Sep

Investing Systems Research Lab Blog for Week of September 7th, 2010

Last week can be summed up in one word…Wow!

It seems the glass went from 1/2 empty to 3/4 full in just a few days.

In last weekends blog I made a comment “Based on the fact that the market rarely does what everyone expects, we might just have a huge rally that takes us right up to the top end of the range.”

I said that in the context of September traditionally being the weakest month of the year based on the seasonal chart.

The weekly range was much wider then expected and the forecast basically contained just about everything except Friday’s follow-through.

Here was the range we expected last week:

Friday was the day that was quite unexpected as you can see below on the daily.

Notice above that we are right up against the 100-day moving average which has proven to be resistance in the past, so we would be surprised to see much more of a move without some consolidation and perhaps backing and filling.

If this rally has legs we might see it hit the upper end of the range near 1130 on the S&P, but that would most likely not happen next week. But you never know. Last weeks extraordinary move caught just about every off-guard. Seriously we started the week wondering if 1040 would hold or if we were headed back into the “danger zone”, then the market made a runaway move up.

So what next?

Well, on the weekly we see the “right shoulder zone” is within striking distance, so it’s not out of the question it pushes higher. But we will not necessarily get there in just one week. If anything I would expect a red candle week, then perhaps one last push the following week to take us there.

Or, perhaps that low volume rally from the low and to near the upper end was just a way to jam the bears that had been coming out of the woodwork the previous three weeks. Of course no one wanted the “people” to go into a three day holiday weekend feeling dejected, so what better way to lift everyone’s spirits that hitting the big green button and sending the market soaring.

Honestly though, we closed the week at a very critical juncture, right at the trendline. Next week will be very interesting to say the least. Do we break the downward sloping trendline and make a run for the 1130 right-shoulder zone or do we consolidate the move and work into the apex of this triangle? We will have to see because I can’t say for certain. As I said before, the glass went from 1/2 empty to 3/4 full in just a few days and the sentiment can again turn on a dime.

The good news is that based on the daily chart the market is not really overbought, but a run-away move like this typically needs a pause and consolidation. At the 1040 low Tuesday the last thing anyone expected was to be end the week staring at 1100. It was probably one of the least expected moves in quite some time.

We had some interesting trades last month in the Research Lab Trade Plans.

The one that really bugs me is EROC, which made the move we expected but stopped us out along the way. You might have noticed we have been a little more liberal with the stops subsequently as we have seen this exact same thing happen several times this year. The stock hit the entry and the intra-day volatility hit our stop right before the stock made the move we were looking for.

If you notice the stops are a tad wider in the Trade Plans, it is because we are making minor adjustments to avoid this as much as possible while still maintaining reasonable stops.

JKS is one sweet chart and it’s amazing that the Entry and all 3 Targets are contained in the green square. Just because we hit the targets and closed the trade doesn’t mean this stock might not push a lot higher. It’s definitely one to watch closely.

ARNA is a stock that all members should be familiar with and we are looking at a potential “significant” run-up leading into the FDA advisory panel on Sep 16th. While we may see it run up into this date, all bets are off that day as we have seen many of these type of stocks lose 1/2 their value overnight. Then again, there’s the chance that “this time it’s different” and ARNA explodes to the upside. The best way to play this is trading a run-up or spike and pulling all but a few “low cost shares” off before the 16th.

The chart is a beauty at this point…look for the 7′s next week.

Last but not least let’s look at the open trade still hanging around from August. LLEN.

The red line indicates our stop-loss and you can clearly see there’s a ton of support in that area. The yellow line is the Entry at 9 and the pattern is still developing. If it goes according to plan the price will start moving up along the green upward sloping line, forming a sort of big “W” and hitting our targets and making us very happy.

The nice thing about this trade is that the stop sits at a significant area that once breached, you would not want to be holding the stock. Of course as we have seen before, there is the “ever so slight” chance that we get a move down to the stop, then the stock goes right back up.

If that happens I will raise my fist in the air and yell curses at the high frequency trading machines that have once again thwarted our spectacular plans with their evil little intra-day spikes.