Caution Warranted: Candlesticks are a very useful strategy that can be used in bullish or bearish scenarios. I have found over the years they can offer good risk/reward and be accurate when trying to find a stock that could be bottoming. Calling a top in a specific name or index is a tricky endeavor as the markets do have a long term upward bias, but there is a candlestick that I have found with my experience can be helpful, if not in outrighting shorting, can be useful to exit or reduce one's position. The one I will show in this article, with several examples is the filled-in black candlestick. This often happens at short-term peaks with a stock, and it is when a name opens powerfully higher than the prior sessions CLOSE, but selling pressure appears throughout the day but does CLOSE above the prior sessions finish. It indicates fatigue and offers a good potential short entry with a stop above the filled-in black candlesticks intraday high. Let's take a look at a few situations where this played out. These rare candles often occur with events such as earnings announcements, etc. Use this post purely for educational purposes as some of these stocks have their own earnings reports coming this week.
Drilling Down The Drillers: The diverse energy space has been firing on all cylinders. This is the one major S&P sector where currently it is ok to purchase pullbacks, and maybe the financials. Coal was the star of the week with names like AMR BTU and CEIX all gaining between 15-18%. Integrated plays like TTE look good with a bull flag pattern, although earnings are on deck this week. PSX is approaching the very round 90 number once again and moves above that figure often go on to touch par and beyond. The drillers have been under the radar somewhat against exploration plays as seen on ratio chart below. That could be about to change. Some names are acting better than others and two that have recorded recent breakouts above cup with handles pivots are NBR and HP (116.97 and 31.34 respectively). Microcap play FET is acting well above both the very round 20 number and the 200 day SMA. The chart below of TDW recently broke above a cup base pivot of 13.65. Last week dropped 7%, forgivable after the week prior jumped almost 25% in the best WEEKLY volume in more than 10 months. I believe this name will touch the very round 20 number sometime later in 2022.
Biotech Lag: The XBI which many think of the "equal weight" biotech ETF as its top holding is less than 2% of the fund (by contrast the IBB's top 5 holdings account for nearly 30%). On a one-year lookback time frame, the XBI is lower by 33%, while the IBB which is comprised of the larger, more recognizable names is down just 14%. But on the chart below these higher beta plays in the XBI could be due for a bounce. A good risk/reward situation is setting up here with round number theory coming into play with a nice CLOSE Friday above par (use a CLOSING stop of 95 on the XBI). The bulls, not many left, should be encouraged by not only the bullish candlesticks last Monday and Friday, but the volume that backed it up. One could say it felt like capitulation as WEEKLY volume last week was the heaviest since the big overall markets lows in early 2020. Am I saying this ETF can rise to highs near 175 (which it did in February 2021), following that dramatic bottom made in March 2020? Of course, we will only know in retrospect, but the group is likely to catch some bids here, and let us look at some names that can benefit.
Is 2022 Year Energy Breaks The Curse? We frequently mention the pic here of how energy has a tendency to lag other major S&P sector peers, after a year that it was the best actor of 11. In 2007 and 2016 it was the best behaved, and notice the following year it was negative as 2008 fell 35% and 2017 lost 1%. Of course, 2021 was a stellar year for the group with the XLE jumping 46%. Will this be the year where it can back it up with another solid performance in consecutive years? Perhaps as many may not be positioned for that, and the space is still hated by many (political pressures and bank lending to energy names is seen as politically risky too, thanks Will), and it still represents a very small fraction of the S&P. Below is the chart of the XOP and since late November has been reluctant to remain above the very round par number. I think the trend is your friend and energy will surprise and continue its upward ascent. Look for CVX to dominate XOM as well, as it currently trades just 2% off most recent 52 week highs, as XOM is now 8% below its own. On its WEEKLY chart, it has the look of a bull flag with a move above 120 carrying a measured move of nearly 30 handles. That will have a dramatic impact on the entire space, and many will be lifted by that possible rising tide.
Technical Irrelevance: Sometimes technical analysis does not matter (Petr Pinkhasov quote this week), and I am a die-hard technician. That goes for fundamental work too in the current market environment where margin clerks could be very busy in a December month that they may not be accustomed to. With many caught mentally "offside" looking for a year-end rally institutions could be scrambling to unwind their previous stance, and that could further "unnerve" benchmarks. Of course, this applies to individual names more so as they can crater 30-50% where the indexes will lose 3-5%. Sure I am throwing numbers out there, but technical damage has been severe recently. Below is the chart of the Nasdaq as warning signs should have been put up with the big reversal on 11/22 with a bearish engulfing candle at all-time highs and quickly negating a bull flag breakout at the very round 16000 figure (our previous target originally in our 6/25 Technology Note). It held the 15000 number Friday, but the action has been wide and loose, hallmark bearish traits. I would have preferred tauter and less velocity in the move toward 15000.