Bullish, Bullish, Bullish, some stocks to watch

Well it seems that it's business as usual. Just when the market gives you pause to think the uptrend might tiring, the potentially bearish weekly candles from last week all got wiped out with a strong week across the board. Particularly encouraging for the bulls is that the Nasdaq and Russell, which I pointed out had been lagging, pushed strongly above their recent resistance.
This image shows the weekly candles for the major indexes since Jan 1. Judging from these alone, it seems that the intermediate to long term trend is still quite bullish.
(Click image to see it bigger)


The Vix remains in its low range. It might be a good idea to set an alert for if it moves above 14.50 or so as a wake up call to assess things.


One observation I'd like to make is something of a cautionary bit. I tend to be a worrier, which doesn't really help in the face of a strong bullish market, but it is worth considering the risk in the air when there seems to be such a strong sense of confidence and perhaps, complacency among the bulls. I think this mockup shows my thinking clearly enough.



The fact remains, as always, that an uptrend is an uptrend until it's not anymore. So everything is all systems go at the moment. But it is interesting to consider the momentum of the last year and whether it might just be waning a bit. Last week's gains were done in a short week(whatever that means) and Friday's finish was on less than average volume.


That said, there's a ton of strong looking stocks out there.
Here's a china play.
CTRP - Very nice 5 year chart with a recent high volume week of an earnings jump. Biggest weekly volume since the end of 2/27 China stock market scare.



It even looks great on the daily chart with the Investools study set. It's looking prime for a support bounce and a set of fresh green arrows.



GROW had some serious volume on Friday for a bounce up and further forming of a potential ascending triangle. It's early to assume that it will bust through the triangle resistance, but a play up to that point would still be a pretty good risk/reward ratio for those bold enough to play it.
The volatility bouncing down from resistance in the last 5 months is unnerving, but considering it was a $2.50 stock just two years ago, maybe this is a very natural and healthy period of consolidation.



Here's another from the investment world.
AINV - It looks like it needs to come in and establish new support here after such a quick upward move, but it's certainly one to watch.



The growth is smaller than we look for, but it is better than its group. Investools has lumped a lot of industry groups together on their recent change to the Big Chart and Industry Group designations. So some stocks, like this one, are compared to a group of stocks that are not entirely accurate as competitors or comparable companies.
This from moneycentral.msn. com.

Anyway, one can quibble about which website is correct or if growth estimates are suitable for one's standards, but a strong chart speaks for itself. The stock is at an all time high after 4 days of above average volume and big moves.

And last, but certainly not least.......
Our very own VSEA!
It's a bit difficult to figure out what the SOX is doing, but VSEA appears to have put in a new support level and it may be ready to resume upward movement.

First the SOX, for your reference. Friday's candle is not exactly what we want to see at potential resistance from a double top pattern.

But VSEA does look nice.


Have a great week. I'm pretty busy in the coming weeks, but I hope to put together a new and improved watchlist for the group. So stay tuned.

Roaring Market, tired? REITs seem to be.

The Market has been on an amazing tear lately. Big caps have clearly been leading the charge with the Dow and the SPX at record highs and showing no signs of weakness. The Nasdaq and Russell 2000, however have not been quite as hot. Both have spent time below their 20 MAs and the Russell has even plodded along its 50 MA still barely peeking above the peak before the late February sell off. In recent weeks they have consolidated and only in the past week made an effort to retake new highs, though not yet successful. It seems to me that the Dow and SPX are more than ripe for a pullback, but the Nasdaq and RUT may be ready for a breakout to further heights, finally joining in the exuberance. The question is, will the Nasdaq and RUT step it up to join the big caps surging higher or will they all succumb to the weight of a big caps correction? Whatever the case, the easiest first warning signal to watch for will be the 20 MA on the SPX. Until that is broken, there's no reason to worry. After all, we use the charts to show is what IS happening, not what we think is going to happen, right? This is how we take the emotion and guesswork out of the equation.
(click imagine for bigger view)


One important factor as far as the Nasdaq is concerned will be the Sox, which seems to be at a make or break area. After breaking out of its previous range, it looks like old resistance became new support. So a bounce from this level would make a lot of sense. The inverted hammer yesterday(needs confirmation) lends support to that idea. Nevertheless, it isn't a good sign that the Nasdaq was so strong and the SOX tried but then didn't ultimately contribute to that gain. The bullish case for the SOX is further dimmed by a clear double top formation. If it does break back below this support area, the double top will be confirmed as a pattern and we would look to a target of about 470, right back where it was before breaking out of the symmetrical triangle.


