Signs of Hope

U.S. equity indices have traded in a choppy, sideways trend for the first 4 days of this week as the clowns in Washington D.C. consider exactly how badly they want to screw up the economy for 2013 while debating the fiscal cliff.

This day-to-day back and forth between the 2 political parties probably makes for good ratings for financial TV, but it roils the markets.  So after the markets put in deep "V" patterns recently, this uncertainty has lead to a period of sideways to slightly downward trading in markets this week.

These deep "V" patterns are not the typical action you like to see at market bottoms.  As I mentioned in my last post, I'd rather see some sideways backing and filling as the markets try to stabilize and form a new base for a move higher.

Despite it's choppiness, as I see it,  the trading so far this week is actually constructive.  It has many traders skittish and worried, and many of them on the sidelines.  It has allowed for some profit taking after the sharp run up off the lows.  And it keeps the traders that actually are trading in a very short term frame of mind.

All of these things add fuel to the fire for a rally if the indices move above recent resistance areas.  For the Russell 2000 (IWM), the first key level is at the $83-84 area.  For the Nasdaq Composite (COMPQ), the first key level is 3050-3100.

One thing I've noticed is a subtle positive divergence developing in RSI 14 readings.  As the chart of IWM shows, the recent reading is higher than they were at previous 3 recent higher price areas.

This first chart is from August 2 when I put it on Twitter.  It shows the important level that needed to hold for the rally to continue, and it did.  The recent bottom in the IWM came down to that exact same level.

Click on charts to enlarge:

 The second chart shows my current take on IWM.

Another interesting development is the surprising recent strength in the financials (XLF), primarily in BAC and C.   This may mean that trader's concerns over the fiscal cliff are exaggerated at the moment.

Ideally, I'd like to see the market continue to trade sideways and chop around for a bit.  This would allow for some market leading stocks to tighten their bases and offer better entry points.

So while traders have to be prepared for all scenarios, recent action is somewhat encouraging.

Still a Tricky Market

It's been 2 weeks since my last blog entry that suggested traders wait for a valid 'follow through day' (FTD) before making large commitments to the market. 

The scenario of a reflex rally was mentioned as a good possibility, and indeed we got one as the U.S. market indices rallied strong in the Thanksgiving holiday shortened week.  Although not surprisingly, trading volume declined significantly.

Readers of Investors' Business Daily know that the paper placed the market back into a "confirmed uptrend" mode after the trading on November 23, the day after Thanksgiving.  Despite the lower volume on that day, IBD said that the run rate for the shortened trading day was ahead of Wednesday's volume. 

So despite my skepticism on IBD's market call, it doesn't really pay to quibble as to whether a half day's trading constitutes a valid FTD.  Rather, I look to see how the leading stocks in the market are trading and if there are a growing number of stocks breaking out from proper base formations.

What is happening in many cases is that leading stocks are poking above their proper pivot (buy) points, then quickly reversing back into their base, which leads to a stop loss getting hit.  Then in some cases, a week or more later that stock will move out of its base and make a decent gain. 

If you've played any of these types of stocks and were stopped out several times, it can make you reluctant to keep going back into the market looking for setups. 

Sturm Ruger (RGR) the gun manufacturer, is a good example of what I'm referring to.  After making a monstrous 12 fold advance from its November '08 lows up to April of this year, the stock dropped 41% in the next 6 weeks. 

RGR bounced back in June and July, then formed a handle in August and the first few weeks of September, before attempting a breakout in the 3rd week of September.  The stock quickly reversed and fell back into its base.

RGR then spent the next 8 weeks tightening up in a 2nd attempt at forming a handle, and briefly poked above it in the 1st week of November.  But this attempt at a breakout also failed, and the stock fell back 9.5% from those highs.

Finally, the stock broke out for good on November 21, but even then a trader would have been worried as the action on that trading day left the stock off its highs, right in the middle of the day's range.

