-- $SPX AND $NDX P&F CHARTS, AEROSPACE & DEFENSE ETF'S LEAD, 5 DEFENSE STOCKS, INTERNET ETF BREAKS OUT, 3 ISTOCKS CHALLENGING RESISTANCE, OIL STALLS, XLE GETS COLD FEET --
REST AFTER BIG SURGE... Link for today's video. After big gains the first two weeks of February, stocks took a breather this week and consolidated. A rest after a sharp advance is perfectly normal at this stage. Among the groups, the Energy SPDR (XLE) fell back along with oil, and these two will be discussed in detail further down. There were pockets of strength in the tech sector this week as the Networking iShares (IGN) and Internet ETF (FDN) both surged to new highs. FDN, Google, Ebay and GrubHub will also be featured further down. Today's commentary will start with two Point & Figure charts to provide some perspective on the overall market trend. I will then dive into the Aerospace & Defense Industry because it is a leading group this month.
FILTERING THE NOISE WITH P&F CHARTS... Chartists looking to filter small price movements and add a systematic touch to their analysis can turn to Point & Figure charts. Chart 1 shows a 60-minute P&F chart for the S&P 500 and each box is five points. With a traditional 3-box reversal setting, this means a move greater than 15 points is needed to reverse a column. Note that the X-Columns represent rising prices and the O-Columns represent falling prices. Even though this P&F chart is based on intraday prices (60 minute), it extends back to mid October and captures the medium-term trend quite well. Before looking at the analysis, note that the red lines are bearish resistance lines drawn down at 45-degree angles. When prices break above a bearish resistance line, a blue bullish support line is drawn up at a 45-degree angle. This means prices are always above or below one of these lines.
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Chart 1
The trend line signals provide a systematic element to the chart analysis. A break above the bearish resistance line is bullish, while a break below the bullish support line is bearish. We have seen three signals since mid October and the current signal is bullish. Notice how the index broke above the bearish resistance line with the surge above 2025 in early February. A new bullish support line was then drawn from the low of the move and it extends up at a 45-degree angle. In addition to some systematic signals, P&F charts are also excellent for marking support and resistance zones. The lows extending back to December mark a support zone in the 1975-1990 area. A break below this zone would call for a reassessment of the long-term uptrend.
NASDAQ 100 TRIGGERS TRIANGLE BREAKOUT... Chart 2 shows the Nasdaq 100 P&F chart with 10 points per box. This chart also uses intraday data, but I chose closing prices instead of the high-low range, which was used in the S&P 500 chart above. Charts based on the high-low range will have more columns (reversals) than charts based on closing prices. There are only two systematic signals on this chart. The index broke above the bullish support line in the first half of October, suddenly reversed, and then broke above the bearish resistance line a few weeks later. The index is currently well above the bullish support line and in bull mode overall.
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Chart 2
The trend line signals also help chartists establish a trading bias. The bias should be bullish when prices are above the rising bullish support line and bearish when prices are below the falling bearish resistance line. For example, chartists would be ignoring bearish signals because the Nasdaq 100 is well above the bullish support line. Chartists can also look for patterns on P&F charts. The black dashed lines show a big triangle consolidation, which formed after a large advance. Triangles are typically continuation patterns and this month's breakout signals a continuation of the October-November surge.
AEROSPACE & DEFENSE ETF'S LEAD... Chart 3 shows three aerospace and defense ETFs with breakouts and upside leadership this month. The first window shows the Aerospace & Defense ETF (PPA) breaking triangle resistance and hitting a fresh 52-week high. The second window shows the iShares Aerospace & Defense ETF (ITA) breaking ascending triangle resistance. The third shows the SPDR Aerospace & Defense ETF (XAR) with a similar pattern. PPA and ITA are the most active and trade an average of 51,000 shares per day. XAR is not very active and averages less than 10,000 shares per day. Even if you do not trade these ETFs, there is still good information from the price action. In particular, this price action tells us that the aerospace and defense group is one of the strongest groups in the market right now and we should be looking at stocks in this group. The indicator window shows the StockCharts Technical Rank (SCTR) above 90 for these three the entire month.