If, by chance, the SOX does rally from here, I'd love to see VSEA break its pullback after not holding the level it gapped to. There are a few potential diagonal lines of support and a confirmed hammer a few days back. So it's not out of the question, though there is still some room to go yet before completely filling the gap.


Oil stocks have been ripping lately. How about that SLB flag we discussed at the last meeting? I hope somebody took this trade. I didn't because I was a bit scared by the upper shadows on the 14th and 15th. Would, coulda, shoulda....


I read a good article on the weakness of REITs.
Stocks Can't Fall? Check Out REITs' Retreat. It gives a good perspective to consider with respect to the strength of the current overall markets.
It is interesting too that the weakness of this group has all but been ignored in the recent market hysteria. People go straight to the homebuilders for weakness mentions, but this group's weakness is more recent and may have only just begun. I can't remember, but I think we may have looked at this chart at the last meeting. Regardless, there is a pretty clear head and shoulders pattern there. The long term trend line has not yet been broken, but it seems likely in the coming months to see continued weakness from this group. The Head and Shoulders pattern is said to be one of the most reliable reversal patterns. With a height of roughly 10 pts. on the IYR, an expected target would be around 72.50, coincidentally an old area of resistance.

Just for reference, here's a sweet, year-long head and shoulders pattern on the Homebuilders. Actually, it's kind of funny to look at the last 3 1/2 years as a giganto pattern with a neckline at 550. But I don't think that one is going to pan out, because it would call for a target of Zero. We'd be in serious trouble! :)
Notice that the more recent peak of the homebuilders in February coincides with the all time peak of the REITS.

Anyway, the REITS do look weak, but not quite as gory as the homebuilders.....YET!
I don't know what happened yesterday, but there was huge volume in the IYR was it bounced at both horizontal and diagonal support. So it looks like a bounce is likely, but I'll be watching this group for short entries in the coming weeks if the market does ever run out of steam.

You can certainly search the Investools site for Real Estate stocks, but I went straight to the source to find out what is in this ETF. The Ishares page for the IYR holdings.
I went through a bunch of the top weighted stocks on that list. Many of them look ugly.
Here are some I think have fairly clear lines to watch, either for a support break or a resistance bounce.
ABM

KIM

SPG


TCO

UDR


VNO


It might seem foolish for spending all this time on bearish ideas when the market is ripping. But just as we should be looking for stocks with relative strength during a downtrend for when the market does turn upward, we should also be looking at relative weakness during a bull market for when the market turns over.
Happy hunting.

This one goes out to Jack

Jack definitely gets the MVP award for pace setting in this group in recent months. Many thanks for setting a great example of how to trade in a disciplined way and keep it simple and consistent. Also, for sending us your info-packed emails.

The latest one with your watchlist and recommendations for our list came just before our meeting and I hadn't seen it until after we met. Sorry I've taken this long to respond to it.

Of the three stocks you specifically recommended, WFR, SIMO and DRIV, I really like WFR and would prefer to leave the others.

DRIV doesn't have an F/E score above 3.25. That's an easy place to set the bar, so let's stick to it.
SIMO looks like a stock worth following, but the volume is a bit under the 1 million level and as a result the options chain is a bit less populated than we'd like. There are only 4 months available and open interest throughout the chain could be more consistent. As a result, there are certain contracts which have a spread of .40. For example, in order to do a longer term, in-the-money call purchase, one would have to deal with a spread of .40 for the June 17.50 and .50 for September 17.50. (Again, this is after hours, so maybe it's better during the trading day.)
Regardless, the stock is up 100% in the last 8 months and it just took a hit on potentially bad news for the group. Hard not to feel like this was a momentum play that has played out.
I should note that it hasn't yet broken its recent trend or made a lower high or low yet, but the volume on the gap down is significant. I would say that until the stock breaks through the 24/25 area, it shouldn't be messed with on the long side.
(Click it to make it grow)


