Research Lab Blog

May

Investing Systems Research Lab Blog for Week of May 14th, 2012

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“Buy the lower end of the range and sell the upper end of the range”

I’ve been mentioning that for a couple weeks now and still seems to be a reasonable strategy providing the “lower end” doesn’t break.

Last week I posted this chart of the S&P 500.

Then I said “1360 is really the key support level to watch, but it would not surprise me to see it breached at some point during the week with 1340 being the next level to watch.”

We spent most of the week chopping around in the lower end of that range and the actual low on the SPX was 1343. As you see on the chart below 1360 turned out to be about the “median point” of the week.

Here’s where we are now.

Next week will be interesting. The market could still easily test the range between 1330 and 1340 where I have the lower “zone” drawn.

But I think we are actually setting up for a bounce…

From what I see, the market looks ready to retrace back to around the 1380 area, maybe even higher.

The nice thing about buying the lower end of the range is that you can use fairly tight stops. If for some reason I’m wrong and the market starts really breaking down here, all you have to do is set the stop just under the lower-end of the range, say at 1325.

This Friday is OPEX and the Facebook IPO, so it should be an exciting week heading into that.

Earnings season is winding down, but there are still some set to report so be careful. For the most part this earnings season has been full of landmines. It seems like for every one stock that reacted well to earnings and gapped up, four got hammered. Even the ones that gapped way up after the release tended to drift right back down. There just hasn’t been a lot of follow-through to the upside even on stocks that got a pop.

It’s been a very tough environment. Like I said going into last week… “Sometimes not losing money by staying on the sidelines is the best strategy.” While this past week really wasn’t that terrible, as you can see on the chart above and on most charts, that it really wasn’t the type of market where a lot of money was made. Just a lot of chopping around in the lower end of the range.

While I still think the S&P is likely to trade down to 1290-1300 before Autumn (see the dashed line on the chart above), this week I’m expecting a “tradeable bounce” as I mentioned.

However I am keenly aware of the Macro issues and the problems in Europe, so any “out of the ordinary” news item can send this market into the “waterfall selloff” I have mentioned. So while I think we will try some swing trades this week, be prepared to “abandon ship” should things start to sink quickly.

Here are some stocks to watch on the daily charts (notes on the charts).

This week I will be posting some new Trade Plans, so be sure to check the waiting page each morning.

Honestly last week I spent more time working on the new version of the Research Lab than I did trying to find good trade setups, mostly because of the environment.

I am happy to announce that “all systems are go” and the new version of the Research Lab will be live on Monday, June 4th.

This is a huge upgrade and paves the way for all sorts of other nifty features and enhancements.

The great thing about how we build software these days is that you won’t have to do anything to upgrade – we are upgrading it for you and you will simply log in as normal from the new page that will magically appear before your eyes in a few weeks.

In the meantime I think we might have a few opportunities for trades this week but we still want to be careful. We are still in defensive mode overall.

One last thing I want to mention should be pretty obvious, but bears repeating:

Don’t forget to sell when you have a profit…

I don’t think we are in a buy and hold environment so the trick is to catch a trade and look for the exit as quickly as possible. In this environment, profits can disappear quickly so don’t be afraid to take them when you have them.

Be sure to join us Monday morning on the live broadcast in the Research Lab.

I’m expecting this week to be better than last….

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May

Investing Systems Research Lab Blog for Week of May 7th, 2012

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Last week I posted this chart of the S&P 500 and said “We are in a heavy resistance zone between 1390-1420. I’m tempted to think we get a pullback this week after testing the upper-end of that range.”

Well we tested the upper-end for about an hour on Tuesday hitting 1415, then it rolled right back over and kept rolling.

Last week was the worst week for the indexes all year with the S&P losing about 2.4%. Under the surface many stocks didn’t fair nearly as well and were crushed.

Make no mistake it was a terrible tape all week, save the short-lived rally Tuesday morning.

The 15-minute chart of the S&P shows a clear head and shoulders pattern and the break down through the neckline.

It actually broke down late Thursday, but it seemed that everyone was reserving judgment until the jobs numbers Friday, which clearly disappointed. The market gapped down and faded all day. The last candle of the day was pretty ugly too…

So going into this week I think the best course of action is to stand aside and see if we get follow-through selling for a day or two. Perhaps we will get some sort of capitulation and then reversal. We will soon be hitting oversold territory, at least in the short-term.

Here’s a daily chart showing the areas to watch for a potential bounce.

1360 is really the key support level to watch, but it would not surprise me to see it breached at some point during the week with 1340 being the next level to watch.

While it is possible we get a “waterfall selloff”, I would expect a bounce, perhaps a significant one if we reach the 1340 area, where I have drawn a new upward-sloping trendline.

