Who’s the Genius? (XRT)

That’s right, friends!

 

Hugh’s the genius!

 

Earlier this week, fellow Normandy scribbler Hugh L. O’Haynew offered a downright genius call on the transports that not only nailed it in the following trading session, but now sets us up for an upside equity breakout that he also advised was forthcoming.

 

SOUND THE TRUMPETS!

 

RING THE MERRY BELLS OF REDEMPTION

 

All hail.  All hail!  GLORY, GLORY HALLEL-HUGH-YA!

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Love that knee bandage, sister.

 

Anyway, we note that Hugh’s call was all the more prescient for coming on a day and at a time when the rest of the market did PRECISELY NOTHING!

 

Fast asleep, friends.

 

That’s correct.  The transport breakout that he wrote of in this week’s Wall Street Elite letter (Transport Hi-Jinx) came on a day when the S&P 500 fell 0.01% and the NASDAQ rose 0.15%.  Call it a wasted day for the broad market.

 

Not so the trannies, though, which added a fat 1.5% on the day, as Delta, American and Southwest Airlines all surged, putting the Transport Average at 8059 and confirming a breakout above a 57 week declining trendline (in red, below).

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The leap also put the transports on top of all her moving averages, most notably the long term MA, in yellow.  As Huey himself intoned earlier in the week –

 

[T]he rise above trendline resistance will also bring the trannies above their long term moving average (in yellow), and that would pretty much lock in place the turn higher for the intermediate trend.

 

So he wrote.

 

And so it was.

 

Prophet! Sage! Necrophiliac!

 

Alright, alright, simmer down…

 

We like giving old Huey a ribbing from time to time, but we also want to take the opportunity to piggy-back on his read to make our own trade for the week.

 

And it goes like this –

 

  1. We’re going to assume that Hugh’s call on the Transports is the correct one, as the technicals currently indicate, and echo his prediction of higher prices for the sector in the months to come.
  2. We’re also going to quote directly from Transport Hi-Jinx his observation that “[t]he transports are a key leading indicator of stocks, as orders to book new deliveries have to be made well in advance of actual industrial production.”
  3. We’re then going to take it one step further and analyze current volatility levels in order to convince you that an unbelievable upside move for the overall market is now at hand.
  4. And we’re going to close with a dance routine that’ll knock your socks clean off.

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“SHAKE!”

 

We start with volatility.

 

Last week, we let it be known that it had been over a month since we saw a 1% move on the market in either direction, and that this kind of action regularly presaged a key market breakout.  We averred at the time that it would be to the upside.

 

A week later we see the following bit of chartitude, reporting that for any 40 day period going back as long as accurate records are available, the current period manifests the least volatility by a longshot.

 

Have a look –

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The amplitude (high/low range) of the Dow Jones Industrials over the last 40 days registers a meager 2.27%, outstripping the previous tightest trading range in 1922-23 by 26 basis points.

 

Phenomenal.

 

The market has never been so tightly coiled – never so unclear about its next move.

 

In real life, the action on the Dow looks like this –

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The chart makes it clear just how tight things have become since the Brexit boondoggle left everyone wondering “…what’s next?”

 

Election 2016

 

It may very well be the election that gives us a final answer to that question, but we’ve a hunch that the move will occur, rather, in anticipation of the poll results.

 

That is to say, we see a move unfolding now, today, that culminates with news of the election of the next president.  And certainly the longer the range takes to get resolved, the greater the ultimate snap will be.  But we’re sticking firmly with our belief that it transpires before, not after the election.

 

We also believe that it will be led by a surprising sector – the retailers– and we outline our reasons for that choice hereunder.

 

Don’t Think, Just Buy!

 

Consider:

 

  • The strongest months for retail stocks are October and November. After that, they pump up again in February and March.
  • Moreover, that action regularly spills over into the broad market, where over the last 22 years October has been the single best performing month for the S&P 500, the second best for the Dow.
  • Finally, the weekly chart of the retail sector (below) shows an unflagging uptrend still in force, despite new highs being set more than a year ago!

 

Have a look –

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This is the SPDR S&P Retail ETF (NYSE:XRT) for the last three years, and it clearly shows all the stock’s moving averages in an uptrend (blue arrows).

 

Price is being scooped by the short term moving average (in blue) and is resting directly on the telltale 137 week MA (deep red).

 

Most importantly, perhaps, the last six months have traced out an ascending triangle pattern (in black, at top) that is always bullish.  All that’s required is a break above resistance at $46.50 and we’ll see a blue sky rise toward all-time highs in the $51 range.

 

And finally, weekly RSI and MACD indicators are both above their respective waterlines for the first time since July 2015.

 

All of which signals a mid- to long-term bullish trend about to develop for the retailers.

 

And that’s precisely how we’re playing it.

 

We’re going out six months on XRT, buying an at-the-money CALL and hedging it with an offsetting sale of a PUT.

 

Here’s the details –

- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]

Many happy returns,

 

Matt McAbby

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