The S&P 500 remains in a strong uptrend. While there is always a chance of a decline, right now the trend is up. July has seen the index, as well as the Dow Jones Industrial and Nasdaq 100, move into new-highs territory. These indexes track large companies. If you are wondering why some of your smaller company trades aren’t fairing as well, take a look at the Russel 200 and Wilshire 4500. Those indexes remain below prior highs.
That is a good reminder that IF you monitor the indexes, the indexes you monitor should be applicable to the stocks you trade. Monitoring the S&P 500 doesn’t do you a lot of good if you only trade small-cap oil and gas stocks, for example. If you are trading large stocks, or stocks that tend to be correlated with a major index, then the major indexes are more applicable.
Most of the time I don’t really monitor the indexes. I let my scanners and screeners tell me how the market is doing. If you use a high momentum stock screener, when there are few results you know it is not a great time to be trading. When you have lots of high momentum stocks you know the market is healthy because you have to dig through lots of strong stocks to find the best ones. By simply scanning every week or two you get a good feel for how the market is doing because you’ll see the number and quality of the trades on the list change.
If you are an index tracker, there is an old resistance/new support zone to watch on the S&P 500. It is between 2960 and 2900 (rounded). This is the old resistance area, and once broken there is often a tendency for the price to pullback to that area. On a legitimate breakout (we only know that in hindsight) I expect the price will pullback into the old resistance area about 50% of the time. For an example of what this looks like, check out the breakout and pullback to the old resistance area that occurred in late 2016.
If the S&P 500 drops below that old resistance zone, we could be in a larger decline.
Stocks to Watch For Breakouts
Here are some stocks on the radar right now, as they are in strong uptrends and near breakout levels to the upside.
LPL Financial Holdings (LPLA)
Recently ranging below $86. I like the sharp sell-off in late June prior to the strong July rally and upside breakout on July 18 (if it closes above $86). A sell-off or shakeout like that, below recent support, is quite common before a sharp advance. Looking for a near term target of about 8% above the $86 breakout level, putting a profit target at about $93. There may be more in it over the long-term, but I typically try to capture one major price wave and get out before a significant pullback. With a relatively tight stop loss, the reward-to-risk on the trade is 3:1 or greater. Can also use ATR Stops as an exit. Adjust inputs to suit your preference.
This stock has earnings in late July. Careful of that.
Dexcom Inc. (DXCM)
This stock has been in a big range for almost a year. There was a sharp rally in June, followed by the consolidation which is going on now. If the price can breakout above the consolidation, on high volume, could trigger enough buying to push the price to the top of the range. If it can break through that it could setup up a nice run to the upside. Target is between $196 and $200.
The consolidation provides an area to put a stop loss below. That’s about 10% of risk for 27% to 29% potential upside. Can also use ATR Stops as an exit (I set different inputs for every stock, depending on its volatility).
This stock has earnings scheduled for Aug 1. Careful of that.
The S&P 500 is still in an uptrend. There are a lot of strong stocks out there, so I am continuing to trade this as an uptrend, although I am not fully deployed. That means that recently I have not been able to fully utilize my capital. Right now I tend to have one to two swing trades on at a time. When conditions are amazing I have five or six on at one time. While there are lots of good setups, many of them don’t follow through. For example, on July 4 I mentioned Netflix in the Final Word. It was setting up nicely but failed to break higher and then gapped lower on July 18 following a poor earnings announcement. I see that happening a fair bit. And that is ok. As traders, we take what we get and can’t force it.
The stocks mentioned in this article may break higher, or the trades may never materialize. It is also possible they may break higher and then quickly fail and drop. That’s why we attempt to protect our downside with a stop loss.
Disclosure: No trades as of yet in these stocks, but may initiate if conditions stay favorable.
By Cory Mitchell, CMT