Sunday, June 26, 2016

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.




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