Now for WFR. I really like this one. Beautiful fundamental scores including very high growth rates both historical and forward looking estimates. It trades an avg. 4.8 million shares a day which results in a nice and liquid options chain. Lots of choices for months(even LEAPS) and strike prices with most of them showing quite high open interest and tight spreads. Even for those who aren't so into options trading, it's nice to at least have the option to sell covered calls or hedge a position you are in while it sits sideways or pulls back.
The only striking downside at the moment is that it is part of the semiconductors group which is looking pretty sketchy as of late. However, we can take the great relative strength of this stock to the group as a very positive sign for when the group does gain strength.
Here's the SOX on a 2 year, weekly chart. Looks very indecisive at the moment, but if I had to make a guess at which direction it would break out of the recent consolidation, I'd guess down. Wait and see.


WFR, in contrast looks like a very strong stock. I'll show the 5 year chart first to point out a bit of what we talked about at the meeting with respect to Bases as taught by Investor's Business Daily and "Proper Buy Points." The idea is to buy when it breaks out of a quality base (various structures that basically make up a period of consolidation or pulling back between resistance and support - a cup and handle, for example) with very high volume. If bought at these proper buy points, you are more likely to be able to hold a stock during mild pull backs because you have a cushion of profit to work with.
The stock has double since mid 2006, so we might be nervous about jumping in here. But the picture looks a bit different when we realize that the low in 2006 was a very healthy pullback after a gain of about 550% between late 2004 and early 2006. The most optimal recent buy point was the breakout during the week of January 22 or even the bounce off support during the week of March 5. But that doesn't mean we can't jump on for a ride at the right time.

Looking at the daily, the recent shoot up above resistance has pulled back to form a flag. A break above flag resistance with volume would theoretically have a move of about 6 points, depending on how you draw the flag pole. I've done it from the move above the recent resistance line.


The markets have been very ambiguous lately. There seems to be a bearish tone to things, yet certain stocks like WFR are acting quite bullish. It would make sense to keep some trades alive on both sides of the fence. For a bearish idea to watch for, we can look to our recently whittled down list of strong stocks. Go figure! CTSH has taken a hit this week and I can't see any obvious news to account for the reason.
Since the stock popped above its 2005 consolidation in early 2006 it has trended very steadily upward. I thought we might be building strength to break through recent resistance, but though its support line hasn't broken yet, down looks more likely than up. The MACD and Stochastic on the weekly chart would support that view as well.



On the Daily chart we have three red arrows and a very clear double top formation. The height of the top pattern measured from resistance to support between the two peaks is about 10 pts. A break with volume below that support line would project a target of 10 pts. down to 75, which also happens to be a former support level from December. For further support of the bearish case, notice the bearish divergence between a lower high on the MACD and an equal high in price.
I would give this move about 2 months to play out and buy an extra month of time in the option. The big question is whether or not to go short on the initial breakdown or wait for a test of resistance at 85. After 5 down days in a row, I would think at least a few days of relief from the selling should be in store. (I say, "Go short," meaning either sell short stock or buy puts.) If the breakdown occurs on big volume, that will be the big signal to take the trade.
As always, buying an in-the-money option is an easier way to control your risk and maximize dollar gain in the option as the stock moves(because of the higher Delta). Buying at or out-of-the-money options is trickier because there is no intrinsic value and you are much more at the mercy of implied volatility and time decay. However, if implied volatility rises and the stock does move in your favor to pick up intrinsic value, your percentage gain will be significantly higher than with an in-the-money option.


Jack mentioned in his email and asked in the meeting about having a bear list with a minimum F/E score. I responded perhaps in a flippant way that, "you want crap fundamentals with a crap chart for an ideal bearish setup." In theory, I suppose that is true, but we also have to consider that a crap chart has perhaps already been beaten up pretty good. A great performer still near the top of a fantastic ascent will have much further to fall and therefore could be much more attractive. Becasue the stock market is a forward looking mechanism that discounts all factors, it would make sense that the chart would actually precede the breakdown of what were or are still very strong fundamentals. KBH would be a good example of that happening. So with that said, perhaps it's not a bad idea to look at fundamentally strong stocks that have bearish reversal patterns going on. But to specifically require a certain fundamental strength for bearish candidates seems a bit overboard.
Again, thanks to Jack for all your input. I hope this is helpful.

