Spotting tops and bottoms is perhaps the best reason for utilizing technical and sentiment indicators in your investing and trading arsenal. The first signs of a bottom forming can be subtle and I'm beginning to see a few. Consumer discretionary stocks, which have been relative laggards during the market weakness, are showing slight signs of relative strength and on a longer-term weekly chart have printed a long-term positive divergence. Take a look at Chart 1:
Given the steep increase in crude oil prices over the first half of 2008, it's surprising that consumer discretionary stocks have held up as well as they have on a relative basis. The Conference Board Consumer Confidence Index increased in July (reported July 29th as of July 22nd) for the first time since December. One month's increase doesn't make a trend, but it certainly bears watching. Consumer confidence is important not only because it reports the consumer's view of current conditions, but it also provides the consumer's view of future expectations. A further deterioration in crude oil prices would likely have a bullish effect on the consumer discretionary sector and by the looks of the crude oil chart below, further deterioration is becoming more likely.
If crude oil breaks that head & shoulders pattern to the downside, the measurement would be to the $98-$102 area. One of my favorite stocks in the consumer discretionary group from a long-term perspective is Starbucks (SBUX). At Invested Central, we trade stocks, we don't invest for the long-term. However, the technical picture of Starbucks (SBUX) is quite compelling for a longer-term investor. The name brand is obvious and on the heels of a horrible quarter, you can pick it up on the cheap. Take a look at the long-term weekly chart below:
Until next time...