The 3% gain in the Dow Industrials last week was the best weekly performance since the beginning of the year. For a change, the Dow outperformed the S&P 500 by 1%. Since the late June lows, the S&P has outperformed the Dow by just over 2%.
Over the weekend, the news that Larry Summers had dropped out of the running for chairman of the Federal Reserve has given global stocks a boost in early trading. Most of the Euro zone averages are up over 1%. Even more impressive was the sharp drop in short term yields and 150+ point gain in the Dow futures in early trading.
After last week's positive market internals, the overnight action is not surprising, as the technical studies from Friday's column "Stress Index Says Don't Worry Yet…" indicated that the worst of the selling was over.
It was even more important that several key sectors did stage important breakouts last week. Last week I focused on the material and energy sectors, but the industrials also became a market leading sector last week.
These three stocks from market leading sectors look attractive now for new purchase.
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Chart Analysis: The chart of the Select Sector SPDR Industrials (XLI) shows the weekly close above the August high, line a.
- The weekly starc+ band is at $47.54 with trend line resistance now in the $48.40 area.
- The relative performance broke through its downtrend, line c, in August, which was a positive sign.
- The RS line only corrected slightly from the August highs, indicating that it is starting to act stronger than the S&P 500.
- The weekly OBV has turned up from support, at line d, as it held well-above its rising WMA.
- Both the daily RS and OBV (not shown) have confirmed the upside breakout.
- There is minor support now at $45.52-$45.72, with the 20-day EMA at $45.26.
- The monthly pivot support is at $44.66.
Caterpillar, Inc. (CAT) has been holding support in the $78-$81.50 area, line f, since the summer of 2012.
- This level also represents the 38.2% Fibonacci retracement support from the 2009 low at $21.71.
- The weekly close was well above the 20-week EMA at $84.83.
- The downtrend, line e, is now at $88.30, with the February 2013 high at $99.70.
- In early 2012, CAT had a high of $116.95.
- The weekly relative performance closed the week above its flattening WMA.
- The weekly OBV has formed higher lows, but needs a strong move on good volume to complete a bottom.
- The daily technical studies (not shown) do appear to have bottomed.
- There is initial support now at $86.20-$86.80 and then $84.80-$85.20.
- The monthly pivot and further support at $83.81.
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Newfield Exploration Co. (NFX) is a $3.40 billion independent oil and gas company that closed sharply higher last week and last Wednesday's volume was four times the average.
- The short-term downtrend on the weekly chart, line b, is at $27.25 with the starc+ band at $27.65.
- The longer-term resistance, line a, is just above $32 with the September, 2012 high at $35.65.
- The relative performance has broken its downtrend, line c, that goes back to the November, 2011 high.
- The weekly OBV shows a bullish uptrend, line e, and a bottom has been confirmed by the breaking of its downtrend, line d.
- The daily OBV has also broken out and is well above its WMA, so the multiple time from OBV analysis points higher.
- There is initial support now at $24.90-$25.25 with stronger at $24.40 and the monthly pivot at $23.94.
Sigma-Aldrich Corp. (SIAL) is a $10.28 billion specialty chemical company that serves the life science and technology sectors. It has a current yield of 1.0%.
- The May high of $85.91 was exceeded in August with a high at $86.35.
- The 20-week EMA has been holding over the past few weeks and is now at $82.51.
- The next upside targets are in the $89-$90 area, which corresponds to the upper boundary of the trading channel and the starc+ band.
- The relative performance moved back above its WMA in August.
- A move in the RS line above resistance, at line h, would be positive.
- The weekly OBV has turned up from support, at line j, and closed back above its WMA.
- The daily indicators (not shown) are also now positive.
- There is initial support now at $84-$84.40 with further at the $82.50-$83 area.
What it Means: These three stocks have only bounced from support, especially Caterpillar Inc. (CAT), which appears to be forming a long-term base. Last week I recommended both the Select Sector SPDR Energy (XLE) and Select Sector SPDR Materials (XLB). Now I would also look to buy the Select Sector SPDR Industrials (XLI).
There were also quite a few health care stocks that turned up in my weekly scans, so keep in touch with my Twitter feed.
How to Profit: For Select Sector SPDR Industrials (XLI), go 50% long at $46.05 and 50% at $45.46, with a stop at $43.79 (risk of approx. 4.1%).
For Caterpillar Inc. (CAT), go 50% long at $86.65 and 50% at $85.08, with a stop at $80.67 (risk of approx. 6%).
For Newfield Exploration Co. (NFX), go 50% long at $25.34 and 50% at $24.12, with a stop at $23.14 (risk of approx. 6.4%).
For Sigma-Aldrich Corp. (SIAL), go 50% long at $84.74 and 50% at $83.82, with a stop at $81.38 (risk of approx. 3.4%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.