The daily and weekly charts detailed below show what I've described. (Click on charts to enlarge)

The 3D printing sector lead by Stratasys (SSYS) and 3D Systems (DDD) has been at the top of many trader's lists as this exciting new technology continues to gain traction, but DDD has a similar pattern to what happened in RGR.

DDD first tried to break out in early November after forming an 8 week cup, but quickly dropped back into its base the following week.  Then it made a second stab at a breakout in the 2nd week of November, but came under selling pressure as the general market sold off.

After pulling back into a deep handle, the stock rallied off the November 16 lows and ran straight up into new highs.  But once again, the stock sold off last Thursday and Friday and fell back into its base. 

So many traders who use 8% (or less) stop losses have been taken out of this market leader on 3 separate occasions in the last 5 weeks.

SSYS broke out on November 21, and so far has been able to stay above its breakout price of $69.08.

As we stand now, the broad market indices have formed deep "V" formations off the November 16 lows, and have surprised many traders by their continued strength without much of a pull back, aside from the early day weakness on Wednesday of last week.

These types of "V" formations are not ideal for most traders, as in many cases it doesn't allow stocks to form proper bases.  Areas of backing and filling give stocks a chance to digest their gains, and allow stocks to make more sustainable moves. 

Traders who buy a stock moving straight up off the lows without a proper pull back usually are setting themselves up for a quick loss once the stock does meet some selling.  It's best to be patient and pick your entries very carefully.

What you don't want to do is become complacent in continuing to cut your losses.  This frustrating pattern of stop/start breakouts shows a market that is uncertain and tentative. 

For now, keep positions sizes smaller and watch for more market leaders to break out firmly above their basing patterns.

Watch and Wait

After another week of weakness in the U.S. major market equity indexes, Friday saw some relief as the indices were able to reverse off intraday lows and push into the positive.

The small cap index Russell 2000 has lead the decline since the mid September highs, off 12.1% as of Friday's low, with the S&P 500 -8.9% and the DJIA -8.7%. 

The Transportation average continues to lag all of these indices as it has been in downward to sideways grind since March of this year.  Many market pundits shrug off the weakness in the Transports, but I'm not one of them.

Much of trader sentiment that I'm picking up on Twitter is that we're very overdue for a bounce.  I'm also hearing that a "tradeable bottom" has been put in, or is very near.  So any strength in this holiday shortened trading week will probably reinforce that notion for the bulls. 

But what I sense is that most traders "need" a bounce to either lighten up positions where they've been averaging in, or because they feel that seasonality favors the bullish case.

In the chart of the Nasdaq Composite shown below (click to enlarge), it's clear that the downward trading after the presidential election two weeks ago has intensified, as the parallel downward channel slope increased. 

Whether that is a result of traders expressing disappointment in Obama's re-election, or that it puts increased odds for continued gridlock in Washington D.C. to deal with the pending fiscal cliff is for you to decide.

What is concerning is the nature of the selling that has occurred recently; it's not a panic type sell off.  Instead, the selling has been what has been described as "orderly". 

Many, but not all, sell offs that mark tradeable bottoms have a volatile, climactic period where prices trade down violently in a very short period of time.  Recent weakness "feels" like nothing more than a persistent offer to sell equities, but no panic.

So while a reflex rally is possible this week, I will be playing with smaller positions in what should be low trading volume after Tuesday.  If a defined uptrend emerges with a valid confirmation day, there will be plenty of opportunity to latch on to the next bull phase winners. 

Patience is the key, for now.

Buy or Sell Apple (AAPL) ?

The recent general market weakness in U.S. stock indices has been spearheaded by former market leader Apple (AAPL) since the stock topped out back in the 3rd week of September.

Prior to that, readers who follow me on Twitter saw several charts that I posted back on September 3, and then on September 11 that showed divergences in RSI.  These divergences do not always work, but they are one early warning sign that a change in trend may be soon forthcoming.

Here is the chart from September 3.  As you can see I had a box highlighted in light green that showed an area where I anticipated the stock would find support.

Click on chart to enlarge view:

The second chart posted on September 11 was an intraday chart over a span of 20 trading days which showed the same divergence in RSI.

