You guys know that I prefer to incorporate more of a weight-of-the-evidence approach to markets rather than basing my decision making on a single indicator. We look at stock markets all over the world to find themes, both bullish and bearish, and then take advantage of them within U.S. markets. I then take a similar approach and go sector by sector in the U.S., including a series of sub-sectors, to break it down even further and find themes within the U.S. As you guys well know, the reason we were bullish since January was because of the weight-of-the-evidence internationally, not because of what we saw in the S&P500 or Dow Jones Industrial Average. [Read more…]
The U.S. Stock market and most of its sectors continue to rally. As happy as we are to see this, and as much as we expect this to continue through February, these are only counter-trend rallies within larger structural declines. The good news is that counter-trend rallies in bear markets historically tend to be the most powerful kind of rallies. I think there is still room to the upside in many different sectors with very well-defined risk.
There are two ways for assets to digest big gains: they can either correct through price or they can correct through time. Often times we see the price of a stock sell off after a big move, regroup and then move on to new highs. But other times, we see a more healthy consolidation where the stock trades in sideways range allowing time to pass by which makes the smoothing mechanisms catch up to price, rather than the other way around.
Today I want to show you guys a good example of this sort of consolidation. This week we launched our US Sectors & Sub-sectors package on Eagle Bay Solutions and members received over 50 annotated charts with commentary on multiple time frames. Aerospace and Defense stood out from the group because of the way it’s digested the gains after its parabolic move between 2012-2013. ITA is the ETF that represents this space which holds companies like United Technologies, Boeing, Lockheed Martin and General Dynamics.
First off, here is a weekly chart showing prices trading in a sideways range over the past year allowing the 50-week moving average to catch up to price, rather than a price correction down towards the moving average. Also notice how this bearish divergence in momentum earlier in the year worked its way off through time. Momentum divergences often signal a change in trend. These trends don’t necessarily have to reverse, they just tend to change. In this case, the trend went from up to sideways. Momentum also found support near the 40 level which keeps it in a bullish range:
Also notice relative strength plotted at the bottom, which had also been correcting, starting to turn up. This is another good sign from a longer-term structural perspective. We are still maintaining a $122 target which we arrive at by taking the 161.8% Fibonacci extension from this entire consolidation. Structurally, we only like this name above support from the last year. Below that and things get hairy.
Now that we have a longer-term perspective, we can look closer at the daily chart for execution and risk management. Here is a daily candlestick chart showing prices trading above upward sloping 50 and 200 day moving averages. This is a good thing of course, especially based on the long-term chart. However, with momentum hitting oversold conditions in the July sell-off and prices still within this year-long range, it is hard to get overly optimistic in the short-term:
It still looks to me like a sideways range where we can take profits near the June highs around 114. I still think some more time is needed before we can get aggressively long this name. Perhaps some more backing and filling is necessary.
This is a good example of how a long-term chart can look so great and the shorter-term look doesn’t necessarily agree. Risk management is priority number one for us always. This risk is not just money but also time. Opportunity cost is also a risk that we take when we put money to work. So for now, I would be fading strength towards 114. I want to see more time around these levels and let ITA prove that it can break out of this range. That would signal that the longer-term chart is ready to take the next step to new highs and continue its uptrend.
Members of Eagle Bay Solutions receive updates to this chart and over 50 others on a weekly basis. Make sure you take advantage of our New Launch Special Offer
Tags: $ITA $SPY $UTX $BA $LMT $GD