Market rally has important levels but this was hard

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Dow Jones futures open Sunday night, along with S&P 500 futures and Nasdaq futures.




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The stock market rally generally lost ground over the past week, but major indices found support at key levels. However, many promising stocks pulled back shortly after crossing buy points. Investors should follow a number of rules for the current trading environment, from light exposure to taking partial profits.

Vertex Pharmaceuticals (VRTX), Karl Schwab (SCHW), Excel energy (EE) and CALX stocks are usable, while Celsius (CELH) is setting up.

VRTX stocks are on the IBD 50 list. Calix (CALX) was the IBD stock of the day on Friday, with Excelerate Energy and SCHW stocks selected earlier this week.

It is a stock that is not doing well Tesla (TSLA). Tesla shares plummeted over the past week, breaking to new bear market lows on Friday.

Dow Jones Futures Today

Dow Jones futures open at 6 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.

Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular trading session.


Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live


Stock market rally

Outside of the Dow, the stock market rally showed modest losses after the previous week’s big gains, though there was a not insignificant pullback from Tuesday’s highs to Thursday’s lows.

The Dow Jones Industrial Average made a fractional gain in stock market trading last week. The S&P 500 index fell 0.7%. The Nasdaq composite fell 1.5%. The small-cap Russell 2000 lost 1.7%.

The 10-year Treasury yield rose 1 basis point to 3.82%, after falling to 3.69% on Wednesday.

US crude oil futures fell 10% last week to $80.08 a barrel. China’s zero Covid signals and aggressive remarks from the Fed led to demand concerns. Natural gas prices increased by 7.2%.

ETFs

Among the top ETFs, the Innovator IBD 50 ETF (FFTY) fell 1.1% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) fell 0.2%. The iShares Expanded Tech-Software Sector ETF (IGV) fell 3.55%, with cloud software names hitting hard. The VanEck Vectors Semiconductor ETF (SMH) fell 0.65% and met resistance at the 200-day line.

Reflecting more speculative story stocks, ARK Innovation ETF (ARKK) fell 9.5% last week and ARK Genomics ETF (ARKG) plunged 11.1%. TSLA stock is a major stock in Ark Invest’s ETFs.

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SPDR S&P Metals & Mining ETF (XME) fell 1.9% last week. The Global X US Infrastructure Development ETF (PAVE) lost 0.1%. US Global Jets ETF (JETS) fell 2.9%. SPDR S&P Homebuilders ETF (XHB) fell 3%. The Energy Select SPDR ETF (XLE) fell 1.6% and the Financial Select SPDR ETF (XLF) fell 1.4%. The Health Care Select Sector SPDR Fund (XLV) rose 0.9%. VRTX is part of the XLV fund.


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Stocks near buying points

VRTX shares rose 3.75% last week to 314.63, recovering a buy point of 306.05 from a flat base, part of a base-on-base formation. The biotech fell during the day on Nov. 11, as medical stocks came under pressure, but cut losses. The relative strength line is off recent highs, but shows steady progress throughout the year. Vertex earnings growth remains strong.

SCHW shares rose 2.45% on Friday to 79.81, breaking the downtrend of a handle and offering early entry. The official buy point is 81.18 from a nine month handle deep cup. However, the handle also formed just above a low of 77.51.

EE shares rose 2.7% to 27.17 on Friday, also breaking the downtrend of a handle. According to MarketSmith’s analysis, the April IPO has an official buy point for handle cups of 28.49.

CALX shares rose 6.6% to 69.82 on Friday, recovering bullishly from a pullback to the 21-day moving average. That pullback followed a profit gap after several weeks of tight trading. Calix’s revenues are still declining, but government funding for rural broadband is expected to drive future growth.

Shares of Celsius rose 3.9% to 96.99 last week, but returned lower on Friday. That could be good news. The energy drink maker has a consolidation buy point of 118.29. A break here could provide a lower entrance, although it’s too low to be a good handle. The 50-day line is still sliding for CELH stock, but the 10-day and 21-day lines cross that key level.

Tesla stock

Shares of Tesla fell just over 8% last week to 180.19 and fell to a new bear market low of 176.55 on Friday. That followed drops of 5.5% and 9.2% in the previous two weeks, a sharp drop since late September.

It’s a tough environment for aggressive growth stocks, especially EV manufacturers. Tesla is concerned about demand as production increases and competition intensifies. It has slashed prices in China, with more cuts likely as subsidies end on Dec. 31. Meanwhile, the “Twitter circus” remains a concern. CEO Elon Musk’s chaotic reign in just three weeks puts the Tesla brand at risk.

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Tesla is still growing at a strong clip, while new US subsidies should boost domestic demand in 2023.

But TSLA stock has gone sideways or down for several years. So while the EV giant could turn higher again, investors would have to wait for the chart to pick up again. That can take a long time.


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Analysis of the market rally

The stock market rally had a down week. Following last week’s big CPI-driven surge, indexes rose initially, but then pulled back from Tuesday’s highs and tested key levels on Thursday. But shares recovered modestly from Thursday’s lows.

A market break was not a big surprise given sharp recent gains and with the S&P 500 index approaching its 200-day line. Holding support areas is positive, while the Nasdaq’s 21-day line is poised to cross the 50-day line. Assuming the indices hold those levels and eventually move higher, this should be a constructive week for major indices.

But it’s been a frustrating week for leading stocks. Quite a few stocks either broke or flashed buy signals early in the week. But with the indexes retreating, many of those names quickly returned among the listings. Some will recover or settle quickly, but that will probably depend on the market.

Energy stocks had a rough week as crude oil prices plummeted, though LNG play EE stocks are an exception.

Medical stocks, pressured by defensive growth names, rallied this week. That includes VRTX stock as well as many biotechs and health insurers.

Network companies like Calix, some financials like Schwab, as well as building materials and some industries still look interesting.

Aggressive growth did not have a good week. That includes Tesla stock, cloud software, and ARK-type names. CELH shares were an exception.


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Investment rules for this market rally

Investors should always have sound trading rules. But the current tricky market rally means investors should focus on light, flexible trading. Here are seven guidelines.

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Keep exposure light: This is not a crazy bull market. Investors should participate in this rally, but now is not the time to be on the margins.

Gradually add lighting: Do not increase exposure quickly. Buying some stocks on Tuesday, say, would have caused rapid losses due to the resulting market pullback. Let yourself be lured by the market gradually.

Look for early entries: Breakouts struggled in 2022, due in part to unstable markets and industry rotation. By the time a stock reaches a traditional buy point, especially from a deep base, it could be in for a pullback. Early subscriptions provide a chance to get into promising stocks before the mini-run pauses.

Take partial profits: Given the ups and downs nature of the current uptrend, investors should consider taking partial profits quickly. This can give you the confidence to drive the remaining position. Know the character of your property. Some stocks are more sensitive to large volatile movements, where partial gains are particularly important.

Know your line in the sand: You need to enter a trade knowing where you will end up, all or scale. If the stock rises, you can move your stops up.

Diversity of Leadership: While it’s a good idea to focus on a small number of companies, don’t focus too much on any one sector or theme. Sector rotation has hit defensive, defensive growth and growth stocks in succession over the past few days. Try to acquire leading stocks from different backgrounds.

Be prepared: If you want to buy the best stocks, do your homework on early entries. Work on screens to build your watchlists. Focus on specific names that are “done” or almost, but also have a broad list of quality stocks that are starting to build.

Read The Big Picture every day to stay in sync with market direction and leading stocks and sectors.

Follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.

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