A MOMENT OF TRUTH FOR SMALL-CAPS -- REGIONAL BANKS AND SMALL-CAPS FINANCIALS SWING HIGHER -- CYBER SECURITY STOCKS SHOW RELATIVE STRENGTH -- CHECK POINT SURGES TO NEW HIGHS -- PALO ALTO AND FORTINET LEAD SECURITY GROUP
A MOMENT OF TRUTH FOR SMALL-CAPS... Link for today's video. Small-caps have been lagging large-caps for some time now, but the S&P SmallCap iShares (IJR) and the Russell 2000 iShares (IWM) have yet to break down and actually weigh on the stock market. Chart 1 shows the S&P SmallCap iShares within a big zigzag advance the last nine months. The immediate trend (since early August) is also up. Notice that I am using a Raff Regression Channel to define this advance. The lower line, the late August low and last week's low and a buffer combine to mark short-term support at 109. I am bullish right now, but note that a close below 109 would reverse the short-term uptrend. I think this is an important juncture because the price relative flattened over the last six weeks. This means IJR has performed in line with SPY recently. An upside break would signal relative strength in small-caps and this could be enough to propel IJR above the early July high.
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Chart 1
REGIONAL BANKS AND SMALL-CAPS FINANCIAL SWING HIGHER... It has been tough going for the Regional Bank SPDR (KRE), but chart 2 shows the ETF remaining within a short-term uptrend. I featured KRE with the trend line break and CCI breakout in mid August. This signal remains in play and I am marking support at 38.50. As with IJR above, notice that KRE is at a moment-of-truth because it is stalling in the 50-62% retracement zone. A break below 38.5 would forge a lower high and reverse the short-term uptrend. Chart 3 shows the SmallCap Financials ETF (PSCF) with similar characteristics.
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Chart 2
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Chart 3
CYBER SECURITY STOCKS SHOW RELATIVE STRENGTH... Cyber security has come to the forefront over the last few weeks and months - and this issue is unlikely to go away. In the last few months we have seen data breaches at Target, Home Depot and JP Morgan. This section will highlight six stocks involved with security. The first six provide software and/or services to protect organizations from computer/internet driven attacks. The seventh, Synaptics, makes finger print sensors that are used to access devices and services. Chartists should keep these stocks on their radar in the coming months and years. PerfChart 4 shows the performance for all seven since mid May, which is when many bottomed. The S&P 500 is up around 7% and all seven are outperforming the S&P 500 over this timeframe. Symantec ($16.8 billion) and Check Point ($13.7 billion) are by far the two biggest. In fact, they are twice as big as the third largest, which is Palo Alto Networks ($6.9 billion). ProofPoint is the smallest ($1.5 billion). As you can see by these returns, these stocks are going to be volatile and carry above average risk.
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Chart 4
CHECK POINT SURGES TO NEW HIGHS... Chart 5 shows Check Point Software (CHKP) breaking out at the end of August and surging above 70. The stock is short-term overbought after a 10% move in five weeks. Broken resistance turns first support in the 68-69 area. A "throwback" this this area could provide a second chance to partake in this uptrend. The indicator window shows the price relative breaking out in late July and moving higher the last seven weeks.
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Chart 5
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Chart 6
Chart 6 shows Symantec (SYMC) gapping down in late March and filling that gap with a bounce the next two weeks. The stock broke out in mid May and has trended up ever since. The August low marks support in the 23 area. Symantec is the tanker of the group: it is a large slow moving company that is competing with smaller and nimbler speedboats.
PALO ALTO AND FORTINET LEAD SECURITY GROUP... Palo Alto Networks (PANW) and Fortinet (FTNT) are the leaders because they are trading near 52 week highs and show the biggest gains since mid May. Note the PANW trades at 13 times sales with quarterly revenue growth of 48%, while FTNT trades at 6.3 times sales with quarterly revenue growth of 25%. These are clearly momentum stocks that carry above average risk. Chart 7 shows PANW breaking triangle resistance in mid August and holding this breakout. I am marking a support zone around 80 (plus or minus 2.5 points). The indicator window shows the price relative breaking to a new 52-week high last week. Chart 8 shows FTNT breaking out in late June and working its way higher the last few months. Broken resistance and the July lows combine to mark a support zone in the 23-24 area. A pull back to this area could provide better reward-to-risk ratio for a long position.
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Chart 7
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Chart 8
PROOFPOINT AND FIREEYE HOLD BREAKOUTS... Chart 9 shows ProofPoint (PFPT) falling almost 50% from early March to late April. This is what happens when momentum stocks fall out of favor. The stock reversed in early May and surged back to the upper 30s. A triangle then took shape and the stock broke triangle resistance in early August. The breakout held as the stock consolidated in the 38-41 area. Chartists can mark first support just below 30.
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Chart 9
Chart 10 shows FireEye (FEYE) with four monster swings in 2014. The good news, perhaps, is that these swings may be getting smaller. In other words, the stock is settling down a little. The blue trend lines capture these swings and a new upswing started with the trend line break this month. It is a bit early to draw another trend line, but I would consider this break valid as long as 29 holds.
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Chart 10
Chart 11 shows Synaptics (SYNA) with a big breakout in mid June and a sharp decline in July. The broader market weakened in July and Synaptics was hit rather hard because it is a momentum stock. SYNA recovered in August with a gap and breakout the first week. The August lows mark support in the 77.5-80 area.
