Yesterday's strong move triggered a breakout alert for many ETFs. A recovery from the August swoon is well underway -- but when I ran a scan of breakout charts, I noticed many of them had the exact same characteristics.
What I observed was a break above the highs after Aug. 24. However, many names were still well below their 10-day Simple Moving Average (SMA). Furthermore, prices were still 4% to 5% below the August highs.
The triggers came from the Relative Strength Index (RSI) crossing above 50, the Moving Average Convergence Divergence (MACD) seeing a bullish crossover and the Force Index approaching zero or crossing above it. Indicators such as the Commodity Channel Indicator (CCI) and Ultimate Indicator were also passing into bullish territory, and all of this was occurring while the Bollinger Bands were still extremely wide.
The chart below of the SPDR S&P 500 ETF (SPY) encompasses this:
But so do many, many other charts -- and right now, I don't want to take any chart (triggered bullish or not) with these exact same characteristics. In my view, if I see a chart like the one above, I should simply buy SPY.
Instead, look for charts like those from Nike (NKE), Corning (GLW) or United Rentals (URI).
For instance, Nike has a stronger CCI, a Force Index well into bullish territory and a price above both the 10- and 50-day SMAs. Furthermore, the stock is only a few dollars off of its August highs here:
As for Corning, that's above both its recent price resistance and August highs:
The stock looks ready to roll on a close over $18.50. Again, we see a stronger CCI, a MACD bullish crossover that occurred weeks ago and a Force Index making a new move higher.
The 10- and 50-day SMAs are in the rearview mirror and should provide support around $18, and then again at $17.60. We have a clear stop of $17.50 here, with upside to at least $19.50 and stronger underlying technicals than SPY has.
Lastly, consider United Rentals:
This one has been beaten down, but note the tighter Bollinger Bands breaking out higher. The stock is above both its August highs and its 10- and 50-day SMAs, and it looks ready to try to fill a July gap.
A close over $72.50 offers a $7.50-to-$10 upside. You could use a simple $70 call for exposure, with any close under $67.50 signaling a stop on the position. And URI's technical strength has been present for a few weeks, not a few hours.
The Bottom Line
Given the Federal Open Market Committee meeting that's right in front of us, I'd prefer to buy strength and charts that don't perfectly mirror SPY.
Actually, my true preference is to watch the market's reaction to the FOMC. If we see strength building, then the three stocks above would be at the top of my list for buying.