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Sector run down

January 16, 2007
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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?

The strength in the Nasdaq just wouldn’t seem comple
te 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

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