Be Wary Of A Dead Cat Bounce In The Alerian MLP ETN (AMJ)

Ongoing political gridlock in Washington D.C. remains the dominant theme on Wall Street, and, as expected, equity markets remain plagued with choppy trading amid looming clouds of uncertainty. Investors have digested some encouraging news nonetheless, including solid 2.7% GDP growth and better-than-expected construction spending at home along with expansion in China’s manufacturing sector. With all eyes on the “fiscal cliff,” however, it’s likely that investors won’t get too distracted by anything other than concrete developments in Congress as the end of the year approaches [for more market news and analysis subscribe to our free newsletter].

Chart Analysis

Stocks across the board experienced a nasty sell-off after Obama’s re-election as the reality of the “fiscal cliff” sunk in; dividend-paying securities, and MLPs in particular were among the hardest hit given the potential tax rate hikes that could erode much of the appeal behind this asset class. The well-known JP Morgan Alerian MLP Index ETN (AMJ) slid right past its 200-day moving average (yellow line) as “fiscal cliff” woes intensified in the first-half of November, shedding upwards of 7% in a matter of days, only to bounce back higher in recent weeks.

Click to Enlarge

Notice how since nearing $37 a share on November 15, 2012, AMJ was able to rebound right back above its 200-day moving average in just two days. While this strong rebound does suggest that the initial sell-off was likely overdone, another piece of technical evidence is a bit more concerning; AMJ has been struggling to climb back over the $40 level (red line), a major resistance level that it has previously had a difficult time conquering, as seen around early May of this year, around July 20, and most recently around August 20 [see Most Popular Commodity ETFs].

If AMJ fails to climb back over $40 a share in the coming weeks, and also slips back below the $39 mark, accelerating selling pressures could swoop in and sink it to a lower-low past $37 a share. Conservative investors should considering waiting until AMJ has established definitive support in case its recent rebound turns out to be merely the “bounce” in dead cat bounce.

Outlook

Positive news out of Congress can help AMJ continue its rebound higher; in terms of upside, this ETN has major resistance around $40 a share. On the other hand, ongoing “fiscal cliff” woes can inspire profit-taking; in terms of downside, AMJ has immediate support at $39 a share followed by the $37 level. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

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Disclosure: No positions at time of writing.

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