Contrarian Perspective – April 6, 2020

 

As with much of the western world, Hawaii has ground to a halt. Out jogging Friday lunchtime, taking photographs along the way, captured one soul gazing out from the Waikiki shoreline, a beach that is normally sardine packed, 365 days a year. Across the U.S., the economic situation is obvious and raises the point again, as we did with the toilet-roll theory a few weeks back, that if an investor were to sell through fear, they have probably already acted. Confidence in that assumption is provided by our indicator, flagging capitulation in March, the low being 76 degrees on March 18th, with indexes successfully testing their lows three sessions later, creating a small but conclusive bullish divergence.

 

 

Contragauge over the past week has strengthened further, ending Friday at an impressive 162.3 degrees, revealing a substantial improvement in health. However, until 180 degrees is cleared, and reclaimed (could be just a week away), the present rally is still viewed as a bear market move, certainly tradeable from the long-side, but stop-losses really need to be nimble.

Gauge readings last week: Monday 151.3, Tuesday 153.3, Wednesday 156.7, Thursday 157.7 and Friday 162.3 degrees.

 


Indexes

The NYSE Composite basically consolidated last week and that is a good thing – rising vertically is dangerous. Pausing, resisting the urge to drop, in the face of overwhelming negative news-flow, is another clue that the selling is done. On this index, 10,000 has importance, and therefore closing above that this week would further strengthen the outlook. As noted in recent reports, internals are improving, troops are grouping, advancing.

 

 

22,000 is the key level on the Dow Jones Industrials, trading needs to gain a foothold above that this week. As with the NYSE above, a consolidation last week following the recent snap-back off the March nadir. A pause is always welcome, enabling a more sustainable recovery, without the need for another re-test of the lows.

 


ETFs

A key sector, the iShares Semiconductor ETF, maintains a rising outperformance channel that started almost one year ago, another small clue that the bug induced weakness may not linger. To instill further confidence, the price really needs to get back above $220, a move to safety, as that would void a yearlong head-and-shoulders top scenario.

The SOXX P&F chart also shows promise. Bullish Triangle nearing activation, a continuation pattern of the recovery off the March low, developing despite a news-flow headwind.

 

 

The United States Oil ETF rallied into the end of last week, ending a small down channel that dominated much of March. The MACD has kicked up and the 14-day RSI exhibits a bullish divergence. If the rally can extend this week, and go onto clear the 50-day exponential moving average at $8, it should add additional confidence to the overall market. Near-term volatility likely given talk of oil production cuts.

The long-term chart shows Crude Oil falling recently into a support band drawn across from the 1980’s and 1990’s. Interestingly, the recent break of the 2016 low overshot by around 10% – the 2016 bottom was itself a 10% overshoot of the low from 2009, after which the price sharply recovered.

 


Contrarian Stocks

Obviously, Carnival is one of the stocks at the epicenter of the crisis. Once they start to rally it would be another clue that the storm has passed (as far as the market is concerned). The cruise operator has made a new all-time low, breaching the low from 1994, but there has been no downside follow-through, instead the price appears to be stabilizing. $10 is important – rallying and holding above that would be constructive. Stock specific news-flow is bleak.

The six-month chart zooms in on that $10 level. Volume is interesting – it may have climaxed with the record low last Thursday. Momentum shows a bullish divergence. However, it is still too early to jump in, rather wait for decent upside confirmation, above $20.

 

 

Macy’s hit a new all-time low last week, announcing furloughed workers, needless to say, the industry is in tatters. However, note the price action in 2008, a brief breach of the previous record low from the early 1990s, followed by sharp recovery. That could well repeat here, short interest is high, and a string of closes back above the 2008 low should be enough to spur short-covering.

The six-month chart shows recent action in greater detail, of interest if that massive volume on Friday, an up session. This chart shows the $7.50 to be of value – clearing that would signal a recovery is underway.

 

 

Tapestry is attempting to find a bottom to the underside of its low from 2009 ($11.41). As with the above stocks, climbing back above that shelf would spark short-covering.

The TPR short-term chart shows a developing base attempt, backed by a bullish momentum divergence on the 14-day RSI, revealing selling pressure has tired. However, bearish is the record relative ratio low last week – that trend needs to reverse. The price needs to get back above $15 and hold – in the meantime longs are speculative.

 

 

Hawaiian Airlines collapsed down to $10, a level from 2004 that served resistance for a decade. That level is now support and is currently being tested. Should it fail then a range between $2.50 and $10 would follow. However, for now, the potential for $10 to provide a springboard exists.

The six-month candle chart shows a small base attempt underway over recent weeks. Volume over the past several sessions has been declining – whereas the first half of March saw volume increasing as the price worked lower. The bad news is priced in with the airline pretty much grounded, even mentioned nationally in Forbes, now a case of watching for the recovery. The chart shows $15 to be key, clearing that would confirm a bottom across the long-term $10 shelf.

 

 

Maxim Integrated Products broke the floor of a two-year range with the sell-off but has since recovered to the confines of a $20 range. A shake-out occurred across the floor, a 3SR, with short-covering now sparked. Market outperformance also expected given the reversal from the line ratio’s three-year floor.

The MXIM P&F chart also displays a 3SR, with a down column last week not breaching a Bullish Trendline drawn up from the three-year low. A 3 box reversal back up this week would be a cue to consider longs; stop-loss just under the low.

 

 

Novagold Resources completed a healthy correction last month, with the price now recovering, ready to embark on a new up-leg. Volume activity is bullish, momentum is well positioned at neutral, and the stock is outperforming.

The NG P&F relative ratio, against the S&P 500, printed a 3 box reversal up on Friday, now straddling the ceiling of a seven year range. A further couple of box fills from here would confirm the range to be a base, opening up outperformance.