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Chart 3
FIVE DEFENSE STOCKS WITH BULLISH PATTERNS... Unsurprisingly, there are several bullish charts within the group. L-3 Communications (LLL) and Lockheed Martin (LMT) broke above their December-January highs this week, and Textron (TXT) exceeded its November high. Also note that you might be surprised at some of the "other" stocks in the Aerospace & Defense ETF (PPA). FireEye (FEYE), Ball Corp (BLL), Booz Allen Hamilton (BAH) and Computer Sciences (CSC) are all part of PPA. It is interesting to note that cyber security is becoming part of the defense industry. The charts below show five stocks in the group with bullish patterns.
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Chart 4
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Chart 5
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Chart 6
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Chart 7
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Chart 8
INTERNET ETF BREAKS FREE... Chart 9 shows the Internet ETF (FDN) breaking above resistance with a big move over the last two weeks. The breakout ends a consolidation that extended from late November to early February. Broken resistance turns into the first support zone to watch on a throwback. The indicator window shows the StockCharts Technical Rank (SCTR) turning up in February and reasserting its uptrend. The SCTR for FDN is at 94.2 and this means FDN is in the 90th percentile for relative strength (top 10 percent).
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Chart 9
THREE INTERNET STOCKS GOING FOR BREAKOUTS... Chart 10 shows GrubHub (GRUB), which is not part of FDN, with an inverse head-and-shoulders pattern. The stock trended lower from late August until mid December. The higher low in late January then formed the right shoulder of the pattern and the stock broke neckline resistance with a surge in early February. I did not draw an upward sloping neckline, but instead opted to mark a horizontal resistance zone based on the November-January highs. The broken resistance zone turns first support in the 37-38.5 area. The indicator window shows the price relative moving higher the last two months.
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Chart 10
Chart 11 shows EBAY with a large cup-with-handle pattern. The stock is currently challenging resistance in the 57-58 area and a breakout would confirm the pattern.
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Chart 11
Chart 12 shows Google (GOOGL with a potential double bottom in the works. Google underperformed the market throughout 2014 and hit a 52-week low in mid January. The stock is trying to firm with a consolidation in the 490-545 area. The first breakout attempt fell short as the stock moved back to 540 this week. Look for a second move above 550 to keep the breakout alive.
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Chart 12
CRUDE TRIANGULATES... The US Energy Information Agency reported on Thursday that crude oil inventories rose 7.7 million barrels to a record 425.64 million barrels. It was the biggest weekly increase since record keeping began (1982), and above expectations. I am not very interested in this news per se. Instead, I am interested in the market's reaction to the news. This seems like negative news for crude oil (more supply). Prices did indeed dip below $50 after the news, but rebounded and closed above $50 on Thursday. In fact, crude closed near its highs for the session. This means we have a positive reaction to negative news, and this is potentially bullish. I still think the long-term trend for oil is down, but there is room for a counter trend bounce to extend. Chart 13 shows March Crude Futures (^CLH15) forming a pennant in February and a breakout would target a move to the 60 area. On the flipside, failure to break out and a move below the February lows would be bearish and this would weigh on energy-related stocks. Chart 14 shows the USO Oil Fund (USO) for reference.
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Chart 13
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Chart 14
XLE STRUGGLES TO HOLD BREAKOUT... Chart 15 shows the Energy SPDR (XLE) with a possible double bottom in December-January and a breakout attempt last week. This breakout attempt, however, is not looking very strong because the ETF fell back below the breakout zone this week. Based on traditional technical analysis, a double bottom breakout would target a move to around 90. The height of the pattern (~9) is added to the breakout zone for a target. Even if XLE were to recapture the breakout, I would still not become that bullish on the ETF. Note that the bigger trend for oil is down, the bigger trend for XLE is down and XLE shows relative weakness. The indicator window shows the SCTR below 30 since early October. I would not become interested from a relative performance standpoint unless the SCTR moves above 60.
