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REVERSAL


RMO Trading System Signals Market Turn

04/19/10 09:59:00 AM
by Donald W. Pendergast, Jr.

The RMO swing-trading system has issued an unusually large number of sell signals in a wide range of S&P 500 component stocks.

Security:   PFE
Position:   Sell

Anytime a proven trading system issues an inordinately high percentage of buy or sell signals in a major index, it's time to take a closer look. Right now, the RMO swing sell system has flashed 55 new sell signals on Standard & Poor's 500 stocks, meaning that about 11% of the index's stocks made reversals that were significant enough to warrant such sell alerts. Does this mean that every one of these stocks should be shorted? By no means. However, by using a variety of relative strength and fundamental inputs, we may be able to home in on the most promising short candidates. For now, here's a look at the top 26 sell signals, without applying any filters (Figure 1):

FIGURE 1: SELL SIGNALS. Here are 26 of the 55 sell signals generated by the RMO swing trading system, run on all 500 of S&P 500 component stocks.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
You name the sector, its probably represented by one of these stocks or the other 29 that weren't able to fit in this particular screenshot. Our next task is to run a simple 13-week rate of change calculation of each stock (all 55 sell signals) and learn which are the weakest of the bunch versus their parent index, the S&P 500 (Figure 2):

FIGURE 2: WEAKEST 10. Going further, here are the weakest 10 of those 55 stocks issuing sell signals, based on a simple 13-week relative strength ranking versus the S&P 500.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
After running the relative strength exploration versus the S&P 500, we get to see which RMO sell signal stocks are already starting to drop like flies. Note how much weaker that Consol (CNX), Pfizer (PFE), Symantec (SYMC), and Devon Energy (DVN) are than the rest of the sell candidates. These might warrant taking an additional filtering step to check on the potential for earnings growth (or the lack of it) in each of these stocks.

FIGURE 3: PFIZER, DAILY. PFE is not only weak in terms of relative strength, it also has a very bearish chart pattern; with weak money flow and heavy downward momentum already in place, any significant break of $16.80 could unleash a flood of selling pressure.
Graphic provided by: MetaStock.
Graphic provided by: Rahul Mohindar indicators from MetaStock 11.
 
Using a fundamental screen (not shown) that evaluates the potential for earnings growth over the next year, Pfizer (PFE) shares have a much gloomier outlook for earnings growth — in fact, the stock isn't anticipated to even have any substantial earnings growth until some time in third-quarter 2011. Therefore, PFE might be a worthwhile candidate to attempt to go short on, but we'll need to glance at a chart for some further confirmation.

Finally, Figure 3 is the daily chart of PFE. The Chaikin money flow is weak (below its zero line) but is up from the lows of a month ago. The fresh sell signal is evident (green oval on chart), with the most recent price bar resting on the tentative support line established by the March 19, 2010, swing low at $16.80. All eyes will be on PFE's behavior to see if it drops below that support line and, if so, how far it decides to fall before regaining its footing. No one knows how this sell signal will play out, but for those who decide to play it on the short side, at least they can be assured that they've utilized a very sound method in order to select a stock with above-average potential to fall in price. Trading the short side can be tricky, but experienced short sellers should have little problem extracting profits from PFE on any kind of blast to lower levels. Keep an eye on this chart and see how it all turns out, as this could be a very exciting week in the broad market!



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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Date: 04/20/10Rank: 3Comment: 
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