Uncertainty lingers over the market as 2015 draws to a close, with strong U.S. growth offset by terrorist threats, weaker economic conditions overseas and the potential for a Fed rate hike.
The good news for traders is that even with these macroeconomic factors dominating the headlines, individual stock correlation has been trending lower throughout the fall — creating opportunities to capitalize on ideas with less of an impact from index movements.
Here, we highlight four stocks and three ETFs with the potential to deliver performance independent of the broader market due to their interesting chart formations.
We’ll also take a look at what the stock charts are saying about the technical health of the major indices right now.
Stock Charts: Vanguard Total Stock Market ETF (VTI)
VTI, 5-Year Chart
The top chart to monitor right now isn’t necessarily a trade in itself, but rather a guide for the market as a whole.
The Vanguard Total Stock Market ETF (VTI) represents the entire U.S. stock market (as gauged by the Wilshire 5000 Index), with a proportional representation of large-, small- and mid-cap stocks. As such, it provides a better guide to the health of the U.S. market than major indices such as the S&P 500.
Currently, the VTI chart is flashing a warning sign to anyone who is tempted to read too much into October’s stock market rally. A five-year chart of the ETF shows that the September downturn marked a significant break of a long-term trendline, but the early November rebound stalled after briefly surmounting that line.
The more recent weakness in U.S. equities has also created a pattern of lower highs — an issue that becomes more ominous at a time in which the 50-day moving average is trading under the 200-day.
VT, 5-Year Chart
A similar pattern has unfolded in Vanguard Total World Stock ETF (VT), which tracks the entire global market spectrum. The notable exception here is that VT failed prior to surmounting its former trendline.
Together, these stock charts argue for caution. Traders should take great care initiating new long positions until (and unless) these two ETFs can exceed their previous trendlines and hold on to the gains.
Stock Charts: CurrencyShares Euro Trust (FXE)
FXE, 2-Year Chart
With the U.S. dollar having rebounded so strongly in the past few weeks, many foreign currency ETFs are hovering just above support. The growing consensus that the U.S. Federal Reserve will raise interest rates before the end of the year has provided a renewed boost to the U.S. dollar, bringing other major currencies near their lows for the year.
While currency ETFs aren’t typically thought of as being vehicles for big short-term movements, CurrencyShares Euro Trust ETF (FXE) showed plenty of potential for volatility earlier this year.
Keep an eye on this one not just to trade a potential breakdown under its March low, but also as an indicator of broader market conditions and the status of investor risk appetites.
Traders can also watch ETFs linked to the Japanese yen, Canadian dollar and Australian dollar. None of these trade as actively as FXE, but if any of them break down, it raises the odds that FXE will indeed make another move to the downside.
Stock Charts: Market Vectors Gold Miners ETF (GDX)
GDX, 2-Year Chart
Gold and gold stocks have been unable to get out of their own way for over three years now, and that looks unlikely to change any time soon. The SPDR Gold Trust (GLD) has fallen below its prior trough for this year, reaching its lowest level since early 2010.
Notably, Market Vectors Gold Miners ETF (GDX) continues to trade above its 2015 low, indicating that the ETF will need to play catch-up. If it does follow GLD below prior support, GDX will be plumbing all-time depths with no prior volume to prop it up.
This scenario appears to be the most likely outcome of the gold-mining ETF’s current chart pattern based on its history in recent years. GDX tested support in 2013, 2014 and once again earlier this year, and it each case it broke down and experienced considerable losses. With inflation, global growth and overall commodity prices all declining and the U.S. dollar in rally mode, there appears to be little on the horizon to put a bid under GDX and gold stocks in general.
Traders can also find similar patterns in the stock charts of Market Vectors Junior Gold Miners ETF (GDXJ) and Global X Silver Miners ETF (SIL).
Stock Charts: UnitedHealth Group (UNH)
UNH, 1-Year Chart
With so much uncertainty hanging over the market right now, it pays to have a few names on the watch list that could prosper in both up or down markets. The benefits provider UnitedHealth Group (UNH), which has been trading in a defined channel since February, is one such stock.
UNH has multiple hits in the $125 to $126.61 range on the upside, and it has support at $110 (minus the bad print for August shown in the accompanying chart).
The stock looks vulnerable to potential weakness here, with both lower highs and its 50-day moving average about to move under its 200-day. UNH hasn’t exactly been a fast mover (as demonstrated by its beta of 0.6), but its volatility has picked up in recent months — indicating that it could provide a trading opportunity if it breaks one of its key technical levels.
Stock Charts: Kroger (KR)
KR, 1-Year Chart
Like UNH, Kroger (KR) stock is trading in a defined range bounded by $39.43 on the upside and approximately $34 on the downside (again, minus the bad prints).
Also like UNH, the chart is showing a higher potential for downside risk due to a series of lower highs and a 200-day moving average that has begun to roll over.
With a valuation that looks to be expensive for a supermarket stock (19 times trailing earnings, 17 times forward), KR shares could be setting up for underperformance.
Stock Charts: Dow Chemical (DOW)
DOW, 3-Year Chart
Dow Chemical (DOW) is another unlikely stock to monitor for a potential trading opportunity, but the chart shows potential upside in the name.
The recent rally in Dow stock has brought it back up near prior resistance at $53.80, above which no shares have traded since 2004.
Dow features a reasonable valuation, a 3.6% yield and rising earnings estimates for 2015, so the fundamental basis is in place for a breakout in this stalwart chemical producer.
Stock Charts: Avnet (AVT)
AVT, 3-Year Chart
Avnet (AVT) is a U.S.-based electronics wholesaler and IT services company with a $6 billion market cap. The stock has printed a strong chart and is closing in on resistance at $47.27, above which there is no prior volume history.
Avnet is a slow grower, but it’s reasonably priced at less than nine times forward earnings — the type of valuation that can support a breakout above its previous highs.
As of this writing, Daniel Putnam did not hold any of the aforementioned stock.
