The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Don't Miss Another Big Rally
02/23/2012 4:45 pm EST
Chasing high-flying sectors or stocks is dangerous and not necessary when careful daily chart analysis can predict inevitable corrections that present new, high-quality buying opportunities.
Often when a sector or industry group takes off, there are many astute investors or traders who miss out because they do not get a timely buy signal or secure the right entry price and as a result are left on the sidelines. Some finally lose their patience and jump in as the market is topping, only to be stopped out at levels where they were previously hoping to buy.
This can create a level of frustration that results in them avoiding or ignoring that sector or industry group in the future. This is a mistake, as in the majority of cases, a several-month rally is often enough to turn the weekly and/or monthly analysis positive. Therefore, any correction forecasted by the daily analysis is likely to present another excellent buying opportunity.
Since the latter part of January, I have become cautious on two of the best-performing industry groups, the homebuilders and regional banks. The SPDR S&P Homebuilders ETF (XHB) was up almost 67% from the October 2011 lows to the February highs, while the SPDR KBW Bank ETF (KBE) was up almost 40% during the same period.
These two ETFs and the industry groups they track now appear to be completing daily top formations. A few days of further weakness will confirm this view and set the stage for what could be a three- to eight-week correction. Therefore, now is a good time, in my opinion, to determine the price levels and a game plan for getting back into these ETFs as well as the leading stocks in each of these industry groups.
This weekly chart of the SPDR S&P Homebuilders ETF (XHB) shows that resistance from the 2010 high, line a, was overcome early in the year. The next major level of resistance is in the $24-$25 area, which corresponds to the highs formed in 2008.
The all-time high for the ETF, which was actually created after the top in homebuilding, was at $46.55, so the major 38.2% Fibonacci retracement resistance stands at $22.68 with the 50% retracement resistance at $27.24.
The relative performance, or RS analysis, shows that the long-term downtrend, line b, was overcome in early-December 2011. The RS had completed its bottom formation in October (see circle) prior to moving above its weighted moving average (WMA). The WMA is now rising strongly but could be tested on a pullback.
The weekly on-balance volume (OBV) looks very impressive, as it has moved well above major resistance at line c and is now rising quite sharply. A pullback in the OBV to its weighted moving average would not be surprising.
The daily chart shows that XHB has been moving sideways since early February and is currently filling the gap formed on February 3. The daily uptrend, line d, is currently just below $19 with additional chart support in the $18-$18.50 area. The 38.2% Fibonacci retracement support stands at $17.27 with the 50% support at $16.30.
The daily RS line is now testing its uptrend, line e, which could be broken in the next few days. The daily OBV shows a negative divergence, line f, and the OBV has dropped back below its flat weighted moving average. The long-term support for the OBV stands at line g.
There is initial resistance at $20.35 and two daily closes above this level will signal that a top is not yet complete. There is first good support in the $18.50 area, which would require a 9% decline from the recent highs. Given the current high level of bullish sentiment, a decline back to the $17.60-$18 area would not be very surprising.
Strategy for the SPDR S&P Homebuilders ETF (XHB): Go 50% long XHB at $18.68 and 50% long at $17.56 with a stop at $16.44 (risk of approx. 9.3%).
The prior long position in XHB, as recommended on October 19 was established at $15.22. Half of the position was sold at $17.46 and the remaining position was sold on January 24 at $19.44.
There are two homebuilding stocks that I like the best. One is KB Home (KBH), which I recommended purchasing in October. The other is DR Horton (DHI) where there is a clear support levels which if reached should set up a good buying opportunity. Let’s take a look at each of these stocks.
KB Home (KBH) hit a low last October of $5.02 and by last week had rallied back to the $13 area. KBH has already declined from last week’s highs with the 38.2% Fibonacci retracement support at $9.90 and the 50% support level at $8.97.
The RS line broke through its major resistance, line b, in January as KBH was leading the market on the upside. The daily OBV has broken its longer-term downtrend, line c, but has just dropped below its weighted moving average. The weekly OBV (not shown) is positive, and volume over the past six weeks has been strong.
Initial resistance now stands at $12.25, and if overcome, it could signal a rally to the 50% retracement resistance at $12.57. This is calculated from the 2010 high of $20.12. The 61.8% Fibonacci retracement resistance at $14.35 needs to be overcome to confirm that a major low is in place.
Strategy for KB Home (KBH): Go 50% long at $9.56 and 50% long at $8.78 with a stop at $8.18.
