Look to Strong Earnings Stocks for Relative Strength

There are again some red arrows around the world after more weak China manufacturing data. The biggest losses appear in Japan’s Nikkei, which is closed down nearly 2% and is now down around 10% for the year. Europe is off its session lows and only down small (some accelerated trends are broken but that region is not falling apart). Most of Asia is still closed for their holiday. S&P futures are flat to narrowly positive.

January is over and it didn’t go as most would have thought. After a thin, choppy tape no commitment for two weeks, the market started to correct and the accelerated trend line at SPX 1830ish broke. We quickly hit the intermediate-term trend support zone that we spent most of last week holding.

At least now we have a well-defined level to trade against. Use 1769-1772 as your “actionable spot” to trade against. A break and close below that level could get us move down to perhaps 1706 (200-day). If the 2014 pivot holds, then we shall see what type of bounce the market can muster as there is defined resistance at 1797-1799, then the line in the sand that the bears need to protect is SPX 1815ish.

In today’s Morning Call we will check the temperature of some key sectors.

The Nasdaq ETF (QQQ) had a nice rally to close the gap on Friday but met some resistance at Thursday’s high of $86.80 to fade off its highs into the close. The ETF has been hovering around its 50-day trying to hold the recent pivot low of $84.76. It needs to hold this level to avoid additional selling pressure. A break and close above last week’s pivot high of $86.80 could lead to a further bounce.

The Russell 2000 ETF (IWM) continued to run into resistance from its 50-day as the ETF has been trying to hold its 100-day moving average. Continue to use last week’s pivot low of $111 as the key support to watch. If it wants to get some upside traction, it needs to break above $113.65.

The Financial Sector ETF (XLF) is also trying to hold the 100-day moving average at around $21, but it still feels a bit heavy at these lower levels. The 8-day EMA has been putting some selling pressure on this ETF. It needs to break and close above this moving average at $21.30 to regain some power.

The Homebuilders ETF (XHB) rallied off its 200-day moving average to put in an engulfing bar and log a 1% gain on Friday, showing some relative strength. The ETF is trying to reclaim its 8- and 21-day EMAs. Some continuation above Friday’s high of $31.93 could help it break above the downtrend resistance that has been in place since early January for some more traction to the upside.

During corrective phases you do get a group of “go-to stocks” that go green first in a sea of red, and exhibit relative strength that traders can gravitate toward. We’ve started to see some of that and hope that continues. Also look toward the stocks that already reported good earnings.

Google (GOOG) had a nice gap and go on Friday after the company beat its earnings estimate to put in a new high at $1186.54. The stock did give active an entry at prior pivot highs of $1168 to get involved. Some digestion after a big move would be healthy.

Netflix (NFLX) also put in a new high at $412.40 after seeing another 1.15% gain. The stock has been acting well after its earnings, but it’s a bit extended from its 8- and 21-day EMAs. Some rest could be needed. Use Wednesday’s low of $398 as the upper support level. Below that we have the 8-day EMA curling up at $390ish. This stock went green during each gap down for cash flow.

Facebook (FB) was the one of the first to go green in a sea of red Friday and didn’t need a break after its earnings rally. The stock tacked on another 2.44% on Friday to put in a new high at $63.37. It did fade off the highs in the afternoon together with the market. Some consolidation above the earnings gap would be healthy. Active traders could use the intra-day support of $62.

Tesla (TSLA) has been rising since the powerful Red Dog Reversal on January 14th at $138ish. It also went green first in a sea of red Friday. Holding above $176ish could keep this moving. A trade above $186ish could put this back on the path to 2013 highs.

Microsoft (MSFT) stock has been acting better and looks like buyers come in when it’s down. Reports are that a new CEO has been chosen, and it is an internal candidate who is well-regarded. Holding above $37ish keeps it interesting. If it trades through $37.89 it could see more upside.

Twitter (TWTR) also showed some relative strength on Friday. It’s been acting better and trying to clear a descending channel. If it can hold $65ish perhaps it could get some momentum.

Qihoo 360 (QIHU) had a nice breakout above $96 last week in a sea of red and now it’s above $100 and seems like it could want to extend.

Wynn (WYNN) showed impressive relative strength on Friday as the casino stock rallied almost 8% to make a new high. It did close on highs showing some commitment. Look for potential upside follow-through above $219.91

On the weaker side:

Apple (AAPL) hit a low of $493.55 but did a small Red Dog Reversal Friday at $496.70 and closed above $500. It’s not a very interesting trade, but let’s see how this lower pivot develops. If it can trade and hold above $506.50ish, perhaps it could make an attempt to get in the earnings gap that starts at $515.

Amazon (AMZN) was down sharply on Friday as it missed earnings on Thursday and didn’t get a pass from Wall St. It did close on the dead lows so use $357.76 as your pivot for more downside or a possible RDR.

eBay (EBAY) gave back the gains from earnings day but is still in its long-term channel. It tried to go on the Icahn news but came back into the base. I guess if it holds above $52ish it could stay on the radar.

Boeing (BA) looks like it could have found a short-term bottom. Use $123ish to trade against if you are looking for a bounce.

Metals are still trying to stay in the game. Use GLD $119.46 as important support.

We are through the peak of earnings but still have a somewhat busy week. We have a jobs report this Friday so I’m sure there will be a lot to do. I would keep some size down and make sure to honor stops. Nobody truly knows if “that” was the correction, or do we see the 200-day in the coming weeks. We will measure the market and maneuver it as the action develops.

Disclosure: Scott Redler is long SPY, TWTR.

About Scott Redler 367 Articles

Scott Redler is the Chief Strategic Officer of T3 Live. He develops all trading strategies for the service and acts as the face of T3 Live. Mr. Redler focuses on thorough preparation and discipline as a trader.

Mr. Redler has been trading equities for more than 10 years and has more recently received widespread recognition from the financial community for his insightful, pragmatic approach. He began his career as a broker and venture capitalist where he was able to facilitate relationships that led him into trading. Beginning his trading career at Broadway Trading in 1999, Mr. Redler moved on with Marc Sperling to Sperling Enterprises, LLC after establishing himself as one of the best young traders in the firm. As a manager at Sperling Enterprises, continued to trade actively while working closely with all traders in the firm to dramatically increase performance.

Mr. Redler has participated in more than 30 triathlons and one IronMan, exhibiting a work ethic that also defines his trading. His vast knowledge and meticulous attention to detail has led to regular appearances on CNBC, Fox Business, Bloomberg, and he is a regular contributor to Minyanville and Forbes’ Intelligent Investing blog. He has been quoted in the Wall Street Journal and Investor's Business Daily, among other publications.

Scott received a B.B.A. in Marketing/Finance from the State University of New York at Albany, graduating Magna Cum Laude from Albany's School of Business.

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