November Implications? Market participants tend to look for certain sectors for clues as to the outcome of the election coming up, and now that we are inside 100 days to the event, rhetoric will start to heat up on the topic. Some will point to the nascent weakness in biotech, other to the importance of the banking sector. Below we take a look at the current WEEKLY chart of the defense ETF, the ITA. Not helping the cause within is the performance of the top 2 holdings in BA and RTX, off by 59 and 39% from most recent 52 week highs respectively. Boeing is lower 7 of the last 8 weeks, with all 8 weeks CLOSING at or near lows for the WEEKLY range, a poor sign. On its daily chart the decline seems somewhat orderly, with the decline coming in fairly taut trade. KTOS looks to be the best actor in a wobbly group, although it has encountered resistance at the very round 20 number, all throughout 2020. Overall however when a specific group does not participate in a broad market advance, one should take notice (ITA now 34% off most recent 52 week highs, while the S&P 500 is off by 3%). Stocks are both cheap and expensive for a reason.
Nearly every summer the wife and I travel to England (she is British). Of course this year it is not taking place. Last summer as we were walking along the Thames, I was a little restless as I had been stalking a breakout in AMD. The setup was as beautiful as some of the scenery, with a bullish ascending triangle one year long in duration. We know the longer the base, the greater the space once a breakout is confirmed. Wifi was a bit spotty along the stroll, and with each bar we passed I made an excuse that "there must be a bathroom in there" or perhaps there was a "hazy IPA on the menu". Anything to check the price of AMD on my CNBC app. Of course each time I checked the phone, the 35 pivot was getting closer and closer. It must have been about 2 hours before the CLOSE on 8/9/19, and it firmly took out 35 to the upside. I remember seeing 35.30, 35.40, and with that I confidently hit the buy button, knowing I would NOT be able to check it again before the CLOSE. Following the purchase there was certainly a bit more of a pep in my step. It was a Friday afternoon, so of course for the WEEKLY breakout to be considered valid it would need to CLOSE above 35 to end the week. Upon arriving home later that evening, I checked to see how much higher it had ascended in the last 2 hours of the session. I logged onto the computer anticipating 37-38.
Round Number Restfulness: As many recognizable names are coming into contact with the round numbers, they are pausing to catch their breath. Looking at COUP, it kissed the round par figure on 3/12, the 200 number on 5/27 and is now touching 300. Once it penetrates that number decisively, or should better say if, will it find a rocket launch off it if tested again? DDOG broke fractionally above the very round 90 number (as stocks do that for the initial time they are likely to reach par and beyond), Tuesday and powered higher Wednesday above a bull flag formation. It attempted to CLOSE above 90 multiple times between 6/23-7/6, as it was above the number intraday SIX times, but ZERO finished above. Below is the chart of NFLX, and it should be interesting to see how it reacts, if it can firmly climb above the 500 figure. It is about 10% above its rising 50 day SMA, a line it came into contact with 4 separate times between 5/27-6/29. It may need to take a recess and revisit the line, but by the time that occurs PRICE will likely be near the 500 number. This uptrend shows no signs of letting up.
David Versus Goliath: We have spoke in the past about the more concentrated XLY compared to that of the much more diverse XRT. Being in the right names can really give an investors a strong return if concentrated. The phrase comes to mind, "concentration builds wealth, while diversification preserves it". Half of the XLY is represented by just its FOUR top components in AMZN, HD, MCD and NKE. In the XRT AMZN is the fifth largest holding at just more than 2%, while in the XLY it is one quarter of the fund. The XRT is home to some of the smaller cap names too, and perhaps it could benefit from the recent robust move in the Russell 2000. Below is the WEEKLY chart of the XRT, and it is back into a long tight range it traded prior to March. From long consolidations often come sharp moves and this one was certainly to the downside. I wonder how the XRT chart would look if its top 3 holdings, say STMP CHWY and ETSY (all 3 are in top 5 holdings at about 2.5%) had the same weighting as the XLY.
Gap fills are a widely known strategy in the market that can be applied on both the upside and downside. The strategy is basically self explanatory, and gaps that fill to the downside after a very strong move gives investors good risk/reward to open a position. A gap is simply a pocket of air, in between two different time periods on a stock chart. It is very likely to be following an earnings release, potential takeover news, etc. Often after a gap fill, one will see a powerful intraday reversal, so one should be ready to pounce with a limit order to take advantage of the situation.
Round number theory is one that is under followed, and not given the credit it deserves. It is a simple, yet effective tool that can help investors trim or add to core positions. The round figures often will serve as support, or a roadblock. Some round figures are more important than others. First time trading above 10 can give a stock a boost, as some mutual funds are not permitted to own single digit names. The 90 number is very important, as many studies have shown that the first time a stock trades through that level it very often trades to par and beyond. Whether the reason that round number theory works is psychological or not, it does not matter. Follow PRICE action first and foremost. Below let us take a look at some more examples.