Research Lab Blog

Dec

Investing Systems Research Lab Blog for Week of December 12th, 2011

Filed Under Main Content | Leave a Comment

Welcome Research Lab members. This week I have 10 sweet chart setups for you.

But first let’s take a look at the overall market.

Let’s start with the 15-minute chart of the SPY. I want to use the SPY here on the 15-minute rather than the SPX because it shows the gaps.

I drew a horizontal blue line where the market opened Monday, and you see that most of the price action all week was below that line. So while it’s true the market was up last week from the previous weeks close, it was actually down from the open Monday. Notice that the majority of the time during the week the price was trading below that blue line.

Also notice on the chart above that I drew a green horizontal line that shows a “significant resistance” area. Actually the area between the blue and green lines is the resistance zone. In order for the market to move higher, it’s going to have to take out quite a bit of resistance, as you will see on the charts below.

Here’s a look at the SPX on the 60-minute chart.

The downward sloping green line will be the one to watch this week. If the market can break through it to the upside and take out the highs from last week, it could be headed to the top of the rising channel.

Let me be perfectly clear…there is a TON of overhead resistance on all the timeframes. I am a little skeptical on whether the price action can actually surmount all these hurdles.

When I look at the 60-minute chart above I see a sort of “rounding top” pattern forming and it would not surprise me at all if it rolls over. Right now the market looks fairly constructive since the 17 crossed above the 43 on the 15-minute, but in my opinion it needs to PROVE that it wants to move higher from here and the only thing that will prove that is if it takes out all this resistance that lies just overhead.

The daily chart of the SPX below the clearest picture of the convergence of all this resistance of which I speak.

You see the downward sloping trendline drawn across the highs going back to July across the recent highs. Also notice the 200-day moving average which I discussed a bit last week.

In order for the market to rally into the end of the year, it will have to break above the 200-day moving average and “take it out” emphatically.

Notice back in October where the market peeked above the 200-day for a couple days, then moved right back below it. This could happen again and be a sort of false breakout, only to get turned back, so the key is for the price to move above it and stay above it for enough time to show the 200-day acting as support rather than resistance.

One of the things I will be looking for is more than two or three days where the CLOSE stays above the 200-day. If the market manages to break above it significantly and move to the area where the “question mark” is drawn on the chart above, then it could “rip” into the end of the year with a target near the top of the rising channel.

But for now, as I said, the market has to PROVE it wants to move higher….

Until it does, I think we want to be careful. I am not going to just assume it will take out all of these resistance levels.

So what we have is a “convergence” of major overhead resistance…the 200-day moving average, the downward-sloping trendline, and the highs of last week.

If you recall the previous week the market surged around 8%.

For some reason I was under the assumption that the surge was due to the problems in Europe being “solved” in part. That’s what those huge 3% gap ups were about right? The news was that the EU leaders had found a solution to keep it from falling apart, then that Wednesday before the open the Central banks around the world announced they would backstop the debt of the entire planet. That is what supposedly accounted for the “historical” move which took the market right to the top of the triangle.

Then, this past week I kept hearing that the “problems weren’t necessarily solved” and I kept scratching my head wondering if I was dreaming. I thought we were out of the woods here and that’s why the market rallied so much the previous week. It’s all BS and the “gaps” we have been experiencing lately make it even more difficult to trade.

In the big scheme of things, if the problem is that certain countries have too much debt, can’t pay their debt or the interest on that debt, how can loaning them more money be the solution?

It reminds me of a quote from the Mogambu 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."

I guess that doesn’t apply to countries…

Ok, so IF the market cooperates and IF Santa is coming to town with a year-end rally, then there are a lot of stocks with good trade setups.

Here are some I like now…

Remember, the market is up against all sorts of significant resistance, so there’s a chance that these stocks won’t “break out”.

Be very careful with the setups above…there have been a lot of false breakouts recently in many stocks. If you get into a trade on a breakout and it reverses because of market weakness, sell quickly and ask questions later. You can always buy back in if it moves back above the breakout.