As per the October recommendation, buyers should have been long KBH from $7.04. Half of the position was sold at $9.90 and the other half was sold at $12.56, as recommended last week.
DR Horton (DHI) is another homebuilder whose long-term pattern suggests it will be an excellent buy at stronger support. The stock peaked in early February at $14.78 and is already testing first support just under $14. There is further support in the $12 area with the 38.2% retracement support at $12.22. The 50% Fibonacci retracement support level is at $11.42.
The RS line broke through significant resistance (line e) in October but started to diverge from prices in late January and early February. The daily OBV has broken its uptrend, line f, but did confirm the recent highs. Typically, this would suggest a rally back to the weighted moving average and then a further decline that should set up a good buying opportunity.
Initial resistance is at $14.50 and a close above $14.70 would indicate that new rally highs were ahead. There is resistance from 2010 at $15.44.
Strategy for DR Horton (DHI): Go 50% long at $12.32 and 50% long at $11.62 with a stop at $10.82 (risk of approx. 9.3%).
The regional banks have also been strong, and the below daily chart of the SPDR S&P Bank ETF (KBE) shows a solid rally from the October lows at $16.17. KBE has overcome the 50% Fibonacci retracement resistance at $21.97, but it seems to have stalled below the 61.8% resistance at $23.34. A daily close above this level would be a sign of strength.
There is first good support for KBE in the $21-$21.50 area with the 38.2% Fibonacci retracement support now at $20.16. The uptrend, line a, is a bit lower with the 50% retracement support at $19.38. A decline below the 61.8% support at $18.61 and the December low at $18.34 would be negative.
The daily RS line, after breaking out in December, did form a negative divergence, line b, at the recent highs. Support for the RS is not far below current levels at line c. The daily OBV also formed a negative divergence, line d, and the OBV is now just slightly below its weighted moving average. There is positive divergence support in the OBV at the uptrend, line e.
Strategy for the SPDR S&P Bank ETF (KBE): Go 50% long at $20.56 and 50% long at $20.06 with a stop at $18.28 (risk of approx. 9.9%).
Regions Financial Corp. (RF) has had a dramatic run from the October 4 low of $2.82. As the weekly chart shows, it has reached the 61.8% retracement resistance at $6.08, which was calculated from the early-2011 high. A daily close above this level would be positive. It is important to remember that RF traded as high as $37.15 in 2006.
The RS analysis shows a nice bottom formation, as it made higher lows, line g, and is now well above its rising weighted moving average. Volume action is even more impressive, as the OBV broke its long-term downtrend, line h, and is now acting stronger than prices. A pullback in the weekly OBV to its rising weighted moving average would not be surprising on a further correction.
There is initial chart support in the $5.20-$5.40 area with the 38.2% retracement support at $4.84. The much stronger 50% retracement support is at $4.50. Therefore, this support zone (line f) should be a good area to consider buying RF.
Strategy for Regions Financial Corp. (RF): Go 50% long at $4.78 and 50% long at $4.48 with a stop at $4.16.
On October 25, I recommended buying RF at $3.82, and the entry was filled on October 26. Half the position was sold at $4.82 on January 10 and the other half was sold on February 16 at $5.82.
F.N.B. Corporation (FNB) is also a Southeastern regional bank which is considerably smaller than Regions Financial (RF). The daily chart for FNB completed its top with a high of $12.56 in January and looks like it could bottom well ahead of other regional banks. FNB bottomed in September ahead of most regional banks, making a low of $7.87.
There is next good support in the $11-$11.32 area, line a, with the 38.2% support at $10.80. The 50% support is at $10.20 with the key 61.8% support at $9.65. The uptrend in the RS line was broken on January 25 and now shows a pattern of lower lows and lower highs.
The daily OBV is holding up better, as it is still above its weighted moving average and is close to its recent highs. There is much stronger support at line c. The weekly OBV (not shown) is well above its rising weighted moving average.
Strategy for F.N.B. Corporation (FNB): Go 50% long at $11.28 and 50% long at $10.76 with a stop at $10.46 (risk of approx. 5%).
I hope this analysis will encourage you to keep track of those market-leading sectors, industry groups, and stocks, even if you have not participated in their recent strength. It is possible that we will see even higher levels before we get a deeper correction.
It is not so much these two examples that I hope you will focus on, but the actual process that I want to emphasize. By developing a strategy or game plan in advance, it is then easy to set up price alerts that will let you know when prices get close to your target zones. This will give you the opportunity to update your analysis and place actual orders so you are less likely to miss the next move up in a market-leading sector.
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