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TECHNICAL ANALYSIS


PENDY'S PICKS: August 22, 2012

08/22/12 08:48:05 AM
by Donald W. Pendergast, Jr.

The .OEX meets up with a powerful resistance level, staging an impressive intraday reversal after rising early in the session.

Security:   .OEX, SLB, AAPL, COP, MA
Position:   N/A

The .OEX (Standard & Poor's 100) finished Tuesday's trading session at 649.56, closing down by 0.41%; the index surged higher in the morning, rising as high as 656.10 before reversing sharply lower in the afternoon. The 17.9-month, 15.9-week, and 41.2-day cycles are in bearish mode now, although the 33.8-week cycle in this large-cap index is still projecting higher, albeit at a gradually slowing rate of ascent and should top out shortly.

If this is truly the start of the reversal of the rally that began in early June 2012, look for the 630.00 area to be the first meaningful support level, followed by the 620.00 level. There could be tradable bounces up from those supports, after which retests of the same levels should fail spectacularly as the decline really starts to gather steam. The 615.00 and 600.00 levels also offer sizable support and may actually contain the first multicycle low that is expected in by late September-early October 2012.

Figure 1 shows us the strongest four-week relative strength (RS) performers in the .OEX; Cisco Systems (CSCO) once again keeps its top ranking slot, with Sprint Nextel (S) still riding shotgun in second place. Sprint Nextel has formed a nice little triangle; a drop below 4.99 should really unleash some fresh selling frenzy as latecomer bulls decide to stampede for safer pastures -- hopefully their cell phones have a GPS app that can guide them to that place, wherever it may be.

Apple Inc. (AAPL) was all over the financial news after it made its own impressive intraday reversal. Apparently, the starry-eyed bulls discovered that buying stocks with bearishly diverging money flows are at a high risk for a pullback and/or reversal. Freeport-McMoran Copper and Gold (FCX) showed up here on the strong RS list at an odd time; the stock had rebounded nicely in recent weeks, but it too is due to make a significant cycle high within the next seven to 10 days -- if not sooner -- before descending into a major multicycle low sometime between October and December 2012.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Tuesday, August 21, 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. As of Tuesday, three health care sector giants remain on the list -- Bristol Myers Squibb (BMY), Merck (MRK), and Eli Lilly (LLY); Johnson & Johnson (JNJ) has dropped off the list, being replaced by Mastercard (MA).

Verizon Communications (VZ) plunged on Tuesday, dropping by nearly 2%; this is not all that surprising, as the stock has been under distribution (as demonstrated by its disintegrating money flow trend) recently. Wal-Mart (WMT) continues to fall; look for 67.00 to be a potential cyclical trough/support level.

If Tuesday's reversal in the .OEX is the start of a trend reversal, look for more big financial names to populate this weak RS stock list in the days and weeks just ahead.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Tuesday, August 21, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing sell setup signals; 8% of the .OEX components issued new RMO swing sell signals on Tuesday.

There was also one new swing buy setup in Capital One Financial (COF). We saw a sell setup in Chevron (CVX) in yesterday's edition of Pendy's Picks; a short entry was triggered on Tuesday even as three other heavy hitters from the energy sector also fired swing sell setups -- ConocoPhillips (COP), ExxonMobil (XOM), and Schlumberger (SLB). COP went short on a decline below 56.57, XOM on a drop beneath 87.26, and SLB will short if 74.14 is hit. Amgen (AMGN) has been going sideways for nearly four weeks now and will trigger a short if it declines below 82.92.

FIGURE 3: SWING SELL SIGNALS. The S&P 100 (.OEX) components issuing RMO swing sell signals at the close of trading on Tuesday, August 21, 2012; 8% of all .OEX components fired swing sell setup signals during this session, with one new swing buy setup signal also being issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Among the exchange traded funds (ETFs) that Pendy's Picks follows, there were no buy or sell setup signals to report on Tuesday. If the decline in the major stock indexes gathers momentum, expect this list to have plenty of new attendees within the next trading session or two.

The .OEX showed some vulnerability on Tuesday after being turned back at the 656.00 level. Several major cycles in the index are already heading lower, although its 33.8-week cycle still may attempt one more push higher before finally giving up the ghost on this particular rally.

The next week could see volatility increase substantially, and while any number of outcomes is possible in the short term, the probabilities are nearly 100% that the .OEX will experience a 5% to 8% decline between now and early October 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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