Nov

Investing Systems Research Lab Blog for November 28th, 2011

We hope everyone had a great Thanksgiving holiday. Even in difficult times we all have a lot to be thankful for.

I don’t have to tell you that the market has been in a “down-cycle” since the end of October and culminated with the worst Thanksgiving week since 1932. If you joined us for the shows last week we suggested that it was best to just stand aside for the holiday shortened week.

Our indicators have all been on a Sell for some time. The long-term market timing indicator gave a sell signal at the end of August and “ buy and hold investors” would have moved to the sidelines Sep. 1st, at S&P 1220.

The last trading day of November is Wednesday and in order to get a “buy” signal for the market timing model, it would have to close around 1285, which isn’t going to happen.

While the long-term timing system is useful for gauging the overall environment, it doesn’t have a significant weighting with respect to the shorter-term cycles, which we look to trade.

I have pointed out many times over the years on this blog that “investing” and “trading” are two separate things. This is not a market for investors right now, only traders.

To navigate the market, I use a combination of technicals, fundamentals and sentiment. Deciding which stocks to trade and when to execute is typically based strictly on technicals and patterns. Fundamentals come into play with regard to the “macro” environment, which tend to demonstrate their effects over time. Sentiment is probably the most difficult to gauge as it runs in different cycles and is not as simple as the Bull-Bear ratio.

Over the years we have developed a keen sense of the prevailing sentiment and look to fade it at extremes. Right now the negative sentiment is nearing an extreme and we should be getting close to a capitulation-washout or a tradeable bounce.

As I’ve been mentioning here for some time, it’s a news-driven market and headlines are whipping it all over the place, even intra-day and creating a lot of uncertainty.

Rather than the news itself, we watch how the market reacts to the news. I just read two articles.

One makes the hair on the back of my neck stand up:

Unless Germany and the ECB move quickly, the single currency’s collapse is looming

The other gives me some hope:

Germany, France plan quick new Stability Pact: report

We will have to see how the market reacts to the ideas presented in the latter, so that the former does not come true.

I will say this. Based on what I have heard and read the past week, the prevailing sentiment, you would think everyone would be ready to load the boat short first thing Monday. That rarely works out when it seems so easy.

Could the market continue it’s slide going into this week? Absolutely…heck the bottom could drop out temporarily creating a “capitulation” low and reversal.

On the other hand, the market might actually find a bit of stability here at this lower level, base out for a couple days then turn around on a dime and create a “buying panic” if it looks like there’s going to be a Santa Claus rally this year.

It could indeed go either way, but I am thinking the market will tip it’s hand this week.

We will be watching the 15-minute chart for the first indication of a cycle-up.

Here’s what we will look for… When the price breaks the trendline, moves above the 17 and 43 EMA’s and the 17 crosses the 43. We need all three of those conditions to occur.

This is how the chart looked last week: S&P 500 15-minute chart – November 18th, 2011. (Note the sell signal on Nov. 16th in the red circle.)

Here is how it looks right now:

You can clearly see why we were not excited about taking new trades last week. The price never moved above the moving averages and the moving averages did not cross to the upside.

But now you know what to look for…

If and when we get these conditions, most likely this week, we will look for some “hit and run” trades.

Now this does not mean that all of a sudden the market will start a huge new rally that lasts till the end of the year, but it is the first of the clues we will be watching for. It will give us an indication of a potential “cycle-up”. The duration and the magnitude of that cycle will need constant evaluation.

This blog typically follows a somewhat standard, yet flexible format…

I usually start off with some overall market analysis, perhaps a few interesting tidbits about trading or investing, then it usually wraps up with some good swing trade setups to watch.

I have looked through over a thousand charts and run over a dozen scans today. I can tell you it is not pretty out there. Most charts look horrendous to any market technician. Downtrends, waterfalls, breakdowns overhead resistance, you name it.

As I mentioned above, with the long-term indicators on a sell, we have to work within this context, taking counter-trend trades and taking profits quickly.

In this type of environment, my preferred method is getting in and out of a stock as quickly as possible with a 5%-7%-9% gain. Lock in a quick profit and move that capital back to the safety of cash.

Someday the environment will change and it will be safe to “build positions”, but for the time being I think daytrading and swingtrading are the only way to go.

