Sector Basers
If you’re trading long for the
intermediate-term and off breakouts in this market, staying in the right sectors
becomes all the more important. What basing patterns and breakouts I’m finding
are coming from well outside the tech sector.
To
help identify the strongest sectors and industries, I look at the
strongest-performing mutual funds and exchange-traded
funds over various timeframes, using TradingMarkets’ indicators
page on fund performance. I stress six-month performance since I trade
over the intermediate term, but you can choose from a variety of time frames to
suit your own trading style.
A glance at the top mutual funds and ETFs by six-month performance shows outstanding performance from the healthcare and financial sectors, among other areas. And
that’s where Monday’s breakouts came from.Â
If
you trade intermediate-term momentum, remember that the highest probability play
remains waiting out matters largely in cash until the market puts in strong
follow-through action from an apparent bottom and multiplies the number of high
relative strengths stocks. Last week’s market declines invalidated the prior
follow-through day, and there’s a dearth of strong basing stocks from the high
momentum ranks. If you do insist on playing long trades, stick to pilot
positions in stocks in strong, market-defying sectors while keeping the majority
of your equity in cash. Â
Shares in U.S. Bancorp
(
USB |
Quote |
Chart |
News |
PowerRating)
surged 2 1/4 to a 52-week high of 28 5/8, clearing a 6 1/2-month cup-with-handle
on volume of 5.2 million shares, double normal trade. Note the superb action in
the stock’s relative strength line. On breakouts, I want the RS line to precede
or coincide with the stock’s move into new high or new 52-week high ground.
In
the healthcare sector, Province Healthcare
(
PRHC |
Quote |
Chart |
News |
PowerRating) is 11 weeks into a base
with a rising RS line.
 Â
The top field of all
charts in this commentary uses a logarithmic price scale and displays a 50-day
price average in red.
In the second field, a blue relative strength line represents the displayed
security’s price performance relative to the S&P 500. The third field
displays vertical daily volume bars in black with a 50-day moving average in
blue for volume.
Remember that all stocks are
speculative and risky. On any trade, reduce your risk by limiting your position size to a percentage of your total
account and setting inviolable price stops. For an intro to combining stops with
position sizing, check out my lesson, Risky Business.
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