Snapback Rally Plays Havoc With Short-Term Narrative

Published Feb 9, 2020

Power Trading and Markets – February 9, 2020

Snapback Rally Plays Havoc With Short-Term Narrative

Welcome everyone to Yellow Tunnel. Each week our team has its sights set on the business of sharpening trading psychology, awareness and trading skills that generate consistent profits that compound week after week to make a material difference in the lives of the members of the Yellow Tunnel community. I and my team strive to provide the right set of tools and trade discipline the lead to real financial success within our trading portfolios while also having a lot of fun doing so.

CURRENT TRADING LANDSCAPE

The market has been volatile, and closed the gap as hope for the world economies to continue to grow is the current narrative despite the uncertainty with Coronavirus. The question on everyone's mind remains: if this is "V" shape recovery or continuation of range-bound market.

I expect market volatility to persist. However, underperforming sectors have rebounded and Technology and SPY continue to make new all-time highs. I believe the market will rally starting a few weeks earlier than I anticipated. Following Friday’s strong employment data, SPY was able to stay above $330 and though Friday was a risk-off session with Monday's session possibly set up to also trade down, the market is on track to resume bull trend. I would only expect shallow pullbacks from here out.

I remain bullish on the pullbacks, as long as the market is above/near 50 days MA on SPY. Please watch 330 support levels using SPY. Aggressive short-term buyers should consider buying near $330 on SPY and selling near $333.

SECTOR SPOTLIGHT

This week’s focus is on the healthcare sector that has demonstrated excellent relative strength in spite of the rhetoric surrounding pricing for prescription drugs from President Trump in his State of the Union address and a strong showing by Bernie Sanders in the Iowa caucuses. Without question, there is a political agenda to bring down the cost of medicine, but the power lobbies that back the drug companies are sending a clear message of “not over our dead bodies”. It’s a hot topic in an election year for sure.

With that said, the healthcare sector is made up of more than pharmaceuticals. It packs in medical device makers, insurers, facilities operators, over-the-counter medical supplies and specialty products. A good way to cast a broad net over the sector is to own shares of Health Care Select Sector SPDR Fund (XLV).

The top ten holdings in XLV represent 51.6% of total assets with four Dow components occupying the top four spots with strong representation in the medical device space from Medtronic PLC (MDT), Abbott Labs (ABT) and Thermo Fisher Scientific (TMO), all of which are in powerful bullish uptrends.

Looking at the technical picture, shares of XLV are demonstrating excellent relative strength after a brief pullback with the broader market.

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TRADE OF THE WEEK

Coincidently, the top holding in XLV just happens to be the trade of the week. Shares of Johnson & Johnson (JNJ) are trading in a very bullish pattern of late. As far as healthcare stocks are concerned where the political narrative is more hostile, JNJ carries a much lower risk than other stocks in the sector.

The company is a free cash flow machine, never faltering during the recession with a rich history of raising its dividend and delivering steady earnings growth. 2019 revenues and earnings came in line and the forecast for 2020 is for sales to grow by 5.5%, which would be a strong showing boosted by expanding margins.

When applying my AI tools to JNJ, the Seasonal Chart shows the 20 and 30-day probability readings indicating higher prices for the stock over the near term. Trading JNJ from the long side should prove to be a profitable venture for those looking to walk the stock higher using short-term trading strategies.