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Stocks Ready to Consolidate After Massive Run, Says Basil Chapman

“Think about the last gathering you went to with regular people, and tell me, did anybody mention a stock they purchased that had tripled or quadrupled? Did anybody give you a tip or even talk about the stock market?” Basil Chapman, a leading market technician and host of the Tiger Technician Hour, thinks your answer to those questions is likely to be no. Chapman recently joined Jim Puplava on Financial Sense Newshour to discuss where the markets are going, the important role they’ll play leading up to 2020 and ways investors can jump back into the market.

Chapman suggested the U.S. stock market hasn’t hit a market top yet: “I don’t see how we can make a top without everyone talking about it,” he said. Considering the December 26 lows, “this is the absolute antithesis” of a market top. He said the December bottom stirred people up, he thinks it will take some time before anyone starts to get back into the markets, “we’ve got time on our side.”

The next 18 months will be an interesting, albeit rather untraditional era for the markets. Chapman thinks “we’re looking at something different” in the final stage of this president’s four-year term. Having lost control of the house in the 2018 mid-term elections, getting legislation through Congress will prove to be challenging, if not almost impossible for the president. “When you look at it as objectively as possible, the President doesn’t have anything...he’s claimed the stock market as his and he’s got to latch onto that, that’s going to be his bailiwick because he’s not going to get legislation through.” This is important for investors to keep in mind.

2020 is a year to keep on our radar, not only because it’s a U.S. presidential election year, but it’s also when Chapman posits we could see “a major climax in the market.” Right now, we could have a rotational correction lead by some of the major stocks, but Chapman said, those will start to pull back, which is what he’d like to see. “A pullback gives a really good buying opportunity for those people who missed getting it earlier, and that would be the perfect scenario.”

Chapman identified areas and stocks that he feels are ideal for getting back into the market such as waste management and cyber security, areas that no matter the state of the markets, we’ll always need.

Medical marijuana is also an area where he thinks we could continue to have a flurry of activity. Chapman advised those getting back into the market to “have patience, identify what you really like and have two prices: one that looks like you’ve got a 20 to 30 percent pull back and then some crazy price lower than that that you might not get but maybe if you do get it, it’s a really great entry point.”

Here's Chapman's full notes outlining his technical outlook and targets on the broad U.S. stock market, various key sectors and asset classes that were discussed in the full interview (click here for audio):

Where we are now in mid-February, 2019?

  1. Since the December 2018 lows – actually a synchronous low between 12/24 and 12/26 in the key indices, a V-shaped broad recovery has rallied about 19 percent in most indices. Usually there is an h-pattern as the markets bounce and then do a retest at or above the key low formed. In this case most indices barely rested after the initial take-off, and have rallied pretty much non-stop to their current prices.
  2. The key indices have soared past their daily 200-ema usual resistance levels, and are at, or very near their December 3rd left side doji candles – where the December swoon really began.
  3. The VIX-Volatility Index (@14.09), after hitting a 36.20 high in late December has slipped to the 14s. The longer it remains in the 14s-13s the greater the chance that market prices will rally further. However, any rally in the VIX to the 16s and 17s will make the market vulnerable to selling again. If at some point the VIX goes to the 20s selling will intensify.
  4. Semiconductors – SMH@103s: From the all time March 2018 high of 114s, it cascaded 29% to the 80s Dec low. Now +19% in the 103s, there should be strong resistance in the 105s. Any rally into March over the 105s would be very positive for the overall market. It will take a close below the 99s key support to begin a deeper timeout. The 94s should be very strong support over the coming weeks.
  5. IYT-Transports ETF@191s: After a -25% decline, from 209s to 155s, this sector has rallied +23% over the daily 200-ema and must hold the 184s if there is a sell-off into late Feb. Rallying over 195s by mid-March would be very positive and help the overall market – transports are an economic bellwether.
  6. Sectors that were deemed favorable after the anticipated late 2018 consolidation included the cyber security (HACK), broker/dealers (IAI), medical cannabis (MJ), and the financials (XLF). They remain on the buy list, but this next phase has to see the IAI-Broker/Dealer ETF begin to lead, and lately it has been stalling at the 200-ema in the 61s.
  7. The $DXY (@96.49): The Dollar Index rallied through most of 2018 from the 88s, February low, to December’s 97s high, now consolidating between the 97s and 95s. The monthly chart has held the 14-ema support @95.20s. My thinking has been that the dollar represents confidence in the USA and the US economy. Gold is both a fear factor and inflationary commodity. So how the dollar holds the 95s will be important, and whether gold has some consolidation here are factors.

