Dec

Investing Systems Research Lab Blog for Week of December 12th, 2011

Welcome Research Lab members. This week I have 10 sweet chart setups for you.

But first let’s take a look at the overall market.

Let’s start with the 15-minute chart of the SPY. I want to use the SPY here on the 15-minute rather than the SPX because it shows the gaps.

I drew a horizontal blue line where the market opened Monday, and you see that most of the price action all week was below that line. So while it’s true the market was up last week from the previous weeks close, it was actually down from the open Monday. Notice that the majority of the time during the week the price was trading below that blue line.

Also notice on the chart above that I drew a green horizontal line that shows a “significant resistance” area. Actually the area between the blue and green lines is the resistance zone. In order for the market to move higher, it’s going to have to take out quite a bit of resistance, as you will see on the charts below.

Here’s a look at the SPX on the 60-minute chart.

The downward sloping green line will be the one to watch this week. If the market can break through it to the upside and take out the highs from last week, it could be headed to the top of the rising channel.

Let me be perfectly clear…there is a TON of overhead resistance on all the timeframes. I am a little skeptical on whether the price action can actually surmount all these hurdles.

When I look at the 60-minute chart above I see a sort of “rounding top” pattern forming and it would not surprise me at all if it rolls over. Right now the market looks fairly constructive since the 17 crossed above the 43 on the 15-minute, but in my opinion it needs to PROVE that it wants to move higher from here and the only thing that will prove that is if it takes out all this resistance that lies just overhead.

The daily chart of the SPX below the clearest picture of the convergence of all this resistance of which I speak.

You see the downward sloping trendline drawn across the highs going back to July across the recent highs. Also notice the 200-day moving average which I discussed a bit last week.

In order for the market to rally into the end of the year, it will have to break above the 200-day moving average and “take it out” emphatically.

Notice back in October where the market peeked above the 200-day for a couple days, then moved right back below it. This could happen again and be a sort of false breakout, only to get turned back, so the key is for the price to move above it and stay above it for enough time to show the 200-day acting as support rather than resistance.

One of the things I will be looking for is more than two or three days where the CLOSE stays above the 200-day. If the market manages to break above it significantly and move to the area where the “question mark” is drawn on the chart above, then it could “rip” into the end of the year with a target near the top of the rising channel.

But for now, as I said, the market has to PROVE it wants to move higher….

Until it does, I think we want to be careful. I am not going to just assume it will take out all of these resistance levels.

So what we have is a “convergence” of major overhead resistance…the 200-day moving average, the downward-sloping trendline, and the highs of last week.

If you recall the previous week the market surged around 8%.

For some reason I was under the assumption that the surge was due to the problems in Europe being “solved” in part. That’s what those huge 3% gap ups were about right? The news was that the EU leaders had found a solution to keep it from falling apart, then that Wednesday before the open the Central banks around the world announced they would backstop the debt of the entire planet. That is what supposedly accounted for the “historical” move which took the market right to the top of the triangle.

Then, this past week I kept hearing that the “problems weren’t necessarily solved” and I kept scratching my head wondering if I was dreaming. I thought we were out of the woods here and that’s why the market rallied so much the previous week. It’s all BS and the “gaps” we have been experiencing lately make it even more difficult to trade.

In the big scheme of things, if the problem is that certain countries have too much debt, can’t pay their debt or the interest on that debt, how can loaning them more money be the solution?

It reminds me of a quote from the Mogambu Guru:

"If you can’t repay what you already owe, no one will loan you more money, which you don’t want to borrow anyway because you are not as stupid as you once were."

I guess that doesn’t apply to countries…

Ok, so IF the market cooperates and IF Santa is coming to town with a year-end rally, then there are a lot of stocks with good trade setups.

Here are some I like now…

Remember, the market is up against all sorts of significant resistance, so there’s a chance that these stocks won’t “break out”.

Be very careful with the setups above…there have been a lot of false breakouts recently in many stocks. If you get into a trade on a breakout and it reverses because of market weakness, sell quickly and ask questions later. You can always buy back in if it moves back above the breakout.

GCA was a good example of this last week. It came down and hit our stop right at the low of the day in the morning then turned right back up and ended the week at a new high. I can’t tell you how many trades we have had over the years that got stopped by a penny or two, but I try to keep the stops as tight as possible and getting stopped out at the low is just a part of trading. Sometimes it’s not a bad idea to give your stops just a little extra leeway, especially since stocks seem to be more volatile these days. Don’t be surprised if I give just a “little extra wiggle room” with the stops in the future.

Normally the chart patterns I favor the most for swing trades go something like this:

A stock is in a major uptrend, above the 200-day and 50-day moving averages and they are both sloping up. Then the stock has an orderly pullback for about a week or so, bases out for a few days and then begins to turn back up. The stochastics are below 20 and begin to turn up as the chart starts to “cup up”. At the same time we get a trendline break from a trendline drawn down across the highs of the pullback. The stock makes a pivot low day then turns up and takes out the high of the previous day or two.

I have scans I run here almost every night that look for all these conditions, but lately these perfect setups have been few and far between. Many of the best trade setups get “thwarted” due to gaps…but that’s just part of the game.

So we have to take the patterns the market is offering at any given time, and that’s where we are right now.

Each “cycle” is a little different and we have to take the patterns that are working at the time…

One other thing I look for as far as chart setups is “well behaved charts”, not erratic price moves all over the place.

I have a few other stocks on my watchlist with very nice trade setups. I will be using those to initiate new Trade Plans this week.

Be sure to check the “Waiting Trade Plans” page each morning before the open. The trades are staged about 30 minutes before the market open.

Also, join us each M-W-F morning before the open as we take the picks from the Grid and mark up the charts. Doug had a sweet setup on QCOR Friday that went on to make a significant move.

We will see you on the live broadcast this week…