Volatility returned to the market this week, and how you reacted or interpreted it will depend greatly on your strategy and process. It may also depend on how you define ‘the market’, as from my longer-term view what is unfolding still appears to be a form of rotation rather than a full blown correction that many commentators have called for. A quick look at the major index ETF’s ($DIA, $SPY, $QQQ, $IWM, $IYT) tells the story:-
So what’s your market doing?
Dow – broke its 20EMA, held its 50-day, bounced back, uptrend intact.
S&P – broke its 50-day, reclaimed it next day, uptrend under pressure.
NASDAQ – marginal break of 50-day, bounced back, uptrend intact.
Russell – below its 20, 50, 200MA’s which are also all now falling. Ugly.
Transports – broke its 50-day, bounced back, uptrend intact.
If you’re just using ‘the market’ as your guide on what to do, you can be forgiven for being confused. This not only highlights the need for you having a defined process for dealing with such situations but also provides a good example of why I prefer to use the technical condition of the individual stocks themselves to determine whether I should still be holding them or not, rather than an unrepresentative or arbitrary market index.
It’s not uncommon during such periods while taking exit signals for stocks that invalidate their trends for my timeframe, to also have new entry signals still present themselves. We saw this happen several times last year, and they can often go on to be some of the biggest winners when the market later resumes its uptrend. Think what it means for a stock to be showing its leadership to you during a time of broader market weakness. These are the names you want on-side, the names that can continue to lead should a further market advance materialize. But they’re signals you’ll never see if you impose a moratorium on new positions because of what an index full of stocks you don’t want to own has done recently.
This week was no exception with one exit and one new entry.
Alcoa ($AA) triggered an exit on Monday’s break of support and our trailing stop. This has been a huge trend we’ve been riding since the end of March for a 24% gain. These current levels could be used as an initial stop on a new position should it return to fresh highs, so it’s one to keep an eye on, but for our timeframe it was time to step aside.
Skyworks Solutions ($SWKS) has been a super-smooth trend and gave a fresh entry signal with Wednesday’s move to fresh highs. Textbook stuff.
Much like the broader market, we had some wide ranging price action amongst our open positions.
Marriot Intl ($MAR) had a marginal break of its 20EMA before recovering with the market on Friday. This is still one of the best trends out there.
Gilead Sciences ($GILD) continues to hold up very well. It’s incredible when you consider the way this used to be kicked about alongside momentum names in market sell-offs, and with everything we saw this week this is still sitting above its MA’s and within spitting distance of new highs. The beast of biotech.
Apple ($AAPL) felt the full brunt of this week’s volatility, slicing through its 20EMA and 50-day in one fell swoop, only to regain both with another gap and run in the opposite direction the very next day. We’re still sitting a safe distance from the noise, but should it reclaim the highs from here the next level for our trailing stop is obvious.
Dr. Pepper Snapple ($DPS) was one of the few names that didn’t see a break of its MA’s this week, not even on an intraday basis. Solid trend.
Lockheed Martin ($LMT) put in some impressive price action this week, suffering only a modest pullback on Thursday as the market sank lower, and powering to all time highs in Friday’s bounce.
JCPenney ($JCP) paid a visit to its 50-day for the first time in two months and at one point looked like it might trigger an exit as it flirted with our trailing stop. We’ve already been generous with this given its volatility and had already marked the 9.73-9.50 as being important to its intermediate trend so it was interesting to see it find support there on Friday.
Home Depot ($HD) finished higher on the week, putting the data breach firmly behind it and moving close to fresh highs.
Nike ($NKE) was the star performer this week with much better than expected earnings and a strong outlook sending the stock sharply higher. We had used the tight consolidation of its initial breakout as our entry two weeks ago and this week we got a moonshot of a follow-through. Our stop now moves up to $79.75. We can afford to give this room to breathe and trail it higher again once we see how it consolidates and acts from here.
There are also plenty of other stocks shaping up well that remain on the watchlist. Similar to our existing positions it’s dominated by consumer discretionary, pharm/biotech, industrial, and technology, with a notable absence of financial or energy names. Here are just two examples:-
Sherwin-Williams ($SHW) is on the verge on new highs with the possibility of placing a stop at a previous swing low, breakout level, and 50-day MA, providing a potentially attractive risk/reward trade.
Alexion Pharma ($ALXN) has been consolidating for nearly six months now and with this week’s clear rejection of the 200-day it’s looking as if it’s ready to breakout from this range, with a series of higher lows in place and its MA’s stacked and rising. The 168-173 high closes on a daily and weekly basis could be used as an entry trigger.