ChartWatchers Newsletter

Retail Stocks Remain Very Attractive And Here Are A Few To Consider

About a month ago, I wrote a ChartWatchers article detailing the bullish historical tendencies of retailers during the months of February, March and April.  In particular, apparel retailers ($DJUSRA) have shown tremendous bullishness during the months of February, March and April.  In addition, the DJUSRA was approaching a key price support level.  As it turns out, that price support held and stocks in this group are beginning to trend higher as they typically do this time of year.  First, let's check out the updated chart:

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Healthcare SPDR Turns Up, Biotechs and Pharmaceutical ETFS Show Improvement

In case you haven't noticed, the Health Care SPDR (XLV) has taken a bullish turn. Chart 1 shows the XLV breaking out of a bullish "ascending triangle" that I described in my February 4 message. At the same time, the XLV/SPX ratio (top of chart) appears to be bottoming. And while biotech and pharmaceutical stocks have improved, healthcare leadership is still coming from other places. That earlier message showed three healthcare ETFs that are leading the healthcare sector higher. Two of those three have since hit new records.

The two parts of the healthcare sector that get the most attention are biotechs and pharmaceuticals. Both groups, however, have been the weakest part of that sector. But they are starting to show some improvement. Chart 2 shows the VanEck Vectors Pharmaceutical ETF (PPH) rising to the highest level in three months. It's also nearing a test of its 200-day average (red arrrow). The relatively small size of of its base, however, doesn't inspire a lot of confidence. Chart 3 shows the Nasdaq Biotechnology iShares (IBB) recently touching a four-month high to improve its short-term trend. It still needs to clear its September peak around 300, however, to turn its major trend up. Both groups are especially vulnerable to problems related to the pricing of drugs, which raises their risk level. For those looking to invest in this sector, the three top ETFs shown above offer the strongest choices. Or an investor can just buy the entire sector via the Healthcare SPDR (XLV). With so much of the market looking over-extended, healthcare may be one of the few sectors that still offers real value.

Trading Stocks in a Stretched Market

I made my case to EarningsBeats members this past Wednesday just before we started to see a bit of selling. Here are the highlights:
1-The VIX is up by almost 9% today as it tests its 50 day moving average from the downside even though the market is higher. This is troubling to me as I am seeing fear picking up in spite of today's buying.

2-All of the major indexes are extremely overbought. The NASDAQ has stochastics close to 100 and a RSI nearing 80. The Dow and S&P are close to those numbers. All represent sell signals.

3-The equity only put/call ratio is at its lowest level since November 15 of 2016. In other words, strong betting on the long side with a disproportionate number of calls to puts on options that expire on Friday. I see this as a contrarian signal.

4-The prime earnings season is basically over. Traders are going to be looking for other reasons to be long.

5-The S&P has been up six trading session in a row. This has happened only one other time over the past year.

6-There remain too many uncertainties that could derail the current rally at any moment. What might they be? Good question.

After I had mounted my case for a pullback there was some selling in the major indexes though the NASDAQ remained stubbornly strong. However I made it clear to members that it doesn't pay to chase stocks when the market is so stretched; best to wait for better opportunities.

For example, take a look at the chart for Apple which took off like a rocket after it posted better than expected earnings:

You can see that the stock rose 12.5% in just two weeks, a good year by some measures. You can also see that stochastics climbed up close to 100 and with a RSI of 90; the stock is incredibly overbought. But traders like to flock to stocks with strong earnings; it just makes sense to be patient and buy on your terms, not near the top. To me a much better entry point would be on any pullback to the 20 day moving average, now near $129, where it should get decent support.

This is what we do at EarningsBeats; scan for stocks that beat earnings and have solid charts. Some of these turn into trade alerts where we provide members with entry points, price target and stop loss. These trade alerts come from our exclusive "Candidate Tracker" and if you would like to see a sample just click here.

As a trader you need to continuously look for entry points on stocks that will provide you with high reward to risk potential. Chasing stocks that are stretched in an overbought market can eat away at your capital very quickly.

At your service,

John Hopkins
EarningsBeats

Rethinking Support and Resistance for Indexes and ETFs

Just like potato salad in the fridge, support and resistance levels for the S&P 500 have a shelf life and become stale over time. The value of the S&P 500 is based on the price of its individual component stocks. Support and resistance levels for the index loose their importance over time because component stocks and weightings change on a regular basis. The further the look back period, the bigger the transformation in this key index. The S&P 500 in 2017 is not the same as the S&P 500 in 2010, and certainly not the same as the S&P 500 in 1999. Chartists should keep this in mind when considering support and resistance levels for the S&P 500, as well as for other indexes and ETFs based on a basket of stocks. 

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Dow and S&P 500 End Week On a Strong Note

What started off as a soft week for stocks ended on a strong note. Friday's gain was enough to keep stock indexes basically flat for the entire week. But there was some improvement on the charts. The daily bars in Chart 1 show the Dow Industrials jumping 186 points (0.94%) on Friday. That was more than enough to keep it well above its 50-day average and chart support along its January low. Also encouraging was its 14-day RSI line (above chart) bouncing off the 50 level for the second time since mid-January. That's usually a sign of market that's consolidating rather than correcting. The only soft note on Friday was volume, which didn't match the price gains. The S&P 500 also saw improvement. Chart 2 shows the SPX jumping 16 points (0.73%) on Friday. If you look closely at the circled part of the graph, you can see a bullish short-term pattern called an "island reversal". That pattern is formed when a "gap down" (red arrow) is followed within a few days by a "gap up" (green arrow). That pattern usually signals higher prices. My Thursday message expressed concern that the two MACD lines for the SPX had yet to turn positive. The box on top of Chart 2, however, show the two MACD lines converging for the second time in two weeks. It wouldn't take much to turn them positive. Also encouraging was the fact that financials led Friday's rally. So did small caps and transports.

New Highs Expand in the Healthcare Sector

New highs are a sign of underlying strength and chartists can measure this indicator using High-Low Percent. In particular, I like to rank the nine sectors by High-Low Percent or a moving average of High-Low Percent. Note that High-Low Percent equals new highs less new lows divided by total issues. Chartists looking for the weekly leaders in High-Low Percent can look at the 5-day SMA. The table below shows the technology, healthcare and industrials sectors with readings above +6%. As a percentage of component stocks, these three sectors saw the most new highs last week. Consumer discretionary and energy were the weakest because the 5-day SMA of High-Low Percent was below 1%. 

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Stocks Relative to Their 52-Week High-Low - SPX v. NDX

Today during my DecisionPoint Report webinar, I pulled the intermediate-term indicator chart of SPX Stocks Relative to Their 52-Week Hi-Lo to show my viewers the divergences that are all over this chart. After I finished the webinar and reviewed the chart again, I decided it would be great to see what the same chart for the NDX looked like. It's a tale of two very different indexes right now.


What is present in both charts are divergences and confirmations that are quite reliable. The red arrows on the SPX chart below represent negative/bearish divergences. You can see how price tops are rising, but indicator tops are in decline. In the case of the blue arrows, there was a bearish confirmation, meaning declining price tops are matching declining indicator tops. The last few months are our warning that the SPX has problems. 

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