Is the correction over? The Nasdaq Composite and other blue-chip indices may still be warning otherwise. But in a market made up of stocks, it almost goes without saying, some will zig while others zag. And right now there are industry-leading blue-chip stocks setting up as classic pattern longs and shorts for bullish and bearish profits and diversified portfolio protection.
From the leading tech-heavy Nasdaq, the broad-based S&P 500 and bluest of market bellwethers, the Dow Jones Industrials, the technical story is the same. Broken trendlines and bear flags. It’s not a good sign. To be fair, investors shouldn’t run for the hills and stuff cash under the mattress.
Now and more than ever, the warnings being witnessed on the price charts are the result of fewer and fewer stocks. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Tesla (NASDAQ:TSLA) are among the blue-chip stocks responsible. They’re making the indices more lopsided due to massive valuations and hefty stock prices.
In the Nasdaq 100 less than 10 stocks account for a full 50% of its weighting. And a full 25% of the S&P 500’s movement is tied to a similar number of stocks, despite its much heavier portfolio of holdings. And if Amazon were a constituent of the price-weighted Dow Jones, we’d have to rename the index due to its sky-high stock price of around $3,000.
Sure, it would be hard to imagine life without most of these companies. That’s especially true today as the pandemic has made many of these giants of industry even more indispensable. But that influence has been an overly-popular trade on Wall Street and quite often, at the expense of many other solid blue-chip stocks.
As we anticipate more seasonal weakness in our favorite tech stocks before a bullish market follow-through day emerges (and one likely fueled by those same trillion-dollar influencers), it’s time to trade other blue-chips both long and one of the accused from the short side for well-timed profits.
Blue-Chip Stocks to Trade: Caterpillar (CAT)
Source: Charts by TradingView
The first of our blue-chip stocks to trade is Caterpillar. The machinery giant has been modestly outperforming the Dow Jones in 2020 with a gain of around 4%, compared to a loss of approximately 2%. But right now the price chart in CAT stock suggests a much bigger performance is in the works.
Technically, this week shares of CAT have cleared a mid-pivot buy point within a well constructed, corrective “W” base. It’s bullish and maybe more so given the price strength amid more challenging conditions in the major averages.
With shares modestly extended 5% above a textbook purchase and stochastics near overbought territory, I’d suggest a November or December slightly out-of-the-money bull call spread in lieu of buying shares of this blue-chip stock.
Chevron (CVX)
Source: Charts by TradingView
The next of our blue-chip stocks to trade is Chevron. Here and on the CVX price chart, a challenging period for shareholders is setting up for greener days ahead.
It’s not exactly a secret Wall Street’s narrative for the oil and gas industry has been a bearish one. Who needs fossil fuels, everyone is driving a Tesla, right? Wrong. And all those other tens of thousands of uses for petroleum-based products aren’t going away anytime soon, either. Heck, even alternative energy sources are guilty of needing fossil fuels.
Sure, Covid-19 hasn’t done this blue-chip any favors, but enough already. That’s what we’re possibly seeing develop on Chevron’s price chart. Technically, CVX has retraced 50% of its post-March rally. The decline is simultaneously challenging the stock’s long-term trendline after putting together a Covid-driven undercut pattern.
Bottom-line, if the September low continues to hold support, this blue-chip stock is a purchase if shares can muster a bullish stochastics crossover signal.
Amazon (AMZN)
Source: Charts by TradingView
The last of today’s blue-chip stocks to trade is Amazon. As already alluded too, the diversified tech giant has been a huge beneficiary of the pandemic. From its essential and non-essential goods delivered right to our doorsteps, streaming, and cloud services, Amazon is a force in multiple markets. That doesn’t make it a buy though, not yet at least.
Overzealous attention to AMZN by investors has begun the inevitable process of profit-taking. What’s more, the price chart is indicating the likelihood of a larger correction for this blue-chip stock.
Technically, shares of Amazon have formed an engulfing monthly candlestick topping candle. With the stock also penetrating its stubborn Covid-19 trendline and signaling a bearish stochastics crossover, a larger cycle of corrective price action has grown more likely.
Bottom-line, even if you can’t be without its services, buyers of Amazon are likely to be offered a discounted share price with a bit of patience. I’d suggest waiting for the blue-chip stock to trade down into Fibonacci support associated with the March low before considering a purchase. In the interim, with confirmation of a top and plenty of downside room before support comes into play, a short position in shares or bearish exposure using AMZN’s options markets looks primed for acting on.
On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any of the securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
