JNJ Sneezes And Healthcare Catches A Cold: JNJ was one of the stalwarts in the healthcare arena, until shareholders were blindsided last Friday as the stock plummeted more than 10%. Of course it being the largest component in the XLV, some other names were most likely unfairly punished. But the sector has been performing wobbly ever since, and it recently stood atop the major S&P sector leaderboards. However on a one week basis it is at the bottom of the leaderboard rankings, edging out just energy to show you how quickly sentiment has changed within the space. Now I may be a bit bias but I think the technicals revealed some foreshadowing of the JNJ event as the XLV made that double top at 96, and went very quickly from all time highs to correction mode as the ETF is down 10% from its most recent 52 week highs. Of course the Obamacare ruling recently did not help the group at all as UNH, the ETF's third largest component, is now testing 200 day SMA support, a line that has provided comfort since early '16. Were Small Caps The Canary In The Coal Mine? Small caps are often considered a good leading indicator to market direction. They are more nimble and give a good sense before the mega cap supertankers shift in their ways. Below is the WEEKLY chart of the PSCH, the small cap healthcare ETF. It shows an alarming decline of nearly one quarter of its value from the late August highs. Its daily chart, not seen here, has the look of a bear flag breakdown from a 120 trigger on 12/13 which carries a measured move lower of 25 handles. The fund had set up nice as it formed a 3 week tight pattern at all time highs the weeks ending between 8/31-9/14, which all CLOSED within just 1.59 of each other. But it broke the OPPOSITE way that it traditionally does, and when that occurs the move can be powerful. In fact this week looks to be setting up, depending on Fridays CLOSE, for a bearish three black crows formation. Some names in the space have been holding up well including HZNP and AMPH, while others crater like ENDP now down 50% from highs made just 2 weeks ago, not a typo. Examples: When former best of breed names turn bearish the drops could be breathtaking. If it happens to occur in the healthcare sector they could be even more stunning. Below is the chart of NBIX and how it appeared in our Healthcare Report on 12/7. Sometimes obviously luck plays a role, but one should just go about the normal business of trading chart patterns responsibly, and if something extraordinary happens in your favor do not let it go to your head. NBIX was a former leader rising from round 40 number the week ending 4/4/17, that rose more than 30%, to nearly 130 the week ending 9/14/18. Since the week ending 11/9 it has recorded THREE weekly declines of at least 9% and it now sits 44% off most recent 52 week highs. The best charts on the way up or down offer add on points on PROFITABLE trades, not one under water and NBIX was no exception. It sliced a rounding top pattern well before the recent bear flag formation.
Group Overview: Looking over the last one and three month time periods, there has been just one major S&P sector that is still trading in the green. That group would be the utilities. Technology, via the XLK, has dropped more than 14% over the last 3 months. The ETF is lower 9 of the last 11 weeks and now trades 17% off most recent 52 week highs. Trying to find green shoots in the space, makes finding needles in a haystack easy. However it does not mean an investor should completely ignore the markets, as when sentiment gets this ugly we could be getting closer to a bottom. Let me make it clear that I do not think that time is now, but looking for catalysts for the debacle the benchmarks have endured should never end. It could be a bullish candlestick formation for example, but many of those have been negated recently. Instead of constantly looking to call bottoms, investors should take the approach that they do not mind missing out of the first 5% higher, and can sit on the sidelines until a new trend firmly comes into place. Patience is a virtue and can help one avoid capital DEpreciation. Semiconductor Satisfaction Starting? Any investors who have become accustomed to ADDING to names on the way down, is feeling the pain in a big way. The market has been flashing warning sign for many weeks now, and astute traders were raising cash. This is not the only time one should be making a list during the holiday season, but prepared market participants can be rewarded handsomely if they are putting in their homework in these perilous times. Below is the ratio chart of the semiconductors compared to the S&P 500. Remember this group may have been a "canary in the coal mine" as the SMH was one of the first major technology subsectors to lead us down in mid March. Can they be the first to lead us higher, when the market turns around? Certainly that is a big IF, but the markets always attempt to confound the most and have a great track record of doing so. Start pouring through the space and look for names that are holding up the best. Examples: One must never fall in love with a stock. One can rent a name and attach itself for a profitable ride, but if a chart shows signs of breaking down an investor must separate his or her emotional attachment to it. Below is the chart of AMD and how it was profiled in our 12/10 Technology Report. To be fair lets give this stock full credit for rising 19 of 23 weeks ending between 4/13-9/14, but since its highs it now trades 45% off most recent 52 week highs. It has endured three double digit weekly losses since the first week of October and it filled in a gap from the 10/24 session on 12/3, resuming its downtrend. That also happened to be resistance at a downward sloping 50 day SMA, and the top line in a symmetrical triangle. One can now add to their short, or initiate a new position, below the pattern with a sell stop under 18, which would carry a measured move to the single digits. Remember trends once in place are more apt to stay that way than reverse, and this could be a good example.
