Cigarettes Might Kill You….in the Market

• Posted by Greg Harmon
• on September 12th, 2011

Everyone who is not addicted to them understands that cigarettes are bad for your health and cause cancer which makes you die. Simple right? If that was not enough of a reason to stay away from them take a look at the charts. As a group they have performed very well lately but are showing signs of cracking. They are not dead yet but it seems an appropriate time to review their health.

Lorillard, $LO

Lorillard, $LO may be the canary in the coal mine. After coming off of the August 9 lows the price trended higher and the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicator trended higher with it. But two weeks ago the MACD peaked and started lower with the RSI and price following it. It is sitting on support at 107 and had a nice bounce on Monday. If the bounce holds it could certainly reverse higher, and the RSI which has remained over 50, and MACD near the zero line would have little issue turning higher and confirming that move. But it is not happening yet.

Altria, $MO

Two others in this space, Altria, $MO, shown above, and Reynolds American, $RAI, shown below. Are exhibiting MACD divergences, often a precursor for a change in direction. Both trended higher off of the August 9 low along with their respective RSI and MACD and the price and RSI are now moving generally sideways or rising less steeply. But notice what has happened to the MACD indicator. In both cases it is moving lower, or diverging, and near a negative cross. Keep an eye on these two as a RSI dip below 50 confirming with the MACD could knock them off of their highs.

Reynolds American, $RAI

Finally, British American Tobacco Industries, $BTI, shown below, is showing clear signs of a topping pattern. The Diamond Pattern can resolve either up or down but the falling RSI and negative MACD, along with the bearish tilt in the sector, support a Diamond Top. A fall out of this Diamond would lead to a target of 72, back in the 70 to 75 consolidation range prior to the move higher.

So you can see that not only is tobacco bad for your health but is looking bad for your account as well. That is why I have taken to smoking hash in the hookah.

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