The current chart shows that the area I highlighted in the first chart was undercut but by roughly 30 points based on today's intraday low so far today.  This relentless selling pressure, coupled with the way the stock knifed through its 200 DMA shows extreme weakness.  Sellers want out and they don't care about moving averages or zones of support; they just want liquidity.

Here's an updated current chart:

Given the severity and swiftness of the decline over the last 7 1/2 weeks, I would be a seller (if you haven't sold already) on any bounce back to the high $580s to low $590 area.  This stock has been "over-owned" and every money manager's favorite stock to buy during this bull market.

Stocks that move this far this fast can be great if you're a nimble short term trader and/or options player.  But most investors who take a longer term approach should be cautious on the long side until the stock settles down and forms a new base.

Hold That Line

The leading U.S. equity market index Nasdaq Composite underwent another day of selling pressure as disappointing earnings from Google (GOOG) (inadvertently released prior to the market close) weighed on the tech heavy index. 

As the chart below shows, despite recent weakness, the Nasdaq has remained above the recent uptrend line drawn from the recent June 5 lows.  So while that is encouraging for the bulls, we've now had 7 of the last 20 trading days end in distribution days (professional selling). 

The Nasdaq index dropped below the 50 DMA last week, then regained it on Tuesday and Wednesday of this week, only to fall below it once again today.  This is another tool that many active professional traders use to monitor the strength of the market.

Also, the index has formed 2 small bear flags of late, and has traced out what could be an intermediate term head and shoulders top.  3037-3040 is a key area of short term support.

The DJIA and S&P 500 are still above their 50 DMAs as they are not reflecting the weakness in the Nasdaq.  So for now, the uptrend is intact as long as the indices can hold their recent respective uptrend lines.


Click on chart to enlarge:

Simple Profit Taking or Something More?

Recent action in the U.S. stock market has led many traders to question whether the market is in the process of forming an intermediate term top.  We've had 5 distribution (professional selling) days in the previous 20 trading days in the S&P 500 index (SPX).

Some market leading stocks like HAIN, AAPL, DDD, SSYS, AMZN, etc. have sold off and displayed relative weakness.  The market has been propped up with the guarantee of "free money" from Fed ever since they announced the latest round of QE, even going so far as to leave it open ended.

So why the market weakness?  What can the Fed do other than promise QE infinity as it has already done?  What is the market discounting that we don't know yet?  Or is this just a temporary period of weakness where money managers who are up on the year take profits before they close their books for the year?

A lot of questions there, and unfortunately I don't have any quick and definitive answers.  I do find the chart pattern between the initial leg of the 2007 top (left side of the big head & shoulders top) to possibly serve as an eerie comparison to the current market.

The biggest difference that I see right off the top is the 2007 top had a few more distribution days prior to the "false breakout".   That said, we could bounce back inside the recent trading range and generate a few more professional liquidation days before the real top is in place. 

This is why you must monitor the market and your portfolio holdings on a daily basis.

Here's the left side top of the 2007 top. (Click on chart to enlarge)

And here's the chart of the current market:

Scanning the S&P 500

Over the weekend I used Finviz.com to scan through the S&P 500.  Below are some charts that caught my eye; listed in no particular order. Overall there a good number of bullish consolidations that should bode well for a continued move in the S&P after the recent softness in the general market recedes.

Many of these setups are tactical trades where I'm looking to employ a variety of trading strategies as they're not all at or near their old highs where you would traditionally look for breakouts. 

In some cases, I'm looking to buy near the bottom of tight trading ranges, then using tight stops just under the range that produces a good risk/reward ratio.  And in others I'm looking to buy pullbacks to original breakout points. It pays to stay flexible.

Looking at a monthly chart of the SPX over the last 20 years, we can see that the last 2 bull markets lasted 64 and 56 months respectively.  We're currently in the 43rd month of this bull move, so there's likely room to run longer.  Interestingly, the last 2 major topping patterns both took 11 months to play out.

