22 Jan Weekly Forecast and Ideas – Breakouts soon?
Sideways action continues
Being the Swing Traders that we are, a sideways market that lasts more than a few weeks can become difficult at times. Pops turn into drops before they can gain traction, breakouts fail more often than not, and the sideways action begins to frustrate many. To wit, quoting Investors Business Daily from their Weekly paper this week:
“… portfolio profits are currently being plagued by a sideways trend and divergence between the NASDAQ composite and the Russell 2000… when the different indexes start going in different directions, that can spell trouble” “The names tried have struggled, many that have been avoided ultimately failed. Not swinging for these looks like a lack of action and isn’t as exciting. However, it’s preferable to losing money and saves your energy for better pitches to come”
We have been trying to explain the same thing to our SRP members for a few weeks as we have kept average cash balances around 40-50% while looking for those base pattern breakouts with good fundamentals. We have managed some really nice short term swings in the Biotech and Gold Miners sector using 3X ETF’s like LABU and NUGT. Those can work well while the typical sideways action in many sectors continues.
With the above said, let’s examine the SP 500 index both on a longer term Elliott Wave view and the more recent 5 month daily views. In both cases we remain in a Bull Trend, but again as of the last many weeks sideways.
Daily view shows a nice Reverse Head and Shoulder forming with support at 2252 pivot:
Weekly views show the long term Elliott Wave count per our analysis. We are still in Primary Wave 5 up from 1820 and within that, the 3rd major wave. The 3rd major wave is made up of 5 waves and we are possibly still in the 3rd of a 3rd, which means an upside breakout is still possible with a 2333 and 2406 projection as possible. We would like to see 2252 area hold. Currently the 7 week base is working off the prior 100 plus point rally.
One other area we would point out to watch is the Small Cap Index, right now testing the 50 day MA line: A further drop to 129-130 area would not be abnormal, but for now a nice bounce off the 50 day line holding
Oil has also been consolidating for several weeks following the 7 wave corrective pattern we pointed out and the pivot rally off the $44 area. This has caused Energy stocks to consolidate sideways as well. This is also constructive action right now with 50.70 a support line to watch.
Biotech has also continued to consolidate as well. We could call this a 25 week base pattern with a possible reverse head and shoulder. Near term we also show the more recent trend which is a series of 1’s and 2’s. A test of 61.45 area near term is possible and we would like to see that hold and then rally hard to the upside into a Wave 3.
The 1, 2 series continues…
The Weekly longer term chart shows the consolidation pattern:
Gold is attempting to uptrend from the 1124 lows. We had pointed out a Fibonacci convergence existed between 1117-1124 that could pinpoint an ABC Corrective bottom. Most recently we have discusssed 1220 as resistance which Gold ran into this past week, and at SRP we played that move up from 1191 to 1220 with NUGT ETF, which gave us an 11-15% gain before our exit. Gold will attempt to take out 1220 and if it can we see 1256.
Bottom Line? If you are feeling like not much is sticking and the sledding feels muddy, that’s because it is. What we focus on at SRP is fundamentals and technical’s both. Therefore if we are in a sideways market and the traction is tricky, we expect in time that the fundamentals will come through and push a consolidating chart to the upside in our favor. Biotech, SP 500, Energy, Small Caps, and Financials… all in base or mild corrective patterns. Be patient and continue to focus on sectors and fundamentals as we do at SRP.
Sentiment Update: Bulls trampling Bears… caution?
Still a massive disconnect here with over a 3 to 1 ratio of Bulls vs. Bears in Investment Advisor surveys. This is a historically extremely high ratio and part of a topping warning. Right now we have a reading of 60.6% Bulls and only 17.3% Bears. We pointed out that in a Major Wave 3 up and the 3rd wave within that tends to be the most optimistic of human behavioral patterns for stocks. The sideways movements have failed to alter the Bulls in surveys, something to watch.
3x ETF Trading Update:
We like to mix in leveraged ETF trading at SRP because we take our Elliott Wave based forecasting models and then look for pivots to both enter and exit a sector, removing single stock risk. To be sure it is much more difficult to pick an individual stock that will outperform a 3x Leveraged ETF assuming the sector analysis and short term forecast is spot on. Recently for example we felt that Biotech was going to bottom out on a pivot and then rally. With the XBI sitting around $36 after a runup and pause, the timing was good for a continuation trade. We enter LABU as it has 300% leverage to the XBI movement. If we can project XBI is going to move in a human behavioral pattern from $36 to $39 for example, we can reverse engineer the math and enter LABU looking for a move that is 3x leveraged to that 36-39 percentile gain. This resulted in 15% gains for SRP members within a short window of time, but again exiting is also key and we dived out hours prior to an 11% meltdown in LABU. These 3x ETF’s are meant for trading in most cases and perfect for swing trades…. but you must have a process and be patient for the set ups to be in your favor. Below was our post Alert analysis of the LABU Trade, selling 1/2 at a time which we tend to do on every trade.
This brings us to our Weekly Ideas section. We like to have an active “Watch List” of Swing Trade candidates to work off of at SRP, as most traders should have. We tend to update this in the Morning Pre Market reports each day as need be. Here is a fresh list of ideas we are starting with this week for our consideration and yours:
SLF- Sun Life is in the Insurance and Annuity business. The financials have been going sideways and consolidating post election gains. Sun trades at 10x earnings with good growth, an 11 week base pattern and PE of 10
INCY- Incyte is one of the stronger Mid Cap Biotech companies possibly on the radar of larger acquirers due to their pipeline. 2 Weeks tight base pattern could consolidate a bit more and possibly continue.
IDCC- 6 week base pattern, PE Ratio of 15, strong growth and in the wireless modem business. One of the faster growth stocks in the market.
AIRG- Post IPO base #2 here for this Wireless equipment maker. May be trying to break out again after a correction.
PCRX- The maker of Pain killer drug Exparel. After a difficult 2016 with FDA reviews and labeling and other issues, we think they should emerge in 2017 as a good growth play.
ESNT- 7 week base pattern for this Mortgage insurance provider. Earnings due Feb 10th, PE 15
IPHI- 10 week base with earnings due Feb 2nd. On our list multiple times.
MOMO- Recovering after BABA reduced their equity position and pushed the stock down. Has been on of our favorite growth names for months.
LITE- Possible ABC corrective base pattern completing for this Fiber Optic play, holding $34 is key.