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Technical Take: Groupthink

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Remember to make sure you have a good risk/reward setup in your trades and be careful out there!

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You probably want to be long stocks in strong groups, and short (or at least not long!) stocks in weak groups. Check out some of the below groups for actionable trading ideas.

Small Cap underperformance could continue. The Russell 2000 is sitting right on the bullish support line on a point and figure chart. This uptrend will break with a move below the 815 level on the RUT. Keep an eye on this as it could be another data point supporting the end of 4+ years of small cap out-performance.


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Energy remains one of the best groups for long exposure, and while slightly extended, this will be a key group to focus on buying pullbacks. The OSX (Oil Service Index) has been a huge winner so far this year, and a pullback to the 50 day near 250 should offer good setups in individual names.


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So far the NDX has been able to shake off a traditionally weak seasonal bias and grind higher. While there is definitely potential for a broadening top formation, I think tech should be a decent group to look for long candidates with defined risk/reward (tight stops!). Near term the 1900 level needs to hold.


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The SOX (semiconductor index) is a great example of a technology group bucking the weak seasonal trade, and this is where you want to look for good risk/reward long setups. It looks like the semis could be starting an uptrend, and pullbacks into the 490-495 level should offer a good buying opportunity. However, I would caution that there is probably some fast money parked in this beta trade; fast money that could leave quickly at the slightest sign of weakness. Use the 475 level and the 200 day moving average as a line in the sand for long trades in this group.


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The BTK (AMEX Biotech Index) is sitting on good long term support at the 200 day moving average. Look for the components of this index that offer good risk/reward setups for long ideas.


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While the BTK looks to be at support, the BBH ETF (Biotech HOLDRs Trust) looks ugly. You can see the clear head and shoulders topping pattern which I believe is especially bearish given it is occurring below the 200 day moving average. This pattern would project prices down into the low to mid 160's. I think this is an interesting divergence between two similar biotech groups. Check into the components that differ and you might find some interesting biotech stocks to avoid!


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One group that must be avoided at all cost right now is the homebuilders. This group looks like death. As you can see in the below longer term chart, the HGX is breaking to new lows for the year and the multi-year uptrend line. We have seen and heard plenty about the troubles in housing and this clearly indicates we might not have even seen the worst for this group. Look out below!


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The group that continues to worry me the most about the overall health of the market remains the financials. The BKX (Banking Index) continues to under-perform and is currently breaking levels that would project down to new yearly lows. Until this group is able to stabilize and form a decent base I believe the broader equity benchmarks will face tough headwinds.


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Remember to make sure you have a good risk/reward setup in your trades and be careful out there!
No positions in stocks mentioned.
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