Wednesday's market decline looked worse than it was. Thursday's decline drew more attention. The headlines were dire, but I heard on the market summary that the homebuilders had strong up days. D.R. Horton (DHI) had a 5.7% up day on a strong reversal, Lennar (LEN) was up 5.1%, and KB Home (KBH) was up 5.2%. Not every trader is clicking the Sell button when you've got groups of stocks gaining 5-plus percent.
So what fell? I had been keeping an eye on Applied Materials (AMAT). That closed below the up-trending channel it had formed, as well as its 50-day moving average. Intel (INTC) set a 3-1/2 month low. Xilinx (XLNX) gapped down off the 11-year highs it set a couple weeks ago. In general, most semiconductor sector stocks.
Since I don't see near-universal selling, I do not think further downside is baked in Friday's pie. If the market opens even moderately positive, I might look at a small, bullish trade on a sector that suddenly sported good news and strong reversals – the homebuilders. If the market opens in a negative mood, I would think in terms of a small speculative bearish trade in a weak sector – the semi's.
If you look at a daily chart of the Homebuilders ETF (XHB), with the Stochastics visible, you'll see that nearly every time the %K and %D lines fell below 20, then the %K rebounded above 20, XHB usually followed with at least a couple of points gain over the next few weeks. With XHB in the 20's, a couple of points is around 10%.
Focusing in on the recent month, XHB staged a reversal on June 25th, logging well above-average volume on a gap-up that took it up 8.5% within 12 trading days.
Now once again XHB has staged a strong reversal pattern on well above-average volume. If it follows through like several other recent situations and stages a similar 10% gain, notice that it will take XHB to the mid-June highs around 31.8.
Now what if the market opens weakly on Friday? If more negative news comes out, and it appears the overall market will produce more downside, a bearish trade on a weak sector may make more sense.
SMH, the Semiconductor sector ETF, gapped down sharply on Thursday and had a solid down day on above-average volume:
SMH could easily fall the 3.7% to get to the June lows and round-number level of 36. The next target would be the April lows, slightly below 34.
In today's Seasonal Forecaster newsletter, I cover a ‘quick hit' limited-risk speculative trade for each of these scenarios, targeting a specific double-digit profit within 2 weeks in each case.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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