May
14

Investing Systems Research Lab Blog for Week of May 16th, 2011

Filed Under Main Content 

 

Everything was fine until “sell in May and go away” started. The market environment has increasingly become difficult and choppy.

Last week I said “I still think there’s a bit more risk to the downside, but there are a lot of opportunities setting up”. I still feel the same way.

I was hoping for weakness early in the week to set us up for a tradeable bounce, but the bounce Monday and Tuesday was essentially a “Bull Trap”.

We are in sort of a “no-mans land” at this point and I would not suggest trading aggressively at all. As a matter of fact, it’s never been more important to use stops than right now.

I looked through a couple thousand charts today and I have to say I’m a bit concerned about what I see. I’m not seeing a bunch of good swing trade setups, and I’m seeing a lot of the previous market leaders with “less than constructive” chart patterns. As a matter of fact we discussed how AAPL looked like a short if it lost 345 (which it did), Friday on the show.

I think CAT provides a good example of the environment.

cat5142011

 

CAT lost the 50-day moving average Friday. As you see on the daily chart above, this has been a rare event since September of 2010. In March and April, each time it moved below the 50-day, it rebounded quickly and “cycled” back up.

Watch CAT closely this week for one of two things. Either a spike bottom and reversal back above the 50-day. Or an evident loss of the 50-day, which will not bode well for the overall environment.

 

Looking at the Weekly chart of the SPY, we see the 10-week SMA is in play, with risk to the 30-week over the next couple weeks.

Here are the “zones” we will be watching.

 

spyw5142011

 

There are a few likely scenarios and whichever does transpire will indicate the landscape.

The market will either:

  • find support at the 10-week and trade pretty much in the yellow zone

 

  • drift lower into the red area, with occasional highs in the yellow zone, and use the 30-week as support

 

  • miraculously confound the skeptics and rational humans, trading to the upper-end of last weeks range and “perhaps” spiking into the “blue-sky” above the horizontal green line.

 

Which do you think is more likely?

It will be interesting to see how CAT behaves, with an eye on the Red, Yellow Green zones for the S&P.

My instinct and common sense tell me we are due for a week or two of “weak market conditions”. Do I think the bottom could drop out? Not likely just yet.

We have been “timing the market” for a very long time and here’s the key point to remember on that Weekly chart above.

When the market starts trading below the 10-week moving average, it’s time to get defensive real quick.

If the market penetrates the 30-week moving average, it’s time to pack up and go on vacation, or brush up on your shorting strategies.

To sum it up, we are approaching a critical juncture, but my guess is that we have to wait until options expiration is over at the end of this week. This week might be a snoozer.

 

 

On the positive side, the market is still in an uptrend until proven otherwise.

I like to use the RENKO chart of the SPY as a guide to the primary trend.

spyrenko5142011

 

I consult this chart several times a week to see if we have put in “another brick in the wall”. I am always on guard for the first red brick of the current “cycle”.

It’s interesting to note the PSAR stop at 129.28 coincides pretty well with the 30-week moving average on the weekly chart.

To learn about RENKO Charts and how to interpret them visit http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:renko

 

I don’t see a lot of high-probability setups going into Monday, but here are a few I will be watching.

 

ceva5142011
entg5142011
kkr5142011
slxp5142011
snps5142011
vhc5142011

 

These are worth keeping an eye on, but I don’t have the confidence level I normally have here. I’m seeing breakouts failing every day. I’m seeing support get broken on stocks that seemed to have bottomed a week ago. I’m seeing stocks in certain sectors get  “taken out to the woodshed” routinely.

Energy and mining stocks that had been in uptrends since last fall, riding the 50-day all the way up, have been decimated. A clear sign of institutional distribution.

The key going forward, as we transition out of earnings season, is to pay close attention to the sectors that catch the rotation and Relative Strength.

Energy, oil, gold and silver might be a “bounce play” soon, but I bet it will be short-lived.

Our Focus List has been stripped of most stocks that lost the 50-day, and the next couple weeks will show us where the “big money is going”.

Look for stocks in the daily scans that have a theme. I’m seeing more technology, semiconductors, retailers and consumer based stocks everyday. Biotech and pharmaceutical stocks are hot. Medical and healthcare stocks are performing.

So it’s still a “stock-by-stock” market and there are trading opportunities everyday. Catch the right Low-Priced pick, and it can double in a few days. Catch the wrong “blue-chip”, and you can lose 10% faster than you can wonder why CSCO is in the DOW.

 

To sum it up: be defensive. IF you put on a trade and it goes against you, cut the loss quickly. If it moves in your favor, move up the stop. If you catch a 5%-7%-9% move, sell it quickly and take the profits while they are there.

We will be Live in the Research Lab Monday morning at the open and we will mark up the charts of the picks, demonstrating entry techniques and trying to isolate the ones that make big moves. On a day to day basis we always have our finger on the pulse of the stocks that are “outperforming”. We take each day as we see it, without preconceived notions, and attempt to “trade what we see, not what we think”.

We really appreciate your participation in our morning shows and have a blast answering questions and giving opinions on stocks. You guys really bring a lot to the table as far as comments and knowledge and you know we are more than happy to share our “knowledge and opinion” on just about anything.

Like Doug said last week “If you ain’t havin fun, you’re not doing it right”.

 

RL1t2
Share and Enjoy:
  • Digg
  • Bumpzee
  • del.icio.us
  • Facebook
  • Furl
  • Mixx
  • NewsVine
  • Reddit
  • StumbleUpon
  • YahooMyWeb
  • Google Bookmarks
Comments

One Response to “Investing Systems Research Lab Blog for Week of May 16th, 2011”

  1. Jean on September 25th, 2011 8:07 am

    Just do me a favor and keep writing such trenchant analysis, OK?

Leave a Reply