Observation: It is very positive coming off a significant low in unison (12/26/18). At this stage we might see a rotational correction. Especially if the metals, and perhaps the commodities – even copper just broke out of 6-month trading range – start to siphon money from some market sectors that have done really well.

That could lead to some sectors having a consolidation, while others hold up quite well – thereby curtailing more serious downside action.

The Dow Jones Industrial Average @25890s on 2/20/19

Daily: Bumping into the strong 25900s resistance just under the 26000-millennium level. A rally into the 26150s begins to make the 26952 all time September 2018 high a magnet in this quarter, rather than later in the year. Support in the 25500s-300s will be important to hold into March. Closing below will set in place a consolidation phase that could target the 24700-500s. The MACD and stochastic are strong, but rather extended in time. The green 9-ema support is @ 24580s, the 14-ema (black) is @25390s.

Weekly and Monthly: There has been a strong technical improvement as the MACD and stochastic have rallied strongly in the weekly. The monthly MACD remains weak, the stochastic is attempting to cross positive. In both cases a push into the 26100s that holds for a week will further improve the technicals, and raise the base of support. A weekly close below 25000 within the coming 3-weeks will likely begin a consolidation phase. Either way the 24000 level at this stage looks like major support for this quarter.

The Dow remains one of the most well rounded indices with everything from airline, food & beverages, finance, entertainment, multinational oil, tech, sportswear, chemicals, building materials, multinationals like MMM, UTX and CAT, retail, insurance, even to health products.

In sum: The Dow and the other key Indices – having already given a fabulous yearly +20% gain, and not yet two months into 2019 - makes the most obvious statement ‘too much, too quickly - time for a consolidation’ appropriate. While the 15-cascading days of December 3rd, where the waterfall cascade acceleration took place, this has been a 37-session recovery back to that level. So it might be anticipated that from here the action gets a lot choppier.

For the Dow it will be the 26150s+ or under 25500 that could determine the March parameters and directional projections.

SMH- Semiconductor ETF @103s

This chart’s huge 27% rally belies what was being said in December and even in early January, that orders were disappointing. Even AMAT- Applied Materials mentioned that in their earnings announcement. Looks like the chart never got the memo.

This is an important sector, enveloping much of the economy, so even if there were to be a timeout starting very soon, the 99s-97s should offer initial support. If that fails, the SMHs – and probably the general market – will come under more selling pressure. The weekly has 9-ema support in the 95s. But certainly, trading into the 106s would be very positive. Right here some caution prevails.

Dollar Index - $DXY @96.57

Discussed earlier, the Dollar Index has been consolidating the strong gains from 2018 in a rather narrow range. If the Dollar is representing confidence in the US economy by foreign governments it might be somewhat immune to gold’s action.

If there is a slide below 95.00 this timeout might extend longer. But a rally back to the 97s would suggest a normal consolidation is unfolding as the monthly tries to garner some more upside momentum.

Gold - @gc- Gold Continuous Contract @$1341

The gold contract has just rallied close to the weekly chart’s left side peak of 1353s from May, 2018. This is where we might see some form of consolidation, perhaps going back into the rectangle range in the 1320s. That would be similar to the 1/4/19 high, and consolidation. That is why the dollar and gold are at possible inflection points. But no change of direction will take place if the dollar slides and gold pushes to the 160s in February.

The IAI-Broker/Dealer ETF@61s:

Bumping up against the daily 200-ema for a few weeks, if, instead of breaking upside, there is a pullback to the 58s-57s area with the market sliding, that will be an area of support that must hold. If it holds, that might be the start of a rally attempt to pierce the 61s decisively, for the next big up phase. This is a sector that should in 2019 become a leader as more participants join the stock market rally.

Note: The President has claimed the stock market as an icon of his Presidency. With a total embargo on any of his policies likely, the market will have to be his bailiwick.

It is going to be a very interesting 20-plus months.

To hear Basil outline his technical outlook and targets on the above, including the U.S. stock market, various key sectors and asset classes, click here for audio.

About the Author

Justine Hall

Digital Content Assistant
Financial Sense® Wealth Management