foxex: Wedge Breakout

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, May 01, 2020

1. Indexes foreshadow a pull back in prices

2. The sector least likely to fall

3. Opportunity in online games

Market Moves

Gold and oil prices staged a mild rebound today while stocks fell strongly, breaking down through a steep upward trend line stretching back to the lows of March 23rd. The S&P 500 index (SPX), the Nasdaq 100 index (NDX) and the Dow Jones Industrial Average (DJI), all fell more than 2.5% lower. Most of the move came from yesterday's after-hours price action and this morning's pre-market action in the futures market. This was driven by eager investors selling Amazon shares following the guidance the company gave after its earnings report.

The chart below shows the mirrored action between the S&P 500 and the CBOE Volatility index (VIX). Both of these indexes show how the price action broke from a wedge formation at what may turn out to be the start of a continuation in the previous trend (down for stocks, up for volatility). While it is impossible to know exactly how long such a continuation move would last, one important dynamic to watch for is just how the price action does go. If stocks don't continue lower, that becomes a strongly bullish forecast for a later period.

The yellow sections on the charts below stake out a baseline path that allows for a 50% pull back in the short-term trend starting from the recent highs. Chart watchers know that as prices fluctuate, if they don't get any worse than the path laid out here, stocks may be attractive to investors through June.

The Sector Least Likely to Fall
Active investors know that when a downtrend resumes, a tactical shift is in order. In such times they focus on which stocks are least likely to fall rather than the stocks they think could rise dramatically. The so-called defensive stocks will often allow a trader or investor to find respectable gains in a choppy market.

The chart below compares State Street's Consumer Staples sector index ETF (XLP) and four stocks likely to benefit from ongoing quarantine efforts: Johnson and Johnson (JNJ), Procter & Gamble (PG), Walmart (WMT), and Kroger Foods (KR). If the S&P 500 continues lower, these four stocks are likely to outperform the benchmark index.

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Opportunity in Online Games

Even if the stock market indexes don't continue on the same trajectory they launched from in late March, one group of companies is likely to continue its recently strong showing. Online entertainment companies will likely benefit from the extended period of time people had little to do indoors besides go online. Many people took to the digital battleground to fight their boredom and game habits don't always turn off overnight.

The chart below compares Electronic Arts (EA), Glu Mobile (GLUU), Activision Blizzard (ATVI), Take-Two Interactive Software (TTWO), with State Street's Consumer Discretionary sector index ETF (XLY). Each of these companies has already rebounded twenty percent or more since the March lows. If the broader market indexes do not fully retrace a 50% pull back from recent highs, then the Consumer Discretionary sector is likely to resume its uptrend in June, and these stocks could be among the leaders.

The Bottom Line

Stock market indexes made a marked pull back from recent highs as investors digested the news from the top six Nasdaq stocks that reported in the past week. Amazon's pessimistic outlook sent shares lower in after-hours trading, causing the broad market indexes to gap lower at the open. Should prices pull back further, opportunities may appear among the consumer staples sector and the online gaming industry group.