Jun

25

Investing Systems Research Lab Blog for Week of June 27th, 2011

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Overall, the market is not “constructive” at all given the macro environment and recent price action, however it would not surprise me to see a rally this week.

It’s hard to discuss the market without first identifying what time frame you are talking about. Same goes for individual stocks.

Taking a step back and looking at the Monthly chart of the S&P, it would seem fairly likely that the support zone and trendline I have been watching will get tested eventually. A breach of those will likely result in a move to around 1100.

If the S&P closes June below the 10-month moving average, that will trigger a confirmed Sell Signal in our long-term market timing model.

If the news continues to be “unpleasant” and the economic indicators continue to be weak, look for some price action in the red box over the next 6 weeks.

Looking at the Weekly chart, the market doesn’t look quite as bad. It’s very oversold and the stochastics are bottomed out and turning up. As I said, an oversold rally would not surprise me at all over the next week or two.

As long as the trendline is not broken and we are above the support zone between 1220 and 1250, I’m still optimistic.

I mentioned last week that I thought we could move back up to test the 30-week moving average and it did just that, but I really didn’t expect a fade all the way back down to the low end of the range.

Honestly, it’s actually constructive for the market to spend time testing the lower end of the range, as long as it holds.

One thing that concerns me is all the long-range days. Literally for the past 15 trading days the S&P has been thrashing around between 1300 and 1260 and until it starts closing decisively above or below that range, we just have to call it “choppy”.

As you know we prefer to take trades in individual stocks when the daily price bars are compressing and the daily ranges are narrowing. Taking a trade after a long-range day is kind of a crapshoot. So when the market itself is doing this, it’s hard to gauge.

The Renko chart looks the same as it did last week, no new bricks.

Regardless of what the overall market does, we always look for stocks that have good technical patterns developing.

Here are some I will be watching with notes on the charts.

The thing to keep in mind in the current environment is that you MUST use stops and be quick to cut loose a trade that moves against you, “just in case”.

Traders tend to lose sight of the fact that they can always buy the same stock back, even if they are stopped out. I’ve done this a few times myself this month – bought a stock, set my stop and had it hit only to re-enter a couple days later.

Anyone that’s been trading long enough knows that getting stopped out is a blessing when you see the stock trading much lower a day or two later. I like to buy on strength, set the stop below recent lows and let it work. If the stop gets hit and the stock starts rebounding, I won’t hesitate to get right back in. I take comfort in the fact the stop will prevent a “catastrophic” loss in any one stock.

I also like to manually trail up stops. When someone asks about “trailing stops”, they usually mean setting an “automatic” trailing stop at their broker, which follows the price of a stock either in percent or dollar terms, then sells when it pulls back from the high by the indicated amount. I don’t like or suggest that at all. A trailing stop to me is where you place a hard-stop at your broker and then if the trade starts going in your favor, you manually cancel the current stop and move it to a higher level. Sometimes I will move a stop to “breakeven”, which is essentially the entry price, but most times I will wait until there is a reasonable profit and move it up at that point. Using a breakeven stop has it’s advantages but is much more likely to get hit.

As I mentioned last week, this is not an environment for “investors”. If a friend came across a large sum of money that he planned to invest in the market and asked my advice, I would suggest that he hold off for a while and keep the money on the sidelines until it’s clear the trend changes. The current trend is down as we have noted every week here since the beginning of May. When the primary trend is down, there is no reason to “invest” new money.

I draw this conclusion from the many “clues” we have such as the Renko chart and the moving averages on the various timeframes.

Trading is a different story. As long as you are willing to be active and take risks, there are great trades that present themselves almost every day. I say right now don’t be afraid to trade at all, be afraid to invest.

I think next week might just present some good trading opportunities for daytraders and swingtraders as we are due for an oversold bounce.

However there is no question that it’s a “news driven” market right now, so we have to see what the tape gives us based on the reaction to news events.

One last thing to consider. We are headed into the last trading week of the 2nd Quarter and there will be a lot of “Window Dressing”. Institutions and Hedge Funds will want to show “market leaders” in their holdings and not a bunch of beat-up stocks and ones that have recently been hammered or near 52-week lows.

Then, we have a 3-day weekend ahead and will be looking forward toward earnings season, which is always exciting and presents lots of opportunities.

Join us at the market open as we take the picks from our scans and identify good ones to trade.

Cheers!

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Jun

18

Investing Systems Research Lab Blog for Week of June 20th, 2011

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Going into this week the market will definitely be “news driven” and there’s no way to tell at this point how the market will react to the news. We will just have to wait and see how the Greek Tragedy plays out. On the Blog here at the end of May I mentioned how the whole Greek thing was like “the sword of Damocles hanging over the market”, and that has proven true.

I am guessing that some resolution will be found because it is not in anyone’s best interest to see the EU collapse.

I’m getting a lot of mixed signals going into next week so we will have to stay on our toes. As I have been hinting at for some time, from an “investors” standpoint, this market is really not something you want to be involved in. Certainly not from the “putting new money to work” aspect. Unless you are a short-term trader, I would be on the sidelines with “buy and hold” money, waiting for a better environment.

The sell signal on the Renko chart a few weeks ago coupled with the close below the 30-week moving average are 2 strikes against being “invested” and the third strike would come with a monthly close below the 10-month moving average.

Speaking of the Renko chart, last week I inadvertently posted the SPY chart rather than the S&P chart and that’s why it looked different.

Here is the correct chart.

The red bricks indicate that the primary trend is down, which of course is no surprise to anyone. But I like to post the chart to remind us of that.

I mentioned that I’m getting mixed signals on this week. Other than the primary trend pointing down, the Weekly chart actually has a “doji” candle that indicates we could see an up week next week.

The doji is where the price opens and closes at the same price. Following the recent decline, it signals the potential for a reversal. The confirmation of a short-term bottom will only come from a green candle this week.

Here’s the Weekly S&P chart.

So I think one of two things happens, depending on the “news”.

If the news is bad, we sell down to the upward-sloping trendline and find support there around 1250. If the news is good then we trade higher and put on a green weekly candle that takes us back up to the 30-week moving average.

Since nothing is ever as simple as it seems, it would not surprise me to see a test of the trendline at some point regardless of the news. It’s important for the trendline to hold as you can see from the same chart zoomed out that it goes alll the way back to the 2009 lows.

Notice the 8/2 stochastics are in oversold territory and starting to turn up. That’s one positive sign. Another positive sign is that most stocks are very oversold and many have formed a “temporary bottom” and look tradeable.

For the first time in a while I am finding quite a few stocks that look like they are due for a bounce and the recent lows are a perfect place to set a stop.

Also, last week I think we might have reached the “extreme negative sentiment” in the media that clues a near-term bottom. As you know I have been looking for “capitulation” and it seems Wednesday and Thursdays intra-day sell-offs were pretty close to that. Another constructive clue, at least for a the very near-term is that Fridays low was higher than the previous days in all the indexes.

So while the coast is definitely not all clear and the news can torpedo the market instantly, if perhaps some buyers step in I think there might be some good opportunities for short-term trades this week.

Here are some charts that have the types of patterns that interest me.

One thing to keep in mind going into next week is all the “uncertainty”, which does not make for a constructive environment.

If an agreement is not reached on the Greek debt then all bets are off and there’s no telling what happens.

However if the news is even somewhat positive, I think we get a nice oversold rally and you have to strike while the iron is hot.

When I looked through my customary 2000+ charts, I found a TON that look ready for a bounce. The magnitude and duration of that bounce is the hard part to determine.

A lot of stocks may get a small bounce in percentage terms, then roll back over to test the lows, or the lows may give way.

I think the best thing to do is have a stop-loss order in place on every open position and generally speaking that would be at the recent lows.

One last thing I want to mention is that by now, listening to our morning broadcasts, it should be clear that we don’t trust the “gaps” at all. When the market gaps up or down .5% or more, we are always extremely skeptical and expect it to trade in the opposite direction most of the time.

Also, as we have been mentioning, we have a close eye out for the customary afternoon sell-offs. We see stocks every day that make nice moves up in the early part of the day, only to roll over mid-day or in the afternoon.

So the idea is to move up stops when you have a profit and be very quick to take profits from day to day when they are there.

I don’t trust the market and I don’t trust any stock at this point, but trading what we see on the chart has been working.

We had a couple Trade Plans last week that worked great as long as you had the sell targets already programmed in at your broker. I think that is the best way to go right now. Set the entry, stop and target ahead of time and let it play out rather than trying to make decisions on the fly.

Join us at the market open as we dissect the news and take the stocks from the scans and try to identify the best entries.

Cheers!

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