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TECHNICAL ANALYSIS


PENDY'S PICKS: July 23, 2012

07/23/12 09:18:46 AM
by Donald W. Pendergast, Jr.

The .OEX pulls back on Friday, confirming a smaller-degree cycle high is now in place.

Security:   .OEX, BHI, SLB, HAL, DELL
Position:   N/A

The .OEX (Standard & Poor's 100) finished Friday's trading session at 626.57, declining by 0.86%. Analysis of the current cycle counts in this "biggest of the big" US stock indexes reveals that the 61-day cycle is declining, with the 32-day cycle also ready to peak; there could be some more pullback early this week, with the larger-degree 16-week and 34-week cycles helping push the .OEX higher again later this week.

Figure 1 show us the strongest four-week relative strength (RS) performers in the .OEX; Walgreen's (WAG) remains at the top of the heap on this list, still attracting investor capital after such a massive gap higher late last week. The real news here is the massive strength now seen in the oil services and/or oil exploration group stocks like Baker Hughes (BHI), Schlumberger (SLB), Halliburton (HAL), Occidental Petroleum (OXY), Williams Cos. (WMB), and National Oilwell Varco (NOV).

Fully 60% of our top 10 four-week RS stocks are from these two industry groups, confirming the major rotation back into these stocks after their major declines earlier this year. Any and all of these stocks can be considered excellent covered-call (CC) opportunities, so check them out.

FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Friday, July 20, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 2 is a look at the weakest four-week RS performers in the .OEX; note that shares of Xerox (X) are now perched at the top of this list and that Hewlett Packard (HPQ) is still severely lagging the .OEX as well. Sara Lee (SLE) and Ford Motor (F) still seem determined to set a world record for times they appear at or near the top of the weak RS list.

As mentioned in the previous edition of Pendy's Picks, the inclusion of Morgan Stanley (MS), Bank of America (BAC), and Citigroup (C) in our weak RS list suggests that the "Sell financials, buy big oil" stock rotation theme has caught on with institutional investors and the rest of the smart money crowd, and in a big way. Financial stocks are the single largest sector within the .OEX and .SPX, so when these issues start to rise or fall in unison, you have a pretty good idea of which way the major large-cap stock indexes are going to move in the near term.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Friday, July 20, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing sell setup signals; 9% of the .OEX components issued new RMO swing sell signals on Friday. There were also three swing buy setup signals as well. This continuing ratio of more bearish setups than bullish comes as the .OEX has already made a 61-day cycle high (confirmed) in conjunction with a peaking 32-day cycle; if most of these short setups get triggered on a drop below their Friday lows, expect further near-term declines in the .OEX -- at least until the 16-week and 34-week cycles can begin to draw prices higher once again.

Three of the sell setups are financials -- JPM, RF, and BK -- which is no surprise as money continues to flee bank stocks and migrate toward the oil sector issues. In addition, watch DELL and INTC to see if they decline below their Friday lows, as this could also be the start of more rotation out of the tech issues.

FIGURE 3: SWING SELL SIGNALS. The S&P 100 (.OEX) components issuing RMO swing sell signals at the close of trading on Friday, July 20, 2012; 9% of all .OEX components fired sell setup signals during this session, with three new buy setup signals also being issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
In the world of exchange traded funds (ETFs), we have three new sell setup signals to track -- the iShares Transportation (IYT), Medical Devices (IHI) and the Broker-Dealers (IAI), and the Russell 2000 (IWM) ETFs (Figure 4). There were no swing buy setup signals in any of the ETFs that Pendy's Picks tracks. Obviously, the setup signal in IWM is of major interest here; a decline below $79.81 (Friday's low) could really get the selling in small caps going again; this would also likely help drag the .OEX lower too, especially if investors/traders get spooked by more bad news from Europe, the US, the Middle East, or just about anywhere else.

FIGURE 4: SWING SELL SIGNALS. The ETFs that fired new RMO swing sell setup signals as of the close of trading on Friday, July 20, 2012; there were no new RMO swing buy setup signals on Friday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Friday's decline in the .OEX and other US stock indexes come at a time when bullish longer-term price cycles are in direct conflict with lower-degree cycles. At present, the smaller cycles (which are bearish) have the upper hand and investors/traders should be playing a sound defense, using a variety of put options and/or trailing stops to protect existing long positions.

Putting some capital into oil services stocks is a sound strategy, especially if crude oil can hold on to its recent gains. 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: lineartradingsys@gmail.com

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Date: 07/24/12Rank: 5Comment: 
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