Staples Intact: They saying goes in markets, as in life, it is not where you start but where you finish. Overall the benchmarks have began the last three weeks in fine fashion on Mondays. The S&P 500 rallied 1.5, 1.1 and .2% on 11/26, 12/3 and 12/10 (this past Monday recorded a bullish hammer candle off the round 2600 number). By the end of the week, the last 2 CLOSED dead on their lows. Hallmark bearish action as trade starts strong and ends wobbly, and the prevailing feeling among the majority of investors is very defensive in nature. The consumer staples on a three month look back period for example, are just one of three major S&P sectors that are positive (other two are utilities and real estate). Below is the ratio chart comparing the staples to the S&P 500 and one does not need to be a rocket scientist to see capital is being deployed to the space. Best in breed names include CHD, PG and CLX, which are all just a stones throw from all time highs. Suspect leadership, but reinforces the notion that there is usually always a bull market somewhere. Retail Reeling: In our 12/4 Consumer Report we examined the possibility of a breakdown in the relationship between the XRT and the S&P 500. The ratio chart below shows that potential did follow through to the downside, as a bearish head and shoulders pattern was carved out. From a pure performance standpoint the XRT is now in bear market mode 21% off its most recent 52 week highs, nearly doubling the softness seen in the S&P 500 as it trades 12% off its own highs. This week it added onto the week ending 12/7's 6.6% drop slumping another 3% (the XLY slipped up just 1% this week). There is some strong strength within the the XRT, as auto part plays AZO and ORLY are trading just 3 and 4% off most recent ALL time highs. They are the second and fourth largest components in the ETF, and the biggest name in the fund NTRI was the subject to M&A activity as it was bought by TVTY. The XRT was not affected as much by the strength in these aforementioned names as the weightings are very similar with no stock making up more than 1.75%. Contrast that with AMZN in the XLY making up 21.7%. Examples: Last week we highlighted that there was no real place to hide in retail, as is the case in almost every sector at the moment. Whether space was deemed defensive, case in point COST which undercut its 200 day SMA for the first time in 14 months following an ill received earnings report Friday, or BIG as a safe discount play which is now 56% off most recent 52 week highs, the selling has been indiscriminate. Below is an example of a luxury play and the chart of RH and precisely how it was presented in our Consumer Report from 12/11. A large body filled in black candlestick on 12/4 was foreshadowing into some potential weakness and it did demonstrate that this week falling more than 7.5% (to be fair it did advance 18% the previous week). A current look at the chart shows it is now 2 handles from successfully filling in a gap from the 12/3 session and it would be prudent to reduce ones short position.
