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REL. STR COMPARATIVE


Wireless Telecom Industry Group Strong In 13-Week Relative Strength

03/12/09 09:03:59 AM
by Donald W. Pendergast, Jr.

The wireless telecom industry group is currently #1 in 13-week relative strength versus the Standard & Poor's 500. Is it too late to buy now, or to add on to an existing long position?

Security:   WMH, .GSPWTES
Position:   Accumulate

The rebound in the broad markets over the past two sessions looks convincing enough; it certainly does appear that capitulation has finally occurred, catching overconfident short-sellers unaware at the worst possible time. Yet the wireless telecom industry group (S&P ticker .GSPWTES) has already been grinding out a series of daily higher highs and higher lows since November 2008, putting it squarely at the top of the relative strength heap compared with the S&P 500. Does this industry group still have some room to run, or is the party almost over? An examination of this industry group's daily chart (Figure 1) will attempt to answer this question.

FIGURE 1: WMH, DAILY. All of the ingredients necessary for a bullish long breakout appear to have fallen into place. A confirmed close above the 550-day channel line could be a good place to add on to the initial RMO buy signal.
Graphic provided by: MetaStock.
Graphic provided by: Rahul Mohindar indicators from MetaStock v 10.1.
 
Old-time trend-followers are fond of the saying, "Never attempt to step in front of a strong trending move."

Given the length and strength of the wireless industry group's trending move since last autumn, perhaps this would be a good time for traders to pay heed to the old-timer's wisdom. Now that the broad market has finally caught a bid and seems poised for a period of further gains (bearing in mind that this is still a sector-wide bear market with a ton of overhead resistance), the twin buy signals on this daily chart merit further investigation.

Those familiar with the Rahul Mohindar (RMO) trading system already know that when the RMO indicator (top window) is above its zero line and rising and the daily bars are blue, the appearance of a blue buy arrow qualifies as a confirmed long entry signal. All of these ingredients are now in place on the daily chart. Adding more bullish fuel to the fire, price is approaching the upper 55-day channel; a break above it is considered a major trend-following entry signal. In addition, price is well above its rising 50-day exponential moving average (EMA), even as the spread between the 20-day EMA and the 50-day EMA is expanding.

How to play this setup? First of all, you'll need to either trade the WMH wireless HOLDR or the most highly correlated stocks contained within that HOLDR for the best possible chance of success.

Here's how I might consider a long entry, given the unique advantage of two possible buy points. The RMO buy signal is already confirmed, so I would put on half my position on a buy-stop just above today's (Wednesday's) high near $86. If filled, I would begin to trail the position with a stop at $73.01 (the March 6th low), gradually letting it rise once a 2.5 * ATR 10 trailing volatility stop begins to kick in.

If the 55-day channel breakout takes place, enter the final half of the position just above the channel high near $86.63. The next significant overhead resistance lies near $101, so I might consider taking half off at a profit as price approaches $100 unless the entire position gets stopped out before then. Once half is off at a profit, just let the rest run with the 2.5 * ATR 10 trailing volatility stop.

More conservative traders bemoaning that "I've been burned too many times to trade a breakout move anymore" can use an alternative exit strategy; the second window from the top shows the "exit swing signal" signal histogram. Watch for this indicator to exceed its upper red boundary, and then at the first daily close below the red line, close out the position or at least take half off and run a much closer trailing stop.

The largest component stocks in WMH include Qualcomm (QCOM), Research in Motion (RIMM), Verizon COmmunications (VZ), and Vodaphone Group (VOD). Run the same technical analysis on these stocks and see if they are also offering a similar (or even better) trade setup. Otherwise, using the WMH HOLDR might be a more logical, easy to use method of trading this potential long breakout setup.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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