Oct

31

Investing Systems Research Lab Blog for Week of November 1st, 2010

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Next week is going to be extremely exciting. We have the election on Tuesday and the Fed announcement on Wednesday, then the jobs number Friday to wrap things up.

The action will be mostly news driven and and we could see some wild swings in the market. The risk level is very high and it might not be a bad idea to sit on the sidelines, or trade with small positions.

Already, after having looked through about a thousand charts, I am beginning to see a lot of stocks that look to be in topping patterns. Many of the market leaders are already pulling back or topping themselves and the much anticipated correction might actually start this week. It will one of the most anticipated corrections in some time, but if everyone expects it can it still happen? I say yes.

As we mentioned several times recently, the main thing to watch is a close below the 20-day moving average by the major indexes. I’m watching the Russell 2000 ETF, IWM as it looks the weakest and will probably be the first to crack. The DOW, S&P and Russell have essentially been trading sideways for a couple weeks now as the QQQQ rose. The Q’s have been the leader all along since the March 2009 low, but it’s so heavily weighted to just a few stocks like AAPL AMZN GOOG etc. that we prefer to use the Russell and S&P to gauge the market.

Is it possible the market has been resting and consolidating it’s gains and is ready to take another leg up? I suppose this is possible for a couple reasons, but I would still err to the side of caution. The overall trend is indeed up and a change in that trend has yet to be confirmed. However we are starting to see trendline breaks due to the sideways action, so that has us concerned.

It’s almost a crapshoot next week. How will the market react to the election? Then, will the Fed announcement of QE meet expectations? Will the jobs number be perceived as good and what will the revisions look like?

We are going to have to wait to see. Personally I think the risk is to the downside and what concerns me the most is that I feel the next “correction” will be faster and deeper than most expect. Over the years I have seen months of gains erased so fast that people are caught off guard and don’t have time to react. It starts off with a couple down days, a little rebound then individual stocks start cascading lower and within a couple weeks the damage is done. We saw this just last April. The wildcard is how the “computers, bots, and HFT’s” will act when the trend changes. Will they pull the bids? Will they pile on to the short side? Will they magnify the downside move? I think all scenarios are possible.

In the mean time, if the market doesn’t “tank”, we have some pretty good looking charts for next week as far as swing trades.

Check the Trade Plans Monday morning before the open. While I am hesitant to load in more than a few, some of the recent pullbacks have presented good opportunities as long as the market holds together.

I’m seeing some low-risk entries on some of the leveraged short ETF’s start to set up, which is interesting. We will be watching TZA very closely next week. I’m starting to like TZA between 22 and 23, with a stop at 21. But only for an initial position to test the waters. I would consider adding on if the range moves to between 23 and 24, and a clear break above 24 will be the main buy trigger. However with any move below 21, I would stop out and forget about it, preferring individual stocks to the long side. The nice thing about TZA is if you catch it at the right time, you can get a significant move in your favor quickly and move up the stops and make a nice trade. The compounding actually works in your favor on a string of multiple down days.

Of course that would all be predicated on a “change in trend”, which is difficult to predict, but easy to spot after the fact. As I mentioned previously, the biggest telltale sign for a trend change would be a move below the 20-day moving averages for the indexes. Shorting before that happens is risky.

One other thing that concerns me is that some of the relationships between the dollar, the market, interest rates and commodities are starting to act weird and decouple to some degree. This is another sign that “change” is perhaps underway.

In celebration of Halloween, Zerohedge has a great Horror Story titled “Trigger Points, Black Swans, And Other Unpleasant Realities”.

I suggest you read that to avoid becoming one of the hoards of complacent zombies. It’s always a good idea to be aware of the truly scary scenario so we aren’t lulled into a false sense of security by the so called financial media. They will be the ones rationalizing the disaster after the fact.

In keeping with the Halloween theme, I offer you Timewave Zero for 2010. Pay particular attention to what the graph does starting November 14th, a couple weeks from now.

Now if you are the type of person that believes in ghosts, aliens, UFO’s, 2012 or that the pyramids were designed to create a force field around planet earth, then Timewave Zero might indeed seem spooky. The soundtrack definitely is…

That’s the fun of Halloween!

Enjoy it and be safe.

