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TECHNICAL ANALYSIS


PENDY'S PICKS: July 25, 2012

07/25/12 10:46:00 AM
by Donald W. Pendergast, Jr.

The .OEX pulls back a bit more on Tuesday, July 24, rebounding from the intraday lows by the close of the session.

Security:   .OEX, IYM, SLV, BAC, FCX
Position:   N/A

The .OEX (Standard & Poor's 100) finished Tuesday's trading session at $616.67, declining by 0.82%. As of Monday, the index once again pulled back sharply during the early part of the trading session, dipping down to $612.20 before staging a mild comeback by the time of the closing bell. The recent downswing has retraced 79% of the swing up from July 12 to 19 and is near a make-or-break point; a drop and close below $609.03 will terminate the uptrend that commenced with the June 4, 2012, swing low.

Figure 1 shows us the strongest four-week relative strength (RS) performers in the .OEX; Walgreen's (WAG) remains on top of the list, with the oil exploration/production and oil services stocks actually strengthening. Baker Hughes (BHI), Schlumberger (SLB), Halliburton (HAL), Williams Cos. (WMB), and National Oilwell Varco (NOV) are continuing to attract trading and investment capital from the smart money players in the market. Nike (NKE) continues to impress; this stock is a very good economic bellwether and when sales are strong and increasing, it can be an indication of an economy that is on the mend, albeit slowly. Google (GOOG), Sprint (S), and Amgen (AMGN) also remain on our top 10 list.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Tuesday, July 24, 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; Bank of America (BAC) is now the weakest large-cap issue and is joined on the list by financial sector giants Morgan Stanley (MS), Citigroup (C), Met Life (MET), and Bank of New York (BK). Clearly, the rotation out of financials into the oil sector stocks is a major investment trading theme at the moment. Watch to see if $609.03 holds on the .OEX, as that will play a big factor in determining the near-term direction of most large-cap financial issues. In addition, note the three tech giants on this list -- Cisco Systems (CSCO), Hewlett Packard (HPQ), and Dell (DELL). Tech is also weak compared to the .OEX and .SPX, so look to other sectors and groups if you are looking to play bullish momentum and/or covered call setups.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Tuesday, July 24, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing sell setup signals; 19% of the .OEX components issued new RMO swing sell signals on Tuesday. There was only one swing buy setup signal -- in JPMorgan Chase (JPM), believe it or not. Having such a high percentage of large caps flash sell setup signals is either telling us that the market is setting up for a significant swing lower (if the majority of these new signals are triggered on a drop below their respective Tuesday lows) or that the market is still playing games -- dipping down to lure in short sellers, only to reverse higher by the close of the session -- just prior to a tradable bullish rally. Note that the 19 signals are from a diverse cross-section of industry groups and sectors.

FIGURE 3: SWING SELL SIGNALS. The S&P 100 (.OEX) components issuing RMO swing sell signals at the close of trading on Tuesday, July 24, 2012; 19% of all .OEX components fired sell setup signals during this session, with only one new buy setup signal being issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Eleven exchange traded funds (ETFs) flashed swing sell setup signals on Tuesday; many industry groups are represented, spanning the range from Aerospace and Defense (ITA) to Silver (SLV) and nearly everything else in between, including the Basic Materials (IYM), Nuclear Energy (NUCL), Telecom (IYZ), and Regional Banks (IAT).

There was only one swing buy setup signal, that being the SPDRS Gold Trust (GLD) ETF. That just goes to show you that gold and silver can and do move according to different price cycles, and that there are many technical, fundamental, and seasonal factors at work that determine the fair market value of each of these precious metals. See Figure 4.

FIGURE 4: SWING SELL SETUP SIGNALS. The ETFs that fired new RMO swing sell setup signals as of the close of trading on Tuesday, July 24, 2012; there was also one new RMO swing buy setup signal on Tuesday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Tuesday's action in the .OEX is similar to that seen on Monday. With the long-term cyclical picture still suggesting higher prices between now and August 31, 2012, traders should be busy preparing a list of fundamentally attractive large-cap stocks that are outperforming the broad markets over the past four to 13 weeks, then use your choice of proven mechanical trading system to help get you into the next rally in such issues.

Expect a tradable rally to erupt within the next few sessions, and 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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