Todays Big Stock: SPDR S&P Homebuilders ETF (NYSE: XHB)

In order for the economy to ever get going again, the American consumer is going to need to get back on its OWN two feet. Its bad enough to have to deal with issues such as high unemployment and rising gas prices, but the most difficult problem facing consumers may be the constant decline in housing values. Not only does the fall in housing create financial headwinds, but it also creates psychological barriers resulting in a lack of confidence for the future. So the question is this: Is the housing market bottoming, or getting worse? If I trust what the market is telling me, it’s probably getting worse.

The XHB (SPDR Homebuilders ETF) is an Exchange Traded Fund that seeks to replicate as closely as possible the performance of the S&P Homebuilders Select Industry Index (HSII). The HSII represents the homebuilding sub-industry portion of the S&P Total Markets Index. The XHB invests in industries, such as homebuilding, building products, home furnishings, home furnishing retail and home improvement retail. This ETF can be a great gauge into the market’s “view” of housing Please review the 1 yr. chart of XHB (SPDR Homebuilders ETF) below with my added notations:

Over the last 9 months, the XHB has created an important price level at $17 (green). You can see how as far back as November the price of $17 has not only been a primary area of support whenever it is approached, but it was also prior resistance. Last week the XHB broke this key area of support and it did so on a pick up in volume. Volume increases on breakouts or breakdowns add validity to the break. Apparently, the market is sending a message that not only is housing not recovering, but it also may be heading even lower.

The Tale of the Tape: The housing ETF, XHB, has broken its key level of $17. This should signal lower prices for the XHB and probably the housing/real estate industry in general. A short could be entered on the XHB with a stop above the $17 level. Also, traders might want to research homebuilding stocks for potential breakdowns there.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Todays Big Stock: Skyworks Solutions, Inc. (NasdaqGS: SWKS)

Skyworks Solutions offers diverse standard and custom linear products supporting automotive, broadband, cellular infrastructure, energy management, industrial, medical, military and cellular handset applications. Skywork’s portfolio includes amplifiers, attenuators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure radio frequency subsystems, receivers, switches and technical ceramics. It has aligned its product portfolio around two markets: cellular handsets and analog semiconductors. The handset portfolio includes customized power amplifiers and front-end solutions, from entry level to multimedia platforms and smart phones. Some of its primary handset customers include LG Electronics, Motorola, Nokia, Samsung, Sony Ericsson, Research in Motion, and HTC.

Earlier this week Skyworks Solutions released their earnings report for the 3rd quarter. After announcing a 48% increase in profits and guiding higher for the 4th quarter, Skyworks Solution’s (SWKS) stock rallied significantly on the news. Although the stock has declined about 30% from it’s high earlier this year, could the stock finally be ready to move higher?

Please review the 1 yr. chart of SWKS (Skworks Solutions, Inc.) below with my added notations:

Over the last 9 months, SWKS has created an important price level at $25 (green). You can see how even as far back as November the price of $25 has been an area of support or resistance whenever it is approached. After the release of SWKS’s earnings report earlier this week, SWKS broke back above the $25 level on extremely high volume, thus the stock should be moving higher from here. Commonly, stocks will reverse back to retest the levels they break. So, SWKS’s $25 level should act as support on any pullbacks.

The Tale of the Tape: SWKS (Skyworks Solutions, Inc) released their earnings report this week and the stock reacted positively to the news. After jumping through the $25 level, SWKS should be moving lower. Although a long position could be entered here, a lower risk entry could be made on a pullback to $25 if that were to occur. A stop below the $25 level would be advised either way. If SWKS were to break back below $25, the stock would most likely fall lower, thus a short position could be entered instead.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!
Christian Tharp, CMT

Todays Big Stock: Warner Chilcott (Nasdaq: WCRX)

Trading in the stock market can be complicated. It can be confusing. It can be challenging to know what trade to make and when to make it. However, there are those trading opportunities that are clear and obvious. Usually, the “keep it simple stupid” trades tend to be the best. Simple or not, does that mean the trade will work out in your favor? Of course not, but at least you knew it was the right trade at that time. A stock that might have made a move that fits that description would be WCRX (Warner Chilcott Plc).

Warner Chilcott is a specialty pharmaceutical company focused on the women’s healthcare, gastroenterology, dermatology and urology segments of the North American and Western European pharmaceuticals markets. Please take a look at the 1-year chart of WCRX (Warner Chilcott Plc) below with my added notations:

WCRX has been holding a very important level of support at $22 for the last 7 months. No matter what the market has or has not done this year, WCRX has not broken below $22 . . . until yesterday.  Something seems to have changed with WCRX. It has always held $22, and then the level breaks. It’s simple. Stocks that break significant resistance usually move higher and stocks that break significant support tend to move lower.

