Industrial stocks as a sector of the S&P 500 have underperformed the S&P 500 all year and once again in the latest down-leg in October. After a steep “counter-trend” bounce over the past few trading sessions (along with the broader U.S. stock market), industrial stocks such as Deere (NYSE:DE) are now bumping into a layer of technical resistance where active investors and traders could look to re-initiate short-side trades.
Large-capitalization industrial stocks, although they cover a wide variety of industries, are to a good degree exposed to the global business cycle in that they offer products and services internationally. As such, this is a sector that will either act bullish or bearish when global economic growth begins to pick up or slow down. The fact that industrial stocks remain lower by 3% for the year-to-date despite the sharp nearly 10% bounce over the past few trading days goes to show just how much they are struggling.
DE Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To better illustrate this point, let us look at the first chart, which is a multi-year weekly chart of DE stock. Let’s first focus on the blue line at the bottom of the chart, which shows the relative performance of the industrial stocks as a sector versus the S&P 500. Here we clearly see that industrials have largely exhibited relative weakness. The price chart on the top half shows the absolute weakness, i.e. that after an initial rally in January this sector and DE stock in specific here traded lower for the rest of the year so far.
From a trading perspective, I am now focusing on the trading range (down-sloping two black parallels). Note that thanks to the recent rally, DE stock is now back at the top of its trading range. Unless global growth is about to pick up again, which I do not yet see, Deere stock will likely have a hard time moving higher.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, I drew a black line that captures the upper end of the trading range, if we ignore the breakout fake-out rally in early October. Note that at current juncture, a bunch of “stuff” all comes together to provide a solid confluence resistance area as marked by the blue box. This resistance layer is made up of: 1. the simple black resistance line; 2. the red 200-day simple moving average (the 50- and 100-day moving averages are also in this area); and 3. all three of these moving averages are now sloping lower.
Active investors and traders could now look to short DE stock around the $145-$150 area with a next downside target around $138. Note that Deere is scheduled to report earnings on Nov. 21, which is to say that any swing trading positions should be closed or at least materially reduced in size through the earnings report.
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