Tag Archives: Power Charts

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S&P in bullish setting amid uncertainty?

So all the bad economic news has come and gone and the S&P bounced off the crucial 200 DMA in a picture perfect manner and is now carving up the handle out of the cup, IBD William O’Neal’s favorite price formation.

Such technicals argue that money managers seem to have decided what to do with all the bad economic data – they are not selling.

It could be argued that the “not selling” part is the cup, while the handle contains the opportunistic ones taking positions and those intermediately indecisive seeking more confirmation and sure, there is plenty to be taken off the table… like Italy and Europe in general, debt limit and Washington, more clarity on China and, perhaps soon, a decisive decision by the market as to which will continue to be the bull, economy or oil.

But as often is the case, undesirable events have a tendency for conflation at the most inconvenient timepoint: Europe and Washington could implode simultaneously, former out of honor and latter out of spite, while the confusion as to what is the dominant China narrative gets hijacked by the panicky narrative of all the bad debt mandarin banks hold on their books.

As for the US, Reinhart and Rogoff soberly point that ”interest rates seldom indicate problems long in advance” and the fact that the 10-year yield is dropping amidst political spite in Washington is blatantly comforting when we know first hand (Europe anyone?) that things in the debt space, to paraphrase Hemingway, happen gradually, then suddenly.

On oil, the time seems to be quickly approaching as to who will remain the standing bull – the economy or the oil. That this decision is well-nigh is suggestive by the banks and hedge funds themselves who keep predicting that the continued economic growth will drive the oil price higher. The problem with this argument is that at some price point the causal relationship reverses, and its not just an outright demand destruction but also tightening response by those whose inflation, already spiked by food, will be deemed intolerable because of oil.

On a more optimistic note, picking off some quality stocks – like Altria (MO) – and getting a little accumulation of them now may be a wise long-term approach when, after sifting through hundreds of charts daily, one cannot find not a single decent trading setup – until last night.

Valeant Pharmaceuticals, VRX, has a bullish flag that has been going sideways between $47-55 for over 3 months. With a stop at around $47.50 the downside risk, as of today, is about $5 while the upside could be as high as $70… for ballpark odds of 3-1 in favor of a bullish breakout.

Of course, much can go wrong with this trade, not just that the VRX is in the pharma space where the government, and not the market, is the determining factor, let alone that VRX has no PE and trades at 3.3 time the book.

Then again, the shorts are at 6.3% of the float and many of those 14 million shorted VRX shares may have to get some cover if things do not go the short way.

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Two stocks with great price charts

A sell-off is a good time to evaluate strength of particular stocks and although not many have any good trading patterns, here are some stocks with exemplary chart set-ups, some with good fundamentals also, that could reward risk takers in coming days.

Motorola Solutions (MSI)
Huge ascending triangle looking to break into $50s.

Good Year Tire (GT)
With the earnings gap largely filled, this name at a good entry point. The May highs at $18. 72 is not an island reversal which typically means the top could be broken through much more easily.

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Divining the charts of the commodity carnage

What could price trends in various markets suggest to us as to where things are going?

Chart below is of copper and yesterday’s trading clearly broke below the 200 DMA and the next possible support is lower at 370 (then 340). The velocity of the price drop also suggests that the 370 may be reached fairly soon at which point any rally would look at the 200 DMA as a resistance level. Fibonacci retracement lines also support this view. Besides the dollar rally, there are also some fundamentals driving the price down, particularly high Chinese copper inventories and lack of credit there to fuel new copper purchases.

As oppose to copper which has a well defined price pattern, oil (WTIC) looks set for another $10 leg down and even there the price may keep drifting lower and into $70s.

As for the dollar, it is still not clear whether its recent rally is sustainable because both the 20 and 50 DMA momentum is down and the price is sloping down the long (200 DMA) price trend. So far, the dollar rally looks to have legs up to the upper Bollinger channel (about 76) which is also the short term resistance area made in November. This top may be reached fairly soon and at that point, dollar looks more likely to head down towards 72.

Some in the media are saying that the recent dollar rally is sustainable because of the anticipation that Fed will stop pumping money in June via QE2 thus ushering “quantitative neutrality”. Markets typically discount things 6-or-so months ahead, so this argument, month before QE2 ends, is little dubious.

Coal looks like its has placed a nice interim bottom, but its double top at around $52 needs to be taken out for this commodity to continue its upwards channel. There is lot of chatter about huge pending coal demand in Asia that can act as a catalyst for such a rally this summer. Two years ago, coal has seen bullish summer time price action while last year, coal held well during the summer sell-off and subsequently rose huge in the fall.

