TomAspray's  Instablog

The current fragile state of the US stock market was highlighted Monday when the S&P futures dropped 15 points in 60 minutes as stocks dropped in an apparent reaction to an article in the Financial Times on what the Fed might do.

Stocks in Asia were mixed overnight and are slightly higher in Europe as are the US futures. Today, we get the latest reading on the Consumer Price Index and Housing Starts along with the beginning of the FOMC meeting.

From a technical perspective, it is still my view that it would take "two consecutive days of solid price gains along with strong A/D numbers" to indicate that the correction was over." Clearly volatility has picked up but it is difficult to determine whether the bullish sentiment has decreased enough to support a new phase.

The healthcare sector has exceeded almost all expectations in the past few years. As I noted last December, the sector broke 12-year resistance in 2012, which suggested it should also be a strong performer in 2013. Many are now wondering whether they should stick with the healthcare sector, take profits, or look for new health care stocks to buy.

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Chart Analysis: The daily chart of the DJ Health Care Sector (DJUSHC) shows that it broke its daily uptrend, line a, in early June but has bounced nicely from support at line b.

• There is further support in the 490 area and the rising 20-week EMA (not shown).
• The minor 38.2% support is now in the 482 area, which is about 5.7% below current levels.
• The relative performance peaked in April but still has been able to hold above its uptrend, line c.
• Volume picked up Monday, and the OBV is very close to moving above its WMA.
• The weekly OBV (not shown) did confirm the recent highs and is well above its rising WMA
• A close back above 527 should confirm the uptrend has resumed

The Select Sector SPDR Health Care (XLV) is up over 21%, so far, this year and the weekly chart shows that the starc+ band was tested a few weeks ago.

• From the May 22 high at $50.40, it corrected 6.4% to a recent low of $47.16.
• There is monthly pivot support now at $46.47 with quarterly pivot support at $44.23.
• The long-term support, line e, is in the $42.50 area.
• The weekly relative performance shows a longer-term pattern of higher highs and higher lows.
• The RS line has turned up from its WMA and moved through short-term resistance at line f.
• The weekly OBV completed its bottom formation in December, point c.
• The OBV made further new highs last week and continues to lead prices higher.
• The weekly starc+ band is at $50.96 for this week.

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One healthcare stock that looks good is AmerisourceBergen Corp. (ABC), which is a $12.85 billion provider of drug distribution and related healthcare services. It has current yield of 1.5%.

• The weekly chart shows that after the high in April of $56.91, it has stayed in a narrow range with a low last week of $52.38.
• The rising 20-week EMA is at $51.47 with the uptrend, line a, at $50.
• The relative performance moved back above its WMA last week and now has support at line e.
• The weekly OBV did confirm the recent highs and turned up last week. It is well above its WMA.
• The weekly starc + band is at $57.90

The daily chart of AmerisourceBergen Corp. (ABC) shows that the short-term flag formation, lines d
and e, was completed last week. The initial upside targets are in the $58.50-$60 area.

• The 20-day EMA was tested last Thursday and it closed strong Monday.
• The daily relative performance suggests that the correction is likely over as it has moved back above its WMA.
• The daily OBV is now testing its WMA and a break through the resistance at line f will confirm the completion of the continuation pattern.
• There is minor support now at $55 with better at $54.20-$54.50 that includes the monthly pivot.
• More important support is in the $53 area.

What it Means: The longer-term trend for the healthcare sector is positive and the more narrowly focused Select Sector SPDR Health Care (XLV) is also holding up pretty well. It is a more defensive sector, and the recent correction may have been enough to set the stage of another rally.

AmerisourceBergen Corp. (ABC) looks attractive technically but option traders apparently are bearish as there was purchase of a large number of August $50 puts recently that would break even at $49.12. I would look to buy on a pullback but would cancel the order if the recent highs are tested first.

How to Profit: For AmerisourceBergen Corp. (ABC), go 50% long at $54.52 and 50% long at $53.67, with a stop at $51.28 (approx. risk of 5%). Cancel the order if $56.42 is hit first.

Portfolio Update: Should be still long the Select Sector SPDR Health Care (XLV) from $38.50, with a stop at $45.79. I have taken some profits on the way up.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Last week's lower close has left many of the key US markets on the verge of stronger sell signals but the global markets are starting off the week on a very positive note. Japan revised its first quarter growth to 4.1% as the Nikkei 225 gained almost 5%.

This could complete the correction in the Nikkei as it has reached the buy levels outlined last week. European stocks are strong as the Dax Index is up well over 1% in early trading with the S&P futures showing double digit gains.

Of course it will be the close Monday that is important as the daily charts reviewed in the Week Ahead column need two consecutive strong closes with strong A/D ratios to indicate that the correction is really over.

The DJ Technology Index has been lagging the overall market all year as it is up only 6.5% this year versus an 11.5% gain in the Spyder Trust (SPY). The technology sector is trying to once again become a market leading sector but will the reaction to this week's earnings from some well-known tech stocks push this sector into a leadership role?

