Bollinger: Buy energy & materials

Posted Apr 19th 2007 5:15PM by Steven Halpern
Filed under: Newsletters

To get a technical advisor's assessment of a Bollinger Band setup, there's no better technician to ask than John Bollinger himself. Looking at recent stock market behavior, he says, "The chart pattern made by the decline and the recovery is a classic Bollinger Bands W bottom."

Indeed, the editor of The Capital Growth Letter notes that the recent bottoming pattern is a "textbook example." As a result, he says he remains constructive on the US stock market.

He explains, "Stock market breadth has been good; actually, it has been very good. Both the daily and weekly versions of the NYSE Advance-Decline Line are at new highs. The NYSE Composite made a new recovery and all-time high on Tuesday the 10th."

He continues, "The recent decline was over quickly and was met by solid purchasing interest in stocks. Net new highs dipped into negative territory on only two days, the day of the low and the day of the retest, and have since been running highly positive."

In addition, he notes that up volume has been more than 90% of volume on two days, a pairing he observes has an excellent forecasting record for higher prices over the next three, six and 12 months.

In his assessment of sectors, he notes that energy and basic materials have been the number one and two groups in his rankings. He notes that the first group of stocks out to new highs after the correction was the energy sector.

To participate in this group, he owns iShares Trust Index Dow Jones Energy ETF (ASE: IYE) as well as the Oil Service HLDRs (ASE: OIH).

He states, "We have oft repeated that the energy stocks should be bought on pullbacks and sold, or hedged, only if necessary, on strength. Of course there will come a time when this will no longer be good advice, but there is no sign yet of a change in the dynamic in this market sector."

"As far as we can tell," he adds, "the demand curve for energy has crossed above the supply curve and remains there, which means that energy assets will be attractive for the foreseeable future." As a sign of things to come, he speculates that the next big up move will be in natural gas.

Further, he adds, "Don't believe the commodity market bears. The commodity market is still strong. Our Commodity Composite just made another new high. This is a clear-as-a-bell argument that the world's economies are strong, that demand for basic materials is high and that a recession is not in the immediate cards."

To play the basic materials stocks, he recommends the iShares Dow Jones US Basic Materials ETF (ASE:IYM) -- which he says should be bought on any weakness.

For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free daily website, TheStockAdvisors.com.

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