Reading the Market Through Bleary Eyes
05/17/2014 6:00 am EST
With all of the indicators available to traders today, Greg Harmon of Dragonfly Capital offers one that isn't garden variety.
There are many indicators trader and investors use to help read the market and make decisions. The Relative Strength Index (RSI), Fibonacci support and resistance levels, trendlines and Ichimoku Clouds to name a few. But here is one you likely have not heard of. Where are stocks on the Alcohol Cycle?
The Alcohol Cycle
No doubt you will recognize the red labels of the Market Cycle, and I have added the corresponding labels for the Alcohol Cycle. This cycle is measured as which types of Alcohol stocks are peaking and starting to roll over. Take a look at the chart for Craft Brewers Alliance (BREW). As a representative of the premium beer category, it is now in full-blown puking mode and may be overdone. The RSI is technically oversold, with a strong red candle on oversized volume. Look for support at the 6.00 to 6.20 area.
Craft Brewers Alliance (BREW)
Molson Coors Brewing (TAP) is another good example. Look for a bounce near 40. This means that the next group of alcohol stocks to roll over is the working man's beers. Anheuser-Busch inBev (BUD), the makers of Budweiser is a great example. And these are starting to roll over. The chart for BUD below shows it breaking through the 100-day SMA with a bearish RSI, not yet oversold, as it moves lower. There is support at 80.50 and then 76.40 before a gap to fill at 73.79.
Anheuser-Busch inBev (BUD)
Another example in this group is AmBEV (ABV), which could gain downside momentum under 39.50. As people abandon premium beers and then working class beers, they turn to hard liquor to quench their depression. And these stocks may be just starting to turn, signaling a market bottom. Diageo (DEO), printed a shooting star reversal candle last Wednesday that was confirmed Thursday with a RSI that is starting to trend lower and a Moving Average Convergence Divergence indicator (MACD) that is crossing to negative. A break below the blue box and 50 day SMA at the 112 area would confirm the bottoming process.
That would leave only a rollover in the wine stocks as a signal to start buying. The chart of Constellation Brands (STZ) is close to that set up. The RSI is bullish but cracking the midline from above heading towards bearish territory. Price is converging back toward a flattening 50-day SMA. Watch for a break under 34 as the key for this to move lower with support at 32 next.
Constellation Brands (STZ)
Fans tend to love alcohol stocks as they are considered recession proof-consumers celebrate in good times and drown their sorrows in bad times-so you can make money both times.
By Greg Harmon of Dragonfly Capital