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TECHNICAL ANALYSIS


PENDY'S PICKS: July 26, 2012

07/26/12 09:27:41 AM
by Donald W. Pendergast, Jr.

The .OEX retests support, closing the session down by a small fraction. Expect a rally soon.

Security:   .OEX, CAN, GD, TGT, GLD
Position:   N/A

The .OEX (Standard & Poor's 100) finished Wednesday's trading session at $615.92, declining by 0.12%. The big index once again pulled back, attempting to make a retest of Tuesday's low of $612.20 and then closed the session not far from where it opened in the morning. Once again, the imagery is that of an index that consistently finds strong support at the lower end of its daily trading range, and one that is also likely to be driven higher by powerful long-term bullish cycles -- in this case, the 34-week cycle in the .OEX.

Figure 1 show us the strongest four-week relative strength (RS) performers in the .OEX. Walgreen's (WAG) is still perched on top, with the oil exploration/production and oil services stocks actually strengthening; National Oilwell Varco (NOV) has dropped from the top 10 list, being replaced by Anadarko Petroleum (APC), and we still find that five of the top 10 RS stocks hail from the oil exploration/production and oil services groups.

The presence of Amgen (AMGN) and Baxter International (BAX) also seems to suggest that a rotation into health care is gaining steam. Nike (NKE) and Google (GOOG) remain strong and could be good covered-call candidates for the near term as the bullish cycles in the .OEX start cranking things higher for the next four weeks or so.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Wednesday, July 25, 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. Bank of America (BAC) is still the weakest large-cap issue, once again joined by financial sector giants Morgan Stanley (MS), Citigroup (C), Met Life (MET), and Bank of New York (BK). Even though these large caps are currently weak, they should all experience tradable swings higher as the .OEX begins to reverse higher.

Note that Freeport-McMoran (FCX) is actually weakening; on Wednesday, the Market Vectors Gold Miners (GDX) exchange traded funds (ETFs) actually had a major bullish reversal -- gaining nearly 3% -- but FCX (a major gold miner) was actually down on the day, a very interesting divergence. The major cycles in FCX continue to suggest that a major decline is due in the stock, with a major multicycle low occurring in spring 2013.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Wednesday, July 25, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing sell setup signals; 15% of the .OEX components issued new RMO swing sell signals on Wednesday. There were no new swing buy setup signals. As mentioned in the previous edition of Pendy's Picks (PP), "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 Wednesday 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." The bullish 34-week cycle in the .OEX strongly suggests that we are going to see that tradable bullish rally, and sooner rather than later.

FIGURE 3: SWING SELL SIGNALS. The S&P 100 (.OEX) components issuing RMO swing sell signals at the close of trading on Wednesday, July 25, 2012; 15% of all .OEX components fired sell setup signals during this session, with no new buy setup signals being issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Only five ETFs flashed swing sell setup signals on Wednesday. The SPDR's Gold Trust (GLD) and iShares Silver Trust (SLV) ETFs actually fired swing buy setup signals; a rise above their respective highs on Wednesday triggers new long trades in each of these metals ETFs. Nuclear Energy (NUCL), Industrial Sector (IYJ), Consumer Goods (IYK), Global Consumer Staples (KXI), and the SPDR Large Cap (SPY) all fired swing sell setup signals. While these are all valid short setups, it is doubtful many of them will actually trigger new short entries because of the bullish long-term up cycle in most of the major US stock indexes.

FIGURE 4: SWING SELL SETUP SIGNALS. The ETFs that fired new RMO swing sell setup signals as of the close of trading on Wednesday, July 25, 2012. There were also two new RMO swing buy setup signals on Wednesday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The .OEX, along with many of its component stocks, is on the verge of a tradable bullish rally, one that can break forth at a moment's notice. Be sure the stocks you seek to play on the long side offer you the following qualities:

1. High four-week (and also 13-week) relative strength versus the .OEX or .SPX
2. Excellent earnings growth potential for the next six to 12 months
3. Excellent liquidity and swing/trending capability.

Mechanical buy signals from a system you have tested and actually made money with can be used to get you into and out of the trades. As always, limit your risk and try to diversify among the top relative strength sectors and groups. 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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