Free Trend Following Trade Ideas For May 2018 (Part 4):
To all my American readers, I hope you enjoy your Memorial Day long weekend. It’s nice to have an extra day to unplug, reflect and spend quality time with people you care about. I hope you can make the most of it.
After all, the market isn’t offering much of a compelling alternative! Because heading into the end of May, we had another bumpy week as bulls and bears tried to hash it out. And at this point, the winner is still yet to be decided. So…
In this weekend’s market update I’m eager to give you a summary of the big picture action, before sharing some specific stock charts to watch for potential opportunity… if buyers do retake control of the tape.
With another volatile trading week behind us and a shortened week for US markets coming up, it feels like the stakes are high. So let’s recap where we left off Friday and some setups for the week ahead.
2019 Memorial Day Weekend – Stock Market Update:
Emerging Markets Under Pressure:
Whether you chalk it up to trade war headlines, USD strength or just the random noise of the markets, emerging markets are back near their recent lows. And unfortunately, this technical damage is really starting to add up. While it could be a good time for long-term index investors to dollar-cost average, as a trend-follower it’s hard for me to get excited.
Here’s the weekly chart of the EEM ETF, where you can see prices have continued to come under pressure:
While the pace of decline is slowing and it’s possible EEM will soon come into some support, it’s sure not showing any signs of momentum just yet. And as you’d expect, Chinese shares are getting hit particularly hard, as shown via MCHI:
Logically, this drop appears to align with the latest round of trade tariffs. So if that’s the case, then it might imply momentum has left this part of the market, at least until we get a change in the trade narrative.
But in any case, that’s a tough game to play because of how quickly and unpredictably things can change. And it’s not just emerging markets.
Global Stocks Also In a Rut:
One of the themes I’ve been mentioning the past few weeks, is the tired and sloppy action in stocks, globally. Because unlike in 2017 when stocks around the world were rallying higher, the last 18 months have seen a lot of back-and-forth action. This makes it hard to get excited about momentum.
Here’s the ACWI weekly chart so you can see what I mean:
Clearly, the ETF is back in this big messy zone and it hasn’t been quick to bounce. So bulls might need to be patient. Plus, US stocks are also flopping around here too. $280 seems to be the level to watch on SPY:
Outside of equities though, there are other US assets showing some interesting signs of trend. But that might be a warning sign to bulls.
Treasury Bonds and USD Continue to Gain:
Obviously the stock market doesn’t exist in a vacuum. Capital flows to where it’s treated best. And this includes other asset classes like fixed income (bonds), and even currencies.
In this case, both US government bonds and the dollar are at 52-week highs as stocks tread water going sideways. First, here’s the TLT ETF as a proxy for bonds:
In late 2018 it looked like TLT was going to break down. But the rally since then has been phenomenal. And now, I think there’s a reasonable case to be made for a multi-year bottoming pattern. While it can be hard to wrap your head around rates going down, right now that seems to be what the price action is implying.
At the same time, US Dollars also appear to be in high demand, as shown by the slow and steady uptrend in the USD Index below:
For US multinationals, currency fluctuations can have a material impact on earnings. And so if this trend keeps bumping along, some EPS numbers may start to come under pressure.
Now all that said, there are still a few pockets of momentum in the current market. But it’s slim picking and I’m keeping new positions smaller than usual with a clear plan for when to sell. While it’s tempting to jump in and buy the dip, a little prudence goes a long way.
But with that disclaimer out of the way, here are a few of the charts I’ll be watching Tuesday morning.
Trade Ideas For Memorial Day Weekend 2019:
As a trend follower, it’s not always easy to find trade ideas when the markets are going sideways. While there are a few standout stocks here and there, in my experience the breakouts tend to fizzle out a little faster when the whole market is slumping.
So with that, I first want to share a couple of dip-buying ideas because this strategy can sometimes work well in choppy rangebound markets like we’re seeing now. Personally I keep this a smaller percentage of my trading though, because it does require you to be quick and nimble when managing the trade.
Dip-Buying Trade Ideas For This Week:
First up then, check out the chart of Xperi Corp (XPER). The stock has really taken a beating, but it’s started to stabilize a little bit, and the short-term RSI indicates it’s quite oversold:
With any luck, XPER can make a quick bounce here. But as is the case with these bottom-picking ideas, I wouldn’t want to stick around long because the trend right now is certainly lower.
Along the same lines, you might also be interested in Entegris Inc (ENTG), which is shown below. Keep in mind while I do most of my trend following on weekly charts, I like to the trade dip buys on the daily timeframe so I can get in and out faster.
One of the things I like here is how ENTG is also coming into some potential support. Perhaps previous buyers will show up and add to their positions to help sustain a short-term bounce.
In any case, having a few different strategies like dip-buying and trend following working together can also help diversify your returns. If you’re curious to learn more about how to get started dip-buying yourself this article is a great place to begin.
Moving on, let’s turn our attention to some momentum breakouts!
Trend Following Breakouts To Watch This Week:
Now even though the market’s slumping a bit, there are still a few small pockets of strength. But I do want to reiterate, my expectations aren’t so great for these. While I want to have some exposure in case the market does bounce vigorously, it’s currently showing no signs of immediate movement
So consider how you balance your fear of losses and drawdown vs. your fear of missing out on upside! Careful position sizing and a clear exit strategy can help.
Now the first leader I’m watching going into the week is Copart (CPRT), which has just broken out in a big way. Here’s the weekly view:
Impressive, right? Now I appreciate it might feel like chasing here, so you could wait for a pullback before entering to improve your risk/reward. But if the broad market takes off I’d be comfortable buying a high.
A stock with a somewhat similar look is Ollie’s Bargain Outlet Holdings (OLLI). I’ve mentioned this stock before on the blog but it continues to recover to all-time highs after it’s violent December drop:
Even though OLLI isn’t the fastest mover, it’s in blue sky territory and appears to be trending up. And in the current market environment, that’s saying a lot! Okay…
Progressive Corp (PGR) is another stock that managed to finish the week on a strong note. Below you can see the chart poking to new all-time highs with an uptrend still intact:
The fact there are so few charts like this right now helps reinforce the relative strength shown above. And with no overhead supply, I’m cautiously optimistic this ticker could keep ticking higher.
Now, one of the hurdles I’m up against when trying to find ideas right now is the few stocks at 52-week highs are really quite extended. This makes for poor risk/reward entries, and it can also be psychologically difficult to chase price like that.
Another idea you can try in these cases is to zoom into 50-day highs. And one such stock that has my eye right now is Fanhua Inc (FANH). Unlike many of the other strong stocks out there right now, it’s coming out of a long sideways consolidation:
To be fair, there is some overhead supply and this one isn’t out of the woods yet. But the chart is an appealing one and may be worth keeping an eye on.
Now before we finish…
I also want to share my existing trend-following trading positions for US-listed stocks with you. So here they are in a FinViz watch list! Take a look if you’re still itching for more potential trade ideas.
They might be of interest because everything is laid out in charts so you can easily see what’s what.
Because actually, there have also been a lot of great trends this week so I’m quite bullish on many of my existing holdings.
I hope seeing my current stock portfolio helps give you more context on how I’m seeing the current market, AND, where I’m placing my bets.
While I’ve obviously shown you some of my favourite picks for the week ahead, I can also help teach you how to fish for your own trading ideas!
Just keep reading.
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