Nov

27

Investing Systems Research Lab Blog for Week of November 29th, 2010

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I hope everyone had a great Thanksgiving and enjoyed the long weekend. I certainly did.

While last weeks price action might not have been too meaningful as most people had other things on their mind, this week is certainly going to be interesting.

Double POMO Monday aside, I am not ruling out the possibility of a severe market drop if the situation in Korea escalates out of control. We can look at as many charts as we want, analyze technicals, market conditions and economics, but geopolitical events trump all that when it comes to a situation like this. Hopefully it will just be another case of saber-rattling, but keep in mind that in the unlikely even that all-out war breaks out, the market will not like the uncertainty. With that in mind I think it’s a good time to reduce overnight exposure and keep a stop under every stock you hold.

Several weeks ago I posted the daily chart of the SPY when it was outside the upper Bollinger band and suggested it would find it’s way back inside the bands. The price action actually carried it back to the lower section of the envelope and we now find the SPY sandwiched in between the 20-day and the 50-day moving averages. The 20-day appears to be acting as resistance and the market must move back above it to be constructive.

The 50-day should act as support, but if it gives way we will look to the 200-day for the next major support.

The candle on the Monthly chart, with 2 trading days left in November, is also ominous.

Note the similarity with Aprils candle and then what happened the following month.

Traditionally December is the strongest month of the year, but traditionally September and October are the weakest and that didn’t hold true this year. So it seems 2010 is atypical as far as seasonals go and thus carries very little weight into December.

Also notice on the Monthly SPY chart above the Fibonacci levels that are drawn from the 2007 highs to the 2009 lows. Notice how the market retraced up to the 61.8 level twice then was turned back both times. Until we break above Novembers high, there is no “blue sky”.

I would say it’s likely the market will come down and test the 10-month moving average in December. It happens to be right at the 50% retracement level and the midway point of the range going back a year.

This does not mean we can’t find good trades and opportunities to jump in and out of stocks with a short-term timeframe, but we have to keep the big picture in mind. Looking at the forest rather than the trees I think it’s going to be a difficult environment over the next couple months. There are a lot of reasons to be cautious now.

Again, until we take out the November high I will be skeptical and err on the side of caution. I don’t think it’s a good time to initiate new “investments”, but there are always good trading opportunities when volatility picks up.

Amazingly enough the Russell 2000 small cap index has been the strongest in the past few weeks and many low-priced stocks have made extraordinary moves. This is probably the area to focus on in the near term as the smaller stocks tend to be strong this time of year. Also there will be a lot of year-end positioning by institutions and individuals to dump the laggards and perhaps bid up the leaders.

There is a lot of potential bad news out there that can send the market reeling so keep in mind that in a “liquidation environment” company specific news and earnings don’t matter much. On days when the market is tanking, there’s no reason to step in front of it and try to fight the tape. We can take each day as it comes and we don’t have to trade every day.

When the market looks as risky as it does now, there is no reason to feel like you have to trade every day. Wait for the best opportunities to present themselves then jump in with a tight stop and take profits quickly when they are there. Holding overnight is a lot riskier then daytrading in a down market.

In these blog posts over the last few months I have said that I would not be inclined to consider shorting the market unless the 20-day moving average is penetrated to the downside and we start getting multiple closes below it. Well, were are pretty much there on the DOW and the S&P, however the NASDAQ is right on the fence and the Russell is still above it. So I am thinking it is probably a little risky to short the indexes at this point, but that could change quickly if the recent lows give way. If we break the 50-day moving average on the S&P and the recent lows around 1175, then we could be looking at a significant pullback.

Yes, next week should be exciting. We are near a critical juncture and just have to wait and see what happens.

Join us Monday morning in the Research Lab as we watch it unfold.

Have a great weekend.

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Nov

20

Investing Systems Research Lab Blog for Week of November 22nd, 2010

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If the market is strong next week I will be like a kid in a candy store. There are tons of great chart setups out there and many have similar patterns.

The recent pullback put pivot lows on a lot of stocks and thus perfect low-risk stop loss placement. From what I see on tons of charts is that you want to put a stop just under the low for Tues-Wed-Thurs of last week and place your bets.

Here are some stocks and set-ups we will be watching next week.

So there you go. some nice trade setups to watch. Remember these are simply “artist renderings” and some may not play out and some might take a bit longer to set up just right.

Check the Trade Plans to see which we like best.

Enjoy your weekend.

We will see you live in the Research Lab Monday morning at the market open.

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