Market Lab Report - Premarket Pulse 5/5/16

Published:

5 May 2016 13:13 ET

Major averages fell yesterday on higher volume as the S&P 500 is testing its 10-week moving average. Of the FANG stocks, FB and AMZN are showing improved leadership while NFLX and GOOG continue to founder. Leading stocks in general have been having a tough time showing true leadership characteristics, as many lacked the thrust during the rally than began in February.

On April 24th we issued a Short-Sale Set-Up report covering three such broken down former leaders: GOOG, MSFT, and NFLX.

GOOG is currently sitting just below its 200-day moving average at 696.36 (719.96 for GOOGL shares) where it is in a shortable position using the 200-day line as a guide for an upside stop. We reported on GOOG as a short-sale set-up two Sundays ago and it has since moved lower. MSFT is sitting just below its 200-day moving average and we would look to use any rally up to the line at 50.68 as a potential short-sale opportunity. Otherwise, the stock could be shorted at current levels using the line as a guide for an upside stop given that the stock is less than 2% away from the 200-day line. We would prefer to short NFLX into any rally that potentially carries up into the 20-day moving average, currently at 96.12.

Tesla Motors (TSLA) is set to open up just below its 50-day moving average at 229.42. It is currently trading at 226-227 in pre-open trade. We would look to short the stock as close to the 50-day line as possible, although it will open a little over 1% away from the line and would still be in a shortable position using the 50-day line as a guide for a stop.

One significant clue of a weakening market is the fact that we've seen many of these junk-off-the-bottom rallies off of the February lows start to roll over. For example, housing stocks and airlines have been decimated over the past two weeks, and they were both groups that had sharp rebounds off of the February lows.

Oil is trading higher due to the wildfires in Canada which could affect oil production. Futures moved higher on this news but have lost some of their upside momentum. We would look at any market rallies as potentially shortable affairs given that the Market Direction Model is currently on a sell signal, though short-sale opportunities as well as buying opportunities can come regardless of its signal.

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