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TECHNICAL ANALYSIS


PENDY'S PICKS: August 24, 2012

08/24/12 09:20:48 AM
by Donald W. Pendergast, Jr.

Thursday's trading session confirmed the obvious: a bearish trend reversal appears to be getting under way in the .OEX.

Security:   .OEX, MMM, IBM, DELL, SPY
Position:   N/A

The .OEX (Standard & Poor's 100) finished Thursday's trading session at 644.71, closing down by 0.80%; the index closed near the lower end of its daily range and has already closed below a key cycles-based trendline. The index may pause soon and then attempt another runup at the recent swing high of 656.10, but any such move is likely to fall short of making a double top -- and with the ensuing selloff being very quick to manifest. There is no change in the cycles analysis that suggests that September 4, 2012, is the latest date to expect the peak to be in place -- if it isn't already.

Figure 1 shows us the strongest four-week relative strength (RS) performers in the .OEX; Cisco Systems (CSCO) is still handily outpacing the .OEX, but be aware that its long-term money flow is still deeply entrenched in bearish territory. Sprint Nextel (S) fell off its high horse and is correcting; look for the 4.60 area to provide minor support in the next session or two. This strong RS stock list now has five financial sector issues -- Bank of America (BAC), Allstate (ALL), Citigroup (C), MetLife (MET), and Morgan Stanley (MS) -- and it will be interesting to see how these stocks fare once this new bearish turn in the market gathers steam.


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Thursday, August 23, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 2 is a look at the weakest four-week relative strength (RS) performers in the .OEX; many of the same names remain -- for instance, Boeing (BA) was absolutely hammered on Thursday, gapping lower on mega volume, taking out its 71.00 support level. The stock now looks to be on target to test the 66.80 support soon.

Then there are Excelon (EXC) and Southern Co. (SO), two utilities that are still struggling; so much for utilities being safe havens during times of market turmoil. It's interesting to note the inclusion of Coca-Cola (KO) on this weak RS stock list; Pendy's Picks firmly believes that more and more legislative arrows will be aimed at soft-drink and fast (junk) food retailers as the public more fully begins to grasp the health consequences that manifest in the lives of consumers of such foodstuffs.

A nation of obese, sedentary, soda-swilling diabetics isn't a country capable of enjoying the blessings of robust economic output and good health, and that truth is finally being broadcast loud and clear. Expect companies like KO, McDonald's (MCD), and others in the junk food biz to reinvent their business models and product lines in the years to come. Hewlett Packard (HPQ) is another company that will have to reinvent itself as mobile computing continues to destroy the market for home PC's and notebook computers; look for HPQ to initiate bold (last-ditch?) new programs to partner with various mobile computing/communications providers. I still love my HP notebook, regardless - it's easily the best one I've ever owned.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Thursday, August 23, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing sell setup signals; 12% of the .OEX components issued new RMO swing sell signals on Thursday. There were no new swing buy signals.

Speaking of companies in need of a new business model, Dell (DELL) shares are literally falling through the floor and have just issued a new swing sell setup signal; a decline below 11.22 triggers a new short entry.

Apache (APA) goes short if 87.43 is hit; ditto for Anadarko Petroleum (APC) on a decline beneath 68.91 and Williams Cos. (WMB) is a new short entry on a drop below 31.68. Berkshire Hathaway (BRK.B) triggers a short on a decline beneath 85.12; it's doubtful that Geico can prevent the stock (Berkshire owns Geico Insurance, for your information) from making a proportional retracement here. The stock is being distributed by the smart money; look for support to manifest near 82.00 and then 80.44.

FIGURE 3: SWING SELL SIGNALS. The S&P 100 (.OEX) components issuing RMO swing sell signals at the close of trading on Thursday, August 23, 2012; 12% of all .OEX components fired swing sell setup signals during the session, with no new swing buy setup signals issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Among the exchange traded funds (ETFs) that Pendy's Picks follows there were four sell setup signals to report on Thursday -- the iShares Consumer Goods (IYK), Oil Equipment & Services (IEZ), Oil & Gas Exploration (IEO), and SPDRs Large Cap (SPY) ETFs (Figure 4). No big surprises here; in fact, if the SPY triggers a new short on a drop below 140.44, the selling pressure could get intense as panicked traders and long-term investors decide to lighten up their stock holdings before the weekend hits.

FIGURE 4: ETFs. The exchange traded funds issuing RMO swing sell signals at the close of trading on Thursday, August 23, 2012; there were no new swing buy setup signals issued.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The .OEX, along with the rest of the major US stock indexes, turned southward -- in a big way -- during Thursday's trading session; the anticipated cycle peak of the 11-week long rally that commenced in early June 2012 now appears to be in place, although there could still be one final attempt to rally before the worst of the upcoming decline hits. 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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