Housing Comfort? Without question the housing stocks have been broadly hit in 2018. We can see the overall narrative with the pure play ETF, the ITB. It is lower by 34% from most recent 52 week highs, and perhaps the descent is wearing off, as we know moves tend to overshoot on both the up and downside. Of course one can not enter the space blindly, but there does appear to be some green shoots developing, that may signal a potential trend change. The group which was one of the best subsectors within the discretionary arena in 2017, and has been anything but in 2018. If the fund can hold the round 30 number on a weekly CLOSING basis, there have been some promising candles, most prominent the doji the week ending 11/16. If that figure is taken out to the downside all bets are off as that would record a bear flag breakdown with a measured move of 8 handles lower. On its weekly chart one must monitor closely a possible bullish MACD crossover which would be a first in more than one year, dating back to October '17. On a volume perspective, we may have seen capitulation the week ending 10/26 as it was the second largest weekly volume in the last 5 years. Builder/Bank Ratio Chart: On a one week and one month look back period the financials have been the worst performers of all 11 of the major S&P sectors. Sure that is a short time frame, but bigger picture changes have to start somewhere. The XLF is now trading at levels not seen since September '17, and for the ETF not to be making a stand after its second strongest weekly loss of '18 last week is telling. It is following through to the DOWNSIDE losing another 2.4% this week heading into Friday. Below is the ratio chart comparing the builders to the financials, and one has to come away impressed with the bottoming action in October-November, and the subsequent move higher in December. And we will go over plenty of domestic names in this report, but one can even point to Brazilian play GFA on a 4 week winning streak up better than 20% to witness the change in sentiment. No question periphery plays have been hammered, like a SITE down 43% from recent 52 week highs or a FND lower by more than 50%, but the pure plays are looking to start '19 off on the right foot. Examples: Below is the chart of TOL and how we recently presented the name. It is known to develop more luxury properties, and that does not seem to have helped during the recent downturn, as we know a falling tide will take most everything down with it. It has certainly not helped their cousins in the retail arena as names like TIF, KORS or LVMHY are deep with downtrends too. The housing names seem to be finding a floor, no pun intended, as they are making valiant efforts to escape their misery recently. TOL, the former best of breed play, is still in the midst of a bullish ascending triangle, although it has fallen back within the pattern after approaching 34 numerous times since undercutting the level in September. It illustrates the importance of CLOSING prices. This chart here is from a couple weeks ago, but has since traded intraday above 34 a couple more times. If it can soon muster the strength to do so, the bears will most likely move to the sidelines.
Group Overview: As we pointed out last week energy has been one of the worst acting major S&P sectors, regardless of the recent timeframe. In fact on a 3 and 6 month look back period it IS the worst behaved. Those trying to pick a bottom have been fruitless in their success, and rallies should continue to be sold. Of course there will be countertrend rallies, but they are tricky to navigate, even for the most seasoned market participants. To make matters worse, seasonality is not on the side of the bulls either as December is rare to CLOSE the month higher from where it began in recent years (chart below). To pile on the negativity I had a coffee with a salty energy veteran today, and he highlighted the fact that there is most likely no Santa Claus rally this year as many traders will sell their losers for tax purposes in the arena to offset the winners (if there were any is a big IF). In reality that makes perfect sense to trend followers as well, as they primary goal is to sell weakness and buy strength. Solar Percolating: Last week we discussed that solar charts were beginning to take on a better complexion. The TAN ETF is looking for a sixth consecutive weekly CLOSE above the very round 20 number. That level doubles as 50 day SMA support, and a gap from 11/2 was successfully filled recently. Below is the chart of RUN, the third largest component in TAN, and a legitimate handle was formed this week as it must be at least 5 days in duration. A peek on its weekly chart shows nice consolidation dating back to the week ending 7/20, which recorded a bearish engulfing candle at all time highs. Just prior to that the stock screamed higher 16 of 22 weeks ending between 2/16-7/13 traveling from 5 to 16. The week ending 11/30 jumped 18% in the best weekly volume in 3 months. The chart has a sunny disposition, pun intended, and enter with a buy stop above a cup with handle trigger of 15.10. Examples: Names in soft groups that tread water while the rest of the space bleeds, can often be the first out of the gate when the area eventually turns around. Below is the chart of DK and how it appeared in our Energy Report from 11/28. The stock is now higher 4 of the last 6 weeks, and they have been volatile. All 4 of the advancing weeks CLOSED in the upper half of the weekly range with three of them gaining 5% or more (to be balanced and fair the two declining weeks fell by 7.2 and 5% ending 11/23 and 12/7). This name has not been a leader as it still sits 35% off most recent 52 week highs, but PRICE action is constructive. This week is up better than 6%, and a possible bullish engulfing candle awaits depending on Fridays finish. On its weekly chart there is something for the bulls and bears, as the naysayers will claim bear flag, while optimists see a fledging double bottom base being carved out. Bringing the time frame in, the round 40 number has been a nuisance with 5 days since the beginning of November above 40 intraday, but it was unable to CLOSE above any of them. Wednesday put an end to that streak with a potential move into year end near 45. Remember measured moves are often surpassed by wide margins, and those that shave off premature can leave big winners on the table.