Good evening StockBandits!
The recent rest phases we’ve seen in the market finally came to an end last week with some upside acceleration. Each of the averages finally had a more emotion-driven move with a big thrust higher. That delivered new all-time highs for the S&P 500 and DJIA, as well as some very important continuation moves for the NAZ and RUT as they pushed past key levels and added to their recoveries off the spring lows. In short, it was a change of pace the bulls needed.
Although the bulls claimed yet another week with some milestone achievements, it does come with some strings attached. Volume was still pretty lackluster, and now price is looking rather extended – for the blue chip indexes in particular. The S&P 500, for example, has rallied in 12 of the past 15 sessions, with 2 of the 3 declines being less than 2.5 points each. That’s about as close as you can get to a one-way move, so it’s very tough to warrant aggressive buying up here until some rest is seen.
My watchlists turned up very few bearish charts, as the rising tide has lifted most of the “boats.” On the bullish side, however, there are actually some good setups starting to emerge. In order to avoid chasing extended names in an extended tape, the setups I’ll be favoring here on the long side are those which have just put in some rest and, ideally, have pulled back in recent days. That may allow them to get reset and perhaps give them a fair shot at nice initial moves out of their respective bases even if the broad market finally cools off.
Many are quick to aim for a top in this market, but that’s a very difficult game without much relative reward tied to it. Although the next one may prove different, historically we’ve seen time and again that tops tend to be much more of a process than an event. An initial selloff goes a little deeper, the next bounce(s) is(are) feeble, and some lower highs get established. Once that has happened, the mood gradually shifts into broad-based selling. Seeing all-time highs and trying to short them here in expectation of a deep correction right off the top simply isn’t warranted – by the recent price action or by history, so be careful embracing the theory that a deep correction is imminent without an event as a catalyst. A rest is certainly needed here though, so I’m aiming to stay nimble with new longs.
Let’s get to the charts.
NAZ – The NAZ added 1.8% last week to exit the short-term consolidation zone it had recently carved out. Price saw a trio of strong closes which left this index back above 4286 and closing in on 4344. Volume is still subdued, but price is trending higher and that should not be dismissed.
SP500 – The S&P gained 1.3% last week as it continued to post strong closes in all 5 days – even Tuesday’s minor decline. This index has been up 10 of 12 and 12 of the last 15 sessions. Here again, volume has been quiet with only one exception but price now has ample breathing room for a pullback whenever one arrives.
RUT – The RUT recovered extremely well last week from its short-term pullback, pushing back through 1137 and then 1160 to end the week with a 2.7% gain. That also confirmed a higher low, so this was a notable improvement in the small-caps. Now we’ll see if the short-term momentum can continue or if instead we see some profit-taking kick in. Once again, in the latter scenario it will boil down to whether another higher low can be formed on a dip.
DJIA – The DJIA finally quit flirting with 16735 last week with a solid 1.2% advance to a new all-time high. Strong finishes continued in this index as well, so now the bulls will aim to maintain this breakout. The prior multi-month trading range could still see a measured move completion, which extends to the 17100-17200 range.
VIX – The VIX finished the week in the 10’s, which it hasn’t seen since February 2007. This index has an all-time low of 8.60, set in December 2006, and on that occasion it got back north of 21 in less than 3 months. The implication here is that fear is hitting a multi-year low, leaving options cheap with ample room for worry to change the picture. Time will tell whether or not this occasion leads to a market pullback, but we’ve seen for quite some time now that volatility can remain low for an extended period of time, reminding us that a high VIX tends to offer more reliable signals than a low VIX.
Notable Names:
F is much like many other stocks out there right now in that it just rallied big from what had not been a bullish pattern. Price also has run pretty much nonstop, making it illogical to chase during this run. It’s now approaching some key resistance, which it may respect and finally put in some rest.
SMH is the semiconductor ETF, which is all technology. It just rallied in 14 of the last 15 sessions, including 12 straight. This is not a sustainable pace, but for now it’s impressive to see. Moves like this often lull bystanders into thinking it will continue without relent, but the farther it goes the more extended it becomes and the more overdue a rest it gets.
LNG is again setting up for a play, this time on the diminishing-volume pullback off the high. I like this one for a single-day play if price can clear the small trend line at $67, as it has room to rally back toward or through the high. Given all the recent momentum, along with this nice setup, it is likely on the radar of many traders tonight.
YELP is sitting in a small base after a shallow pullback and some lateral price action in recent days. A turn up through $66.30 puts it back on the move, and I like it for a single-day play on the long side if that break occurs on Monday. This base is not as tight as it appears due to the deep correction in price for the first half of this chart.
CONN is stabilizing here after a quick pullback and now there’s a steep descending trend line just overhead. A push through $46.75 could allow it to pop, so I like this setup for a single-day play on the long side. Given its recent volatility, that’s all I’m interested in.
RP is wedging here after a nice rally, and a breakout through $21.85 would be of interest to me for a single-day play on the long side with room up to $22.86, the prior high. I don’t like the risk/reward enough for a swing, so I’ll be out by the closing bell if this one triggers an entry.
New Swing Trade Candidates:
These stocks look ready for imminent multi-day moves. Pattern confirmation occurs with a move through the entry level. Initial stop and target levels are also provided.
CERN has carved out some quiet higher lows since the April low and recently showed some nice strength. It’s been resting for a few sessions and this wedge is tight, so a decision point is nearing. If price clears the trend line at $54.25, I’ll get long for a swing looking for a move back toward a couple of key levels as targets. If it happens to roll over, I’ll use short-term support as a stop, which sets up a nice risk/reward play. Earnings aren’t for another 6 weeks or so, which gives it time to move.
Bullish Watch (click for charts)
Bearish Watch (click for charts)
Trade Like A Bandit!
Jeff