The Tale of the Tape: WCRX had a very important support at $22 throughout the entire year. Yesterday the stock broke below that $22 level, thus should be moving lower. Since the stock doesn’t move all that quickly, the most ideal entry would be a short position on a rally back up to $22, if that happens.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!
Christian Tharp, CMT

Todays Big Stock: Tesoro Corporation (NYSE: TSO)

It is nearly impossible to discuss chart patterns on stocks without eventually discussing the very common Head and Shoulders (H&S) pattern. An H&S pattern is a reversal pattern that forms after an uptrend. A textbook H&S pattern starts to form when a stock rallies to a point and then pulls back to a particular level (shoulder #1). Next, the stock will rally again, but this time to a higher peak (head) than the previous shoulder. After forming the head, the stock will pull back to the same support as the first shoulder did. Finally, the stock rallies a 3rd time, but not as high as the head (shoulder #2). The level that has been created by all 3 of the pullbacks is simply a support level referred to as the “neckline”. The formation of an H&S pattern warns of a potential reversal of the uptrend into a possible downtrend.

As with any chart pattern, a trader will usually not want to act on the pattern until the stock “confirms” the pattern. Confirmation is the break of the key level that has been created by the pattern.  In the case of an H&S, confirmation would be when the stock breaks the neckline.

What a lot of newer traders do not know is that H&S patterns can also form upside down after a downtrend. This pattern would simply be called an Inverse Head and Shoulders pattern. To see such a pattern, please take a look at the 1-year chart of TSO (Tesoro Corporation) below with my added notations:

After a 3-month trend lower, TSO had formed what appears to be an Inverse H&S. I have noted the shoulders (S) and the head (H) to make the pattern more visible. (For future reference, if you imagine this pattern flipped upside down you would have a regular H&S pattern.) The neckline that TSO’s Inverse H&S formed is at the $25 level (green). Earlier this week, TSO confirmed the pattern by breaking up through the $25 neckline, thus the stock should be moving higher.

The one drawback to this setup is that traders would usually like to see volume spikes on breakouts, which TSO’s H&S breakout didn’t really have. Sometimes light volume on breakouts can be a precursor to the stock pulling back below the breakout level, thus creating a false breakout. So, always remember to use a stop!

Lastly, keep in mind that simple is usually better. Had I never pointed out this Inverse H&S pattern, one would still think the stock is moving higher simply because it broke through the $25 resistance level.  In short, whether you noticed the pattern or not, the trade would still be the same: On the break above the key $25 level.

The Tale of the Tape: After a short downtrend, TSO formed an Inverse Head and Shoulders pattern and confirmed the pattern earlier this week with the break above the $25 neckline. The stock should be moving higher from here, so a long trade could be entered anywhere near the $25 level with a stop below that level.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!
Christian Tharp, CMT

Todays Big Stock: Terex Corp (NYSE:TEX)

Last week Terex Corp released their quarterly earnings report. Although Terex Corp.’s (TEX) second-quarter loss narrowed significantly, and it swung to a profit on a continuing-operations basis on strong sales, the stock sold off significantly. So far, the stock has declined about 37% from it’s high earlier this year and appears to be taking another leg down from here.

Terex, which makes specialized equipment such as tower cranes and rock crushers, lowered its full-year earnings outlook, although it did raise its revenue projection slightly higher. The company has been posting frequent quarterly losses, as raw materials costs and lingering weakness in construction and industrial markets weighed on the bottom line. In all likelihood, it is the lowering of the earnings guidance that caused the stock to sell-off on its earnings release.

Please review the 1 yr. chart of TEX (Terex Corp) below with my added notations:

TEX has created an important price level at $25 (red) over the last year. After the release of TEX’s earnings report last week, TEX broke the $25 level of support on very high volume and the stock should be moving lower from here. Commonly, stocks will reverse back to retest the levels they break. So, TEX’s $25 level should act as resistance on any move higher.

The Tale of the Tape: TEX (Terex Corp) released their earnings report last week and the stock reacted negatively to the news. After breaking the $25 level, TEX should be moving lower. Although a short position could be entered here, a lower risk short entry could be made on a rally back up to $25 if that were to occur. A stop above the $25 level would be advised either way. If TEX were to break back above $25, the stock might make a run back to the $30 level (pink), thus a long position could be entered instead.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!
Christian Tharp, CMT