Oct

29

Investing Systems Research Lab Blog for Week of October 31st, 2011

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“Irrational Exuberance” is a phrase that comes to mind when trying to describe this market.

It just moved up 20% in 4 weeks. (from the 1074 low on Oct. 4th to the 1292 high Oct. 27th). That’s not normal and has only happened twice in fifty years.

At this point is it anyone’s guess what happens next, but like I said last week.

“At this juncture, I am skeptical…”

I consider myself a “rational” thinker and am always cautious when it comes to the overall market. Based on observation and experience I know that the market can lose 30%-50% of it’s value. The shell-shock of 2008 will resonate in the back of everyone minds for years and I suspect I’m not the only one that uses the experience to avoid chronic complacency.

My main goal is to avoid ANY significant drawdown of my trading (or investing) capital – always.

I’m not sure about you, but personally I made the decision years ago that I would never accept big losses in my account. Anyone that “loaded the boat” with stocks anytime the past few weeks was duly rewarded for taking huge risks with their hard-earned money. However traders with a cavalier attitude, the kind that would have them risking significant capital the past week, will someday find themselves holding stocks at the wrong time and they will likely take the same kind of hit the “buy and holders” did in 2008. This time they got lucky…

Going into the EU meeting last Wednesday, the Global Financial System was hanging by a thread, ready to collapse in a 2008 style meltdown if “they” didn’t reach some sort of an agreement. Given the circus atmosphere of the leaders involved and the rumor-mongering media, that is simply not the kind of environment I want to “have it all on the line”. Remember, I said I consider myself a rational thinker…

So the “efficient” market quickly adjusted upward on the “news” to reflect the new “fair value” as of the close Friday.

While it seems like I might sound a little sarcastic at times, I know for a fact that the market is smarter than me and each day’s close reflects the “fair value” of everything known. With the uncertainty in Europe temporarily lifted, the market rose like a ball held underwater, reflecting the expectation that “Global Financial Armageddon” and the collapse of the Euro were off the table (at least as of the close Friday). It actually makes sense…

In the big scheme of things it’s just a huge game anyway. Money does not occur in nature, it is a man-made concept. I don’t want to get into a whole thing about the difference between money and currency, but I know since it doesn’t grow on trees, it must be created by humans. The banks own the Central Banks that create the money from debt and it is borrowed into digital existence by someone sitting at a keyboard. The concept of creating money out of thin air based on debt is so convoluted that I can’t find the words to describe it. IF the problem is too much debt then the solution can not be more debt. Not to anyone that thinks rationally.

It reminds me of a quote from the Mogambo 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.”

It’s funny how that doesn’t seem to apply to Countries, only individuals.

Do I think all the problems are solved? Not a chance. But like I said the other day on the morning show “Never underestimate the willingness of the bankers to create enough money out of thin air, to bail themselves out”.

Extrapolating that concept out a few years I am once again warming up to the idea that gold and silver are going MUCH higher in the long-term.

If you disagree I have a simple “test” you can do at home. Buy an ounce of gold for $1700 and then take 17 $100 bills. Lock them in a “time capsule” and do not open it for 5 years – or 10 if you really want to get a good ‘sample”. See which buys more tangible goods in the future…

Getting back to the market, it sliced right through the resistance zone I had on the chart the past few weeks. It actually gapped right through the upper-end on the EU “agreement”. The market loved the news it seems, though most thinking people are not entirely convinced all the problems are solved. Take a haircut – kick the can down the road and remove the worry of impending financial “collapse”. That’s essentially what happened, so it’s not a huge surprise the market went up big.

A guy walks into a Greek barbershop and says “ I will gladly pay you 50% next Tuesday for a haircut today…”

Did I forecast the huge move up last week? Nope. To me it was more like the spin of a roulette wheel, it could have gone either way. Personally I would rather be on the sidelines during a big “event” that I know is going to send the market moving significantly in one direction or the other.

But I do have to give myself a little credit for the following statements from last weeks blog.

“We can’t deny or ignore this strength so I am starting to think that it’s entirely possible the market pushes through the resistance zone (after a rest) and heads up to touch the 200-day moving average.”

(I was way off on the “rest” part)

I also said:

“So my idea is this. If the market stays strong, there’s more money to be made trading individual stocks…”

Then I posted some charts of stocks with nice “patterns” that I thought might make for good trades last week, even with the overall market seemingly overbought.

I couldn’t resist the idea of talking all those stocks I spent so much time “culling from the herd” and seeing how they performed last week.

So I put them in a spreadsheet using Mondays official opening price as the starting point and the close Friday just to see how they did.

Here’s the results.

The biggest mistake I made last week was not loading every single one of those up in the Trade Plans and let the chips fall where they may. But I know that you Research Lab members take the Trade Plans seriously (some people even trade real money with them) and I wasn’t about to assume that much overnight risk given the environment.

Over the years I have used this blog to discuss my thoughts on the overall market and to bring you the best trade setups I can find on the charts.

Regardless of what I think of the overall market, the way we make money is to trade the right stocks at the right time. The past two weeks I brought you some sweet setups at the right time and they moved in our favor, thanks to the overall market. What can I say?