A warning to those who like to buy blindly without using stop losses - DON'T DO IT.  Any stock can go anywhere at anytime, even stable blue chip stocks included in the S&P 500 index.  Stops are there simply as an insurance policy to protect your portfolio from unforeseen events that can arise at any time.

ALWAYS use stops to limit losses in your account.  Searching for setups that offer prudent areas to keep losses to 2-3% (or less) is well worth your time.

Note:  Some of the charts below are both daily and weekly.


Click on charts to enlarge:

 

Have Housing Stocks Topped for 2012?

Recently many of the U.S. home builders sold off after making huge gains since the beginning of the year.  Since bottoming out in October of last year, the Standard & Poors Homebuilder's Index ETF (XHB) has more than doubled in price.

Yesterday's price in XHB stands out because it marked the second day of selling on increasing volume, as the chart below shows.  It's also important because this index has topped out in 2010 and 2011 at the same time as the S&P 500 index also topped.

Click on charts to enlarge:

 

Two days of weakness in and of itself doesn't mark a top, so I looked at another chart that I've used in the past to look for a turn in housing stocks.  On Finviz.com they have a chart for random length lumber.  When I looked at the current weekly view it caught my eye as it has been a decent leading indicator for home building stocks.

What's interesting is that the weekly chart of lumber has signaled the top for the home builders the previous 2 years, and it's lead to big declines.  There's no guarantee that it will work again, but it's worth noting.

Here are the charts of XHB when they topped out in 2010 and 2011.  

2010 top:

 

 2011 top:

Comparing Last Year to Now

Many traders and technical analysts have taken note of the similarities in market action over the summer months of the last 3 years.  All of this has occurred since the Federal Reserve started their QE program to help prop up the markets.

Last Thursday I posted a chart (shown below) to chart.ly that showed the similar patterns from 2011 to now.  We are right now at a crucial juncture where the market has to decide whether the troubles in the Euro zone can be contained and managed, or whether weakness there will ultimately lead to a worldwide global recession.

Click chart to enlarge:

Here is a close up view from July of 2011 showing the head and shoulders top that lead to the 17.6% drop in late July and into August.  Note how the 200 DMA was in a strong uptrend (as it is now) just as the market was about to fall off a cliff.

Here is my assessment of the current situation showing key areas of support.  The similarities to 2011 are remarkable.

Setups Under $15 for July 2, 2012

Here are the results of a scan completed on finviz.com over the weekend.

The criteria was:

A) stocks under $15 

B) average trading volume over 200K per day

C) percentage of floating shares shorted at 10% or higher. 

These are only for short term trading where I'm looking for 6-8% moves; more in some cases.  In this weekend's scan, I broadened the search up to $15 because many of the lower priced setups posted in this blog from last week already made big moves.

Some holdovers from that previous list that are still valid setups are: COCO, DNDN, GTIV, GTXI, THLD, and TWER  Make sure to check these charts and keep them on your radar.

Here are a few more on my watchlist: EXAS, HGG, MM, PRKR, RBCN, SGI, STEC, TC, TRGT.

ALWAYS use protective stops to protect your portfolio from potential big losses.

Click on charts to enlarge view:

Back in Correction Mode

A week ago here and here a list of stocks was mentioned as potential new leaders if the market continued to firm up and made a move higher.  Since then the U.S. broad market indices broke above key intermediate term resistance levels, only to give it all back last Thursday in a big flush down.  

Friday saw the market turn back up as the Russell Indexes underwent re-balancing.  Then the market started out this week with another sharp decline yesterday across as all broad U.S. indices, with the S&P 500 down 1.6% and the market leading Nasdaq Composite down 1.95%.

Investor's Business Daily is now labeling the current market situation as "market in correction".  So with the broad market weakness for two of the last three trading days it's not prudent for most investors to trade actively or in size.  Continue to build a list of potential new market leaders and watch how they act compared to the broader market.

Some of the names mentioned in those two prior posts have broken out and stayed above their breakout points, while others have dropped back below and are back inside their previous bases.  

Here's a beginning review of some of those names previously mentioned.  

Click on chart to enlarge view: