Nov

Investing Systems Research Lab Blog for Week of November 21st, 2011

"The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine." – Abraham Lincoln

Just a little humor to start off with…

Going into last week I was fairly optimistic that we might have some follow-through from the previous week and some strength that took us to the top of the big triangle pattern everyone was watching.

But instead the market decided to have the worst week in two months and many of the setups we liked didn’t materialize. We typically don’t try to guess what the market will do, we trade and react based on what we see it doing. We always respect the tape.

Everyone reading this post should be somewhat familiar with our 17/43 EMA strategy and while we had a few zigs and zags around it last week, it became clear Wednesday afternoon that it was rolling over.

Here’s the 15-minute chart I was watching that shows the cross to the downside in red.

During the week the 17 and 43 crossed a few times both to the downside and upside, but the candle following the downside cross shown above and the angle of attack gave a pretty good signal that the market had turned Bearish for the near-term.

Between this signal and watching the tick-by-tick action on the tape, it seemed obvious to move to a “defensive” posture.

What will the market do this week?

It will chop around and likely be boring because we will be more interested in stuffing ourselves with turkey…

Since it’s a Holiday shortened week with essentially 3 trading days, I’m not convinced it will do anything meaningful. The market is actually open a 1/2 day Friday and I can’t imagine why. Maybe to give our Congressman time to adjust their holdings for the next big move?

Nothing would surprise me next week except for “high volume”.

It’s almost senseless to try and determine where we think it’s going this week, given it’s Thanksgiving and everyone will be in Holiday mode.

However I will be watching the pattern below develop on the 60-minute chart.

If you look closely you see the light green upward-sloping trendline that was the bottom of the triangle from last week. As you see on Wednesday, subsequent to the 17 crossing the 43, the market closed right smack on that trendline.

Thursday it opened below the support and it became temporary overhead resistance.

Friday was probably the most boring options expiration day I have ever seen. The market simply chopped sideways all day. Most stocks just got “pinned” so the most options would expire worthless. If you were listening to the show I mentioned that I wasn’t really even interested in participating Friday and I actually spent most of the day away from the screens. I certainly didn’t miss anything…

I would love to be all excited about this week and find a bunch of great trade setups, but here’s the problem…

Until the price action in the S&P moves back up above the 17 and 43 and the 17 crosses back up above the 43 on the 15-minute chart, it will be hard to view the environment as ‘constructive”.

Even if that were to happen, we would be so close to the Holiday and with “low volume” likely, I probably won’t feel comfortable initiating new swing trades.

“Every day the market is open is a trading day, but not every day is a good day to trade”.

“There’s a time to go long, a time to go short and a time to enjoy Turkey”. This week I suggest we go with the latter…

However, we will be keenly watching the pattern above develop on the 60-minute chart. The market is drifting in this falling channel and eventually it will break one way of the other.

If it touches the lower-end and finds support and begins to move back up, that will present some good opportunities for swings with tight stops.

If it drifts to the upper-end of the channel and then breaks to the upside, the Santa Claus rally will be in effect.

This is actually a bullish pattern if it breaks to the upside…

But then again, everytime I start thinking optimistically I remember the “macro” environment and all the problems lurking out there.

From the European debt situation to the MF Global scandal to the Stupor Committee, there are a lot of bricks in the “Wall of Worry”. To me the upper-end of that channel represents the Wall of Worry and I am hoping there isn’t barbed-wire at the top of it…

If this was a normal week I would repeat my adage about “trading what you see, not what makes sense”, but I really think we have to wait another week to get a better picture of what the market wants to do. By this time next week we will have a much clearer picture within the context of the pattern above.

So last week I found a ton of trade setups to watch, but as always they are predicated on market cooperation, which didn’t really manifest last week.

Many of them didn’t fill. A few filled with fake-out moves then reversed and a couple actually did ok. In this market, as I have been saying for quite some time, the key is to take profits quickly when they are there and cut losses quickly when a trade moves against you.

Here are a few that still look good and a couple new ones to watch.

So there a few to keep an eye on, but honestly I think this week might be better for daytrading.

The great thing about trading stocks is that you don’t have to force trades. You don’t have to be as active when the market isn’t acting well and you don’t have to trade every day.

"A good signal jumps at you from the chart and grabs you by the face – you can’t miss it! It pays to wait for such signals instead of forcing trades when the market offers you none. Amateurs look for challenges; professionals look for easy trades. Losers get high from the action; the pros look for the best odds."- Dr. Alexander Elder

Join us at the market open in the Research Lab and we shall see what transpires…

I am hopeful we will find a few good opportunities next week but I don’t anticipate any new Trade Plans unless something really jumps out and grabs me by the face, as they say…