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Chart Analysis: The weekly chart of the DJ Technology Index (DJUSTC) shows that the downtrend connecting the 2007 and 2012 highs, line a, was tested two weeks ago.

• The recent high was at 798 with the 2012 high at 808.70.
• A close above both of these highs would be a positive sign for the intermediate term.
• The weekly relative performance moved above its WMA in early June, but is still well below its downtrend, line b.
• A higher close in the next two weeks could complete the bottom in the RS.
• There is next support at 761 and the 20-week EMA with the starc- band at 738.

Adobe Systems Inc. (ADBE) reports its earnings after the close on June 18 as it surprised the market in the last quarter when it beat forecasts by 10%.

• It hit a high of $47.17 in early May and then fell to a low of $41.91, which was a drop of over 11% from the highs.
• ADBE is still up over 13% for the year.
• The relative performance did confirm the recent highs before dropping below its WMA and initial support.
• The RS line has stronger support at the long-term uptrend, line e.
• The OBV is still making new highs and is holding above its WMA.
• A break of the uptrend in the OBV, line f, would be a sign of weakness.
• The daily OBV (not shown) has been below its WMA since early May.

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Micron Technology Inc. (MU) is a $13.14 billion semiconductor company that is up over 100% so far in 2013. It reports earnings after the close on June 19. Prices have now reached the trend line resistance, line a, from the 2010 and 2011 highs.

• For the past six weeks MU has been testing its starc + band and is currently trading above its monthly starc+ band.
• The relative performance broke its downtrend, line b, in early January and completed the bottom formation by the end of the month.
• The on-balance volume (OBV) broke its downtrend in January and retested its WMA in February, completing its bottom formation.
• Both the RS and the OBV made new highs last week, confirming the price action.
• The daily analysis (not shown) does show loss of upside momentum.
• There is first support in the $12-12.20 area and then at $11.40.
• The 38.2% Fibonacci support is now $10.12

Oracle Corporation (ORCL) dropped 11.8% after its last earnings report when it had reached a high of $36.43 in March. This was the long-term resistance from 2011, line d. It reports earnings after the close on June 20.

• ORCL dropped as low as $31.16 by the end of March.
• Prices are now testing the flat 20-week EMA.
• The weekly uptrend, line e, is now in the $32 area and a break below the March lows would be more negative.
• The relative performance has formed lower highs, line e, since late 2011.
• The RS line is trying to hold support at line f.
• The OBV is trying to hold above its WMA.
• A drop in the OBV below the April lows and support at line g, would be more negative.
• There is initial resistance at $34.80-$35.30

What it Means: The weekly chart of the DJ Technology Index (DJUSTC) indicates that positive action over the next two weeks could generate a positive signal for this sector.

Of the three stocks, Micron Technology Inc. (MU) looks the most positive from a long-term point of view, but it is overdue for a two-three week correction.

If Adobe Systems Inc. (ADBE) can hold its recent lows at $41.91, and then close back above $45, it will indicate that its correction is over.

Oracle Corporation (ORCL) looks the weakest, technically, and if its earnings disappoint again, the market may not be very forgiving.

How to Profit: No new recommendation

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Though there has been some improvement in the past 20 years, most fundamental analysts still do not analyze their data using technical analysis. I have found that using trend lines and divergence analysis on fundamental data can often be very useful in confirming your views on the market or on a sector.

In the early 1980s, there was one data series that I regularly watched. It was the number of Help Wanted ads that were in the newspaper. When the number of ads was rising, it was a positive sign for the economy. Conversely, a declining number of ads was a sign that the economy was contracting.

For example, the number of ads turned lower in early 1981 and did not start to rise again until October of 1982. They had formed a clear pattern of lower highs and lower lows (a downtrend), and when it was broken, it indicated that the recession was over. It was consistent with the bullish action in the stock market as it bottomed in August 1982. The recession was officially over in November 1982.

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The Help Wanted ads also peaked well before the 1991 recession, but in 2005 the Conference Board replaced it with the Help Wanted OnLine®. The chart shows that the uptrend in these ads, line a, was broken in the summer of 2007 several months before the major stock markets made their highs. By early 2008, it was falling sharply, and it was later determined that the recession began in December of 2007.

The downtrend in ads, line b, was broken in the fall of 2009, and a year later, it was determined that the recession officially ended in June. The ads are positive as they continue to show a pattern of higher highs and higher lows. This is a positive sign for the future growth of the economy.

Another favorite data series from the Conference Board is their Leading Economic Index (LEI), which is made up of ten variables including the unemployment rate, jobless claims, building permits, stocks prices, etc. It has a fairly good record of predicting recessions over the past 50 years.

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The chart from the Conference Board shows the LEI in blue and the CEI or Coincident Economic Index in red. The LEI was rising by November 2001, which was determined to be the end of the dot-com recession. By 2003, it was in a clear uptrend, line a.

