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TECHNICAL ANALYSIS


PENDY'S PICKS: August 3, 2012

08/03/12 09:35:08 AM
by Donald W. Pendergast, Jr.

The .OEX sold off some more on Thursday, breaking below tentative support near $630.00.

Security:   .OEX, BA, APC, F, AIA
Position:   N/A

The .OEX (Standard & Poor's 100) finished Thursday's trading session at $629.43, closing down by 0.75%. The index dropped as low as $624.73 during the session but managed to close midway between the day's high and low prices. Pendy's Picks had suggested that $630.00 might prove to be a solid support level, but since that level was violated, we still need to see if the strong intraday rebound from slightly lower levels is the start of a new swing higher. The 34-week cycle in the .OEX is still suggesting room for more upside, possibly as high as $650.00 to $660.00 by September 1, 2012, so we still need to give this large cap every bullish benefit of the doubt for the time being.

Figure 1 show us the strongest four-week relative strength (RS) performers in the .OEX. While there still isn't too much change to report in this list, we see that we are back down to four stocks from the energy sector (HAL, BHI, NOV, and SLB). Sprint Nextel (S) is still enjoying the panoramic view from the top of the list, with Walgreen's (WAG) still looking secure in its role as a second-place performer. Note the sudden ascension of Gilead Scientific (GILD) back into our top RS ranking list; this could be a stock primed for even more gains if the .OEX decides it wants to end this current trading week on a positive note.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Thursday, August 2, 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; changes here are relatively minor. Starbucks (SBUX) remains the weakest RS player; perhaps an 8.2% unemployment rate is not supportive of $4 latte prices, but who knows? Lowe's (LOW) remains high on the weak RS ranking list. This is rather disturbing, since in an environment of sluggish new-home sales, it would seem logical that homeowners would still be keen on maintaining if not improving their current residential properties.

But in the era of the Great Recession, it seems that homeowners may be delaying even needed home maintenance expenditures. Bank of America (BAC) is still hanging tough at the lower end of the weak RS list. DELL and HPQ must really like their status as long-term members of this list, too; home PC and notebook computer sales are in a long-term downtrend, one that may never reverse to any noticeable degree as the move to mobile computing begins to accelerate.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Thursday, August 2, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing buy setup signals; 20% of the .OEX components issued new RMO swing sell signals on Thursday. There were no new swing buy setup signals. Of major interest here is the sell setup signal in Anadarko Petroleum (APC); given the recent strength in the energy sector stocks, might this be the harbinger of a correction for the entire oil exploration/production industry group?

A decline below $65.38 might unleash a torrent of selling in this stock, so be sure to watch all of your open energy sector stock positions and have an exit and/or profit-taking strategy all ready to go. Boeing's (BA) sell setup gets triggered on a decline below $71.15; fears of major cuts to the US defense budget appear to be spooking investors and traders in this manufacturing giant's common shares. If 80% or more of these sell setup signals are actually triggered on Friday and/or Monday, expect more substantial declines in the .OEX, but if there's only a handful trigger, then look for a sharp, readable rebound rally lasting into next week.

FIGURE 3: SWING SELL SIGNALS. The S&P 100 (.OEX) components issuing RMO swing sell signals at the close of trading on Thursday, August 2, 2012; 20% of all .OEX components fired swing sell setup signals during this session, with no new swing buy setup signals being issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Three exchange traded funds (ETFs) flashed swing sell setup signals on Thursday: the iShares Regional Banks (IAT), Defense and Aerospace (ITA), and Broker-Dealer (IAI) (Figure 4). A decline below their respective Thursday lows of $23.41, $61.39, and $19.75 will trigger new short trades; there were no swing buy setups in any of the ETFs that Pendy's Picks regularly follows. Since the .OEX has many financial components, new triggered shorts in IAT and IAI would also seem to imply more downside for the large cap indexes.

FIGURE 4: SWING SELL SETUP SIGNALS. The three ETFs that fired a new RMO swing sell setup signal as of the close of trading on Thursday, August 2, 2012; there were no new RMO swing buy setup signals on Thursday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The .OEX overshot a potential support area near $630.00 on Thursday but did manage to stage a decent rebound. With one-fifth of all .OEX components having printed swing sell setups, we are at or near another key make-or-break point in the index.

If most of these (80% or more) setups actually trigger short entries in the next two sessions, expect some more selling pressure to take the .OEX down toward the $617.00 to $620.00 range. However, if only a few trigger, expect a quick, tradable rebound rally, one that could morph into something more substantially bullish as we move into August. 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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