New Stock Roadmap? – 07/29/2014

Another classic consolidation session. Big winners in some groups vs. big losers in other groups = a breakeven finish. And really, this is the same kind of swirling, non-trending action we have seen since the beginning of July.

I previously stressed that the market would rally up to 2000 AND THEN go through an extended consolidation period. However, I think that so many investors were spooked by 2000, that they didn’t want to wait til the final second. Meaning many investors have been selling each time we got up around 1980-1990.

This has me re-thinking what comes next. Perhaps that extended consolidation expected after hitting 2000 is actually taking place now. That may mean that when stocks finally get up to 2000 they will have the strength to break above. Probably up to around 2050 before the next serious consolidation begins.

Granted, any serious weakness in key economic reports this week and we are back to 1900 in a hurry. However, if the data continues to impress, then the above is the roadmap I am following.

Best,

Steve Reitmeister ( aka Reity…pronounced “Righty” )

Executive Vice President

Zacks Investment Research

I Have Found the Trend – 07/22/2014

Yes, there is a clear trend for the market since the beginning of July. And that trend is…

SIDEWAYS

We started July at 1973 and we closed Monday at that same exact level. With this sideways action are all the normal trappings that come with a consolidation period. That being a rotation from group to group with no clear leadership and no clear way to profitability.

Consolidation periods are standard fare for the market. Typically when they are done stocks will resume in the same direction they were headed before the sideways action began. In this case, that would be higher.

Your best bet at this stage is to make sure your stocks pass the grade this earnings season.

Best,

Steve Reitmeister ( aka Reity…pronounced “Righty” )

Executive Vice President

Zacks Investment Research

Consolidations Ready For A Break Higher

Tickers in this Article: SLCA, HLF, MCO, BKD

Consolidations are when the price action of a stock becomes tightly contained following a trending move. Consolidations can take on all sorts of shapes and characteristics. One in particular can be useful for trading purposes since the consolidation itself shows there is still short-term buying interest. The longer-term buying interest of the trend – combined with the short-term buying interest of the consolidation – indicates that the next likely move for the stock is higher.

Many traders wait for a breakout of a consolidation, believing the breakout provides confirmation of the next move. That isn’t necessarily true, since false breakouts can occur even with this confirmation. This presents two options. Take a long trade as soon as you see the consolidation pattern discussed below, or wait for the breakout. The former keeps risk lower since the entry point is closer to the stop level. The latter has slightly more risk, but may give traders a bit more confidence in taking the trade. (For related reading, see: Simple Way To Avoid False Breakouts.)

U.S. Silica Holdings Inc. (SLCA) U.S. Silica Holdings Inc. (SLCA) has more than doubled in price since February, and the price has been consolidating since the start of June. The consolidation is still showing there is upside strength because the second swing low on June 20 was higher than the swing low on June 13. A move above $55 will break the consolidation and indicate another move higher. The price target is $59.50 and a stop can be placed below $51. SEE: Profiting In Bear And Bull Markets

Moody’s Corp. (MCO) Moody’s Corp. (MCO) is currently trading near the middle of a trend channel. This consolidation could be pause before a decline back toward the low of the channel, or a pop higher toward the top of the channel near $91.25. On June 16 the price made a swing low at $84.48, proceeded to make a new high at $89.08, but when it retreated the price made a higher low at $84.54. The price has been rallying back toward the high since. This shows there is still buying interest and the price is likely to test, and potentially break, that high before heading back toward the channel low. Given the choppier tendency of the stock, minimize risk with a stop below $85.70. To give more room place a stop below the recent swing low at $84.50. Initial target is $91.25 based on the trend channel, but there is upside potential beyond if the long-term trend continues. (For related reading, see: How To Trade With Price Channels.)

PolyOne Corp. (POL) PolyOne Corp. (POL) jumped 2.32% on June 20, and closed above a small consolidation which should mark the resumption of the uptrend. $43 is one target, based on a trend channel which began in May 2013. Based on the run higher in mid-May to early June, a more aggressive target is $45. Stops go below $40.08. A massive volume day in late May has resulted in a skewed OBV. Even so, since that time the indicator has been trending higher, signaling that the uptrend is healthy and likely to continue.

