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PENDY'S PICKS: July 16, 2012

07/16/12 09:53:34 AM
by Donald W. Pendergast, Jr.

As expected, the .OEX and .SPX experienced substantial, bullish reversals after testing key support levels.

Security:   .OEX, .SPX, BK, COP, NKE
Position:   N/A

The .OEX (Standard & Poor's 100) finished Friday's trading session at 622.83, reversing strongly to the upside, as previously anticipated by the last few editions of Pendy's Picks (PP). The twin Fibonacci support levels of 610.00/611.00 did their job -- as expected -- with the current bounce very likely to morph into a more sustained swing move that is in harmony with the .OEX's rising 34-week, 16-week, and 32-day price cycles. Based on the current analysis output of Sentient Trader software, the 34-week cycle counts project a potential rise of as high as 691.00 by no later than October 16, 2012, meaning that the line of least resistance for most swing traders and trend followers is toward higher prices in the coming weeks.

Even more exciting for the bulls is the appearance of a new RMO (Rahul Mohindar) swing buy signal in the .OEX at the close of trading on Friday. A move up to 623.28 triggers a new long entry in this key large-cap index, with many of the stocks listed directly below being some of the prime beneficiaries of such a bullish break.

Figure 1 shows us the strongest four-week relative strength (RS) performers in the .OEX; nothing too surprising here, especially since strong (weak) relative strength stocks tend to stay strong (weak); Weyerhaeuser (WY) has shot to the top of the rankings; since this company produces a myriad of items needed by the home building industry, this could be a sign that the smart money on Wall Street believes that a sustained (albeit slow) recovery in the new home construction market has some room to run before the next recession hits (if it hasn't already).

Health sector names are still ranking high in RS, including Baxter International (BAX), Amgen (AMGN), and Merck (MRK). Sprint Nextel (S) and Norfolk Southern (NSC) have also reappeared on our list of top four-week performers vs. the .OEX.

FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Friday, July 13, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
Figure 2 is a look at the weakest four-week relative strength performers in the .OEX; this particular list continues to look stale -- the same big names appear to be caught in a downward trajectory. Tech giants Hewlett-Packard (HPQ), Intel (INTC), and International Business Machines (IBM) continue to lag the .OEX, confirming a shift away from computer hardware and semiconductors.

This is all the more noticeable given the bullish upswing that likely commenced on Friday's bullish reversal; remember that it's always best to get positioned in the stocks that are already outperforming the broad market indexes (.OEX., .SPX, .NDX, RUT) over the past four-week (and even 13-week) at the time that any or all of these big indexes start to turn higher. The next list of buy signals may help you to do just that.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Friday, July 13, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
Figure 3 are the S&P 100 components giving RMO swing sell signals; 7% of the .OEX components issued new RMO swing buy signals on Friday. Since financial stocks are such a heavily weighted sector in the .OEX, it's not surprising to see JPMorganChase (JPM), Bank of New York (BK), and Morgan Stanley (MS) all flashing new buy signals -- all of which will trigger actual long entries on a rise above their respective highs made on Friday.

There were two new RMO sell signals in .OEX components, however -- American Express (AXP) and Devon Energy (DVN). The new ConocoPhillips (COP) buy signal is of major interest, too, as a rise above its Friday buy setup bar (causing an actual long entry signal) could be telegraphing the intentions of the big oil company shares to start a fresh bull run of their own, making up for some of the heavy declines they experienced over the past few months.

FIGURE 3: RMO SWING BUY SIGNALS. The S&P 100 (.OEX) components issuing RMO swing buy signals at the close of trading on Friday, July 13, 2012; 7% of all .OEX components fired buy setup signals during this session, with two new sell setup signals issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
In the world of exchange traded funds (ETFs), we have four new buy setup signals to track -- the iShares Consumer Services (IYC), Broker Dealers (IAI), Insurance Index (IAK), and SPDRS Large Cap (SPY) ETFs will trigger new long entries on a rise above their respective Friday highs. There was also one new sell signal, that being the iShares Global Clean Energy (ICLN) ETF. See Figure 4.

FIGURE 4: RMO SWING SELL SIGNALS. The ETFs that fired new RMO swing buy setup signals as of the close of trading on Friday, July 13, 2012; there was one RMO swing sell setup signal that also printed at the close of trading on Friday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
Powerful, bullish price cycles have now retaken control of the near-term -- and possibly medium-term -- trend direction in the .OEX and .SPX; several technical measures of these cycles indicate that the .OEX could rise as high as 685.00 to 690.00 by the first week of October 2012.

Until that cycle forecasts changes, the likely safest way for swing traders is to deploy funds into stocks that are outperforming the .OEX and .SPX over the past four weeks, and for trend-followers/covered-call traders to focus on those large caps that are outperforming the same indexes over the past 13-week time span.

Swing traders are probably better served by using a mechanical trading system to trigger trade entries (similar to those in Figure 3), while longer-term traders might want to rely more on indicators like the ADX and Aroon to help get them into the stocks that may be ready to trend for a sustained run higher. As always, trade wisely until we meet here again.

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:

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