The market is looking a little toppy after the election results drove the major indices to technical resistance last week.
Last week’s move is likely to see some short-term pressure as more news comes from the Donald Trump Administration, but for the time being the path of least resistance for the market is to the downside. Looking at the charts, there are still some bullish opportunities in the mix as Chesapeake Energy Corporation (NYSE:CHK) is back on our short list for bullish trades. Home Depot Inc (NYSE:HD) is on our radar due to their recent “buy the rumor” rally ahead of earnings. And finally, Materials Select Sector SPDR (NYSE:XLB) is looking forward to President Donald Trump.
Chesapeake Energy Corporation (CHK)
Chesapeake is on our radar for the third time in the last 60 days as this tradable charts is turning bullish again. We’ve covered this one multiple times because the shares have become a trader’s dream in terms of their sensitivity to the technicals.
CHK stock has declined back to round-numbered support at $5, a level that is also fortified by the presence of the shares’ 200-day moving average. Similar support was put in place in early August, just before Chesapeake stock rallied from $5 to $8.
Chesapeake shares are also coming off of a recent overbought signal, triggered last week when the stock finished its decline from $7 to $5. The oversold signals indicates that the shares are more likely to bounce in the short-term as fewer sellers are present to pressure prices lower.
A break above $5.75 will open CHK stock up to move to a likely target of $7, offering nimble traders an opportunity to grab a quick 20% trade.
Home Depot Inc (HD)
Home Depot share spent last week rallying ahead of their earnings announcement this morning. The stock has a history of similar activity ahead of their earnings reports as traders appear to be “buying the rumor.” In Home Depot’s case, the stock typically sees selling pressure or sideways consolidation after these instances.
The earnings report will add some potential buying to the shares, but overhead technical resistance is clearly in place to pressure post-earnings trading. Currently, the stock’s 100- and 200-day moving averages are sitting just above current prices, drawing a potential ceiling for Home Depot.
Of course, the stock has also triggered an overbought signal because of the recent strong and fast rally. This combination of technical trendline resistance and overbought conditions sends a warning that the stock is more likely to see a “sell the news” reaction to earnings.
Materials Select Sector SPDR (XLB)
Investors were looking for Trump stocks last week. Among the many group of stocks suspected to benefit from the incoming administration are the Basic Materials companies. Everything from coal to steel should benefit from the restructuring as well as initiatives to begin relying more on domestic producers over importers.
The SPDR Materials Sector ETF got a slight bounce last week after months of consolidation. Last week’s move took XLB shares above their 20-, 50- and 100-day moving averages, which are all trending slightly higher. This adds to the bullish intermediate-term outlook for the Materials Sector.
At the sector component level, the percentage of companies that are trading above their respective 50-day moving average is on the rise, indicating that sector breadth is improving. This will help the XLB shares to build a stronger trend.
Finally, we always like to see signs of pessimistic sentiment towards a stock that is rallying as it suggests that the “wall of worry” is in place.
In this case, we’ve seen recent adds to the short interest for the XLB shares themselves along with an increase in short interest on the constituent companies of the ETF. This builds a stronger case for the SPDR Materials ETF as we head into 2017 and investors continue to favor industrial and materials names over dividend yields and healthcare.
As of this writing, the Johnson Research Group did not hold a position in any of the aforementioned securities.