Trading Places with Tom Bowley

9 Trade Setups To Consider After Recent Selling

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Market Recap for Friday, December 8, 2017

While we didn't set intraday all-time highs, we did manage to close at record levels on both the Dow Jones and S&P 500, which rose 0.49% and 0.55%, respectively, on Friday.  The NASDAQ tacked on 0.40% as it closes in on a record high close of its own (about 1% away from an all-time high record close).  Meanwhile, the Russell 2000 is doing what it typically does in the first half of December - struggle.  The RUT is down a little more than 1.5% thus far in December, but check out the Historical Tendencies section below to see the breakdown in the RUT's historical performance during December.  It's interesting to say the least.


The November nonfarm payrolls report was released on Friday morning just prior to the market open and it was mostly good news with November jobs higher than expected.  Despite this solid report, healthcare (XLV, +1.12%) provided the most strength, followed by energy (XLE, +0.92%).  Biotechs ($DJUSBT) saw an increase in volume and a quick recovery back above its 20 day EMA as it continues to show signs of returning relative strength.  After six weeks of poor relative strength, it's a welcome sight for many bulls:

There's more work to do here, but a close above 2025 and a breakout above the declining relative trendline would begin to look more and more like the beginning of further absolute and relative strength.

Materials (XLB, +0.00%) were flat, but the remaining eight sectors gained on Friday, showing wide participation in Friday's advance.

Pre-Market Action

Currently, Dow Jones futures are up 39 points as we approach the beginning of a fresh trading week - despite news reports of an explosion in Manhattan.

Tokyo's Nikkei ($NIKK) finished at a 26 year high last night in Asia.  European markets are mixed this morning as we approach another FOMC meeting, which begins tomorrow and results in Wednesday's policy statement.  It's widely expected that the Fed will raise interest rates one quarter point.

Current Outlook

I continue to be extremely excited about the surge in transportation stocks ($TRAN).  I've written in recent articles about the strength in railroads ($DJUSRR) and truckers ($DJUSTK), but now we're seeing strength in airlines ($DJUSAR) as well, despite higher crude oil prices ($WTIC).  The DJUSAR was the leading percentage gainer among industry groups in the industrials last week, but now face a clear gap and price resistance level:

There was a big volume gap down in July from the 282-283 level and the failure to clear that gap resistance in October is evident.  Friday's reversing shooting star candle will make it more unlikely that we'll see airlines breakout today, but that rapidly advancing 20 day EMA should provide short-term support on any selling.  That's the range for now - 20 day EMA as support and gap/price resistance near 282-283 as resistance.

Sector/Industry Watch

The Dow Jones U.S. Medical Equipment Index ($DJUSAM) didn't exactly follow the major indices higher last week.  Instead, the group fell 1.39% for the week, but did provide opportunities as it tested its rising 50 day SMA:

It appears as though the DJUSAM is poised to make another run at its recent high just above 1380.  Be careful if the index were to close beneath 1320-1325.  Otherwise, this industry group should provide some nice trade setups into year end.

Monday Setups

Every Monday, I provide a number of potential trade setups that you can review.  Simply CLICK HERE to review the 9 stocks that look interesting to me as we enter a new trading week.  All of my trade setups come from my Strong Earnings ChartList.  EarningsBeats.com features a nearly identical list and is currently offering a special promotion that includes sending you their ChartList that you can save in your own StockCharts account.  You do need to be a member of StockCharts, but there's a FREE 30 day trial and a special holiday promotion in effect that you can check out.  It's a very inexpensive way to immediately gain access to a list of companies that beat recent quarterly revenue and EPS expectations and show strong technical behavior as well.  It's literally the only list of stocks I use to trade.

This week, my featured setup is Generac Holdings (GNRC).  There appeared to be massive accumulation in late August and throughout September before volume started to tail off in October as a final high was made with slowing price momentum - a negative divergence on its MACD.  At the time, RSI was well up into the 70s and a bearish engulfing candle printed to finally establish a short-term high.  Since then, GNRC has drifted lower to test the top of gap support with its RSI dropping back into the 40s.  While certainly no guarantee, I really like the reward to risk with accumulation in its gap support zone from roughly 46 to 48.  My initial target would be to retest the recent price high near 54.  Check it out:

The pink arrows highlight the MACD centerline "reset" and 50 day SMA test, two things I look for after a negative divergence prints.  The reward to risk for entry now looks solid to me and it gets better if GNRC falls back into its gap support zone (range between the two horizontal lines).

Historical Tendencies

I've discussed the Russell 2000's propensity to rise during the month of December.  December has resulted in rising prices for small caps 26 times in the last 30 years.  But in 2017, the RUT is down more than 1% in the first 10 days of the month.  What's going on?  Well, let me break it down for you.  Here is the annualized return of the RUT since 1987, broken down into the first and second half of December:

December 1-15:  -3.27%
December 16-31:  +74.88%

We haven't hit the Russell 2000's seasonal sweet spot just yet.  17 times in the past 30 years we've seen the RUT gain more than 3% in the second half of December.  9 times we've seen those gains exceed 5%.

Here are the only four years that the Russell 2000 has failed to advance from the December 15th close through the December 31st close:

2002:  -1.26%
2005:  -1.68%
2006:  -0.64%
2016:  -0.68%

While there are never any guarantees, history has proven that you want to have exposure to small cap stocks during the Santa Claus rally.

Key Earnings Reports

None

Key Economic Reports

None

Happy trading!

Tom

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Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to StockCharts.com's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
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