GCA was a good example of this last week. It came down and hit our stop right at the low of the day in the morning then turned right back up and ended the week at a new high. I can’t tell you how many trades we have had over the years that got stopped by a penny or two, but I try to keep the stops as tight as possible and getting stopped out at the low is just a part of trading. Sometimes it’s not a bad idea to give your stops just a little extra leeway, especially since stocks seem to be more volatile these days. Don’t be surprised if I give just a “little extra wiggle room” with the stops in the future.

Normally the chart patterns I favor the most for swing trades go something like this:

A stock is in a major uptrend, above the 200-day and 50-day moving averages and they are both sloping up. Then the stock has an orderly pullback for about a week or so, bases out for a few days and then begins to turn back up. The stochastics are below 20 and begin to turn up as the chart starts to “cup up”. At the same time we get a trendline break from a trendline drawn down across the highs of the pullback. The stock makes a pivot low day then turns up and takes out the high of the previous day or two.

I have scans I run here almost every night that look for all these conditions, but lately these perfect setups have been few and far between. Many of the best trade setups get “thwarted” due to gaps…but that’s just part of the game.

So we have to take the patterns the market is offering at any given time, and that’s where we are right now.

Each “cycle” is a little different and we have to take the patterns that are working at the time…

One other thing I look for as far as chart setups is “well behaved charts”, not erratic price moves all over the place.

I have a few other stocks on my watchlist with very nice trade setups. I will be using those to initiate new Trade Plans this week.

Be sure to check the “Waiting Trade Plans” page each morning before the open. The trades are staged about 30 minutes before the market open.

Also, join us each M-W-F morning before the open as we take the picks from the Grid and mark up the charts. Doug had a sweet setup on QCOR Friday that went on to make a significant move.

We will see you on the live broadcast this week…

Share and Enjoy:

Dec

Investing Systems Research Lab Blog for Week of December 5th, 2011

Filed Under Main Content | Leave a Comment

Last weekend there was nothing on the chart of the S&P that said “you should be in this market right now.”

If you recall this 15-minute chart a week ago, the market was in a clear downtrend. The 17 period EMA had crossed the 43 EMA back on November 16th and not shown any signs of bottoming.

I mentioned exactly what we would be looking for to give the “go long” signal.

From last weeks blog:

We will be watching the 15-minute chart for the first indication of a cycle-up.

Here’s what we will look for… When the price breaks the trendline, moves above the 17 and 43 EMA’s and the 17 crosses the 43. We need all three of those conditions to occur.

Well as you know, if you were watching, all three of those conditions did occur Monday. The problem was that the market gapped up 3%, which is a rare and significant event. Of course it was based on the “news” that I linked to last week about the European leaders agreeing to not let the system collapse. I am actually happy that all the central banks around the world decided to do whatever it takes to keep the wheels from coming off the bus. Had they not pulled out the bazooka, who knows what might have happened last week…maybe BAC would have gone under five bucks, and we can’t have that.

So the problem with Monday’s HUGE gap up is that it not only thwarted the two Trade Plans on deck, but it didn’t really offer a good opportunity to get into any stocks as they mostly gapped up as well.

Here’s a chart that shows the action and I used the SPY because you can clearly see the gaps.

At the very upper-left of the chart above you see the last sell signal in red. At Monday’s open you see I drew a green circle where the three conditions we discussed occurred. You got the trendline break and the 17 crossed through the 43. That would have been great if the price action had actually moved up through the trendline and moving averages.

The second green circle I drew occurred at the end of the day Monday and was essentially the best “entry” point I can see on the chart. The price pulled right back and bounced off the 43 EMA, similar to what we look for on intra-day stock charts for potential entries. You can also see that Tuesday had another pullback and bounce off the 43 in the afternoon.

Here’s the thing. What happened last week was very rare, so I’ve been using this “setup” as a learning opportunity. Typically these indicators on the 15-minute chart will provide ample time to get in or out as the price will actually break the trendline and move above or below the moving averages, then they will cross.

Notice at the end of the day Friday the price moved below the moving averages and they look like they might be ready to cross to the downside. This is kind of a warning sign that we might get a little pullback early in the week.

Keep in mind that there are times where the 17 and 43 “pinch together” and spend time very close to each other, which is not a clear signal. Like all indicators they are not perfect. I always pay attention to the “angle of attack” and the distance between them. When the 17 crosses the 43 forcefully and is moving away from it, that’s a clearer signal. As the trend change is established they will spread apart for a while, then tend to pinch together again before spreading apart again.

