$ROK Rockwell Automation – November 15th, 2021

 Bullish – ROK – $334.48

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Market Outlook:

Inflation numbers announced last week saw equities retreat after a multi-week rally. However, we view this slight pullback in the major indices as a positive as equities were near overbought territory and the pullback allows for better risk/reward long opportunities. However, higher than expected inflation numbers indicate that inflation may be more permanent than transitory as originally believed. This will likely lead to higher rates in the near future which will be a headwind for equities, especially higher beta unprofitable companies as investors flock to safer value names. Retail Sales numbers announced this week will provide a better idea of how much inflation is impacting the retail sector and will provide further evidence to what the Fed may do next regarding rates. Our outlook for equities remains positive due to the strong earnings season where 80% of the companies in the S&P 500 that have reported so far have beaten analysts’ estimates. 

ROK Bullish Trade Idea:
Our bullish trade idea today is Rockwell Automation Inc (ROK). ROK is part of the Industrials sector which has finally seen some momentum after breaking out to new all-time highs and pulling back. We view ROK as an attractive play on the Industrials sector which will benefit from Federal Infrastructure spending as well as commercial infrastructure spending as the reopening continues. ROK is also well-positioned to take advantage of the reshoring of US manufacturing coupled with the oncoming capex cycle. With a focus on automation and leveraging R&D in high growth areas, ROK’s medium to long term picture looks positive. From a technical perspective, ROK recently broke to new all time highs and recently pulled back to retest the $327 previous resistance and bounced higher with good momentum. Both 1M and 6M trends are bullish and with a technical score of 9 (out of 10), ROK is a very strong stock that will likely continue higher. 

As this is a debit spread, look to take profits at 75%-100% gain and cut losses at 50%:

  • Take Profit: $20.47 – $23.40 Credit
  • Stop Loss: $5.85 Credit

View ROK Trade

Sector Outlook

The Relative Rotation Graph (RRG) for sector rotation indicates that there are 4 sectors in the Improving and Leading categories, and 7 sectors in the Weakening and Lagging categories

Leading (positive relative trend and positive relative momentum): Technology and Materials are both showing strong relative strength and continue to provide leadership. 

Weakening (positive relative strength and negative relative momentum): Discretionary recently rotated out of the Leading category as price is pulling back. Weakening relative strength and momentum. 

Lagging (negative relative trend and negative relative momentum): 6 sectors are now in the Lagging category. Industrials is showing strong momentum and will likely rotate into the Improving category. Real Estate and Healthcare continue to show weak momentum and relative strength. 

Improving (negative relative trend and positive relative momentum): Communications and Staples have recovered out of the Lagging category after multiple weeks of poor performance. 

XLI

Industrials recently broke to new all-time highs, pulled back, and bounced higher which provides a good risk/reward bullish entry. Look for a continuation of rally as Industrials gains momentum. 

XLP

Staples has shown an improvement in momentum recently but has now approached a major resistance level at $73. A break above this level would indicate a further rally. However, bearish price action at current levels would provide a good risk/reward bearish entry. 

Market Observations

  • UBER – Price has once again bounced higher from the $42 minor support level. Next resistance at $48 and $52. 
  • MS – With rising yields, MS has found support and rebounded from the $98 support level. Look for continuation back to $105 resistance. 
  • EA – Price action has remained rangebound for a while and is currently retesting the $146 major resistance zone. Look for bearish price action at current levels for a good risk/reward bearish entry. 

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Tony Zhang