The first quarter of 2016 has had more swings than a playground, resulting in a host of awfully interesting stock charts.
We saw risk assets beeline out of the gate on Jan. 4 as a fairly direct result of the mid-December rate hike by the Federal Reserve. After reaching historic oversold readings, stocks began to bounce in the second half of January, and after a retest of those lows in the first part of February, it was off to the races higher.
While through the lens of technical analysis this V-shaped reversal higher was a natural reaction to severe oversold readings, the “bounce” was further fueled by a) record corporate stock buyback programs and b) more bazookas (monetary policy easing) on the part of major global central banks.
While I am not here to recap price action, we do need a little perspective to understand where we are, how we got here — and what the path of least resistance looks like for stocks as we head toward the second quarter. Many U.S. and European indices fell more than 20% from their 2015 peaks into the January/February lows amid lower corporate bottom lines and slower economic data. Furthermore, there are a plethora of concerning stock charts, many of which feature companies reaching major points of resistance.
This all indicates that the lows for stocks in 2016 have yet to come, and I remain in a “sell the rallies” mode.
Each of the following 10 stocks either will be sensitive to any further downturn in the broader stock market and/or has reached a major technical area of resistance in recent weeks. Thus, each of these stock charts should be watched closely, and they could provide great trading opportunities should stocks begin to roll over again in the second quarter.
Stock Charts to Watch: Bank of America Corp (BAC)
Click to Enlarge Banking stocks such as Bank of America Corp (NYSE:BAC) are heavily weighted in many major stock indices and are sensitive to the economic cycles and interest rates.
Many of the smartest hedge fund traders I know spend a great deal of time following the major banking stocks, because if they rally, then the broader stock market will find it difficult to fall apart. Likewise, persistent selling pressure on banking stocks tends to act as a weight on stock indices.
Bank of America’s sharp rally off the February lows now has BAC quickly approaching a major horizontal area of resistance around the $14-$15 area. Much of the direction in this stock will have to do with the price action in the dollar and interest rates.
While some further upside in the stock on a possible more hawkish tone by the Fed is possible, ultimately the path of least resistance for interest rates is unlikely to be higher — and that could get BAC stock to stall and drop lower again around the $14-$15 area.
Stock Charts to Watch: FedEx Corporation (FDX)
Click to Enlarge Just like the banks, transportation stocks such as FedEx Corporation (NYSE:FDX) are an important telltale for the broader stock market.
Transportation stocks as a whole showed significant underperformance through much of 2015 versus the broader stock market, and thus waved very noticeable warning signs that came true in August 2015 and again in the January/February period this year.
For example, while FDX stock fell about 35% from its summer 2015 highs into its January 2016 lows and has since rallied back 35% in recent weeks, the broader transportation complex still looks to have another down-leg left in it. FedEx in the near- to intermediate-term is very overbought as indicated by a host of momentum oscillators such as the MACD and also has rallied back into horizontal resistance around the $165 area, as represented by the black line.
If the broader market’s V-shaped reversal off the February lows is getting long in the tooth (which I believe it is), then FDX stock will likely struggle at the current juncture.
Stock Charts to Watch: ConocoPhillips (COP)
Click to Enlarge One of the bigger stories in the first quarter — and a major contributing factor in the reflex rally for stocks — was the lift in the price of oil.
Oil-related stocks such as exploration and production company ConocoPhillips (NYSE:COP) rallied sharply in kind with oil as short sellers that overextended their welcome got squeezed and a flurry of better than worse headlines made the rounds.
All of this including a selloff in the U.S. dollar allowed COP stock to ramp off the February lows to the tune of more than 40% so far. However, ConocoPhillips is coming into a layer of major technical resistance just as the price of oil is once again losing upside momentum and the dollar looks near another rally.
Technical resistance for COP is in the area of $44 to as high as $47, all of which is made up of horizontal resistance (previous support), diagonal resistance from the 2014 highs and both the 100- and 200-day moving averages (blue and red, respectively). Note that the previous major lower highs in ConocoPhillips stock (as indicated by the blue bubbles) took place just above the blue 100-day MA.
COP stock may have the energy to push a little higher still, but this major confluence of technical resistance ultimately likely will cap shares for the intermediate-term.
Stock Charts to Watch: Toll Brothers Inc (TOL)
Click to Enlarge Housing stocks like Toll Brothers Inc (NYSE:TOL) enjoyed good relative and absolute strength in 2015, but as housing data began to weaken in the second half of 2015, they started coming under pressure.
What furthermore spooked these stocks was the rate hike on the part of the Fed last December. All of this led TOL stock to drop about 40% from its summer 2015 highs down to the recent February lows.
Along the way, Toll Brothers broke below an important multiyear layer of horizontal support around the $30 area, which the stock in recent weeks has rallied back to. This is just one more stock that, like many others as a result of the February/March snap-back rally, has simply moved back to a big layer of technical resistance.
Unless economic data somehow makes a near miraculous U-turn from here, TOL stock should have a very difficult time moving much higher from here.
Stock Charts to Watch: Amazon.com, Inc. (AMZN)
Click to Enlarge The mega-cap technology-related stocks held up the S&P 500 and Nasdaq-100 through much of 2015 while beneath the surface the broader market began to crack.
