May 17th, 2008
Each week, I study the 197 IBD Industry Groups to determine which are moving up 50 places or more in rank since they are the ones that potentially include future leading stocks. According to the IBD website:
Both the absolute ranking of each of the industry groups and their relative performance over time are important. Focusing on the top 40-50 groups shows you where the leadership is currently, and researching groups that are steadily moving up in rank over the last three months shows you where the leadership may be transitioning to ….. Often the best stocks in the early stage of a bull market are in industry groups that are gaining strength but are not initially among the top 40-50 groups in IBD’s table of 197 industry groups. You may try casting your net a little wider to include those within the top 80 industry groups.
What I saw was an amazing and massive group rotation taking place since the previous Friday. While energy and commodity related Industry Groups still are among the best performing groups, nearly a quarter, or 32, of the lower ranked Groups moved up 50 places or more to positions within the top 100 (the column in yellow is current ranking, green is the increase in rank from positions 4 weeks ago).
But when you look at the charts of the individual stocks within these groups you have to wonder whether any of the stocks might actually turn out being the big movers, and when, since so few today look as if they’ve even completed bases or triggered anything remotely near a buy signal.
But I was impressed by the extended bases (or will they eventually turn out to be nothing more than consolidation patters in a resumed industry bear market decline?) of some individual stocks among in these Groups: Homebuilders, Apparel Mfrs and Retailers, Hospital and Staffing (click on symbol for chart; note different time horizons):
- JOBS (51Job): a Chinese company that cratered after its 2004 IPO but has been forming an intriguing pattern since 2005. A move above 24 would indicate the possibility of a substantial further move higher.
- HXM (Homex): All the homebuilders are making bases (I can’t explain why?) but HXM, because it’s engaged in the development, construction and sale of entry level, middle-income and upper-income housing in Mexico, might have been insulated from the US housing collapse … so far. The stock is bouncing against a resistance trendline extending out from it’s all-time high. A successful break through that resistance could lead to further substantial upside movement.
- RL (Ralph Lauren): I add this to the two previously mentioned clothing manufacturers, TRLG and HBI. The hope for RL is that the symmetrical triangle that it’s been forming since the end of 2007 results in an upside breakout (it will have been a base) and not a break to the down side (instead, it was only consolidating). As mentioned here before, triangles are extremely suspect patterns unless made over an extremely long time horizon (years). Breakouts from triangles of less than a year often fail as the stock meets with headwinds from existing holders who look to cash out of losing positions.
- UHS (Universal Health Svces): Currently making a second attempt at breaking through a resistance trendline that extends back to 2005. On a longer term view, the stock has been in this struggle since making a high of 55 in 2001. Hopefully, should it be successful in this current attempt, it will be more successful than the 2005 breakout.
- UHAL (Amerco): May make an attempt to join R (Ryder), mentioned here earlier, by breaking out of a descending channel, or wedge as some call it. The risk with these patterns is that even though the stock successfully breaks through the upper channel boundary, the stock will hit resistance at the point where the channel first began, in UHAL’s case at the all-time high of 106. In any event, that’s nearly a double from the current level.
I just came across an excellent site that defines, gives examples and, perhaps adds some credibility to these and other charting terms. I recommend Bulkowski’s The Pattern Site to anyone who’s interested learning more about approximately a hundred chart patterns.