PENDY'S PICKS: August 1, 2012

08/01/12 08:48:50 AM

by Donald W. Pendergast, Jr.

The .OEX pulled back slightly on Tuesday, confirming a minor-degree cycle high.

Security: .OEX, MO, FCX, PEP, ITA
Position: N/A

The .OEX (Standard & Poor's 100) finished Tuesday's trading session at $635.74, closing down by 0.24%. While the 34-week cycle in the .OEX is still the main dynamic that continues to draw the index higher, several smaller-degree cycles have topped and a minor pullback appears be under way; look for support to manifest near $630.00 if the 34-week cycle is still in primary control, with prices to snap quickly higher as we move into August.

Figure 1 show us the strongest four-week relative strength (RS) performers in the .OEX. While there isn't too much change to report in this list, we see that we are down to four stocks from the energy sector (HAL, BHI, WMB, and SLB). Sprint Nextel (S) is still numero uno and Walgreen's (WAG) continues to demonstrate remarkable strength since it first appeared on the top RS list nearly two weeks ago.

EBAY, BAX, and AMGN remain in our list, virtually unchanged from yesterday. The addition of EMC Corp. (EMC) is worthy of note, as perhaps this may signal the start of a renewed interest in various tech industry groups as we head into the heart of summer, prior to the traditionally strong year-end performance for the entire tech sector stocks.

FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Tuesday, July 31, 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. There are some real changes to report here; Starbucks (SBUX) remains the weakest RS player among the large caps, with Dow Chemical (DOW) continuing to lose steam, falling to third place. Note that Lowe's (LOW) is now perched just above DOW; perhaps a warning of a future tradable decline in the Dow 30? The "dirty lowdown," perhaps?

Bank of America (BAC) is still clinging to the lower portion of the list, perhaps preparing to drop off in the near future. DELL, HPQ, and CSCO all continue to demonstrate weakness versus the .OEX. Ford Motor (F) has finally dropped off the weak RS list and has been replaced with United Parcel Service (UPS).

When we were kids in New York in the 1960s and early 1970s (no, it wasn't exactly "happy days," but the economy and social structure of the nation was much more secure and stable), we referred to our friendly UPS delivery man as "Buster Brown." Alas, in these sadder and much more chaotic and confusing days we all live in now, even the mighty UPS is struggling, what with high fuel costs, costly union labor contracts and expensive hubs, and a freight delivery network to maintain.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Tuesday, July 31, 2012.

Graphic provided by: MetaStock.

Graphic provided by: MetaStock Explorer.

Figure 3 are the S&P 100 components giving RMO swing buy setup signals; 8% of the .OEX components issued new RMO swing buy signals on Tuesday. There were no new swing sell setup signals to report. Note the new swing buy setup signal in Bank of America (BAC); a rise above 7.34 triggers a new long entry in the stock, and if you see it break above 7.40, then you can be reasonably confident that a bullish swing move is under way in this key financial sector bellwether stock.

Wonder or wonders, even Dell (DELL) and Hewlett Packard (HPQ) have fired swing buy setups -- a rise above their Tuesday highs of 12.02 and 18.43 will also trigger new long entries into these key tech sector issues.

FIGURE 3: SWING BUY SIGNALS. The S&P 100 (.OEX) components issuing RMO swing buy signals at the close of trading on Tuesday, July 31, 2012; 8% of all .OEX components fired buy setup signals during this session, with no new sell setup signals being issued.

Graphic provided by: MetaStock.

Graphic provided by: MetaStock Explorer.

Only one exchange traded fund (ETF) flashed a swing buy setup signal on Tuesday, the iShares Nuclear Energy (NUCL) (Figure 4). A rise above its Monday high of 31.74 triggers a new long trade; there were no swing sell setups in any of the ETFs that Pendy's Picks regularly follows. Five years ago, stocks from the nuclear energy industry group were on a tear; things have quieted down in this corner of the equities market since then, with the terrible disaster in Japan in early 2011 reminding the world of the very real dangers involved with this type of energy technology.

FIGURE 4: SWING BUY SETUP SIGNAL. The single ETF that fired a new RMO swing buy setup signal as of the close of trading on Tuesday, July 31, 2012. There were no new RMO swing sell setup signals on Tuesday.

Graphic provided by: MetaStock.

Graphic provided by: MetaStock Explorer.

The .OEX pulled back a bit during Tuesday's trading session, confirming that a small-degree cycle high has likely been achieved. Nevertheless, until the 34-week cycle actually turns lower, the probabilities still favor a rise toward the $650.00 to $660.00 area by the final week of August 2012.

Focusing on the strongest relative strength stocks from industry groups outperforming the .OEX and .SPX remains the lowest risk pathway for risk capital deployment until further notice. 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.

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PENDY'S PICKS: August 1, 2012

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