Industry Technicals: What IS Working in the Mortgage Market

The Fed Futures Market is giving a 34% chance of a 0.75% cut at the next FOMC meeting. While the Employment Situation next week may be bad enough to push the markets lower, the chance of more Fed cutting seems to have built a short-term floor of support. While I’m not giving up entirely on shorts, I’m avoiding establishing any new short positions (unless the trade is just money waiting to be taken) as many short trades have been subject to whipsaw.

I prefer to stick with what is trending (Don’t mention Ag.). I’ve been watching a few of these mortgage related stocks making strong uptrends for months now, but have been waiting for a pullback to get in. The charts are showing that the time to buy in might be near.

I know that the Fly explained a while ago why these stocks were making money in this environment, but I do not recall the answer. Maybe he can explain again in the comments section. Or, I’m sure others out there know the answer. Any help would be appreciated.

I believe that all the stocks below pay better than a 5% dividend.

[[ANH]]

[[NLY]]

[[MFA]]

[[CMO]]

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On January 24th, the FDA approved the New Drug Application (NDA) from the U.S. Food and Drug Administration (FDA), for its once-daily MOXATAG(TM) Tablets 775 mg (amoxicillin extended-release tablets) for the treatment of adults and pediatric patients 12 years and older with pharyngitis and/or tonsillitis secondary to Streptococcus pyogenes (commonly referred to as strep throat).

News Release: FDA Approves MiddleBrook’s Amoxicillin PULSYS for Pharyngitis/Tonsillitis in Adolescents and Adults

The company is [[MBRK]] It is obvious from the chart that the market liked this news.

The next day, the company issued a private placement of 21 million.

On February 14th, the company announced this: MiddleBrook Pharmaceuticals Engages Morgan Stanley in Its Strategic Process

The stock traded above $6.50 in September of 2006. On the chart, the 50 day has been beneath the 200 day for a year, but has now created a Golden Cross. It looks like it wants to trade higher until the buyout momentum subsides, or until it is actually bought.

FD: Long MBRK

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If the 200 day average does not hold on the VIX, it will signal a major shift in sentiment. February of 2007 was the last time the VIX traded beneath this average for more than a few days. 

My personal opinion is that the VIX will absolutely not trade beneath this average for a sustained period of time, but my opinion is biased to the bear side, even though I am net long in my positions.

The Dow Jones closed at 12684.92, just beneath the 50 day average of 12688.03. RSI(2) for the DJI is 92.28, which is consistent with previous short-term tops.

This setup looks like a humongous bull trap.

But, it could be the beginning of a significant rally.

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Back on January 23rd, I remarked that the Dow Jones showed the best technicals for a sustainable bottom. Now, over a month later, the index is still making a valiant effort to shrug off what ails it and start making higher highs. I am considering going long the Dow Jones in the morning. I am concerned about the 50 day average resistance, as well as the boundaries of the triangle, but this damn market is trading as if it wants to go higher. As noted above, I will be a bull when the Dow retakes the 50 day average, tests it, and holds it. Until that happens, I will continue nervously scaling into longs.

The Nasdaq is still firmly in the grasp of the triangle. I find it difficult to believe the Dow can continue up indefinitely while the Naz languishes, although it makes sense that the Naz will be weaker given its exposure to companies that are less able to weather a recessionary storm.

 

The SPY was able to close just barely above the upper boundary of the triangle. As noted above, I still do not want to be long this index due to the financial component.

While there are still multiple areas for  overhead resistance, the markets seem to have shrugged off “re-test fever” for the time being. In order to not miss a large portion of any move off a market bottom, traders have to have a point where they will again enter long, regardless of their sentiment and hunches. My jumping-in point is based around the 50 day average. As the markets look as though they want to challenge this average, I will forsake finding new shorts and focus on longs, although this may be ass-backward. The market downturns I have examined have shown me that the indexes typically fail their first test of the 50 day average, but I want to be prepared for any possibility.

Finally, INO has been kind enough to present to the winner of the Final Four a one year subscription. This is over a $500.00 value folks. Be sure to check out their site, even if you don’t give a crap, just because they are nice enough to present you tards with a killer free sub.

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Steel and iron stocks have been hot. Over the last month they gained 21.2%. Last week they were up 4.4%. Here are 11 bullish steel stocks, in order of greatest average volume to least.

[[RIO]] Volume on the move above the 50 day average has not been great. A quick pullback would not be a surprise.

[[GGB]] broke down out of a huge triangle. It has since broken back up through the triangle. The volume here is very bullish, and I would consider buying on a pullback, somewhere near the upper line of the triangle.

[[NUE]] has broken out of a long base, but the volume has not been very large on the move up.