Herbalife Ltd. (HLF) Herbalife Ltd. (HLF), after a very weak start to the year, has been moving higher since April. The price is consolidating in June, with the first pullback on June 13 finding support at $62.45, and the June 24 pullback finding support at $63.51 (higher low). A break above the consolidation high at $66.81 signals another wave higher. This is a very important juncture for the stock, as this consolidation aligns with a much larger consolidation from earlier in the year when the price was trending lower. A break higher from this point, reverses the longer-term downtrend and leave open space until resistance near $76. Stop loss orders can go below $63.50 or $62.40.

The Bottom Line Consolidations provide a way to get in on trending moves with relatively low risk when compared to a random entry where a stop level can be hard to pinpoint. No trading method is perfect. though; even if the price breaks out in the intended direction it doesn’t mean it will reach the price target or produce an actual good reward-to-risk ratio (relative to the theoretical one). Trade in the direction of the trend and aim for a target that produces a bigger return than what is being risked to give yourself the best chance at success. Also control position size so that one loss doesn’t significantly draw the account. Charts courtesy of Stockcharts.com Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

 

Recent Flag Pattern Breakouts

Commentary

Tickers in this Article: CMA, HPQ, POL, RXN

A flag is a small continuation pattern and these four stocks recently broke out of one, or are close to it. Flags provide an entry, stop and target, making them a relatively straightforward pattern to trade. The pattern is created by a strong run higher, followed by a small sideways or downward slanting consolidation, the flag. When the price breaks above the flag, initiate a long position, with a stop below the consolidation/flag. The target is traditionally based on the height of recent run higher, added to the bottom of the flag.On-balance volume can also be added to the chart to gauge the strength of trends and legitimacy of breakouts.

Hewlett-Packard Co. (HPQ) Hewlett-Packard Co. (HPQ) popped higher on strong buying on June 13, and since then has been edging lower in a small channel or flag. A break above the flag at $35 is likely to spark further buying into the top of a trend channel at $37. The rising trend channel has been in place since December. The potential trade shouldn’t last more than a couple weeks and a stop can be placed below the low of the flag, currently $34.22. On-balance volume (OBV) is steadily rising, showing continued buying interest in the stock. SEE: Profiting In Bear And Bull Markets

Comerica Inc. (CMA) Comerica Inc. (CMA) is also in a trend channel extending back to early 2013. The price has consolidated through most of June, but broke out on June 20. The breakout signals a likely move toward the top of the channel near $55. A stop can be placed just below the $49.59 consolidation low. On-balance volume is also increasing steadily as it pushes back toward the March highs, indicating that buyers remain keen.

PolyOne Corp. (POL) PolyOne Corp. (POL) jumped 2.32% on June 20, and closed above a small consolidation which should mark the resumption of the uptrend. $43 is one target, based on a trend channel which began in May 2013. Based on the run higher in mid-May to early June, a more aggressive target is $45. Stops go below $40.08. A massive volume day in late May has resulted in a skewed OBV. Even so, since that time the indicator has been trending higher, signaling that the uptrend is healthy and likely to continue.

Rexnord Corp. (RXN) Finally, Rexnord Corp. (RXN) is currently in a flag formation following a strong run higher in early June. Since March, though, the stock is in a downtrend, with resistance right near the flag breakout point. If the price breaks above the flag it will spark a short-term move higher but also potentially initiate the next wave higher of the long-term trend. Target for the flag breakout is $32, with a stop below $27.91. OBV broke above its own descending trendline recently, indicating the buyers have the upper hand and an upside breakout is more likely than a downside breakout. (For related reading, see: Continuation Patterns: Rectangles and Pennants)

The Bottom Line Flags are a small continuation pattern which provide and entry point, stop and target. On-balance volume can be used in conjunction with flags, and other chart patterns, to see the health of the trend. Stops should always be used, as the price won’t always trend in the anticipated direction, even after a breakout. Manage position size so that a single loss won’t significantly draw down account capital. Charts courtesy of Stockcharts.com Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

The Consolidation Dance – 06/11/2014

More and more this looks like a consolidation period with shares having a hard time getting above 1950. That is because stocks bolted higher Monday, but closed back at the mark. Then on Tuesday we saw the flipside with stocks tumbling in the am only to climb back to breakeven at the finish.

