Setups are forming — watch this chart for entries

A day of divergence would be the best way to
characterize Friday’s trade. Major averages diverged from each other
at the close, with some positive and some negative and there was much dissention
amongst the ranks of sectors as to whether it was a bull day or a bear day. At
the bell, the Dow
(
DJX |
Quote |
Chart |
News |
PowerRating) closed down by 2.46 (losing .02%), the S&P
ended ahead by .67 (gaining just .06%), and the “relative strength champ”
Nasdaq Composite
(
COMP |
Quote |
Chart |
News |
PowerRating) tacked on 6.06 (adding .29%) for the day.
Sector action was extremely mixed, lighting up sector minders like a Christmas
tree of red and green. Insurance stocks seemed to lead the advance, playing out
a short on the rumor cover on the news scenario as Hurricane Rita barrelled
closer to the Texas/Louisiana coastline. Internets and Semis woke up little as
well, closing green on the day with tech bellweather (and major SMH component)
Texas Instruments
(
TXN |
Quote |
Chart |
News |
PowerRating) gaining 4%. Weakness was in energy related issues
with the
(
XOI |
Quote |
Chart |
News |
PowerRating) (Amex Oil Index),
(
XNG |
Quote |
Chart |
News |
PowerRating) (Amex Natural Gas Index), $DJUSCL
(Dow Jones US Coal Index), and the
(
OSX |
Quote |
Chart |
News |
PowerRating) (Philadelphia Oil Services Sector)
all getting taken down a few notches on the day.

As always, Morpheus clientele know to always take volume into consideration
in any in depth analysis of market action. Turnover was low yesterday as the
market just chopped sideways. Ordinarily this would be considered bullish (ie:
low volume consolidation), but lets keep in mind that this action is coming on
the heels of some serious selling in the earlier part of last week. As we said
earlier in the week, if we take options expiry out of the volume picture on Sept
16th, we have essentially had three distribution days last week out of five
trading sessions. This is relatively rare and should not be ignored. This tells
us that its getting slightly harder to adopt a bullish bias in the near term
going forward, and the shorting of weak sectors (of which there are many
currently) into bounces should not be ignored as a possible trading strategy in
your arsenal.

One of the weaker groups currently is Retail, as evidenced by the chart below
of the
(
RTH |
Quote |
Chart |
News |
PowerRating) (Retail HOLDR).

The highest probability trade setup is always one in which the fundamental
and the technical are in perfect alignment. This means for a short setup, a
situation where we are more than likely to see earnings deterioration going
forward. When buying any stock you are not really purchasing a slice of the
assets of the company, but rather the present value of some multiple of earnings
going forward. In essence, you buy stocks for growth. In these volatile markets,
when there is even the slightest hint that growth will slow down or even
contract, stocks will sell off. With energy prices taking a larger and larger
chunk out of consumers wallets as of late, it makes sense at this juncture that
retail stocks are coming under pressure. We have not even begun to see real
deterioration in earnings in the sector yet, but some warnings across the board
have already been issued and the writing is on the wall, so to speak. Remember,
like with the strength in Insurance on Friday, its “short on the rumor, cover on
the news”. This would mean that once retail earnings already start to come out
negative in subsequent quarters, don’t be surprised if retail stocks start to
catch a bid by then. For now however, ahead of the actual news, they look like a
ripe short. RTH (Retail HOLDR) is of course a proxy for the sector. The chart
above (daily) shows a down trend annotated by the upper blue line terminating in
$96 area. The lower blue line is the 200 day moving average which as we know
should act as strong resistance when approached from below. The chart below
(weekly) shows a possible target for the short. Prior weekly support at $86
(also confluence of weekly 200ma in same area) would be a likely pivot.

We’ll continue to monitor the situation in the retail sector going forward
and specifically RTH for possible entry soon as the bounce brings price action
closer to the downtrend line on the daily.

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