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TECHNICAL ANALYSIS


PENDY'S PICKS: July 27, 2012

07/27/12 11:35:14 AM
by Donald W. Pendergast, Jr.

The .OEX surged higher on Thursday, fulfilling expectations of a bullish cyclical turn.

Security:   .OEX, ACN, XOM, LOW, GDX
Position:   N/A

The .OEX (Standard & Poor's 100) finished Thursday's trading session at $625.92, rising by 1.14%. Once again, sound cycle analysis had already revealed that a bullish turn was likely, as the powerful long-term bullish cycle -- in this case the 34-week cycle in the .OEX -- has remained in a rising mode for nearly two months and is not anticipated to top for another three to five weeks. The index closed right near the top of its daily range as well, suggesting more follow-through on Friday's trading session.

Figure 1 show us the strongest four-week relative strength (RS) performers in the .OEX; Sprint Nextel (S) has moved up into the top RS slot, with Walgreen's (WAG) now in second place. with the oil exploration/production and oil services stocks actually strengthening. Anadarko Petroleum (APC) has dropped off, replaced with Williams Cos. (WMB) and, once again, we find that five of the top 10 RS stocks hail from the oil exploration/production and oil services groups.

Amgen (AMGN), Baxter International (BAX), Nike (NKE), and Google (GOOG) fill out the rest of the top RS list and should all be on track for further gains as the bullish cycles in the .OEX start cranking things higher in the broad markets between now and late August 2012.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month as of Thursday, July 26, 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; there isn't much in the way of change here, as weak stocks tend to remain weak longer than strong stocks stay strong (or so it seems at times). Bank of America (BAC) remains the weakest large-cap issue, with Morgan Stanley (MS) also continuing to lag the broad market indexes. Citigroup (C), Met Life (MET), and Bank of New York (BK) have dropped off this list, perhaps a sign that some money is flowing back into financials.

United Health Group (UNH) continues to weaken versus the .OEX and the big three tech issues on our list (DELL, HPQ, and CSCO) confirm that large-cap tech is not necessarily the best place to have funds deployed during this new bullish swing in the .OEX and .SPX.

Note the positioning of Dow Chemical and Lowe's in the list -- could this be an early warning of the next big cyclical downturn in the US markets, as in "Dow low"? Makes you wonder, doesn't it, especially since a tradable bearish swing is anticipated to be under way by early September 2012.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month as of Thursday, July 26, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing buy setup signals; 6% of the .OEX components issued new RMO swing buy signals on Thursday. There was only one new swing sell setup signals, that being in shares of Monsanto Co. (MON). The new buy setup signal in ExxonMobil (XOM), if triggered, would seem to give a major seal of approval to the ongoing rally in the oil exploration/production and oil services groups.

A rise above $86.70 triggers a new long entry in this energy giant, perhaps unleashing the tiger in this market's tank. Note that Lowe's (LOW) is flashing a buy setup signal, too, perhaps suggesting that it's tired of being on the weak four-week RS list and is ready for some bullish action. This is still early in this swing higher, so expect to see the number of bullish setups far outweigh bearish ones for the next few weeks.

FIGURE 3: SWING BUY SIGNALS. The S&P 100 (.OEX) components issuing RMO swing buy signals at the close of trading on Thursday, July 26, 2012; 6% of all .OEX components fired buy setup signals during this session, with only one sell setup signal being issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Two exchange traded funds (ETFs) flashed swing buy setup signals on Thursday. The Market Vectors Gold Miners (GDX) and iShares Global Consumer Staples Sector (KXI) ETFs fired swing buy setup signals; a rise above their respective highs on Thursday triggers new long trades in each of these ETFs; and there were no swing sell setups in any of the ETFs that Pendy's Picks regularly follows. 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 Thursday, July 26, 2012; there were no new RMO swing sell setup signals on Thursday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The .OEX, along with many of its component stocks, is very likely in the early-stages of a tradable bullish rally, one that got under way on Thursday. To repeat yesterday's stockpicking wisdom, 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, if possible) 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 before 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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