Shares of Amazon.com, Inc. (NASDAQ:AMZN) in all of this may have been the best example of a stock getting chased and squeezed higher by underperforming fund managers needing to buy the few believable growth stories they could get their hands on. As a result, Amazon stock took its already steep multiyear slope into vertical mode, and by late December had completely exhausted itself.
From late December into the February lows, AMZN stock has corrected about 30%, and the recent rally off those lows has brought it back to major horizontal technical resistance. The current horizontal resistance around the $580 mark also matches up with a 50% retracement of the December-February selloff.
While an overshooting move back up into the $600 area cannot be ruled out, many fund managers may use this area to unload stock they chased higher in late 2015, which should translate into a next leg lower.
Stock Charts to Watch: Netflix, Inc. (NFLX)
Click to Enlarge Netflix, Inc. (NASDAQ:NFLX) experienced a similar chasing higher in 2015 to that of Amazon.
The online movie streaming service continued to expand and surprise investors with its growth numbers, leaving pressured fund investors and quick traders little choice but to chase the stock higher on any dips.
Netflix’s chart since last summer has seen some wild gyrations, where a vertical overshooting in August led to a sharp selloff, only to see one more stampede higher into early December. The December high marginally surpassed the August one, thus marking a failed breakout attempt.
From December into the February lows, NFLX stock dropped 40% in a nearly straight line, and the rebound since is bringing the stock back into a major area of horizontal confluence resistance. This area is made up of its 100- and 200-day moving averages and a layer of price action that since last summer has off and on acted as support and resistance.
Ultimately, this area from around $100 up to $105 should hold as resistance for another push lower in the stock.
Stock Charts to Watch: Caterpillar Inc. (CAT)
Click to Enlarge Caterpillar Inc. (NYSE:CAT) as a mining and construction equipment manufacturer is sensitive to global economic cycles. As can be seen on the accompanying chart, while CAT stock did top out in the 2011/2012 period, it managed another rally in 2014 before the wheels came apart and the stock began a steep 50% selloff right into this January.
With global economic and U.S. housing data still weakening in this cycle, it is difficult to see CAT stock marching sharply higher from here. Much like most of the other charts in this article, Caterpillar as a result of the sharp rally in recent weeks is now coming into a layer of horizontal resistance that acted as support from 2012 into 2015.
While some further upside here in the near-term into the $80 area cannot be ruled out, a sustainable break past this area of horizontal resistance is difficult to see in the second quarter.
Watch for CAT stock to begin stalling in the $75-$80 area and move at least somewhat lower again.
Stock Charts to Watch: Nvidia Corporation (NVDA)
Click to Enlarge After a steep multiyear ascent that began in 2013, shares of graphics processor manufacturer Nvidia Corporation (NASDAQ:NVDA) took this rally into vertical mode in 2015.
Late in the year, NVDA topped out along with many other chart-chaser favorites and dropped a little less than 30% into the February lows. The stock then blasted higher along with the broader reflex rally and last week took out its 2015 highs.
This upside momentum is most likely not sustainable at this rate, and Nvidia stock is again getting very stretched above its medium-term moving average, such as its red 200-day moving average. Additionally, many momentum oscillators registered lower highs last week as the stock pushed to new highs. This type of negative divergence is a warning flag and could see the stock meaningfully mean-revert lower in the second quarter.
Options traders — such as out-of-the-money credit spread sellers — could use this recent vertical leap in NVDA stock to make a calculated bet that the stock at the very least begins to consolidate here in the second quarter.
Stock Charts to Watch: Under Armour Inc (UA)
Click to Enlarge Under Armour Inc (NYSE:UA) rallied a steep 350% from 2013 into September 2015, when upside momentum began to wane, and what by January of this year tallied to a 40% decline was set in motion.
This sharp selloff in UA stock by December had broken its 2013 uptrend line as well as its red 200-day moving average, which the stock had held so nicely all along. The recent multiweek snap-back now has Under Armour back at a major area of confluence resistance made up of horizontal resistance, diagonal resistance from the 2013 former support line and its 200-day moving average.
While just like for many other stocks in this article, some further upside in the near-term is possible, this area of technical resistance ultimately should prove challenging to overcome. The path of least resistance likely isn’t higher right now.
Active investors and traders could either look to short the stock upon confirmed bearish reversals or use the options market to sell out-of-the-money call credit spreads.
Stock Charts to Watch: Wal-Mart Stores, Inc. (WMT)
Click to Enlarge Last but certainly not least, there is Wal-Mart Stores, Inc. (NYSE:WMT).
After a horrendous 2015, Walmart began to bounce and show relative strength versus the broader market in the last couple of months of 2015, which then in the first quarter of 2016 translated into real strength. A flight to defensive stocks might have at least contributed to the rally in WMT stock, though another reason was a reaction to severe oversold readings in the stock late in 2015.
Of all the stocks in this article, WMT looks the most constructive for the bulls and may well have further upside into the low $70s in the near-term. However, just like all the other stocks I highlighted in this piece, a major layer of technical resistance lies not far above.
The horizontal blue bar in the low $70s acted as support since 2013 until it broke in 2015. It is unlikely that WMT stock will manage to just blast past this layer of resistance without at least a meaningful sideways pause or a mean-reversion move lower.
The second quarter of 2016 will be telling.
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