open gain +4.7%

HAIN

Open gain +3.1%

I'm always happy to be more flexible with open profits; play with open gains, ruthlessly cut losses to principle capital. Technically I could have closed both ABMD and HAIN Friday as they made minor lower highs and lower lows over the past two days. But they also both show decent open gains AND have more persistent intermediate-term uptrends intact.

This is where being ruthless with open losses would come into play. Should I be showing a loss in either of these positions I would cut them, no questions asked into the close Friday. But the fact that they are both winners and possess solid swing low support it makes more sense to see if they can become 10-20% winners rather than only marginal winners. If either or both stop out in the next couple days the losses incurred will be practically zero and in fact would still likely show some gain on the trades. But should they hold their intermediate trend and resume higher they could become the next SWN or TBPH to really make a positive impact on the overall P&L.

Successful trading is a process and never ending journey. There will always be mistakes to learn from. If you always stick to the most important rule with uncompromising discipline, profits will follow: "run winners, eliminate losers".

What About The Rising Rate Environment?

For the last few years we've heard almost daily how we are transitioning to a rising rate environment. The Federal Reserve is normalizing monetary policy and interest rates are on their way to the moon. Rather than getting sucked into this narrative I've chosen to focus on the price action. Price has suggested that interest rates will remain low for an extended period of time, we received further confirmation of "lower for longer" with this week's Jobs Report.

Following some jaw-boning from the Fed a few weeks ago most were convinced a June rate hike was a done deal. Many leading asset groups from the last several months were cast aside due to this inevitability of higher rates. High yielding groups like Utilities, Real Estate, and Consumer Staples were written off as overcrowded "safety plays", while precious metals have pulled back after a torrid run from the beginning of 2016. Traders moved away from these groups over the last several weeks as they have been caught up in the short-term banter of the financial media.

If we take a look at the longer-term charts the trends remain firmly intact and appear ready to rally once again.

PCG (Utility)

PCG broke out from dual resistance levels this past week. This formation (Rounded Bottom/Cup-Handle) is a bullish continuation structure and I see higher prices ahead.

IYR (Real Estate) Monthly

The long-term action for Real Estate remains very positive. Traders have gotten caught up in the short-term noise surrounding the Fed and are ignoring this 15-month bull-flag consolidation, which continues to trend higher following the downtrend break in March.

Many Strong names in the Consumer Staples Sector have been building solid consolidations and look ready to resume higher:

KO

PM

RAI

Silver pulls back to major support and rebounds

SLV

SLV Monthly

It should be noted that SLV is holding above its 20 Month SMA for the first time since late 2011. A long-term change of trend I believe is underway.


Treasury Bonds (TLT)

30-Year Treasuries are breaking out from a multi-month consolidation.

10-Year Treasury Yields (TNX)

Since 2014 10-year Yields have been in a negative trend environment. Only for a few months last summer did they show any positive price action. As we can see it did not hold and is now resuming lower out of another failed consolidation.

You could make the argument that this is back to a "risk off" posture for the market. Maybe that is true. But I tend to see it more as a continued rotation across sectors with a suggestion that the Federal Reserve will remain easy. A Fed that is supportive of low interest rates and even possibly more Quantitative Easing should provide a tail wind for equities as a whole.

The market remains in a solid position to make new highs.

Every time I have posted something positive about the price action of the SP500 in the last two weeks, the posts have been met with quite a good deal of skepticism. Participants continue to be very hesitant to embrace the recent change of structure to the broad market averages.

We've seen the year-long downtrend line broken and despite this week's "poor" price action (as many seem to be viewing this as a topping formation), the SP500 did manage to post a modestly positive return, consolidating the big gains from the last two weeks. I see NOTHING negative about the recent action and believe the structure currently is the most solid we have seen in over a year.

SP500 30 min

Zooming in on the last two months it appears the "Sell in May and Go Away" folks did they're best to roll the market over. However all they did was set the stage for the Bulls to rally into summer.

It looks like a confirmed Double Bottom formation is in play. While I hear about bearish "Hanging Man" candles on the Daily charts, the underlying price action is showing modest consolidation ABOVE the recent swing high from May. Momentum confirms a pullback within an uptrend as MACD remains > 0. The recent structure reminds me of mid-February when the market broke out from another Double Bottom pattern and managed to rally 60 points over the next few weeks. We could definitely see a similar move.

Breadth continues to improve, moving averages are under price and turning higher, interest rates remain low, Central Banks remain accommodating, and stocks are breaking out of strong base formations. The recipe is in place for higher prices.

Many Growth stocks continue to be positioned strongly and are at all-time highs. If we remember the rules of Trend and Momentum, we know new highs are most often followed by more new highs.

FB

CRM

USPH

TXRH

Bottom line it remains a target rich environment with many stocks resuming higher out of substantial long-term consolidations. Conditions suggest being open to the increased probability of new all-time highs in the broad market indices as interest rates remain low for the foreseeable future.

Thanks for reading
-ZT