According to BTIG Research, there remains cause to be concerned after the stock market's bounce last week.
For the first time since the October low, breakdowns have outnumbered breakouts. This is a byproduct of the 5% pullback in the SPX over the past two weeks, which naturally saw some stocks break support levels. We are inclined to worry about breakdowns when they are abundant (at least 10% of the SPX, more than this time around) and recurrent (outnumbering breakouts for at least 2-3 weeks).
This last occurred in October, when the market suffered deterioration in breadth that was significant enough to suggest a structural shift may be underway. For this reason, we would be inclined to use strength to sell stocks that previously broke down or stocks that have exhibited weak relative strength.
Looking closer at a few of the internals: A 5-year weekly chart of T2107, or stocks which are above their 200d SMA, has made a lower high and appear to be rolling over again - almost as if it tested overhead resistance and failed before even reaching the overbought territory (if technical analysis were to actually work on such a study).
Breadth however has turned back up on a daily chart and the Dow Jones Industrials (right) bounced off of it's 38.2% fibonacci level (a good sign the high will be challenged ahead) so it would seem that Santa Claus is indeed on his way.
Clearly the next two weeks (Christmas/New Years) will be important and volume is will be low as fund Managers are on vacation. Do we break higher on low holiday volume, hold in a range or (heaven forbid) do we drift lower? Will Europe/Asia be buying overnight or no? The historic bias on low volume is definitely to the upside and algos will be set to auto pilot so barring any shocking geopolitical news, we should be just fine..
What traders and firms such as BTIG will do now is short names which have made lower highs on any move higher in strength. Generally at overhead 50d moving average, 200d moving average or past support, now turned resistance. I would imagine this will be the case, especially in oil & gas (or related) names.
I have been recommending that any long positions initiated, doing so with Calls rather than common shares in order to lessen any losses given the age of this five (almost six) year bull run. The Santa Claus rally may have begun, but that doesn't mean some names won't fail at a higher level. Best of luck-
Per BTIG:
Breakouts: BK, CVS, ETR, OMC, SPLS, WAG, WDC
Breakdowns: CAT, CCI, CNP, COF, CTXS, CVX, DOV, DTV, ECL, EXPD, FLR, GCI, GOOG, GOOGL, HOG, IBM, JEC, JOY, KO, MCD, MET, MLM, NFLX*, NUE, OKE, OXY, PBI, PM, PSX, QEP, RRC, T, VZ, WIN, WMB
*Full disclosure I do have some short positions however not in any of the names mentioned in this article with the exception of NFLX as recommended here.
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