I want to begin this morning's report by highlighting a concern I have with yesterday's snap-back rally.
As you'll recall, everything stopped declining and began to rally between 1:15 p.m. and 1:30 p.m. Within that 15-minute window, we witnessed an instantaneous evaporation of supply in biotech, high-tech momentum, small caps, utilities, staples and energy. My complaint is that traders were unwilling to jettison their safe haven hidey-holes (durables and utilities) in favor of riskier assets. I expect active participants to maintain their sell-the-rip game plan until an undeniable shift away from safety and back into risk has been witnessed.
As far as Tuesday's SPY trading is concerned, the session is likely to be determined by which side of $187.25/$187.40 we are trading. A sustained trade above $187.40 encourages buyers to auction prices up toward $188.30 and $188.65. A failure to build value above $187.25/$187.40 would be expected to send the SPY straight back down toward $186.64 and $186.03.
With Vale (VALE) being the notable exception, our four Brazilian favorites have been consolidating their massive mid-March gains. As far as Petroleo Brasileiro (PBR), iShares MSCI Brazil Capped ETF (EWZ) and Companhia Energetica de Minas (CIG) are concerned, I suspect they've got another dip coming (toward the 50- or 200-day moving averages). But I'll be stalking any such dip for a long opportunity.
VALE has been the underperformer of the group, but I think that trend may be coming to an end. I'm looking for buyers to return as the stock moves to the right of the steep declining trend line (in purple on the chart below). For those impatient few anxious to roll the dice, you could attempt to buy the stock prior to any strength materializing, using the mid-March box ($12.50-13) as your reference point.
If you traded on Monday, you already know how active the trading was in the beaten-down momentum universe. We saw massive volume spikes in everything from Yelp (YELP) and Amazon (AMZN) to LinkedIn (LNKD) and Baidu (BIDU). But was it a washout? Should investors be moving back into these names? No.
Unless you are operating on a timeframe measure in hours, or at most a few days, I would avoid these stocks. The bottom line is that while the high-beta momentum universe is oversold and universally hated, many of the stocks are technically broken. Until these stocks stabilize, form stable bases and begin breaking higher, the risks associated with buying them are simply too great for anyone other than the short-term scalper.
Let's end today's report with a couple bullish charts. Because believe it or not, there are still some bullish setups in tech land.
IBM (IBM), a stock I've disliked for both technical and fundamental reasons for over two years, appears to be turning the corner. After delivering a pitiful earnings report, the stock appears to be attracting buyers on any incremental dip. In my view, prospective buyers have two choice here. They can buy the stock on a pullback toward $182.50-185 on broad market weakness. Or they can wait for the stock to trade through and consolidate above $200 and buy the subsequent upside break.
Microsoft (MSFT), having reported a good quarter, appears destined for multi-year highs. In fact, once MSFT recaptures $42, I believe the stock has room to run toward $47.25. Beyond that and Mr. Softy has an open gap (between $48.25 and $53) dating back to March 31-April 1 2000.
- Cliffs Natural Resources (CLF) closed beneath its March 10 intraday low. Should it remain beneath that price point on a weekly basis, I will likely remove this name from my watch list.
- If you look at the next three years of earning-per-share estimates for Walter Energy (WLT), you'll either cry or cringe. The only thing this company seems to be good at is losing money. But Monday's trading formed a hammer candlestick pattern. Such patterns are indicative of a stock trying to establish a bottom. To be clear, I do not yet trust this stock and have no immediate plans of establishing a trading position. But given our recent focus on late cycle sectors, I wanted to bring this potential bottoming pattern to light.
Any trading or volume-profile-related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my Twitter feed @ByrneRWS.