If you are reading this post you are likely of the people like myself that follows the market on a daily basis. If this is the case, you are also likely aware that we have had a sizeable pullback the past week or two. During these time periods it is prudent to do a couple of things (if you are anything like myself). I will list them below, in no particular order:
1. Take down risk when the time is appropriate (depends on your style).
2. Be careful not to try and catch falling knives, wait for the strong support or a potent reversal before putting risk back on.
3. VERY IMPORTANT: Watch and look for stocks that are showing relative strength that could consequently be the next market leaders.
Number three is what I am going to elaborate on today by giving a couple thoughts and ideas from my own watchlist.
The home builders as we are all aware have been in a downtrend for about three months now while the SP500 has continued it’s trek higher. Yesterday there was a subtle character change that I believe is worth nothing. Yesterday $SPX tanked 1+% (large relative to most of the year) and the homebuilder’s ETF (XHB) actually managed to close up .14%, not to mention some of it’s holdings were up 5+% yesterday. As a result of the relative strength the homebuilders showed yesterdaythey have been put in a great position to potentially be the next leaders of the next leg higher (when it comes). What a trader like myself would look for now in the homebuilders is for them to show commitment at higher prices, AKA do they hold higher and form ‘high and tight’ bull flags? If this is the case then we likely have the next market leaders on our hands and when the indices get their footing back your main focus should be on them (if it is the case that they are the next leaders).
Below is the Homebulders ETF (XHB) with some notes, thoughts and lines on it –
The follownig are two individual homebuilder companies that on top of the already impressive strength of the homebuilder ETF showed, these particular stocks have some of the best patterns and showed the most strength yesterday inside the group. As a result, they need to be on watch in the coming days/weeks.
The Agricultural stocks is also a group of stocks similar to the home builders that have been beaten down relentlessly all year and are beginning to show potential signs of life and subtle character changes.
The following is a chart of the Agg ETF (MOO) with some thoughts and lines on it –
Finally, here are a handful of individual agricultural related names that have showed notable strength and/or have nice (developing patterns).
In closing I would like to say, these are only ideas and thoughts from my watchlist. In no way are these patterns mature enough to be actionable yet. Give them time to see if this THESIS is confirmed before acting upon a THESIS. It is always a good idea to have a thesis, but the thesis needs to be confirmed with price and that is the step we are at now. I will say however, I see more potential in homebuilders than the Aggs, they have more appealing patterns.