Another day of solid buying and the sharp increase in housing starts gave the homebuilding stocks a boost, which helped the overall market. The A/D lines for the NYSE Composite, S&P 500, Nasdaq 100, and the Dow Jones Industrials have now broken their downtrends. Maybe the Wall Street pros realized that too many of them were bearish or cautious on the stock market and started buying.
The A/D line on the Nasdaq 100 has confirmed the new price highs as the PowerShares QQQ Trust (QQQ) is now close to monthly projected pivot resistance at $99.27 and its daily starc+ band. The McClellan oscillator has risen to +195, which is the highest reading since February 18. The oscillator action is likely a sign of strength so a pullback is likely to be a buying opportunity.
So what should one be buying? In last week's Barron's, there was an interesting interview with Stephen Auth, the investment officer, equities, at Federated Investors whose staff manages about $50 billion of assets.
Mr. Auth was one of the few who was bullish at the end of the 2012 and he "expects the Standard & Poor's 500 to reach 2500 in the next 18 months to two years." This is based on his expectation that "the US economy is poised to grow even faster, possibly at a 3.5%-to-4% clip."
There is an in-depth review of his rationale in the article and he provided Barron's with four stocks he likes: Devon Energy (DVN), Google, Inc. (GOOG), Textura Corporation (TXTR), and LyondellBasel Industries (LYB).
I will concentrate on the three stocks that are closely tied to the strong material sector.
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Chart Analysis: The weekly chart of the Select Sector SPDR Materials (XLB) does not reflect Tuesday's new closing high at $50.37. It is up 9.93% YTD versus 8.41% for the Spyder Trust (SPY). It has over 10% in Dow Chemical (DOW) and Monsanto Company (MON).
- XLB has bounced from the rising 20-week EMA and the quarterly pivot at $48.41.
- The monthly pivot resistance is at $50.94 with the weekly starc+ band at $51.97.
- The quarterly projected pivot resistance is at $52.57.
- The weekly relative performance is back above its WMA but has not yet made new highs.
- The daily RS line has moved back above its WMA but is still below its prior high.
- The weekly OBV made new highs last week as it was leading prices higher.
- It held above its WMA on the recent pullback.
- There is short-term support and the rising 20-day EMA at $49.57.
Devon Energy (DVN) is a multi-faceted energy company that is 8.95% below its 52-week high but still is up over 22% for the year.
- The week ending July 4, DVN formed a doji and the following week it triggered an LCD sell signal.
- The weekly chart shows that DVN approached its weekly starc- band two weeks ago with its low at $71.48.
- This was just below the 38.2% Fibonacci retracement support.
- The weekly starc- band is now at $69.98 with the 50% support level at $69.
- The weekly relative performance did confirm the new highs in early July and the weekly starc+ band was reached a few weeks before the highs (see arrow).
- The RS line has now broken its uptrend, line f, and is below its WMA.
- The weekly on-balance volume (OBV) also confirmed the highs but is now below its WMA.
- The daily studies (not shown) have turned up but are still negative.
- The declining 20-day EMA is at $75.01 with stronger resistance in the $77 area.
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LyondellBasell Industries NV (LYB) is a broad-based chemical company that Mr. Auth believes will benefit from low natural gas prices.
- It made a new high on Tuesday and is very close to its quarterly projected pivot resistance at $112.89 as well as the daily and weekly starc+ bands.
- The daily RS line broke through its resistance, line c, on July 17 when LYB closed at $99.53.
- The RS line has stronger support at line d.
- The weekly relative performance (not shown) is also above its WMA and confirming the price action.
- The daily OBV also turned positive in the middle of July and then overcame long-term resistance at line e, last week.
- There is initial support now in the $110 area with the monthly pivot at $104.57.
Textura Corporation (TXTR) is a $759 million application software company that facilitates the interaction between owners and developers of commercial real estate. Therefore, it is tied to the construction industry, which is part of the materials sector.
- The daily chart shows that the downtrend, line g, was broken in early August.
- The 50% Fibonacci retracement resistance from the October 2013 high of $47.25 is at $30.52.
- The key 61.8% retracement resistance stands at $34.46.
- The daily relative performance broke its downtrend, line h, in the latter part of June.
- The RS line shows a shallow uptrend, line I, and is holding above its WMA.
- The weekly relative performance clearly indicates this is a market leading stock.
- The daily OBV bottomed in early May and moved through its downtrend (line j) at the end of the month.
- It turned up again Tuesday and still is acting positive.
- There is initial support at $27.28 and the 20-day EMA.
- The monthly pivot is at $25.82 with further support at $24.10.
What it Means: I also like the materials sector and the Select Sector SPDR Materials (XLB) is part of the Charts in Play Portfolio.
Of the three stocks, I only have a buying strategy for Devon Energy (DVN) which was featured in last month's Red Flags from Weekly Charts. It appears to be in the process of bottoming but one more new low is possible first.
Textura Corporation (TXTR) also appears to have bottomed but a stop would need to go below $24 currently, which makes the risk too high. Will be looking for a better risk entry.
How to Profit: For Devon Energy (DVN) go 50% long at $72.42 and 50% long at $70.08 with a stop at $68.57 (risk of approx. 3.7%).
Correction to yesterday's portfolio: The correct stop for Phillips 66 (PSX) should be $78.33.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.