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Roger’s Recap and Prediction

This week, while the markets saw a temporary pullback our picks are up and this is amazing.

I love when a plan comes together.

Now, let’s dive in and get into what's going on this week.

While the Small Cap Russell 2000 Index (IWM) is holding above its 200-Day Moving Average, overall, the markets are overbought and due for a correction. Our technical indicators are showing negative divergence across all 4 indices and the adjusted RSI (10 day) is still above the 70 threshold level confirming that the market is overbought.

On Friday, the SPY gaped open after the E-Mini S&P was up over 20 points in pre-market trading because of positive earnings, Fed Minutes, and good news with the China deal.

In addition, the SPY closed at its upper Bollinger Band and the market is experiencing resistance at the 290 price level. That being said, after checking our technical indicators, the SPY is due for a temporary pullback.

Overall, we're still expecting to see a short-term pullback in the markets followed by sideways price action and a resumption back to the upside. We’re currently neutral to bullish on the markets.

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Right now, it makes sense to wait for a pullback in the markets before taking on new long positions. You should focus on short-term bearish trades on the weakest stocks in the weakest sectors that are still trading above value.

Roger’s Watchlist

Last week we mentioned Dollar Tree, Inc. (DLTR), CSX Corporation (CSX) and Delta Airlines (DAL) as a part of our watchlist. All three of our picks are up since we last mentioned.

Tech and Real Estate are still are the strongest sectors while Consumer Discretionary stocks continue to move higher. Stocks like Lululemon (LULU), McDonalds (MCD) and Nike (NKE) are performing well.

We wanted to change it up this week. Instead of stock picks, we’re trading sector ETFs. Because it is earnings season, volatility is high in individual stocks but sector ETFs are diversified and hence will lower our risk.

The weakest sectors are the Health Care (XLV) and Utilities (XLU) sectors.  That being said, due to the overall bullish context of the market, we’re going to take a small “dead cat bounce” play on these sectors.

If we see a short-term pullback in the overall markets, we could very well see some short-term buying in both of these sectors since they are already at oversold levels.

Options on both ETFs (XLV and XLU) are highly liquid and inexpensive, so we won’t need to see a lot of daily range to realize a decent profit, while still limiting our risk.

We’re looking for XLV to pullback into the 89.75 / 88.75 price area support where we would likely see a short-term bounce - targeting a move back up to the 92 / 93 price area.

XLU has built support between the 58 and 57.50 price levels and is looking like we’ll see an upside break-out. The ETF has consolidated in a tight range over the last 9 to 10 days and is gearing up for a move.

An upside break-out would easily bring a re-test of the 59.07 recent swing high into play. However, we’re targeting a move up to 60 and/or the 61.50 price level if we see sustained upside momentum.

How Do We Know What Sectors To Trade?

You can divide every economics cycle into five phases.

One math formula predicts how it will play out:


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Bonus: Earnings Play

We have a bonus pick for you - we don’t usually do earnings play, but ‘tis the season. Let's look at Edison International (EIX). The earnings report is out Tuesday - April 20 after the market closes.

EIX is a defensive stock, which is in alignment with our expectations. On Friday, not only did we see an increase in volume (which suggest institutional activity), we saw a rejection off of prior support levels and its 200-Day Moving Average.

Look for a shallow pullback to the 65/64 price area before initiating a long trade. We’re targeting a move up to the 70/71 price area ahead of earnings.

P.S., The Jobless Claims Report will be out on Thursday, April 18, at 8:30 a.m. EST during pre-market trading.

All the best,

Roger Scott