From the Desk of Tom Bruni
This past Wednesday I had the privilege of joining 7 world-class Market Technicians in the Stocktoberfest East Chart Battle Competition. It was a lot of fun to share my work with the 450+ conference attendees and surreal to share the stage with people I’ve learned from since day one of learning Technical Analysis. With that being said, I was knocked out in the second round by Charlie Bilello so I’m writing this post to show all three of my ideas in their entirety.
1. Short Relative Under-Performers (In This Case AAPL)
Technology continues to show relative strength vs the broader market, however, one stock in that sector has not followed suit. My first thesis was to short Apple if we’re below 162, with a target down near 130. On the top pane and left scale I show Apple’s performance relative to the Nasdaq 100, while the bottom pane and right scale shows Apple’s price on an absolute basis. Both charts are on the weekly timeframe and are accompanied by a 14-week RSI.
The thesis here is very simple. Apple appears to be repeating the same topping pattern we saw in 2012 and 2015. In 2012 prices made a new high that was confirmed by a new high in performance relative to the Nasdaq 100, but not by momentum. Prices then confirmed a failed breakout and fell 45% peak to trough to its rising 200-week moving average and bottom of the channel. In 2015 we saw a similar pattern at the top of the channel with prices making a new high, but relative performance and momentum making lower highs. Prices then confirmed a failed breakout and fell 33% peak to trough toward the bottom of the channel and rising 200-week moving average.
Today, we’re seeing similar action at the top of this trend channel with relative performance and momentum diverging from price again. A close below the previous high of 162 and will confirm a failed breakout and provide an entry on the short side with a target near the bottom of the trend channel and rising 200-week moving average, a roughly 20% draw-down from current levels and 31% peak to trough.
2. Industrial Sector Out-Performance vs. the S&P 500
A big theme we’ve been seeing in the market is out-performance of commodities like base metals and emerging market equities. If this trend is to continue, we should see Industrial stocks in the U.S. start to outperform the broader market. On the top pane and left scale of this chart we’re looking at the Industrial sector ETF relative to the S&P 500 and on the bottom pane and right scale we’re looking at the absolute price of Landstar Systems, a trucking stock within the Industrial sector. Both charts are on the weekly timeframe and are accompanied by a 14-week RSI.
The ratio of Industrials relative to the S&P 500 has been in a range since 2010 with prices testing resistance in 2011 and 2014, but not being able to break through. Prices got back to the top of this range in late 2016 and have been consolidating underneath ever since. As Technicians we say the more times a level is tested, the more likely it is to break. This time is no different, and I think the higher probability outcome is a breakout to new highs and a renewed trend of out-performance of the Industrial sector.
Within the sector, the Trucking industry continues to show great relative strength, and within that industry, Landstar Systems is a clear out-performer. Prices recently reached the 261.8% extension of the 2008-2013 range near 111 and have been consolidating since. The risk is very well-defined at 111 and the next upside target is near 163. Both Industrials and Landstar Systems took a hit last week, but neither had triggered a long position yet. Until they break out above the levels discussed, there’s nothing to do.
3. Discretionary Out-Performance vs. Staples
A third theme we’re seeing in the market is the out-performance of Consumer Discretionary stocks relative to Consumer Staples. With the top 10 components of each sector representing roughly 60% of the weighting on a market-cap basis, it’s easy to fall into the trap of attributing the out-performance to the likes of Amazon, Neftlix, Home Depot, etc., but that couldn’t be farther from the truth.
Above is a chart of the equal-weight Consumer Discretionary ETF (RCD) relative to the equal-weight Consumer Staples ETF (RHS). What we see is this ratio making new multi-year highs as it breaks a long-term downtrend line and trades above its rising 200-day moving average. The trend is clearly higher, which indicates that this out-performance is broad-based and not just attributable to a few names. Whether you’re trading the spread itself or using it as an additional data point in your analysis, it’s clear that there is risk appetite in stocks and that we want to be looking for long opportunities in Consumer Discretionary names.
Within the sector, Retail, though mixed, has been showing great relative strength as of late with names like Lululemon, PVH Corp., Five Below, and Nike sitting at or just below all-time highs. Within that sector, another name that looks great is TJX Companies (TJX). On the top pane I’ve plotted its performance relative to the Retail sector ETF (XRT) and we can see that it has a clear pattern of multi-year consolidations followed by breakouts. Prices are sitting at the top of their 2.5 year range and the stock’s recent breakout on an absolute basis would suggest we’re going to see a breakout on a relative basis as well.
Bonus Chart: Since we were talking about TJX Companies on a relative basis, I also wanted to point out the setup in this stock on an absolute basis. Below is a daily chart showing last week’s new all-time high made after prices decisively cleared resistance near 84. The stock is just breaking out of this 2 year base, so as long as prices remain above 83.75-84, I think the stock heads to 94.50.
The Bottom Line: These are three of the themes I’m seeing in the market and I hope they brought some value to you and the audience at StockTwits. Whether you’re trading them directly or using them as data points to inform your decision making process, the setups are very well-defined and we know how and where we’re wrong.
Lastly, I just want to thank the team at StockTwits for putting on a great event and Pierce Crosby for including me in this year’s Chart Battle. This was one of my favorite career experiences thus far and look forward to being able to share my ideas with more people in the future. If you’re interested in viewing the chart battle or any other panel from the conference, check out the video archives on the StockTwits Youtube channel.