Two key technical tools that I rely on in my stock or ETF recommendations are volume (Volume Always Precedes Price) and relative performance analysis. As discussed previously, picking positive-volume stocks that are in the strongest industry groups or the strongest sectors will give you the best odds of success.
The strong performance of the stock market in the last quarter of 2013 caught many by surprise as the Spyder Trust (SPY) hit a low of $164.53 on October 9 and has since made a series of higher highs. The price action has been confirmed by the S&P 500 A/D line as it has made higher highs, line a, and higher lows (line b).
The SPY has also continued to stay above its quarterly pivot level on a weekly closing basis since the last week in November of 2012. The 1st quarter pivot for 2014 is at $177.97 with the R1 resistance at $191.41 (see full table below).
Since the close on September 30, the SPY is up 9.7%, which compares nicely with the 10.27% annualized yearly return of the past 25 years. After the stellar performance in 2013, one may need to be reminded that the S&P 500 was up just 13.29% in 2012 and was unchanged in 2011.
Since the end of September, there are quite a few industry groups that have done better than the Spyder Trust (SPY). The table includes three of my favorites led by the DJ Consumer Electronics (DJUSCE), which is up 27.8% over the same time period.
Once I have identified the industry groups that are performing the best, I then look at the group technically across the monthly, weekly, and daily charts. If the group passes these tests, then one can use my favorite research sites to identify individual stocks that offer good buying opportunities.
The weekly chart of the DJ Consumer Electronics (DJUSCE) shows that it formed a bottom between early 2012 and the summer of 2013, lines a and b. This formation was completed in August, and two weeks later, the group had a powerful close. The upside target from the formation was in the 720-740 area, which has already been exceeded.
The weekly relative performance dropped down to test its WMA at the end of June (see arrow) as DJUSCE was testing its 20-week EMA. The RS line made a new high last week and its WMA is still rising strongly.
The volume was heavy during the early June decline and the OBV did not make it back above its WMA until the middle of July. The major resistance at line d was not overcome until the beginning of October. The OBV is still above its rising WMA but did not make a new high last week.
The monthly analysis does suggest the group has formed a significant bottom as it traded as high as 1414 in September of 2007. There is first good support now in the 684-690 area, which includes the rising 20-week EMA.
The best known name in this group is Apple, Inc. (AAPL), which is scheduled to release it earnings on January 27. This is still the stock that seems to get the most emotional response from investors with Carl Icahn taking the company to task this week.
Technically, the stock has completed a weekly bottom formation as the 61.8% Fibonacci retracement resistance was exceeded during the first week of December. This now becomes an important level of resistance and a weekly close above $570, line a, will project a move to the $625 area.
The recent correction low was $529.88 as it came close to the 20-week EMA at $525.60. and the uptrend, line b. Two weeks ago, AAPL did close below the quarterly pivot at $537 but quickly reversed making this level good support.
The relative performance moved through important resistance at line c before reversing in early 2014. The RS line looks ready to close back above its WMA this week. The daily RS line (not shown) did confirm the early December highs and now appears to have completed its correction.
The OBV completed its 11-month bottom formation last September as resistance, line d, was overcome. The uptrend in the weekly OBV, line e, suggested that AAPL was being accumulated last year. The OBV dropped back to test its WMA three weeks ago and has since turned higher. A high-volume close will suggest that it has bottomed.
How to Profit: For Apple, Inc., go 50% long at $541.80 and 50% at $526.70, with a stop at $498.80 (risk of approx. 6.6%). On a move above $577, raise your stop to $519.60.
Daktronics Inc. (DAKT) is a small-cap ($633 million) designer and manufacturer of electronic display systems. It trades an average of 235K shares daily and yields 2.03%. It is up almost 32% since the end of September but is 8.3% below its 52-week high.
The weekly chart shows the breakout above two-year resistance, line a, in November as the rally was kicked off by a daily surge of 8% on heavy volume. The early December high was $16.09 and the low, so far this year, has been $14.48.
The quarterly pivot is at $14.01 with the 20-week EMA at $13.64. The major support from February of 2013 is at $12.12.
The weekly relative performance has been in an uptrend, line d, since early in 2013. The RS line pulled back to its WMA just three weeks before it moved sharply above the resistance at line c. The RS line did confirm the highs put is now pulling back to its rising WMA.
The weekly OBV was in a trading range from May through October when it finally broke out to the upside. The Aspray's OBV Trigger (AOT) moved through its resistance at line d (see arrow), which was a strong sign of accumulation. The AOT has been declining for the past five weeks and could reach the zero level in the next few weeks.
How to Profit: For Daktronics Inc. (DAKT), go 50% long at $14.13 and 50% at $13.78, with a stop at $13.19 (risk of approx. 5.4%).
The DJ US Travel & Tourism Index (DJUSTT) has also been a star performer as it is up 21.1% since the end of September. The weekly chart shows that it was very strong in mid-November as it moved above its trend line resistance at line a.
The index is close to making another new high with the weekly starc+ band now at 563, which is about 4.6% above current levels. There is initial support now at 509 to 511 with the rising 20-week EMA at 496. The longer-term chart support, line b, is in the 481 area.
The relative performance confirmed the upside breakout in November as it overcame the resistance at line c. The RS line has not made a new high over the past few weeks but is holding above its WMA. The monthly RS line has confirmed the recent highs.
The on-balance volume (OBV) led prices higher as it moved through its resistance, line e, three weeks ahead of prices. The OBV is close to a new high this week and is well above its rising WMA.
Sometimes when I am looking for a new position in a market-leading industry group, I do not find any good picks that are currently close to levels where I would buy them. That is the case with DJUSTT as Avis Budget Group (CAR) has one of the most compelling long-term charts. I would only buy it on a significant pullback where a reasonable stop can be used.
The weekly chart shows that it completed its flag formation, lines a and b, in early November with the weekly close at $32.19. The 127.2% Fibonacci target at $36.38 was hit three weeks later and CAR hit a high of $42.48 just last week. It is up just over 39% in the past three months.
Based on last week's high, the 38.2% support stands at $36.46, which is very close to the quarterly pivot at $36.10. The 20-week EMA is at $35.82 with the December low at $35.43. The 50% retracement support is at $34.62.
The relative performance moved above its downtrend and WMA one week before prices broke out to the upside. The RS line has confirmed the new highs and is currently well above its rising WMA.
The OBV had moved below its WMA in August and the volume was low in August as the correction was being completed. This was signaled by the OBV's rise above the downtrend, line c, and it's WMA before the end of October.
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The DJ US Defense Index (DJUSDN) closed strongly above its 20-day EMA at the start of October and is up 21.1% since the end of September. It made another new high this week. DJUSDN had consolidated into a trading range in November, lines a and b, which was resolved before the end of the year. It is trading this week near its weekly starc+ band.
The daily relative performance completed its bottom formation before the end of October as it moved above its WMA and the previous high. This indicated it was a market leading group. The RS line moved through its resistance, line c, just before Christmas. It continues to be in a very solid uptrend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.