[[CLF]] looks great, but the large trading range leaves me concerned. I would like to see it break firmly above the upper range.

[[AKS]] also has interesting technicals. This one also broke down out of a triangle and then broke back up through the triangle. Nice how it retested the upper line of the triangle on the recent pullback. This one is looking juicy here.

[[STLD]] looks like it may get stuck in a range, unless it blows past the December highs.

[[MM]] I would not short this one, although it is way overdue for a pullback. What a killer uptrend.

[[MTL]] What a great breakout, although volume Friday was poor. I would like to see an orderly pullback at this level and then get in on a bounce from the upper range.

[[PKX]] This one looks like it can have very little risk for a huge possible return. I’d risk 10 points, with a stop below 120, with the possibility that it shapes a long cup pattern. Although watch the moving averages, as the 50 day is pressing this one down.

[[ZEUS]] Another great breakout. Do you wait for more of a pullback here?

[[MEA]] A classic cup with handle formation.

If you want to play steel through an etf, use [[SLX]]. SLX just made a fresh 52 week high, although volume was less than stellar.

With the exception of the stocks that have already broken out, what we want to watch for is whether the rest break out, or fall back within their trading ranges.

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That’s right. An assinine call, for sure.

Look, everytime I research these hot ag. stocks, I find another article proclaiming that we should all be investing in ag. for the long term. It seems the general consensus is that these ag. and food commodities stocks are bullet-proof, and will continue to make 52 week highs, even in the wake of a recession.

While I’m not qualified to present a contrary argument as to the fundamentals surrounding these stocks, I find it difficult to believe that farmers will continue to get rich, buy new farm equipment, and continue expanding operations while the consumer suffers death by a thousand paper cuts (from their bills, of course). Although it would certainly be poetic justice for the much maligned farmer to continue banking coin while the consumer drowns in a pool of debt. You know, because typically farmers have had to remain indebted for most of their lives to keep the farm operational while the consumer ate cheap (albeit often gov’t subsidized) food.

Anyway, I’m calling a top. Like all bubbles, this too shall pop.

What I’m expecting is that stocks making 52 week highs like [[MOS]], [[POT]], and [[CF]] are in the process of forming the head of a future head and shoulders breakdown. Please, do not make the mistake of thinking these ag. stocks are just going to rollover and die. No, the asshole dip buyer will step in, at least a few more times, before the rollover will occur. These suckers will think they are getting a bargain. You will hear the pundits discuss the buying opportunities, as they simulataneously unload the positions they’ve been pumping for the past year. 

If your thesis is similar to mine, then what we want is to look at some stocks within the sector that are already exhibiting significant weakness. While stocks like [[MON]] and [[ADM]] are exhibiting weakness, there are still asshole dip buyers waiting on the sidelines. As always, when shorting stocks, we want to stay away from those that have dip-buyers waiting. Therefore we will look for ones trading beneath or right at the 50 day average, as the dip-buyer will likely have moved on to stronger names.

[[VMI]] Fly begs you not to short this one. Do it anyway.

[[DE]] Full Disclosure, I’m short DE. Deere guided down Q2.

[[CNH]] Nice re-test of Head and Shoulders neckline.

[[BG]]

[[AG]] is included here even though it is above the 50 day. I just don’t see this one getting past the resistance of that triple top.

I will continue to monitor the technicals in Agriculture Chemicals and Farm Construction Machinery. If I’m wrong about the top, then we should see all these stocks begin to make 52 weeks highs, similar to [[MOS]] and [[POT]].

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This market is schizophrenic. The argument that the bad news is priced in seems too convenient to be plausible, although it is hard to argue with the action. The VIX is fixin’ to break beneath a month-old trendline. The more bad news we get, the more I see traders buying breakouts. Sentiment shifts between bearish and bullish, within an hour’s time. But what has changed? Nothing, at all. The markets are still consolidating. Moving into big positions here, betting on a move in either direction still seems like a pure gamble. I will wait for confirmation. Overall, I feel like the steers have been given a little rope, so that when they finally stumble blindly over the edge of the cliff, the noose will bite and their heads will be ripped clean off, effectively ending any discussion about whether this is a correction or a true bear market.

That being said, I will still go long if that is what the technicals warrant, and honestly, the breakouts have been developing more and more quality technicals over the past couple of weeks.

Technically, [[GTRE]] is not a breakout. I still love the chart, nonetheless, and will watch for a pullback.

[[SFY]]

[[CSX]] There is something that appeals to my sense of nostalgia when I own a train.

[[BBG]] I have no idea what this company is about.

 Do not forget that breakout plays are by their nature overbought when they setup. Be sure you can stomach the pullback which inevitably follows the breakout. I have not checked earnings or any other fundamentals on these companies.

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