What to Watch for When the Bulls and Bears Battle It Out

Toni Turner |

There's been a tug-of-war in the markets lately with the bulls and bears pushing and pulling stocks in a fairly wide range. Investors will just have to ride out the volatility as the market decides which direction it wants to lean toward next. In our latest interview with Toni Turner of TrendStar Trading Group, we discuss what key indicator to watch, and where the opportunities may be.

EQ: We’ve seen a pretty strong run-up in oil recently. Is this an opportunity to play a rebound or could this be a potential fake out?

Turner: Whenever I’m looking at an asset that is potentially basing or creating a low base–and it certainly appears that oil has been doing so if we look at the United States Oil ETF (USO) –I always consider the first move up to be fueled at least in part by short selling. So no matter if it’s commodities-related or if it’s a sector ETF or even an individual stock, I find that these bases work pretty much the same, and I think this one is no different.

In the case of the USO, as well as all the other related ETFs like the Energy Select Sector SPDR ETF (XLE) , we can see that volume started coming into these assets in December. We saw a bullish divergence form on the 14-day relative strength index (RSI) in January. I wait for other signals and we’ve just gotten those in the last few days. During this first move up, my risk management assumes that the USO could encounter resistance at about $20, as price rises into the 50-day moving average. I will execute my trades as such. The price has to prove to me that it really is reversing and that it really is going to maintain an uptrend. So far, we’re in the very early stages of that potential situation.

EQ: If energy does move up from here, what are some sectors or industries that could really benefit from the price recovery?

Turner: Of course, I’m watching the big energy-related funds like the XLE or the iShares US Energy (IYE) . We can also get more specialized funds like theSPDR S&P Oil & Gas Exploration & Production ETF (XOP) . I actually like the price pattern of the XOP better, although with oil inventories at such high levels, I suspect we’re going to have a lot of volatility to deal with.

There’s also the iShares US Oil Equipment & Services (IEZ) and the iShares Global Energy (IXC). All of them have similar patterns.  If you choose single energy stocks, take care that you don’t target an oil company that doesn’t have a strong balance sheet.

I’m leaning toward companies like Exxon Mobil (XOM) and ConocoPhillips (COP) here because they have strong balance sheets and have the cash flow to handle these kinds of volatile moves on the commodities. They’re also diversified. They own refining divisions and chemical businesses that benefit from cheap crude. They can covert cheap crude to gasoline and other fuels, as well as plastics.

I like the big energy companies here and also the big energy ETFs. However, I still think we have to be cautious here on the first move up and even after that, and not just buy without putting in protective stops.

EQ: We’ve seen some range-bound trading in the market since the start of the year between about the 1990 and 2065 level on the S&P 500. What are you watching for from a technical standpoint to see where we go from here?

Turner: The S&P 500 touched an all-time intraday high on Dec. 29 of 2093.55. I’ve watched this pattern evolve, and there was a couple of times where I thought we were in for a head-and-shoulders pattern forming. Thankfully, that top reversal pattern did not become a reality.  The S&P is forming a triangle right now, so I see the short-term resistance here at around 2065. If the S&P 500 cannot break above 2065 and continue to climb from there, but rather it reverses downward again from here to the 200-day moving average and breaks below 1980, then I think we’re in for some selling pressure.

I’ve been watching the 14-day average true range (ATR) indicator. That has been moving up steadily since the last week of December. When the ATR continues to move higher, it means that the bulls and the bears are still fighting. It means that every day prices push way up and then gets pushed way down.

On this chart, I see a great deal of disagreement and confusion. As long as the ATR is climbing, it means that everybody has a different opinion. Until that average true range starts rolling over and coming down, I will be keeping firm stops on my positions.

EQ: Are there any other groups or sectors that you’re watching closely right now?

Turner: I am watching the SPDR S&P Regional Banking ETF (KRE). If interest rates do start to move higher, I believe regional banks will benefit from that.

Now, of course, if oil in the form of the USO can maintain  levels  above $16.75,   additional industry groups in the energy sector that will surely get a bid  are the solar ETFs like Guggenheim Solar ETF (TAN). Solar stocks usually move up when oil stocks move up. We can also look at First Trust ISE Global Wind Energy ETF (FAN). Finally, we can look at the PowerShares WilderHill Clean Energy ETF (PBW), which has also gotten pounded heavily in the last couple of years. It too may be making a base here, and there are opportunities in these ETFs and in these industry groups, as well as other oil ETFs and energy-related stocks.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
COP ConocoPhillips 49.94 1.06 2.17 4,678,875
XOM Exxon Mobil Corporation 87.65 0.17 0.19 6,787,591

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