Don’t Bring a Knife to This Fight

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The initial market reaction to Apple’s earnings on Tuesday night is positive, and index futures are pointing higher as well. The reaction to the initial reaction will be telling, considering that we are working through a corrective market with plenty of headfakes in either direction. While traders have routinely become downright giddy with each quarterly release of Apple’s earnings, it is important to consider the broader backdrop of the market in each particular quarter the company reports. In other words, it seems a bit too easy for this market correction to bottom in sympathy with the AAPL call.

Hunches aside, this is the type of market where you had better come prepared, or you are better off not taking on the fight at all. For the short-term, I have provided you with a short setup in the form of Tiffany & Company, a high end retail play that looks ripe to break down in a weak market. Should the market sustain a rally after the Apple news, though, instead of the technology or consumer cyclical stocks I believe the bulls would be best served by an old-fashioned Dow Theory buy signal. The transportation stocks would offer such a signal with a bullish divergence. The price action in the trannies was strong on Tuesday, and there is no better one to look at than the rail  monster, Union Pacific.

Like the rest of the sector, UNP has been marking time in correction since early-February. As we rapidly approach the three-month mark, you are looking to see if strong hands will arrive to break the stock up and out of its massive falling channel. I like the stock, sector, and Dow Theory buy signal upon a high volume breakout this week or next. Keep in mind, though, that Dow Theory buy signals take time to play out in terms of the rest of the market catching up. Thus, UNP breaking out would not be an immediate buy signal for stocks so much as it would indicate that this correction is likely closer to ending than it is to just getting started.

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