What a consolidation period tells you is that the market wants to stay with a bullish bias for the long haul. It’s just time to take some profits off recent winners and rotate it to other stocks. This creates sideways action for the overall market even though there are some extreme winners and losers each day. Once this process is complete the broader market usually gets back on the upswing.

I find the best way to survive these periods is to ignore most of the whiplash effect from the daily movement of your stocks (i.e. don’t read too much into the ups and downs). As long as the fundamentals are unchanged, then likely they will continue their upward trajectory once the consolidation period ends and new highs are generated.

 

Best,

 

 

Steve Reitmeister ( aka Reity…pronounced “Righty” )

 

Executive Vice President

 

Zacks Investment Research

It’s also a great time to snap up some new picks on sharp, unnecessary dips. So be sure to build up a wish list of stocks you would love to own on any attractive pullback. Perhaps the articles below will help you discover some fresh ideas to help you profits in the days ahead.

Consolidations Leading to Upside Breakouts?

Commentary

Tickers in this Article: HAL, DLB, CBOE, TEL

During a strong trend, many traders wait for a big pullback to enter because it feels like a “better deal.” Unfortunately, during a strong trend, these deeper pullbacks may not occur (or not frequently enough for active traders). Instead, a more sideways consolidation often develops. These four stocks are currently in relatively small consolidations, so a breakout to the upside signals the trend is continuing. Typically these trades can be initiated with relatively low risk and with price targets quickly achieved.

Halliburton (NYSE:HAL) Halliburton (NYSE:HAL) is in a long-term uptrend and has had another nice run higher since the start of February. The price is currently consolidating, beyond the former 52-week high, between $59.69 and $57.36. If the price breaks higher, it indicates this current up-leg is continuing. Target is $62 to $62.40. A drop back below $57.36 warns of short-term selling pressure. A drop below $54.57 signals a larger correction into trendline support near $52–a region longer-term traders may wish to monitor for buying opportunities. SEE: Beginner’s Guide To MetaTrader 4

Dolby Laboratories (NYSE:DLB) Dolby Laboratories (NYSE:DLB) had a near-vertical rally in early March, but has moved sideways since March 10. The high of the consolidation is $45.16, and the low is $43.27. The stock did something similar in January and February, moving within a range, with a number of false breakouts. Therefore, waiting for a daily close outside the range may help avoid the false breakouts. The trend is up, so a long could also be initiated anywhere in the range, with a stop below $43.20 and the expectation of a breakout higher. Upside target is $47.10 to $47.60.

CBOE Holdings (Nasdaq:CBOE) CBOE Holdings (Nasdaq:CBOE) has formed a small triangle pattern off the 52-week high at $59.28. A break above $57.60 could spark enough buying interest to kick start another price wave higher. Target is $60.50 to $61.10. Recent lows at $55.32 provide support for the triangle, so place a stop below. If the triangle breaks to the downside, more short-term selling could be forth coning. Trendline support is near $52, providing another area to watch for buying opportunities.

Tyco Connectivity (NYSE:TEL) Tyco Connectivity (NYSE:TEL) has been trending very strong for the last year and half, and is currently trading just below the 52-week high of $61.14. A breakout of a small correction channel may provide advance warning of a run at the high, and potentially beyond. If price moves above $60, another re-test of $61.14 is anticipated. There is minor resistance at $60.40, so the price will need to also climb through that. If the price advances beyond the 52-week high, the next target is $62.50. Once the breakout occurs, a stop can be placed below $59.

The Bottom Line Consolidations during strong trends provide opportunities to get in on swing trades. This is because, when the consolidation breaks, it provides evidence of the near-term direction of the stock. Risk can be managed by using a stop loss order, placed below the consolidation (in the case of an upside breakout) or inside the consolidation if the breakout is strong and therefore less likely to pull back into the consolidation. The latter increases the reward relative to risk on the trade, but has a slightly higher chance of being prematurely stopped out. By controlling risk and position size, a losing trade shouldn’t have a significant negative impact on overall trading capital. Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