We will see you Monday morning in the Research Lab and we will be trading stocks.

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Oct

23

Investing Systems Research Lab Blog for Week of October 25th, 2010

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Let’s take a look at the Closed Trade Plans so far this month.

Here are the current stats.

Here are the ones that got closed this week.

The System actually identified 2 separate potential entries on AUMN.

Here is the one we actually took:

Here is the alternate entry.

It’s interesting to note that scenario 2 would have been deleted by the bot on 10/21/2010 since it gapped above T3 at the open. As I mentioned on the Wednesday show, I was hoping for a narrow range day on Thursday, then it would have made for a better setup using the entry at 21.50. We anticipated the potential for a “big white candle”, and you see how it worked out. On Monday it blasted through T3 at 24.31 and the high Friday was 25.60.

By the way, that second screenshot is from the Trade Plan Admin, so it is drawing a duplicate candle today, Saturday, since it’s pulling live data. It’s just using yesterdays data again since the market is closed.

RDWR filled us on an intra-day spike false breakout, then opened just above the stop the next day and hit it. It happens, but we don’t want to take a chance on a big move down on such a volatile stock.

Funny thing about RDWR is that they are coming out with earnings this week on the 27th, and are expected to earn .24, double last year. It will still be one to watch, though we won’t take another shot at it in the Trade Plans, since it could react either way after earnings. I’m guessing it will gap up Monday, as Cramer mentioned it on Mad Money Friday. Depending on how it acts in the next few days, it might do what we expected, put on a big white candle long-range day, but right now it feels like a crapshoot.

If I wanted to speculate again in RDWR I would probably set an entry at 34 and a stop at 32.

The Trade Plans managed to catch MCP last Monday, right at the breakout and long before it was a “headline stock”.

Here is the Closed Trade Plan.

Here is how it looked Friday at the close.

You really have to be careful with these high-beta stocks as you can see. It opened Monday at 28.58, hit the Entry at 29.15 and moved through all three targets, but the big move came Tuesday. The high Thursday was 35.85 and you can see the low Friday. What a wild ride.

Actually it was a toss up in the Trade Plans between this one and REE, however the RL Scanners picked up REE Monday morning too. Doug managed to get an Entry marked up at 8.35 and we all know what it did after that. It was an incredible 3-day run that ended Wednesday as we pointed out on the show.

Let’s take a look at RINO, from earlier in the month to see how it moved after hitting Target 3.

Here is the closed Trade Plan.

Here’s how RINO looks today.

As you can see, Target 3 was just a pause on the way to much bigger and better things.

However the Trade Plan “system” is rigid. Each trade gets a fixed set of targets, making it better to track actual performance in the long run.

We won’t fool with the two others from earlier in the month, but you can always look at the current chart on a closed trade to see where it is now. That’s always fun, especially the further you go back. We have 201 closed trades since January 2009.

So we have 6 closed trades this month and are headed into the last trading week of October.

The market itself looks to be getting a little tired after this big leg up, and we are bracing ourselves for an imminent “big distribution day”.

The run up in the S&P from September to now is a mirror image of the low volume run up from February to April. I even saw a screenshot of the moves next to each other.

That looks fairly ominous as we know the trend changed drastically on April 27th. the M-A run took it up about 16%, while the current run is only about 12%.

But we concur with the idea that chasing the market here is like “picking up pennies in front of a bulldozer” as some say.

Just like we have been saying the past month, and also the month before the top in the M-A run, “be very careful” going forward and have an exit strategy in place. While we might still run up into the elections, the ice is getting thinner every week.

Of course we can still take a lot of day trades and even swing trades with the plans, but using stop loss orders on all trades is critical.

We have said several times that we would not be looking to short this market just yet. As long as the indexes are above the 20-day moving averages, it’s not time to try and guess the top. We will have a pretty good idea when we have crested the summit.

We are studying the market top in April carefully and watching for signs of a similar topping pattern. We have not seen the “big red candle” distribution day yet, so perhaps “the coast is clear for now”.

We shall see…

So have a great weekend and be sure to log in the Research Lab Monday morning before the opening bell to check the Waiting Trade Plans and of course join us for the Live Broadcast as we take the stock picks and mark up the charts.

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