Of course, none of this is a perfect science, but sort of a suggestive guidance on possible price action to be expected, barring any black-swan events, which are increasingly turning white.

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Buy stocks for mid-term

Today’s late market sell of – when the Dow went negative although was positive all day – is a negative short-term overtone to the otherwise bullish pattern where the 20 DMA momentum is about to cross the medium term 50 DMA… so bullish that the DJ Transports even went up!

Given this, we are likely to see a pull back on the Dow to 12060-ish rather then a push to Dow 12,400, the major resistance level which, if broken up, could lead to substantial new highs.

Incidentally, the February 12,400 on the Dow does not look like any major top so once 12,300 is cleared we are to expect a blow off the 12.4K easily. 

Meanwhile, we should expect a pull back in some of the rally stocks, like copper and coals. I expect FCX to pull down to $52.50; BTU to pull to $66-68 range… and I would be a buyer at those stages.

Commodities like copper (FCX) and coal (BTU) ought to do good in the environment where Fed is printing money.

One stock that looks ready too pull substantially higher is the  met-coal Walter Energy, the WLT, even though WLT hit $131 handle today and pulled back to just under $129. This is a high beta stock and $5-6 moves in a intra-day are common. I wouldn’t be surprised if WLT drops $6 to $122 in a day only to rally $4 or $5 by the end then go even higher.

Incidentally, I tag WLT at $170 handle… if you have a stomach to watch it get there… because steel mills operate at about 70% capacity so any incremental gain in that capacity translates into huge demand for WLT coal to power that increase.

Elsewhere, gold looks ready to drop to $1350 or so and if that is taken out look for an intermediate drop to $1280 handle which does not look too convincing to me as a support line so that if breached, GLD could tank down to $1200 handle.

Time wise, this gold drop may coincide with possible interest rate lift by the Fed – say June – which may cause a drastic rise in the dollar and a shave off in many other high fliers like copper and coal, materials and Apples…

Having said that, and barring nuclear reaction in Japan, I would play the coal and copper stocks through April and sell them on strength… sell any tech on strength, like Apple, and move into good dividend stocks to ride out the summer… like MO, PM or few other good ones like POM, AT, FSC and HGT… all with a good and safe dividend yield.

One stock I would heavily get into NOW is GoodYear (GT) even though WaxInk calls it a $50 stock against my modest $20 while GT trades at less then $15.

Major break in down trend set to retest $19

Major break in down trend set to retest $19

Fundamentally, GT has bunch of good headwinds, like rising car sales supported by (expected) employment rise requiring tire changes on clunkers as well as shortage of tires in the mining and a general price rise of tires given inflation that Fed does not acknowledge.

Technically, GT broke away from being a sell-off stock and is now rising a trend line, oft and on retesting the support on the downside – like today because it offered preferred shares. Such support on GT should be bought heavily.

I see GT at $21 this year or maybe higher depending on the tape.

Similar tradeoff are the US car stocks – GM and F. Both have hit major lows and are bouncing so slowly but, if patient, down the line F looks like a $40 handle and GM may tip into $70.

Car derivatives, like parts, ought to be  handled with care and caution.

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Two stock setups

First, a follow-up on my last week’s 6 power chart set-up.

MGA totally broke down with TIF, TSCO and PL still holding up. The FP and LFUS are still good.

For the week ahead, I am looking at DEER and LVS.

Both of these stocks are set up so that they have to make a move one way or another.

DEER is in a 4 and 1/2 week consolidation period with a distinct floor at $11. These setups typically resolve themselves on the upside if the market corresponds. REE was a similar setup to DEER as it consolidated in Nov-December period.

LVS does not have a distinct floor but a good trading box between $42 and $52 and as the STO has just turned up off the bottom as the stock bounced entering this trade through $50 looks like a good way to play the stock. Selling half at $50 and waiting to see if it breaks through $53 is a good way to bet on any possible break through (which would be a monster one).

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6 power-charts

MGA – 6.5 week consolidation flag and dancing at the 20 DMA with rising stochastic and the RSI with MACD soon to turn. Could re-test or break $62 this week.

TIF – Personally, not a fan of any retail but good-ol’ Tiffany has a cup-n-handle floor at $57 and change. Stochastic and RSI little toppy and the MACD little uncertain of a direction but could be a good trade if it clears $66.

FO – May have broken out already but still waiting to see clearance of $63-$64.

TSCO – With ag-stocks hot, this one may dance down to the 20 DMA before poppin’ over $54. May watch for that trigger.

PL – This one looks ready for an upside so some patience is required and good market developments.

LFUS – Littlefuse has had several false break-outs that has trapped traders, but it is now staring its 7 week of consolidation and may rise above $54. Worth a watch.