In the middle of 2004, the LEI moved above the CEI (point 1), which I saw as a sign of strength. The LEI peaked in 2006 and then formed lower highs in 2007, line b, as the S&P 500 and Dow Industrials were peaking. It was then diverging from the CEI.

The LEI plunged in late 2007 and early 2008 as the uptrend, line a, was broken. In the spring of 2009, both the LEI and CEI had started to improve. By later in the year, both were in clear uptrends. Both lines are still rising though the LEI is well below the highs from 2006.

The attitude and the seasonal trend of the consumer is also very important to both the economy, as well as the investor. The chart shows that after the 2003 low, the Consumer Confidence turned higher, and by 2005 lows, there was a clear uptrend, line a.

Consumer Confidence flattened out in the latter part of 2006 and in 2007, line b. Then in the fall of 2007, it started to drop sharply and violated its uptrend, line a. The ensuing plunge in confidence was quite dramatic as it did not bottom out until early 2009.

There were signs in early 2010 that the level of confidence was changing as the last peak before the final low, line c, was overcome. Higher highs were made again in 2011, and the data shows a clear uptrend, line d. In May, it rose sharply to 76, breaking out above the resistance at line e.

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This long-term chart shows the Consumer Sentiment from the University of Michigan, along with the Conference Board's Consumer Confidence. I have chosen to draw trend lines only on the Consumer Confidence data (in green), though you can see that the Consumer Sentiment confirmed the changes in trend.

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The uptrend from the 1983 lows, line a, was broken in early 1990 as the recession officially began in July and ended in March of 1991. The Dow Industrials peaked in July and dropped 22.8% in the next five months.

The series of higher lows in the Consumer Confidence in 1992 and 1994 was the start of a powerful uptrend, line b, that was not broken until early 2001. Of course, the Nasdaq Composite peaked in March of 2000, and by the time the Consumer Confidence bottomed in early 2003, it had lost over 75%.

The rally from the 2003 lows was much smaller by comparison, and the support at line c was broken in the fall of 2007. Both are now clearly positive but a reading below 60 would be a reason for concern.

There are quite a few data series that can give you a good reading on the home construction sector, and one of my favorites is the NAHB/Wells Fargo Housing Market Index, which is plotted below with the single family housing starts.

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The HMI is a monthly survey of NAHB members, which asks them to rate their prospects for single family homes at the present and for the next six months. The HMI peaked in late 1999 and then formed lower highs in 2006, even though the housing starts were continuing to make new highs. This was a significant divergence as it helped create an overly large inventory that has made it more difficult for the housing market to recover.

The HMI turned down in early 2006, and then in late 2006, it broke the long-term support (line c) that connected the 1991 and 2003 lows. A few of months later, the additional support, line b, was also broken This confirmed the very negative outlook of the home builders.

The HMI formed higher lows in 2009 and early 2012 (line e). The bottom was confirmed in May as the resistance at line d was overcome. This was noted in a Week Ahead column at the time.

The first hint of a bottom in the home construction stocks occurred on October 18, 2011, when volume surged in the home construction stocks.

Since October 2011 lows, the DJ Home Construction Index (DJUSHB) is up over 124% versus just over a 30% gain in the Spyder Trust (SPY). The Index was up 164% on May 15 but has dropped 40% in less than a month.

On the right, you will see the long-term monthly chart of the DJUSHB and the H&S top that it formed in 2004-2007. The neckline (line a) at 548 was broken at the end of June 2007, and the eventual low in late 2008 was 130.

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The Home Construction Index made a low in late October of 2011 at 164.93 and rose for the next two months, closing above its 20-month EMA by the end of the year. At the end of May 2012, the 2010 swing high was overcome on a closing basis. This completed the bottom formation and coincided nicely with bullish signal from the HMI the following month.

The current rally has taken it just above the major 38.2% Fibonacci retracement resistance from the 2005 high. The 50% level is at 624.38. There is initial support at 442 with the rising 20-month EMA now at 410.

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The weekly chart of the DJ Home Construction Index overcame its 18-month downtrend, line a, in early December of 2011. The relative performance moved through its downtrend (line b) a few weeks earlier as indicated by line 1.

The uptrend that connects the 2011 and early 2012 lows, line c, has been tested several times over the past two months. The weekly RS line confirmed the January 2013 highs but then broke its uptrend, line d, in April. This is often an early warning sign.

The RS line made much lower highs, line e, in May, which was a sign that home construction stocks were no longer leading the S&P 500 higher. The RS line is now back below its WMA and a drop below the April low would be consistent with further weakness in the Index.

In terms of price, the DJUSHB has support now in the 440-446 area. If it is broken, then the major 38.2% Fibonacci retracement support is at 405 with the 50% support at 359. A drop to the 38.2% support would mean a further 20% decline from current levels.

NEXT PAGE: Two Hot Home Construction Stocks

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.