Let’s Bounce! Market Wrap Up 05/10

Stocks moved sharply higher today, on the back of the news out of Europe yesterday.  With the $SPX rising 4.40% to finish at 1159, the market is clearly searching for a direction in light of the heavy selling we saw last week.  Despite the positive action across the board today, the daily chart of the S&P does not offer as bullish a view.

While it is a positive for the bulls that we closed above the key 1150-1152 level today,  that area needs to hold over the next few days.   As usual, when fighting for a reversal, follow through is key.  Beyond that 1150 zone, however, the bulls face tough overhead supply above 1160, including the 50 day moving average.  Basically, the concept of overhead supply dictates that many of the longs who bought above the 1160 level and held throughout this recent selloff are highly likely to lighten up if they are made whole, given all of the pain that they endured on the way down.  It is that shift in psychology, from buying the dips successfully since March 2009, to selling the rallies that has me concerned about initiating long swing positions at this point.

If you have not read many of my posts up until the past week or two, I would not blame you for thinking that I have been overly cautious for being heavily in cash.  In fact, I missed out almost entirely on the big move up today.  However, I would urge you to please take a look at my earlier postings here and here, when the market was healthier and I consistently offered many actionable setups.

I am primarily a swing trader, holding for at least a few days or weeks.  My philosophy is to be extremely selective yet also very aggressive when I believe I have an edge.  However, when my analysis shows that I do not have much of an edge, I have no problem backing off from the action until charts reset and offer better opportunities.

Two examples of stocks that were once excellent, high momentum long stocks are $GMCR and $CREE. Let me go on record as saying that I think both firms are fantastic in their respective sectors, and deserved to be in the spotlight for many quarters since March 2009.  However, the price action in both names as of late should be a blinking red light as far as initiating long swing trades in general.  These stocks were the leaders on the way up, and when they start to break down, you had better take notice.

Folks, believe me when I say that I trust the aggregate price discovery mechanism of the marketplace in the leading stocks over what any economist or lagging economic data tells me.  If you want to wear a pocket protector and have your 49th birthday party at Chuck E. Cheese, then by all means go make your investment decisions based on the Calculated Bulging Disk, The Big Liberal Picture, and Zero Friends blogs.

However, if you are serious about making money in the market, then you will focus solely on what the price action in the market is currently telling you.  Right now, we are seeing wild price swings and an elevated level of news driven volatility.  Those facts are not constructive to swing trading with an edge.  By all means, go ahead and trade if you are an expert day trader who is confident that you will not get chopped up.

With that said, there are two possible setups that I am considering in the coming days–$GLD and $SLV. Given the unique nature of the underlying metals to those two ETFs, I am not surprised to see their charts looking constructive.

Above all else, do not be afraid to move to a larger than usual cash position as long as we continue to see these wild price swings.  As exuberant as the bounces may seem, many charts are broken and need time to heal before we should consider making bold bets.  If anything, some excellent short selling opportunities may present themselves soon.

Thanks to everyone who voted yesterday as well as those of you who have read my work, and I am looking forward to us banking some coin together!

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