Construction stocks to build on

Industrials led the market higher last week and 2 companies in the sector are showing technical strength that could make them leaders in 2013.

By MoneyShow.com Dec 11, 2012 3:14PM

Home under construction copyright CorbisBy Tom Aspray, MoneyShow.com


Stocks managed minor gains Monday, and while the market internals were positive, they were not impressive. The NYSE Advance/Decline (explained on MoneyShow here) has continued to improve and is now very close to making new highs. A strong move to new highs in the A/D line would signal a much sharper rally.


Stocks are higher Tuesday as the S&P futures are close to the key resistance at the Dec. 3 highs. A strong close above these highs would set the stage for a test of the year's high at 1474.51 in the S&P 500 or $148.11 in the Spyder Trust (SPY). 


The beaten down PowerShares QQQ Trust (QQQ), which tracks the Nasdaq 100, is unlikely to come close to its September high of $70.58.


In a story on MoneyShow Monday (Best Sector Bets for the New Year), I discussed the four sectors that were outperforming the S&P 500 and looked the strongest technically. The industrials sector, as represented by the Select Sector SPDR Industrials (XLI), became a market leading sector last week.


One market leading group that is part of the industrial sector is the S&P Construction & Engineering Index. It was up 1.6% Monday versus a small 0.2% gain in the SPY. Two stocks in this group appear to have completed long-term bottom formations, which gives them excellent upside potential.


chart
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Chart Analysis: The weekly chart of the S&P Construction & Engineering Index tested the support in the 207 area in mid-November and closed strong last week.

  • There is next resistance at the September high of 235.

  • A close above the major resistance at 240, line a, will complete a major bottom with the first target at 260, which was the early 2011 high.

  • This industry group index had a high of 430 in 2008.

  • The relative performance broke through its downtrend, line c, in September before pulling back to support.

  • The RS line shows a positive uptrend, line d, and a move above the September high will confirm the major bottom.

  • The weekly OBV has moved back above its WMA but is still below major resistance at line e.

  • The daily technical studies (not shown) look very positive as it was up sharply on Monday

Granite Construction Inc. (GVA) is a $1.22 billion heavy construction company that provides civil contracting and provides construction materials. It has a current yield of 2.3%.

  • The weekly chart shows that it closed last Friday just above resistance at line f.

  • This completes a long-term reverse head and shoulder bottom formation as the LS (left shoulder) was formed in the middle of 2010.

  • The upside target from this formation is in the $44 to $46 area.

  • The RS line closed last week above resistance at line g, and the move above the early 2012 high completes a major bottom.

  • The weekly OBV has been very strong as indicated by its uptrend, line i. It closed last week at three year highs.

  • The volume pattern (blue line) is consistent with the chart formation as volume peaked as the LS was being formed and has since formed lower highs.

  • There is first support at $30.30 to $30.80 and then in the $29.50 area. Stops on new longs should be under the late November low at $28.65.

chart
Click to Enlarge


Foster Wheeler AG (FWLT) is a $2.52 billion dollar heavy construction company that is based in Switzerland. Recent data shows that they have $709 million in cash with only $152 million in debt. The chart formation for FWLT could also be called a reverse H&S, but it is not as clear.

  • FWLT dropped below the 20-week EMA and the 38.2% Fibonacci support in November as it had a low of $20.88.

  • There is year-long resistance, line a, at $24.41 to $24.73. A move above this level should signal a rally to the 50% Fibonacci retracement resistance at $27.51.

  • This resistance is calculated from the 2011 high at $39.75, but in early 2008 FWLT had a high of $85.65.

  • The relative performance broke its weekly downtrend, line b, in August and has now turned up from its WMA.

  • The weekly on-balance volume (OBV) looks much stronger as it moved above key resistance at line c, in September.

  • This completed a major bottom formation and the OBV held well above its WMA on the recent correction.

  • There is first support at $23 with stronger in the $22.00 to $22.40 area.

What it means: The positive weekly analysis of the industrial sector and the bullish action of construction & engineering industry group suggests that they could be market leaders well into 2013.


These two stocks also appear to have completed significant bottom formations, but I would be a patient, smart buyer and wait for a pullback to buy.


How to profit: For Granite Construction, go 50% long at $30.44 and 50% long at $30.06, with a stop at $28.43 (risk of approx. 6%).


For Foster Wheeler, go 50% long at $22.92 and 50% long at $22.46, with a stop at $21.44 (risk of approx. 5.5%).

Tags: FWLTGVA
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