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TECHNICAL ANALYSIS


PENDY'S PICKS: August 7, 2012

08/07/12 09:52:15 AM
by Donald W. Pendergast, Jr.

The .OEX ekes out yet another gain; cycles suggest more upside.

Security:   .OEX, APA, HPQ, F, IHI
Position:   N/A

The .OEX (Standard & Poor's 100) finished Monday's trading session at $642.10, closing up by 0.22%, adding a bit of follow-through to Friday's strong bullish reversal. The entire move up from the June 4, 2012, multicycle low has been contained within a remarkably symmetrical trend channel, one that has been continuously buoyed by the rising 34-week price cycle in this key large-cap index.

This trend channel has provided numerous short-term trading ops for the overbought/oversold crowd and has also been a boon to longer-term trend-followers, swing traders, and covered-call traders, too. Until the cyclical analysis changes, late August-early September 2012 is still the anticipated date to expect this rising cycle to peak, followed by a noticeable pullback in the .OEX throughout September 2012.

Figure 1 show us the strongest four-week relative strength (RS) performers in the .OEX; energy sector stocks continue to outperform, but Schlumberger (SLB) has dropped off the top ten RS list. Sprint Nextel (S) is still in the top ranking slot, but note that Walgreen's (WAG) has begun to fade. Gilead Scientific (GILD) continues to outperform, with EMC Corp. (EMC) starting to come on strong. Comcast Class A (CMCSA) has dropped off the list; ebay (EBAY), Allstate (ALL), and Google (GOOG) are perhaps the three stocks we should focus on here.

As a financial component of the .OEX, ALL (and other large insurers) will need to continue to be strong in order for the index to continue to rise throughout August. EBAY is a useful economic strength barometer, as is GOOG, and when they are outperforming it could be a sign of a possible minor economic rebound (within the context of an ongoing global depression, of course).


FIGURE 1: STRONGEST COMPONENTS. The 10 strongest S&P 100 (.OEX) components over the past month, as of Monday, August 6, 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; this list moves very slowly most days, although there are some surprises from time to time. Starbucks (SBUX) continues to lead this list of slacker stocks; perhaps when Mickey D's reduced the price of their large coffees to $1, budget-conscious caffeine addicts decided to ditch the $3 gourmet blends at SBUX, using the balance of their savings to cozy up to Happy Meals? Maybe, maybe not, as McDonald's (MCD) is also severely underperforming the .OEX these days.

Dow Chemical (DOW) has dropped off the list (it triggered a swing buy setup signal on Monday), but Lowe's (LOW) continues to underperform, as does Bristol Myers Squibb (BMY), CVS Caremark (CVS), United Health Group (UNH), and United Parcel Service (UPS).

Of real interest is the addition of General Dynamics (GD) to the weak RS list; the fact that Congress decided to take a five-week holiday without coming up with a budget agreement in no doubt weighing heavy on the minds of defense stock investors.

FIGURE 2: WEAKEST COMPONENTS. The 10 weakest S&P 100 (.OEX) components over the past month, as of Monday, August 6, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 3 are the S&P 100 components giving RMO swing buy setup signals; 4% of the .OEX components issued new RMO swing buy signals on Monday. There were two new swing sell setup signals as well; Colgate (CL) and Johnson and Johnson (JNJ) will trigger short entries on declines below their Monday lows. Once again, energy stocks continue to appear on the buy setup list; Apache (APA) will trigger a new long entry on a rise above Monday's high of $86.48. APA has put in a very bullish-looking basing pattern over the past two months and if it can finally clear $90.20, a more substantial rally could be under way.

Dow Chemical (DOW) had been on our weak RS list for several weeks, but the stock is now showing signs of life again. The stock triggers a long entry on a rise above $30.29. Hewlett Packard (HPQ) is also a stock to watch here, as it too has begun to manifest signs of a bullish reversal; a rise above $18.82 triggers a long entry here. HPQ also looks like an excellent short put play for the time being.

FIGURE 3: SWING BUY SIGNALS. The S&P 100 (.OEX) components issuing RMO swing buy signals at the close of trading on Monday, August 6, 2012; 4% of all .OEX components fired swing buy setup signals during this session, with two 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 Monday; the iShares Defense and Aerospace (ITA) and Medical Devices (IHI) ETFs will trigger new long entries on a rise above their respective Monday highs of $63.77 and $64.00 will trigger new long trades. There were no new swing sell setups to report. See Figure 4.

FIGURE 4: SWING BUY SETUP SIGNALS. The two ETFs that fired a new RMO swing buy setup signal as of the close of trading on Monday, August 6, 2012; there were also two new RMO swing sell setup signals on Monday.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
The .OEX managed a bit of bullish follow-through on Monday, further confirming the power of the major bullish turn that occurred last Friday. The most recent cycle analysis in the .OEX suggests that the index has the potential to rise as high as $691.18 by September 6, 2012. Please remember that is a maximum potential and that the index has actually reached the minimum price target of $640 for the bull run that began in early June 2012.

Stick with the strongest stocks in the strongest industry groups for the time being and maintain strict risk control on your open long positions. 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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