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Its been a typical September-October swoon in our opinion, a common period of time in the markets when corrections occur and also bottom out. The markets historically have put major pivot bottoms in during the fall mostly due to seasonal factors. There is a whole rush of traders that come back in September from August vacations. Portfolios get rapidly adjusted, turnover picks up along with volume of trading. Then you have the end of 3rd quarter “window dressing” period when managers sell the losers from the quarter and add the winners. This is often followed by a downslide in October as portfolios are once again adjusted.
We have seen a classic ABC correction pattern in the Russell 2000 small cap index from the June/July highs to this weeks lows. The IWM ETF fell from 120 to 103, about a 14% correction. In the same period of time, the SP 500 fell about 9% but not really until the last 3 weeks or so did the large cap stocks catch up with the small stocks.
A move over 110 on a closing basis for the IWM ETF would likely confirm a bottom in the small caps
This week we pointed out a bullish divergence building mid-week when the Small Cap index stopped declining while the large caps were underperforming on the downside. Later in the week the small caps rallied hard off their lows as much as 5% plus while the large caps lagged.
It would appear most of the damage has been done and the market had a much needed washout. We have a few metrics to look at right now that are of interest. The NYSE short interest has been declining at a rapid pace while the market has dropped, this indicates shorts are starting to cover their bearish bets. Also, in the most recent survey of money managers the percentage of bulls has declined to 37.8% from a high near 56% late in the summer.
In addition, the pure technical pattern shows a possible “Bullish Reverse Head and Shoulders” pattern on all the indices.
We would not be surprised though to see a pullback and gap fill re-test of the Thursday closing prices early next week, and resistance at 1910 on the SP 500. Also, an eventual re-test of the 1820’s lows in the SP 500 can’t be ruled out either. We had a nice Gap fill from the April 2014 lows on the SP 500 early in the week with one more at 1770 area from February still sitting out there, worth us watching. A great real bottom would come in at 1775-1795 which we pointed out early in the week, but we will have to monitor and advise our subscribers on near term patterns. Also, the SP 500 and Dow have not appeared to complete a more traditional ABC pattern, so the current rally may be nothing more than a B wave run up, followed by another leg down…
Resistance for the SP 500 comes in at 1927 and 1944
We are concerned the Ebola outbreak could freak traders and investors out if it is not contained soon…
Early in the week at the SRP service we got stopped out of a few good growth stocks that then declined quite a bit further after we sold, many of them recovering late in the week. We did manage to sneak in a 24 hour 17-20% swing trade gain on FNMA though, which was nice.
For the first time in several weeks we are spotting a few stocks that are looking more attractive in terms of valuation and entry points than we have seen in awhile. With that also said, the chart patterns on many are not out of the woods even with the late week rebound.
A few that we will keep a close eye on for possible pullbacks before entering or breakouts include the following:
SWKS- Skyworks Solutions- Raising guidance for 4th quarter
MANH- Manhattan Associates- Supply Chain Software provider, leader in group
GILD- Gilead Sciences if it can close over $103, PE ratio at 12x 2015 estimatesw with strong growth
CUDA- Barracuda Networks looks very strong now
BABY- Natus Medical also looking good as it hits 52 week highs Friday in an uptrend
EXAS- Exact Sciences- $23 a share range. We first wrote about them at $16.75. They got approval for reimbursement rates of $502 per test for their DNA based colon cancer test, a nice platform from which to grow (Alternative to traditional Colonoscopy Screening)
BABA- Alibaba looks like it bottomed at $82 this past week, probable test of $100 coming soon market willing
Several Biotechnology names we like, one of which has been reserved for our Premium members only in a full report sent out a few weeks ago we think can quadruple in12-18 months, but there are quite a few of interest and are often market agnostic.
Best of luck with your trading this coming week and ahead
The Stock Reversals Team
www.stockreversalspremium.com (Premium service with active short term, intermediate, and long term positions)
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FNMA 17-20% Week of Oct 13-17th