A checklist for signs of a market recovery
Focus: Airlines, AMR, NWA, ALK, ICUI, NUVA, EAC, CHK, NTE
By Michael Ashbaugh, MarketWatch
Last update: 1:24 p.m. EDT Oct. 21, 2008
Editor's Note: This is a free edition of The Technical Indicator, a daily MarketWatch subscription service. To get this column, including at least eight technical stock picks, click here.
CINCINNATI (MarketWatch) -- In the wake of the 2008 crash, the U.S. markets have rallied respectably from the lows.
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Several, if not all, of the events below need to occur:
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An off-the-charts strong-volume rally that's not driven by government intervention. Monday's 400-point Dow spike came on the lightest volume in 18 sessions.
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The emergence of sector leadership. Along with the financials, the airlines have acted well, but these groups won't do it. Ultimately, the financials will be dead money for some time -- several years -- and they've been propped up through almost daily government intervention.
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At least one, and preferably two, 20-to-1 up days to neutralize the October breakdown. Over the past 11 sessions, the U.S. markets have suffered three 20-to-1 down days, the most recent occurring last Thursday.
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A volatility drop to digest the market crash. For instance, a series of 100-point Dow moves -- in either direction -- uninterrupted by these 800-point intraday whipsaws.
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From a sentiment standpoint, analysts need to stop declaring how great this buying opportunity is.
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A decisive break atop resistance.
So that's the technical wish list.
And when considering the final point -- a break atop resistance -- the following areas stand out:
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Dow resistance at 9,387, matching last week's closing peak.
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Nasdaq resistance initially at 1,844, matching last week's closing high, followed by the 1,900 area.
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S&P resistance spanning from 1,000 to 1,010 -- last week's closing high held at 1,003.
From a technical standpoint, anything transpiring under these levels is little more than market noise.
And as these areas are approached, the risk of another sharp downturn increases.
Outside the technicals
Among the daunting aspects of the 2008 crash is the contention that this downturn is different.
And even from recent history, we know how the "it's different this time" argument turns out.
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During the Internet bubble, things were different -- why bother with earnings?
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Then came the housing bubble, and the supposed emergence of a New Housing Economy. Some analysts even declared your mortgage payment would eventually comprise 100% of your income, and consumers would finance day-to-day purchases through their homes.
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Next up, the crude-oil bubble was also different. Analysts screamed from the rooftops of impending $200-a-barrel prices, and the few dissenting voices, suggesting $85 a barrel is more appropriate, were viewed askance. Today, oil trades around $72 a barrel -- less than half the $147 peak.
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And the emerging-markets bubble was related to the commodity boom, with these nascent economies irrefutably dislodging themselves from U.S. influence. Also wrong.
Fast forward to today, and the 2008 market crash is also reputedly different. Highly attractive valuations, and historically oversold technical conditions, purportedly don't matter, because the U.S. economy is headed for a prolonged recession, if not worse.
Yet despite this obviously dangerous "it's different" mindset, the U.S. markets are doing things they haven't done in 75 years, making it difficult to completely shrug off the ultra-bear point of view.
Maybe it always feels this way in real time.
Fortunately, technical analysis is designed for those of us not smart enough to sort things out. Just track the price points.
And when evaluating the technicals, the U.S. markets' breakdown remains in play until proven otherwise.
Again, a break atop the resistance detailed previously -- S&P 1,010 and so on -- would mark a first step toward reconsidering a bear-market rally.
Yet until that first step is taken, another sharp downdraft remains a risk, and capital preservation remains the principal objective. This isn't the time to chase the next 4% run.
Tuesday's watch list
The charts below highlight names well positioned technically. These are intended as radar-screen names -- sectors or stocks positioned to move in the near term. For the original comments on the stocks below, check out The Technical Indicator Library.
Airlines a surprising bright spot amid the carnage
For a market lacking sector leadership, the airlines remain a rare bright spot: Northwest Airlines (NWA
northwest airls corp com
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NWA) , AMR Corp. (AMR
AMR Corporation
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AMR) and Alaska Air Group (ALK
Alaska Air Group, Inc
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ALK) .
This group outperformed coming off the July low, and then got crushed along with the broad markets.
But again, this sector has two things working for it.
First, the crude spike to $147 a barrel forced structural changes to the industry: capacity cutbacks and a-la-carte fees.
Second, oil prices have since been cut in half, plunging to $72 a barrel.
This combination has the group better positioned than it's been in some time, and the charts above show it. At the October lows, just 2% of stocks were positioned atop their 200-day moving average, and each name above cleared its 200-day last week.
Company Symbol Mon Close Support Resistance
ICU Medical ICUI $34.53 $32.50 New High
ICU Medical (ICUI
ICU Medical Inc
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ICUI) is a small-cap maker of medical devices.
As the chart illustrates, it's rallied sharply from the October lows, spiking to eight-month highs this week.
Though extended on a near-term basis, and due to consolidate, a pullback to first support, around $32.50, would mark an attractive entry.
Company Symbol Mon Close Support Resistance
NuVasive Inc. NUVA $46.58 $43.00 $49.50
In a normal market, NuVasive (NUVA
nuvasive inc com
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NUVA) would never make the cut. It wouldn't even come close.
But in today's market, this is a relatively strong chart.
That's partly because it's still positioned atop its 200-day moving average, substantially outpacing the broad markets.
Moreover, it's attempted two strong-volume rallies since July, while the pullbacks have come on lighter volume, hurt by a buyers' strike.
Its near-term outlook should remain higher barring a close back under its 200-day moving average.
Company Symbol Mon Close Support Resistance
Encore Acquisition EAC $30.77 $28.50 $32.75
Encore Acquisition (EAC
encore acquisition co com
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EAC) is a mid-cap oil and natural-gas developer.
Very simply, it's spiked from the lows on strong volume, notching two-week highs.
At current levels, it holds well under the next notable resistance -- its breakdown point, around $40 -- making the risk/reward favorable with a tight stop, around $28.50.
Company Symbol Mon Close Support Resistance
Chesapeake Energy CHK $23.32 $21.50 $24.00
Chesapeake Energy (CHK
Chesapeake Energy Corporation
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CHK) is a large-cap oil and gas name.
As the chart illustrates, it's been absolutely crushed, hurt partly by the CEO's margin call.
But a sharp volume spike can kill a trend -- in this case, a downtrend -- and Monday's two-week closing high improves the chances of a near-term bounce that could be substantial.
At current levels, Chesapeake holds 33% under the September low.
Company Symbol Mon Close Support Resistance
Nam Tai Electronics NTE $7.91 $7.20 $8.30
Profiled last week, Nam Tai Electronics (NTE
nam tai electrs inc com par $0.02
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NTE) remains well positioned.
After gapping higher earlier this month, it has sustained its gains, pulling in to a better entry near its trendline, and the top of the gap.
Its near-term outlook should remain higher barring a close under the top of the gap. End of Story |