Sector Strength Scenarios For A Consolidating Market

Sector Strength Scenarios For A Consolidating Market

Commentary

Tickers in this Article SPY, XLP, XLK, XLV, XLU The S&P 500 SPDR (ARCA:SPY) finished slightly lower last week, but held above support and jumped aggressively on December 6, indicating the potential for a market consolidation or a further run to the upside this week. The bias is to the upside based on the trend, but a failure to break above $181.75 signals this is a consolidation. A drop below $178 is short-term bearish. In which direction the breakout occurs will determine the short-term direction. From a longer-term perspective the S&P 500 is trading right near the high of a trend channel, so while the trend is still up, certain sectors are more appealing than others. Focus on strength when the price action is bullish, but if support is tested or breached there are two more conservative sectors which may weather the decline a bit better. Technology Select Sector SPDR (ARCA:XLK) Technology Select Sector SPDR (ARCA:XLK) was the second best performing sector last week and deserves to stay on the radar this week. The December 6 close is right on the breakout point of last week’s small consolidation. Follow-through higher early in the week is a positive sign over all. Upside targets are $35.05 to $35.15, with a further target at $35.30 to $35.40. Moving about $0.65 per week both targets are within range this week. If the price can’t hold above $34.90 the small consolidation is still underway and upside targets are put on hold till the push higher occurs. A drop below $34.45 indicates some short-term selling pressure but no real technical damage occurs unless the price starts breaching other lows like the one the $33.86–unlikely this week. SEE: Introduction To Stock Trader Types Health Care Select Sector SPDR (ARCA:XLV) Health Care Select Sector SPDR (ARCA:XLV) finished down just marginally last week, but has been such a solid performer over the last year that it remains a sector to be involved in. Following a small correction the price has bounced off a $54 support region. Moving on average $1.18 per week it is quite possible the ETF will eclipse the recent at $55.71 this week. Upside target is $55.30 to $55.35. Another target is $57.50, but that is likely a couple weeks away, assuming the price continues higher. An inability to post a new high signals the price is in a consolidation, but a drop below $54 means a deeper pullback is underway. Utilities Select Sector SPDR (ARCA:XLU) Utilities Select Sector SPDR (ARCA:XLU) was the top performer last week, moving up 1.08%, but remains a laggard overall. With slightly more than double the dividend yield of the S&P 500 SPDR, Utilities is where investors traditionally transition during times of uncertainty. With the strong uptrend in other sectors though, putting in consecutive weeks of high-ranking performance has been a rare occurrence for the Utilities ETF. Until a more definitive down draft occurs in the S&P 500 this remains a defensive ETF play, which isn’t likely to be most the lucrative. There are positive signs though. The lows have been stepping higher as shown by the trendline and a short-term bottom looks have recently formed with the break above $38.25. If the trend holds–stays above $37.65–the price should slowly make its way back toward the $39.50 region. For those who are looking for a more defensive posture, this ETF offers some short-term upside potential, but in the event of a major market pullback offers a dividend yield which helps offset a small portion of the price decline. Consumer Staples Select Sector SPDR(ARCA:XLP) Consumer Staples Select Sector SPDR(ARCA:XLP) is a more defensive sector. It has had lower returns this year than the S&P 500 SPDR, but generally fairs a bit better when the market slides lower. With a small correction in the S&P 500 last week this sector showed a positive return, edging up 0.16%. For more than a month it has been trading within a consolidation, the low of which is $42.13 and the high $43.46. A rise above $43.25 breaks a minor downward sloping trendline indicating a re-test of the high. A move beyond the high is possible this week, but reaching the next target at $44.30 isn’t as the price moves about $0.86 per week. A close below $42.13 means a topping pattern is in place and the price is likely to correct into the $40 range over the next several weeks to couple months. The Bottom Line The trend is still up for the S&P 500 and therefore playing the long-side in strong sectors is the prudent choice. The breakout direction from the current consolidation is likely to signal the short-term direction. The bias is up, but with the price at the very top of a long-term trend channel there is potential for a deeper correction over the coming weeks. Dividend heavy defensive sectors provide some potential shelter for investors if the market turns lower, but with few signs of that occurring just yet sticking with strength is the better play short-term traders. Cory Mitchell is a proprietary trader and Chartered Market Technician specializing in short to medium-term technical strategies.