It’s up to you to decide which trades look best and how to play them, based on your style and timeframe. My job is find the best ideas I can and bring them to you. I do that by looking through thousands of stock charts.

Which brings me to what I’m seeing now…

Many stocks are simply too extended and too erratic to confidently enter right now. Sure some of them are going to extend the gains and some of the parabolic moves will most likely continue simply due to the law of inertia, but trying to find “well behaved” charts right now is very difficult.

There are going to be “chasers” next week I would imagine, but these are the “weak hands” that will sell on the first sign of a pullback. Do not let yourself get trapped when stocks have their inevitable pullback.

Cramer said Thursday “Buy every pullback for the rest of the year”. Personally I would rather take it one week at a time than make such a bold statement. A “rational” person would reserve the right to change their mind as events unfold…

I could post a dozen charts of stocks that have “momo” and “might” keep ascending paraboliclly, but the air is getting thin up here in the Stratosphere. Like I said last week, I want to see a pullback and some bases established. Parabolic moves always end and you don’t want to be left holding the bag when they do.

Next week is great for daytrading – not so much for new swing trades in my opinion.

The last thing I saw on CNBC Friday was a good reality check. The kind of thing I like to remind me to never get complacent.

Check it out. (opens in a new window)

http://video.cnbc.com/gallery/?video=3000054010

Haha…Walt says the market is likely to “repeat” the 2007-2009 “upset” and he’s targeting 580 on the S&P down the road…..can you imagine? He says “IF” this rally fails to break the May peak, we are still in a textbook Bear Market correction and the current run is likely to top out just overhead in the 1305-1325 range.

Talk about a dose of dose of reality…

Now you know I don’t trust anything I hear on CNBS and I don’t take anyone’s market “predictions” as gospel, but it was actually refreshing to see them bring out a true contrarian. Of course they aired this at 4:49, when no one but me was watching. that’s why I wanted to share it with you.

I sure hope Walt is wrong.

To wrap up this post I’m going to do things a little different. I’m not going to post a bunch of great trade setups on the blog and then only put 1 in the Trade Plans. I’m going to reserve the setups I’m watching for the Trade Plans themselves.

Be sure to check the Waiting page before the market opens each day next week. I can’t promise I will have a bunch of them, but I will take it as I see it.

I will leave you with one that looks interesting, but perhaps too volatile for the plans themselves.

I like this type of pattern…

We will see you on the Live Broadcast in the Research Lab at the opening bell Monday. Regardless of what the market does, I’m confident we will find some great trades.

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Oct

22

Investing Systems Research Lab Blog for Week of October 24th, 2011

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As I pointed out last week on the 60-minute chart, the market has been “cycling” up and down in a wide range since the beginning of August.

This last “cycle up” began about three weeks ago, off a gap-down below the support that likely blew out most buy and hold market participants that had stops in for when it broke.

That “spike low” kicked off the recent run up, which has carried a lot further than I or most traders expected, and closed right at the high.

So this last “cycle up” just took the S&P straight up roughly 15% in three weeks, reaching right up into the “heavy resistance zone” at the close Friday.

Here’s the daily chart.

I expect some chopping around up here and then a pullback that tests the 20-day and 50-day moving averages. Notice a “golden cross” is about to occur. That is where the 20-day moving average crosses the 50-day to the upside. We will probably hear a lot about that this week as the Bulls try to convince you the market is headed a lot higher.

At this juncture, I am skeptical…

I want to see a pullback and a base form. So does everyone else. That’s why it might just continue to “ramp-up”, run-away and charge full steam ahead, leaving everyone in the dust. We can’t underestimate the possibility they drive this thing all the way to 1275-1300 with the current “head of steam” the market has.

The “invisible hand” does not care what we think or what makes sense…

We can’t deny or ignore this strength so I am starting to think that it’s entirely possible the market pushes through the resistance zone (after a rest) and heads up to touch the 200-day moving average (not shown).

So as far as the overall market is concerned, I’m sticking with my opening line from last weeks blog “Too late to go long, too early to short”. However a nimble trader might actually look to take a quick short trade on a break down through and below 1230 with a stop at whatever the high turns out to be.

If, on the other hand they are able to push it right through the top of the resistance zone, then there are going to be a TON of great trades in individual stocks on deck.

The worst thing about the market being overbought is the fact that I haven’t seen so many stocks set up for good trades in months.

Imagine that.

So my idea is this. If the market stays strong, there’s more money to be made trading individual stocks and if the market rolls over, the best thing to do is trade the inverse, leveraged ETF’s.

Here’s a few decent looking trade setups I found. There are a LOT more, and that in itself has me nervous…

Notes on charts.

That should give you a good list of ideas to watch over the next week or so.

Keep in mind that if the overall market pulls back, like it needs to, some of these might not fill and others might fill then reverse, so always be sure to use stop-loss orders you are comfortable with.

I’m thinking a few of these might make for good Trade Plans this week so check the “Waiting” page before the open each day.

Also, be sure to check the earnings date of these and any stocks you are considering next week. I don’t recommend holding a stock through an earnings release because it’s really just a crapshoot.

This week should actually be fairly exciting because it seems with earnings season in full swing, stocks are moving more independently,

As always, join us on the Live Broadcast at the market open.

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