Sector run down

I'll use weekly charts here to run down some of the majors. Peter Reznicek, the shadow trader guy, mentioned recently in a video or in his daily show that candlestick patterns are much more powerful or reliable on bigger time frames. We've all seen plenty of daily hammers or bearish engulfings or whatever that were just steam rolled. While we have to always remember that they are merely another form of an indicator and therefore secondary to trend and support and resistance, it's very useful to size up weekly action with candles as they are stronger reads. This makes a lot of sense to me.
As I pointed out in the last post, Oil is moving down in a serious way and is more likely to continue a bit further than move meaningfully upward. The Oil index is actually still in a healthy uptrend the higher highs have been slightly less aggressive lately, but higher all the same. This week shows a potential hammer indicating a potential reversal. To play an ETF on this sector look to the XLE, one of the heaviest traded of ETFs.
(Click image to see it grow)


The oil services don't look quite so healthy. Long term trendline was breached months ago, but this is a clear break. You might also even call this something like a Head and Shoulders top, but it's not so clear. Tough to figure exactly where to place a neckline for a support break. Regardless, if you're looking for a bearish play on oil look to this sector or just play the OIH ETF.


The convergence of price swings in gold seems likely to bust out in one direction or another and from what I understand about the dollar, I'd think up would be more likely than down.

Gold stocks have formed a sideways channel for the latter part of 06. Intermediate down trend in place now, but there is likely support at 125. For a pure play on gold, look to GLD. For the gold stocks, GDX.


Biotech looks very impressive with a break above it's bull flag resistance. For Biotech ETFs, look at BBH and IBB, but check out their composition. Quite different. BBH is heavy in DNA. DNA had an big breakout above a channel of months sideways of sideways movement.



Broker Dealers are making even more money. Everybody loves the stock market right now.
Big bullish candle on a break above resistance to a new high. What's not to like? Not sure if there's a perfect tracking ETF, but XLF is close. Take a look at GS and LEH. Amazing stocks with ever new highs.

Transports seem to be making an effort, but the chart still has quite a bit of work to do to look attractive. Look to IYT to play this index.

The recovery in the homebuilders still looks healthy. That may change soon, but so far, so good. The chart is showing a potential hammer at the seemingly significant 700 level. I'm showing a much bigger time frame here to show the huge topping formation that looks like a pretty well defined head and shoulders pattern. It's height of about 250 pts. forecasted the downward move of around that distance that actually happened quite dramatically on the break of the neckline. XHB is the ETF to play this group with.

The Internet stocks are a touch worrisome in that they didn't have a strong week while the Nasdaq was super strong. But it has been a very strong rally from the inverted head and shoulder reversal pattern, so a bit of consolidation after it exceeded its projected target makes sense. In the last five weeks we have a seen a bearish engulfing pattern, a tombstone doji and two spinning tops. What does this mean? Nothing. We're moving sideways between support and resistance. Watch those two levels for the next move.

After almost two years of sideways action, Software has moved into higher territory and to my eye had a little pennant formation formed. This is a bullish continuation pattern and looks to have begun the next move higher this past week. 3 more points beyond 190 and we'll know for sure. You know what Software stock has been very strong in the last year?
ININ. - GRRRRRRRRR!!!!!!


The strength in the Nasdaq just wouldn't seem complete without some confirmation in the Semiconductors. The SOX index does seem to be working on breaking the long term down trending resistance line, but it won't feel like the job is truly done until 490 is successfully surmounted. SMH is the ETF to play on this group.



Banks ascending steadily in 2006, but looking at the two year period, it looks like an ascending wedge which is inclined to break do the downside. With the bearish engulfing of a shooting star in recent weeks, I'd expect some kind of pullback. For now, however, we've got support at 115 with a big bullish candle that broke above that level. A bounce there would be the most likely for the immediate short term.


Healthcare stocks have been very strong in the latter part of 2006. Starting off 2007 with a big bullish candle too. I have to play devil's advocate, though and draw in th same type of resistance line as on the previous chart. The difference is, this chart looks very likely to blow right through this wedge. It probably needs some healthy consolidation for much more meaningful gains, but it looks like it wants to keep going for now.