I have adjusted the lower end of my trend channel, which should provide some support if we test it over the next week or two.

However, based on looking through at least a thousand charts this weekend, I think the odds favor a continued selloff with bounces here and there.

Since the market was not able to make a new high when it got “very close” last week I am going on the assumption that it has peaked for the time being.

This is kind of an ugly turn of events because I was actually trying to be a bit optimistic going into the week since we were so close to the high that it could have gone either way.

But the clear distribution we saw on Thursday and Friday are not to be ignored…

The near-term bias is down and I want to be extremely defensive.

I see so many stocks that broke trendlines last week, lost the 50-day moving averages and many that just plain got hammered.

Nothing is safe in this environment. Even stocks that had ordinary, constructive pullbacks, then based and turned up, rolled over and took out previous lows. This is the type of price action that should make you run for the sidelines and I’m seeing it all over the place in all different sectors. As I’ve been mentioning for weeks here, the indexes were not really representative of what was going on under the surface. There are many leaders that are just starting to roll over, so I don’t think we are anywhere near the eventual low. We probably have a few difficult trading months ahead of us.

I hate to say this but a simple 38.2 Fib retracement of this last move from the December low to the recent high takes the S&P back to about 1290, which happens to coincide with the highs at the end of October. That’s where I expect we are heading over the medium-term.

I don’t really expect it to be straight down at all and I think we get some oversold bounces along the way in the areas indicated on the chart above. But barring some sort of QE3 miracle, I think 1290-1300 is in the cards. We’ll have to re-evaluate the situation there.

A 50% retracement of the move puts us at about 1250. By the way I’m really not a hard-core Fibonacci indicator guy, but when it comes to downside targets for retracements on the indexes, it’s one of the best guides there are.

So what to do in this environment?

Well..there are a few things that I think are appropriate when we switch to “defensive mode”.

One is that we trade smaller size. If your stop placement would typically draw down 2% of your portfolio, you might go 1/2 size so you are only risking 1% on any trade.

In this type of environment you almost have to expect to get stopped out and make sure you are comfortable with that before you take any trade.

Another trick I use in this type of market is to look for stocks that are way oversold and try to catch the “panic low” on an intra-day spike down. It’s on a case by case basis, but we are likely to see certain stocks that get “flushed” intra-day and then recover. Sometimes they are good to hold overnight and sell the next day. But this is tricky and the entries should be based on 5-minute charts and stops are critical.

I will say that intra-day trades and 1-2 day timeframes are one other way to trade defensively. It’s hard to expect “a few days to a few weeks” holding period will favor long swing trades.

Lastly, one of the best “defensive” trading strategies I use it to trade a lot less often. I will spend a lot of time watching but be much less inclined to jump in anything unless I see just the right conditions and setups. Even then I won’t really trust the follow-through and will be willing to take small profits quicker.

Now I can’t say for sure what happens on a day to day basis because I’m certain there will be days where the market “acts well” and a lot of stocks make moves up. But the “overall environment” itself has changed and I think hit and run trading is the way to go.

When the market turns ugly like this, it’s usually not just as simple as going full-blown short. We could gap down Monday and then have a huge snap-back rally. I’m sure there will be days where the market gaps up significantly too.

The key is to realize that going into this week that “all is not well”, which I’m sure you knew before you read this post. So personally I want to be defensive as possible and understand that there will be better environments in the future.

Last summer was a wild one. We had that “waterfall sell-off” and then from a lower lever we had a lot of wide-range choppy trading and many stocks made big up moves for a few days – tradeable bounces. I actually remember a few days where there were dozens of stocks up double-digits on these bounce days, even in a bad overall market. So we are by no means throwing in the towel and walking away until the market gets better. I think we just have to be more nimble and less active until the time is right.

In the past, with the market and most stocks looking so horrible going into the week, I would refrain from posting new charts here. The ones last week got swept down with the market as did most others.

But I figured I would go ahead and put a few that are on my watchlist that have some possibilities.

Here they are on the daily charts.

So in conclusion, we are going into the week in extreme caution mode.

I am sure we will find some stocks that make nice moves regardless of what the market does on a day to day basis.

The Grid is the tool I use to put these stocks on my radar and then it’s all about the chart…

Be careful this week and don’t assume anything is safe to hold. Be sure to have stops on all open positions and while I don’t think it’s likely, don’t discount the possibility of the “waterfall sell-off” to around 1300.

Be defensive….

As always, join us Monday morning at the market open and we will she how this plays out. This past Friday we said on the show “no reason to buy anything” and we didn’t get any intra-day setups at all. sometimes not losing money by staying on the sidelines is the best strategy.

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