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TECHNICAL ANALYSIS


PENDY'S PICKS: August 6, 2012

08/06/12 08:49:40 AM
by Donald W. Pendergast, Jr.

The .OEX reversed higher on Friday, extending the bullish run that commenced on June 4, 2012.

Security:   .OEX, COP, WFC, MCD
Position:   N/A

The .OEX (Standard & Poor's 100) finished Friday's trading session at $640.64, closing up by 1.75%. The index opened at $629.88 and proceeded to charge higher, right out of the starting gate and never looking back. The 34-week cycle in the .OEX is still rising, with the 61-day cycle close to bottoming; the 40- and 20-day cycles are already moving lower. If we see more bullish follow-through early this week, then it may be prudent to assume that the 34-week and 61-day cycles are exerting a bullish influence, with more sizable gains to come during the month of August. Pendy's Picks is still forecasting a tradable, swift, sharp correction for most of September 2012, however, so make the most of this latest upturn in the large caps composing the .OEX while you still have time.

Figure 1 show us the strongest four-week relative strength (RS) performers in the .OEX; energy sector stocks continue to shine, with HAL, BHI, NOV, and SLB all continuing to impress. Sprint Nextel (S) and Walgreen's (WAG) are staying put at the top of the list, and in the same 1-2 ranking configuration seen last week. Gilead Scientific (GILD) continues to outperform, as does EMC Corp. (EMC). Comcast Class A (CMCSA) is our newest addition to the strong four-week RS list; look for more bullish follow-through in this cable giant's stock this coming week.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Friday, August 3, 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; this list moves slowly most days, although there are some surprises from time to time. Bristol Myers Squibb (BMY) has weakened enough to join the gang here, and United Parcel Service (UPS) has decided to truck on over to join the weak RS party yet again. Morgan Stanley (MS) has finally vacated and the stock is an obvious beneficiary of the bullish turn of events in the .OEX on Friday. Shares of DELL and HPQ continue to stagnate, even as shares of UNH, LOW, and DOW remain chronic underperformers versus the .OEX.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Friday, August 3, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing buy setup signals; 9% of the .OEX components issued new RMO swing buy signals on Friday. There were no new swing sell setup signals. If seven or more of these setups trigger new long entries during Monday's trading session, expect to see some decent bullish follow-through for the remainder of the trading week.

Note the new signals in Bank of America (BAC) and Bank of New York (BK); these are two biggies from the financial sector that need to follow through if the .OEX is to rally significantly for the remainder of August; BAC triggers a new long entry on a rise above $7.49 while BK gets the nod for a new long on a run above $21.84.

ConocoPhillips (COP) goes long on a break above $55.99; the oil sector issues still look very attractive with crude oil still near $90 per barrel; the long-term price cycles still suggest more upside for COP and its oil exploration/production brethren.

FIGURE 3: SWING BUY SIGNALS. The S&P 100 (.OEX) components issuing RMO swing buy signals at the close of trading on Friday, August 3, 2012; 9% of all .OEX components fired swing buy setup signals during this session, with no new swing sell setup signals being issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Two exchange traded funds (ETFs) flashed swing buy setup signals on Friday (Figure 4); the iShares Defense and Aerospace (ITA) and Global Clean Energy (ICLN) ETFs will trigger new long entries on a rise above their respective Friday highs of $63.70 and $6.46 will trigger new long trades. There were no swing sell setups in any of the ETFs that Pendy's Picks regularly follows. ICLN looks very interesting as a potential long entry here; the ETF has been beaten down substantially since March 2011 and is down by more than 65% since making that major high.

FIGURE 4: SWING BUY SETUP SIGNAL. The two ETFs that fired a new RMO swing buy setup signal as of the close of trading on Friday, August 3, 2012; there were no new RMO swing sell setup signals on Friday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The .OEX staged a powerful bullish reversal during Friday's trading session and is now only three points shy of reaching the major swing high of $643.29 set on May 1, 2012. Until price cycle analysis suggests otherwise, it is wise to assume that the index is now under the primary influence of its rising 34-week cycle and soon-to-bottom 61-day cycle.

Despite August's reputation as the dog days of summer in the broad US markets, we may very well see the rally that launched in early June 2012 continue until Labor Day. After that, we should expect at least a 24% to 38% retracement of that entire bull run. The cycles will help us determine the highest probability course of action as time moves forward and brings the .OEX toward its ultimate cycle high of this particular rally. 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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