Take a look at this chart from the blog here on March 12th, 2009 of NSC – Norfolk Southern. This was right at the market bottom and I even joked that it “might be the buying opportunity of a lifetime”. Pull up a chart that goes back and look at the trendline break and that exact buy signal. You will see that to this day the stock never hit the stop and would have made a great “investment”.

The best stock to “invest” in is one that closes higher the day you buy it, and is higher at the end of the week. It never goes below your buy price no matter how long you hold it, be it weeks, months or years…

And of course you can always adjust the stop-loss upward and stay with it as long as you like, but the idea is that with a perfect entry, like the one on that chart, you have a lot of flexibility over time to manage the position without it ever having moved below your buy price.

So the point is that there will be great opportunities like that in the future, but right now we are in a sort of “no man’s land” and it is not a good idea to look for anything other than a trade until the picture becomes clearer and some of our indicators turn positive.

I actually have several stocks that look ready to move up but I am going to save them for the Trade Plans this week.

Besides the live shows, the video training, tips and tricks, analysis and market scans, I know why you are a member of the Research Lab.

You are here to make money trading stocks.

Rest assured that is our number one goal as well. All of the tools and analysis and education and comradery are great, but the idea is the we need to make money trading stocks and that’s what we have been doing for years and will continue to do.

Last December we had 5 Trade Plans and all 5 hit Target 3. I joked at the time that it was all downhill from there…

This December, if the market cooperates and we get it just right, I am confident we will have some excellent Trade Plans and while I can’t promise a repeat of last years performance,rest assured we are working every day (and most nights) to find the best trade setups for you and the best stocks for the watchlists.

The “stocks to watch” list in the Research Lab is an often overlooked resource, but if you are a chart enthusiast you will want to load the list into your platform and look at the charts. We typically update this list several times a week. It’s a combination of high Relative Strength stocks and ones that have constructive patterns as well as some that are “in play”.

Another overlooked resource are the Pivot high and Pivot low lists, which I run here right after I finish the blog post each week. I have my Pivot Trader software loaded up with the NASDAQ 100, the OEX 100 as well as the index ETF’s and the leveraged long and short ETF’s. You can find some good long and short ideas there and I also encourage you to download the Pivot Trader software, enter stocks you are watching and run it every night if you like. Be sure to watch the Help video in the software to understand what the signals mean and how to best interpret them.

This is where I would normally conclude with a bunch of trade setups but as I mentioned, they are so few and far between I want to save them for actual Trade Plans.

Be sure to hit the Trade Plans page each day before the market opens and then click the “Waiting Trade Plans” link to see the ones that are “on deck”. They are posted 30 minutes before the market opens on any given day.

Keep in mind that the stock must trade at the exact entry price in order for the system to move it to an “Open Trade”. This way they are “actionable” and the Entry can be programmed in before the market opens and will fill if the stock trades at the Entry. Some will gap above the entry and some will not trade up to the entry. If a stock gaps above the Entry, then drifts down to hit it, it is “filled”. If it gaps above the entry and hit T1 first, the system will delete the trade and note “gapped out of range” on the Status page.

If a trade does not move up and fill the same day it’s a “Waiting” trade, it may stay in for the next day or I may choose to delete it that night. It depends on the price action…

If you are new to the Research Lab be sure to read the Strategy Paper next to the Trade plans link for complete documentation. There is a Help video as well.

So to summarize, while everyone is extremely Bearish and the macro picture, as in Europe, is bleak and everyone in the media is feeding us negative-sentiment, we are keeping a close eye on the 15-minute chart and our indicators.

I sense an opportunity on the horizon and who knows, maybe Santa Claus has a nice rally planned, but “they” want to try and get in before everyone else.

We will be right there with “them” and we will look to take “low-risk, high-probability” trades.

That’s what we do…

However if the “bottom drops out”, our chart will keep us safely on the sidelines.

Join us at the market open this M-W-F as we mark up the charts of the picks from the Grid as well as discuss swing trades and analyze the situation.

Last thing…

Sometimes it’s helpful to have someone tell you when “it’s not a good time to buy” and that can save you from losing money. I hope last week we prevented some of you from losing money by suggesting you focus on your turkey rather than the market. Impulsive, impetuous traders lost money last week because they have to be trading, even when conditions aren’t right.

We prefer to let our indicators and the charts tell us when the time is right and that is what we will watch this week.