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TECHNICAL ANALYSIS


PENDY'S PICKS: August 20, 2012

08/20/12 11:59:07 AM
by Donald W. Pendergast, Jr.

The .OEX moves a bit higher on Friday; the maximum price target for the June through August rally has been raised yet again.

Security:   .OEX, AXP, BRK.B, FDX
Position:   N/A

The .OEX (Standard & Poor's 100) finished Friday's trading session at 651.58, closing marginally higher -- up by 0.15 %. The 33.8-week cycle in this large-cap index still appears to be in control, having guided the .OEX steadily higher since June 4, 2012. This cycle is still expected to peak near September 1, 2012; the maximum target price for the June through August 2012 rally has again been raised to 740.41 -- with a major peak date of no later than September 4, 2012. Once this summer rally finally peaks, expect at least a 38% retracement of the entire runup from 579.26 to the ultimate price of the rally, a peak that will likely be achieved in the next two weeks. Based on Friday's high of 651.83, the 38% Fibonacci retracement is currently at 624.00.

Figure 1 shows us the strongest four-week relative strength (RS) performers in the .OEX; Cisco Systems (CSCO) has dropped to third place in the rankings and has been overtaken by MetLife (MET). As you may already know, financials make up the largest single sector within the .OEX, so it's not surprising to see various bank, brokerage, and insurance issues duking it out for top RS honors as a big market move gets under way.

Friday's powerful rally was very kind to this tech staple's share price. Sprint Nextel (S) may actually be pausing before continuing higher -- or it could be going into a trading range; time will tell how it all plays out. If you see the stock spike above 5.49 soon, look for profit takers to come in quickly and for the rally attempt to stall.

Halliburton (HAL) and National Oilwell Varco (NOV) are still doing well, but a strong correction is likely due within the next couple of weeks in the crude oil market, just in time for the .OEX to peak and roll over, dragging the prices of these still-hot performers down in its wake. We might very well see gas back down to $3.15 to $3.25 per gallon (here in northeast Florida, anyway) range if the correction plays out as anticipated by the cycle counts.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Friday, August 17, 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; United Parcel Service (UPS) remains here on the lower portion of the list, but perhaps not for too much longer, as its archrival in the freight/express delivery industry -- FedEx (FDX) -- has just flashed a buy setup signal, one that triggers on a rise above 90.68.

As mentioned in previous editions of Pendy's Picks, when a stock is in a strong and/or sustained downtrend and finally makes a major multicycle low and then fires a buy signal from a good system, that is frequently the start of a tradable bullish trend reversal. UPS has fared much worse than FDX in terms of percentage declines, so this could be a good stock to put on your potential turnaround watchlist. If crude oil peaks soon (possibly near $100 per barrel) and starts to roll over, it wouldn't be surprising to see some moves higher in FDX, UPS, and other heavy hitters in the transport sector of the market.

McDonald's (MCD), United Health Group (UNH), and Dow Chemical (DOW) just seem to love being here on the worst-performing large-cap stock list; earnings growth rates are important drivers in a stock's price, so always check on this key fundamental before putting on swing or trend following trades in any of these stocks -- Zacks Research is a great source for this kind of info. Anadarko Petroleum (APC) remains the lone oil exploration/production stock on the weak list; again, if crude tops out in the near term, expect to see more oil-related names appear on this particular list.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Friday, August 17, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing buy setup signals; 5% of the .OEX components issued new RMO swing buy signals on Friday. There were also three new swing sell setups in American Electric Power (AEP), Baxter International (BAX), and Gilead Scientific (GILD).

As far as these sell setups go, AEP looks most interesting. The stock has enjoyed a tremendous rally since mid-May 2012 and if it declines below 42.91, we may see it go into a bearish trend reversal.

On the buy side of the equation, BRK.B may be setting up for an attempt to meet/exceed its February 2011 high of 87.65, so keep a close watch here; a rise above 85.87 triggers a long entry. American Express' (AXP) daily chart features a lovely, maturing triangle/pennant pattern, and if the stock can break above 57.67, it may attract enough buying pressure to finally break free of the pattern as a new bullish continuation move begins.

FIGURE 3: SWING BUY SIGNALS. The S&P 100 (.OEX) components issuing RMO swing buy signals at the close of trading on Friday, August 17, 2012; 5% of all .OEX components fired swing buy setup signals during this session, with three new swing sell setup signals also being issued.
Graphic provided by: MetaStock.
Graphic provided by: Metatock Explorer.
 
In the exchange traded fund (ETF) corner of the US stock market, we find the SPDRs Gold ETF (GLD) (Figure 4) is ready to fire a long entry signal on a rise above 157.09.

It is interesting to note that GLD and SLV don't always trigger buys or sells at the same time; each of these metals has a trading personality all its own. There were no new sell setups on Friday.

FIGURE 4: BUY SETUP SIGNAL. The one ETF that fired a new buy setup signal as of the close of trading on Friday, August 17, 2012; there were no new sell setup signals on Friday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The .OEX had a bit more bullish follow through again on Friday, tacking on another modest gain. The June through August rally is beginning to look a bit tired, but until the 33.8-week cycle actually peaks and rolls over, there might still be some bullish reserves left in various groups and sectors within the .OEX.

To repeat this important observation made last Friday, although the maximum price target for the June to August 2012 rally has now been raised once again to 740.41, be aware that the minimum price target of 640.87 has already been exceeded and that the entire rally is expected to terminate no later than September 4, 2012. 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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