Trend Following Trade Ideas For October 2018 (Part 4):
When it rains it pours, right? Because it’s sure been a bearish start to October. And all of a sudden, the long-term uptrend that’s been underpinning this market has really started to bend. So is this the end?
Well, after raising cash the last few weeks, I’m watching the action closely and being careful about picking my spots. So in this week’s edition of trend following stock picks, let’s recap where the market might be likely to go next, and what stock charts I’m watching.
So before getting into specific stock charts, let’s talk about the big picture market action. Because after a smooth summer uptrend, things have suddenly taken a turn for the volatile. And we’re not even halfway through earnings season!
October 2018 Market Trend Analysis:
It’s hard to believe, but I’ve been writing these weekend trend following updates for about 2 years now. And for the vast majority of that time, it’s been easy to find long stock ideas as the market has continued to coast along.
But all of a sudden, we’re in a very different market environment, not unlike February 2018 when we also had a violent correction and pullback. And even though the underlying macro data still looks strong to me, sentiment and price trends may be shifting.
So I’m not willing to call this bull market dead; but, I’m happy to have a large cash position and wait patiently for a little more clarity on the next big directional move, and better risk/reward.
To help you get a feel for this, take a look at the weekly chart of the S&P-500:
Now even though the long-term uptrend in still holding up for now, bulls will want to see a bounce soon. Otherwise, price risks rolling over again and, in that case we may even see a test of the February lows (about 15% below current prices). Yikes!
The other thing that has me a little concerned for stock bulls is the lack of global equity market support. To be sure, emerging markets have been lagging all year.
With European stocks breaking down last week, it feels like US stocks might be more likely to get dragged down in the crossfire.
For example, here’s the chart of the All-Country World Index (ACWI), which might be sending a top-down warning message to traders around the globe:
So looking ahead, I’ll be watching this chart closely for a new weekly closing low. While upside is always a possibility, right now I think the odds could favour another leg down.
And that’s why after years of being 100% invested, I’ve raised cash and am watching downside risk carefully. To be clear though…
I’m not quite ready to short US stocks until we see a leg lower. Although I must admit, European markets do look a little more tempting for anyone wanting to make a bear raid.
As a proxy for European indexes, here’s the VGK ETF weekly chart to show you what I mean:
On the other hand, I also want to have a list of potential breakouts to keep on watch, depending which direction the market ends up going. By being prepared, we can be ready to pounce.
Plus, with earnings season underway, there are also individual stand-out names (though as we saw with NFLX this week, even strong results can be tempered by a soft market!)
You may want to double-check earnings dates for the ideas below. Because how you trade through earnings (based on your personal preferences), can have a big impact on your trading plan.
Okay, with that caveat out of the way, let’s move onto some specific stock charts of interest.
October 2018 Trend Following Charts To Watch:
Now with the market acting a little soft overall, my expectations for upside follow-through this week are a little more tepid. But nonetheless, it pays to be ready with potential ideas. I also think there are some ETFs which might be worth considering if you want to tap other asset classes.
So to kick things off today…
Let’s start with the chart of CME Group (CME), which continues to hold up well. Now to be fair, I did share this chart a few weeks ago when I picked up shares for myself. But it’s one of the few names that’s been able to hold near highs, so I think it’s worth mentioning again.
In contrast to the rest of the market, CME is looking much more orderly so I’m hoping it’ll be able to provide another leg higher if we see momentum come back into the market.
On a similar note, FirstBankCorp (FBP) is another chart that’s holding up quite well, despite all the market volatility:
At the risk of over-simplifying, I really like to keep an eye on these stocks showing relative strength. By focusing on the strongest names, even in a weak tape, I can hopefully reduce the risk of a big loss.
Now another area of the market that has my eye is the oil complex. Because even though energy stocks are stuck in a trading range, crude oil is starting to look interesting after pulling back into support.
Along those lines, I’m quite interested in the chart of Range Resources (RRC). Don’t you think it looks like it could be carving out a bottom?
Now personally, I do prefer to buy 52-week highs in strong uptrends. But we also have to accept what the market makes available to us on any given trading day.
So given the lack of upside breakouts, I think watching for new potential trend changes is a viable approach. And that’s what I’m hoping to achieve here with this potential bottom.
Alright, moving on…
Another approach you might consider in times of market turbulence is to step back from individual stocks and instead look at ETFs. That’s because these funds can help insulate you from stock-specific issues and reduce the volatility a bit (especially during earning season).
And perhaps not surprisingly, the best looking sector to me right now is the defensive utilities (XLU). Take a look at how the chart is knocking on the door of new highs…
To be totally honest, I thought dividend-heavy utilities might face some more scrutiny as bond yields appear to be rising (causing the two asset classes to compete for income investors). But maybe a greater move towards safety by investors is enough to bid this up.
The other ETF I want to point out to you is the Invesco US Dollar ETF. (UUP) Because again, with a flight to safety looking like a reasonable narrative, the might dollar should stand to benefit. And this is an easy way for individual ETF investors to participate:
As I explained to trend letter subscribers earlier this week, the dollar looks to be one of the best assets out there right now as investors reduce rest-of-world exposure and bringing their funds back home. So I think this is worth some consideration.
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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