The chart above is a great study in using these indicators…

Moving on, we had quite a few potential Trade Plans last week, however only two actually filled.

Going into Monday we had VDSI and SIMO on the Waiting page. Both gapped above the Entry and hit Target 1 without getting filled, so the system deleted them. You can always review these on the Plan Events page in the Trade Plans. It’s a sequential list of everything that transpires with the trades.

There were actually several others that never were activated because they were clearly gapping way over the Entry in the pre-market…LOGI, JRCC and VLO. But that’s just the way it goes sometimes and it’s no big deal. There will be plenty more great opportunities in the future.

Going into this week I see a lot of overhead resistance on the daily chart of the S&P 500. Notice I have added the 200-day simple moving average to the chart because at this point it’s really acting as a ceiling.

As I mentioned on the show a few times last week, in order to get more constructive, the market needs to move above the 200-day and start using it as support instead of resistance.

Here’s the daily chart.

Also notice the downward sloping green trendline drawn across the prior highs. Between that and the 200-day, the market is up against significant resistance.

I expect a little pullback and consolidation, then perhaps another run at these two areas of resistance. I’m thinking a pullback to the middle of the triangle, say around 1220 would be healthy.

If and when the market can break above the trendline and 200-day, it should be able to run to the top of the channel. notice the ? on the chart. That represents the question “is Santa going to bring the rally this Christmas?”

One last thing regarding last week and the “crazy” gaps, two of which were 3% gap-ups in the same week. This is by no means “typical” and only occurred because “they” pulled out the proverbial bazooka to prevent a meltdown right before the Holidays.

As I’ve been saying for some time, it’s a news driven market and it cuts both ways.

It brings to mind the old sayings “don’t fight the FED and don’t fight the tape”. Regardless of what anyone believes, “they” drove this market up big last week and fortunately we were able to participate to some degree. I would have liked to get more swing trades open early in the week but chasing gaps can be dangerous.

I looked through a lot of charts this weekend and many have similar patterns. They had excellent pullbacks then reversed this week and ran right back up to near the prior highs. That makes for a difficult situation going into this week because most of the charts I see would require the market to ignore the resistance areas we discussed in order to keep “plowing ahead” and taking out the prior highs.

So I think the plan of action is to wait a couple days and let the market and the stocks pullback a little bit and then take some trades when it looks like it wants to “attack” the resistance again.

Keep in mind that the possibility does exist that we will see another “cycle down”, not just a shallow little pullback. If we see a real cycle-down, it will take us all the way to the bottom of the triangle and we will look for support at the upward-sloping trendline. I’m not really looking for that, but I am not ruling it out.

It’s just amazing that one week ago tonight (I write this every Saturday), I was talking about how the “negative sentiment” was reaching a crescendo and it seemed everyone was Bearish and I was thinking like a contrarian looking for a “capitulation” and reversal. Well I guess the “powers that be” decided that a capitulation might turn into massacre and they decided to pull out all the stops and guarantee the debts of the entire planet.

As I’ve said before “Never underestimate the willingness of the Bankers to create enough money out of thin air to bail themselves out”.

Here are a few stocks I am watching…

I’m sure we will have plenty more this week once we get a read of the overall market.

Based on Friday’s weak close and the fact that our 17/43 indicator shows we might be due for a pullback, I’m going to go into this week cautiously.

Be sure to check the Waiting Trade Plans page each morning this week.

Join us in the morning as the market opens on the Live Broadcast. We’ll take the stock picks from the scans and identify good potential trades.

Speaking of that did you catch VHC Friday? That was actually one of my best ideas for a Trade Plan going into this week, but it broke out earlier than I expected. Fortunately it was on the Grid and we discussed it on the show, so I hope a few of you got a trade.

I always take it day to day, week to week and never worry about missing out on a trade.

The market is like a busy airport – there’s always another flight leaving shortly.

Cheers!

Share and Enjoy:

← Previous Page — Next Page →

Investing Systems Research Lab Blog

Become A Member of the Research Lab

Free Download

Download The Market Toolbox
Desktop Financial Portal
The World’s Most Comprehensive Financial Software

Blog Roll

More Resources