US stock futures are pointing to a slightly higher open Wednesday (*Update: futures are now ticking lower despite a higher than expected ADP Employment change) after Tuesday’s beatdown. Last week the market experienced the most aggressive and persistent selling we had seen since early November as unrest in North Africa and the Middle East sent oil prices soaring. However, each afternoon the market was able to pare some its losses, many beaten down sectors repaired technical damage, and then the market finally reversed course on Friday. When we saw upside follow-through Monday, many felt indices on a path straight back to highs. But apparently the market is standing on more fragile ground right now than at any point during the rally.
A major catalyst, as mentioned, has been oil. Many economists, including Ben Bernanke in his testimony before Congress yesterday, believe rising oil prices pose the biggest threat to the economic recovery. An oil spike would greatly increase the likelihood of a double dip recession. One industry already feeling the effects of higher fuel prices is the airlines. The international trade group for airlines cuts its industry profit forecast by $500 due to the unexpected jump in fuel prices.
For more market and stock commentary watch Scott Redler’s daily Morning Call video below.
After finding its footing late last week and taking back earlier losses, yesterday we believed the market was in a tricky spot. There was some indecision and choppy action even though we opened higher and closed green on the session. As an active trader, when you get the meat and potatoes of a move, it’s a good time to take some profits and survey the landscape. We highlighted big cap tech stocks, which hadn’t bounced back as strongly as some others, as the sector that would likely hold the key to the next move in the market. When tech leaders began to falter yesterday it was a sign that the bears still maintained some control.
Netflix Reversal Provides Calculated Entry
One big cap tech leader that we have been watching for a potential oversold buy has been Netflix, Inc. (NFLX). On Valentine’s Day, NFLX squeezed shorts and pushed all the way to $247.55, but has pulled all the way back into its earnings gap, bottoming out just above $200 yesterday. The stock showed relative strength for the first time in weeks, holding up decently well while the market got hit.
There were two things that made us confident about yesterday as a potential buying opportunity in NFLX, and the stock has not run overnight so it’s still at a good potential area. First, the stock bounced yesterday exactly off its 50-day moving average. Second, the reversal (a move down through the previous day’s low and then back above it) presents a defined risk-reward parameter. You can enter the stock on that reversal and put stops at the low of that day with targets back at the nearest resistance level, which currently stands around $215.
After buying almost every pull-back of this rally, Marc Sperling of T3Live.com says yesterday’s action was troubling for bulls. It’s not time to throw in the towel to the long side, but definitely time to start exercising caution. While Sperling agrees that NFLX, after bouncing off its 50-day moving average, has the potential to bounce, he says he will look short on some other tech stocks that are off their 50-day MAs. Among those stocks to potentially look short are Baidu.com, Inc. (BIDU) and Apple Inc. (AAPL).
Rare Earth Back on the Move?
The rare earth sector was a bonanza for short term traders during Q4 2010, but more recently has quieted down. Rare earth remains very speculative as most companies have yet to produce earnings, but stock prices spikes have been driven by news that China, which produces 90% of the world’s rare earth supply, would be significantly cutting export quotas. After being somewhat off the radar in recent weeks, rare earth stocks are starting to form constructive consolidation patterns that could soon ignite.
The leader in the group, and one with actual earnings, is Molycorp, Inc. (MCP). The stock has been coiling in a wedge pattern since the beginning of the year, and the 50-day moving average has also converged with the 21-day. We will be watching MCP for a potential explosion above $50 and then out of the wedge.
*DISCLOSURE: Scott is long AAPL, NFLX, SPY. Marc is long MCP, NFLX; Short SPY.
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