Swing Trader’s Brief: Oil Pullback and Relative Strength Stocks to Watch
Each week we step back and look at the bigger picture before the trading week unfolds.
This week the market is trying to stabilize after some pressure tied to oil prices and inflation concerns. We are seeing a modest bounce to start the week with the indexes up about 1 percent, but the bigger story is where the market sits relative to the trading range that has developed over the last three to four months.
Recently the market dipped below the lower end of that range heading into the weekend. The main concerns were geopolitical tension in the Middle East and the surge in oil prices. Now the market is testing that level again from below. That makes this area important.
If the market can push back into the range, it would be a constructive sign for the week ahead.
Oil Is Driving the Narrative
Right now oil remains one of the biggest factors influencing market behavior.
Most industries are indirectly tied to energy costs. Transportation, manufacturing, airlines, and even consumer spending all feel the effects when oil spikes. That is why traders have been watching crude closely over the past few weeks.
The good news this week is that oil has pulled back slightly.
The USO ETF shows oil easing and futures have dropped under the $100 per barrel level, now trading around $95. The market has responded positively to that shift.
If oil continues to cool off, it removes some pressure from equities.
For now that remains a key variable to monitor.
Volatility Is Starting to Fade
Another positive sign is what we are seeing in volatility.
The VIX, which measures market fear and volatility, spiked during the recent pullback. Now it is starting to decline. Historically when the VIX makes a large move up and then pulls back sharply, it often does not return to those highs right away.
That type of behavior usually signals that the market is stabilizing.
If that pattern holds, we could see the indexes gradually move higher this week and potentially reenter the prior trading range.
What the Indexes Are Telling Us
The overall market structure still requires some caution.
The S&P 500 is currently trading below the 50 day moving average, and that moving average is beginning to trend lower. The next major level of support sits near the 200 day moving average.
Because of that setup, traders should continue focusing on relative strength.
When the market is under pressure, the best opportunities often appear in stocks that are holding up better than the indexes.
Relative strength shows up in a few ways:
- Stocks holding above key moving averages while the market is below them
- Stocks making gains while the indexes are pulling back
- Stocks declining less than the broader market
Right now two areas are showing strong relative strength.
Computer systems and electronic component companies.
Seven Stocks Showing Relative Strength
Here are seven stocks worth watching this week. These names are showing stronger technical structure than the broader market.
Laser (LASR)
LASR is showing clear relative strength compared to the S&P 500. While the market is sitting below the 50 day moving average, this stock is well above it with moving averages trending higher.
The chart may be slightly extended right now, so a pullback or a breakout above the recent high would offer a cleaner entry.
Sandisk (SNDK)
Sandisk recently pulled back to the 50 day moving average and is now pushing toward new highs. The trend structure remains strong with upward sloping moving averages.
This setup offers a potential entry with a wider stop due to market volatility.
LITE
Lumentum Holdings is another name in the communication equipment space showing similar technical structure. The stock has reclaimed the 9 day exponential moving average and is not overly extended.
This type of setup can work well for swing traders looking for continuation.
Advanced Energy Industries (AEIS)
AEIS is part of the electronic components group and displays a very similar chart pattern to others in the sector.
When an industry group gains strength, many charts begin to look alike. This stock remains above the 50 and 200 day moving averages and continues to show strong trend structure.
Powell Industries (POWL)
Powell Industries recently pulled back deeper than some of the other names but remains technically strong.
The stock bounced from the 50 day moving average and reclaimed the 9 EMA. With resistance near recent highs, this setup offers favorable risk reward with a stop placed under the 50 day.
Arista Networks (ANET)
Arista Networks is not showing the same aggressive momentum but still demonstrates relative strength.
The chart is forming a range which offers a potential swing trade setup. Traders could risk roughly five points for a potential move toward the top of the range.
BRT Apartments (BRT)
BRT has shown some of the strongest relative strength among the group. The stock is trading above both the 50 and 200 day moving averages and recently broke to new highs.
It may be extended for new entries, so a pullback would offer a better opportunity.
Watching Software for a Second Move
Last week we focused on software stocks that had experienced deeper pullbacks.
Now those stocks are starting to bounce. The IGV software ETF shows the group attempting to stabilize after the correction.
The key question is whether software can hold this range and begin a secondary move higher.
If that happens, the group could provide additional swing trading opportunities in the coming weeks.
The Game Plan This Week
Markets are still reacting to external events including geopolitical tension, inflation concerns, and energy prices.
That means volatility can remain elevated.
The best approach in this environment is simple.
Focus on relative strength.
Trade stocks holding above key moving averages.
Keep risk controlled.
When the broader market struggles, the strongest stocks often reveal themselves quickly. Those are the names that tend to lead when conditions improve.
This week several names in computer systems and electronic components are showing that leadership.
