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Cyclicals At Support?

12/06/01 11:39:51 AM
by Austin Passamonte

Cyclical stocks can be a good place to start when looking for an economic recovery.

Security:   CYC, DD, CAT
Position:   N/A

If the economy is truly in early stages of recovery--with no false starts this time, we can look toward cyclical stocks to lead the way. After all, which group uses both raw materials and new technology combined to fill consumer spending insatiable demands!

Since late September lows we've seen a steep but intact trendline walking the Morgan Stanley Cyclical Index [CYC] higher (Figure 1). A three-week sideways pause had some bulls wondering and bears itching to go short, but that might be premature. Weekly chart stochastic values are within overbought extremes and possibly weakening, but daily charts show the move within that weekly chart picture has price action poised to rise.

Figure 1: Weekly/Daily Charts Morgan Stanley Cyclical Index
Graphic provided by:
Graphic provided by: QCharts.
Note the price action coiled near relative recent highs. For the past thirteen sessions straight (at the time of this writing) price action has coiled its strength for the next directional move. Which way will it be? One can never be sure, but a price coil usually continues the direction from which price action entered. That coupled with stochastic values making a clearly bullish reversal from near oversold extreme strongly suggest it will be upward once more.

Figure 2: Weekly/Daily Charts - XOI CBOE Oil Index
Graphics courtesy of Qcharts

DuPont is one such cyclical that also walked a similar steep line of ascent but recently broke below the measure. It has since formed a bullish flag or channel as price action sits on its 200 DMA with stochastic values reversing up from oversold extreme in bullish fashion. A close above the $44 level should position this one for an assault on $45+ to resume the trendline climb.

Figure 3: Daily Chart - Caterpillar [CAT]
Graphics courtesy of Qcharts

"Big CAT" on the other hand looks relatively stronger than DD by comparison. It has held above a more gradual sloping trendline with no breaks. CAT is also resting on it's 50-DMA for support and looks to break above wedge resistance as stochastic values begin a bullish reversal from oversold extreme.

Many components of the CYC index and other cyclical stocks all look quite like these examples right now, which indicate the first week of December should see a resumption in the current rally from here.

Austin Passamonte

Austin is a private trader who trades emini stock index futures intraday. He currently trades various futures markets from home in addition to managing a trader's educational forum

Title: Individual Trader
Address: PO Box 633
Naples, NY 14512
E-mail address:

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Date: 12/12/01Rank: 4Comment: 

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