There's screwy data on this chart for Healthcare stocks, so it's tough to get up close with it. Generally a nice looking ascent over the last 3 to 4 years. Some minor topping action, though, at resistance for this very long term wedge. It's been very strong since July.
TWGP was one we talked about in a meeting months ago. It had a beautiful trend, but has since broken it and begun a intermediate down trend.



After a few months of consolidation, Retailers reported much stronger sales than expected in December and pushed the index above resistance into open territory. The argument is being made that the strong consumer showing will support the economy for a bullish year ahead. I wonder what percentage of the consumers out there are buying on credit? For a very strong chart, look at MA, Mastercard. With some nice volume pushing through resistance here, it's a buy.
To play the retailers, look at RTH.



So there's the broad stroked look at it. I hope you agree that looking at weekly charts can really simplify things. Of these charts, there are 7 either at or near all times highs. I'd say that's a very bullish sign for the market.
From here you can choose the sector you like best and drill down further for stocks ripe for the picking. There are plenty of sweet ones.
Happy Hunting

Some strength in the list

I won't go through them all, but we do have some strong ones in our midst.

The $SOX index has been struggling a bit lately. It broke both diagonal and short term horizontal support and has been drifting since. It's still above the 200 MA, though, and hanging onto the 50. So I'm not counting it out yet, but it's looking kinda ugly.


In contrast, however, our own VSEA has been very impressive. We're all so proud! Breakout on big volume. The news isn't obvious to me as to why, but the volume doesn't lie. It's a bit extended right now for an entry, but it's definitely one to watch for an entry point, particularly if the SOX and the Nasdaq get their act together. I wrote about the Semis in this post. Don't forget about the increased money for buy backs.



CRDN broke above a bull flag pattern I mentioned in Scrolling Through the List. I think it is probably debatable where to draw the flag pole, but the theory is that once the Flag (The area of consolidation between two lines) is broken to the upside, the stock should continue the distance equal to the height of the pole. Since late November showed consolidation after a big move up off the 41 area, it was a bit of a flag pattern too. I'll place the pole of the most recent flag from the low of Nov. 30 at 51.78. The high of Dec. 5 is 57.15. In round figures, the height of the pole is $5. Taken from the place where the flag was broken, about 55.80, the target would be 60.80. I almost took this trade on Tuesday, but chickened out because I don't trust the low volume in the market during this holiday season and the volume on this one was very low on the bullish candle. Regardless, resistance is at 62.50



Looking at it more closely, I think the move off 41 in November could be seen as a flag pattern with a pole that is about 13 pts. long. It was a big move on earnings and kicked off with major volume. From the breakout on 12/05 above 54, the target would be 67. The breakout was on more than 150% average volume and the subsequent pullback and successful test of new support was on average volume, a bullish sign.
It may seem a lofty target, 67. But looking at the 5 year chart, it doesn't look so absurd. They just announced a follow up order from the Army for 133 million bucks, the largest single order it has ever received. The PEG on the stock is under 1. The 67 area just may be in the cards.



With a positive New Homes Sales report out, the Housing sector looked strong today. KBH looks to be ready to move higher. There are many resistance points along the way, so an options trade will be trickier. Profit targets would be good. Otherwise, a stock position would be ideal.


Crude oil has been week in recent days.


Yet the $OIX confirmed a bullish Harmai pattern today by closing higher than the two day pattern.



Our UNT did form a bullish engulfing pattern today at support, but I'm not in love with the technical picture on the chart and I'm sure there are other oil stocks out there that are stronger.

Like the OIX, the Oil Services Index shows some good bounce potential with a bullish engulfing pattern right at the 50 and 200 MAs for support. The index is just below the support line I'd have liked to see hold, as well as the 200 MA, but it's not yet a convincing break.



From that sector, our very own BHI looks very promising. The harami formation today needs a higher close tomorrow for confirmation. The stock is poised on horizontal support and the 200 MA with the 20 rising through it. Very bullish potential. Low risk entry here with upside to the order of 7 or even 12 points.
Remember that this one trades at a discount to its group and has a PEG of about .50. Very low. Very good.


That's all for now.