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MARKET WRAP UP 07/23/10
The bulls closed out a solid week in impressive fashion, as the S&P 500 finished up 0.82% to 1102. The sentiment of traders has quickly changed back to an eager tone, as market players witnessed various stocks and sectors hold their breakouts this week. As far as declaring the end of the broad market correction that commenced in late April, there remains much work yet to be done. As we near overbought levels, the bears are highly likely to take a stand next week, in the face of any further upside. The amount of technical damage that has been inflicted on the charts in the past few months will cause overhead supply to become an issue, regarding trapped bulls who are now close to being made whole again.
The updated and annotated daily chart of the S&P 500, seen below, should illustrate the big picture issue facing the bulls. Despite the impressive victory in this week’s battle, the war is far from over. We are only now nearing the upper resistance trend line of the broad, multi month trading channel. Nonetheless, the bulls made significant progress over the past few weeks in recapturing–and holding– the crucial 1040-1050 zone. The prospect that the market has made a higher low is now a distinct possibility.
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Undoubtedly, what would make the bulls even more sanguine are the daily charts of the Nasdaq, Russell 2000 (small caps), Dow Jones Transportation Index, and Emerging Markets. All of those dailies indicate a breakout. Whether or not it holds next week will be crucial. Even if sustained upside does not come, a lateral base above the breakout area would be bullish as well (see charts below).
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Should this upside move prove to be legitimate, then we will see more and more charts of individual issues begin to set up. Those of you following my trades know that I have had more of an itchy trigger finger than usual in terms of taking profits in this type of market. Beyond that, cash is still my largest position.
If, indeed, we are seeing the beginning stages of a sustained uptrend, then by definition there will be time for me to become more aggressive. To restate one of my basic trading tenets, I am most aggressive when I see an established trend, in the middle 80% of the move. Whether or not I miss out on some profits in the initial or final 10% is irrelevant to me. Aggression is great, but selective aggression is what gets the money over the long haul.
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TOTAL PORTFOLIO:
EQUITIES: 34%
- LONG: 34% ($ARUN $BX $NTAP $SAPE $POWR $JMBA)
CASH: 66%
I noticed a pattern on the SPY which is almost identical to the SPY topping out in 2007.
I’d be interested in your views on that,or is it irrelevant?
I think sentiment is the same now as then, i.e. plenty of bull heads buried in the sand (re fundamentals I mean).
If it keeps following the 2007 pattern, we will top out just over the 200dayMA, but below 1130, then we will quickly lose over 200 SPY points. And more to come of course, if that path is the way forward.
I do think bulls are very over complacent all of a sudden, and the breakouts (as you mention) would be classic traps, and I do expect them to break down during the next week or so.
We shall see!
Sentiment is completely different between now and then…You should also follow what is called the “Rule of Alternation”.
From my standpoint, I think that today’s RUT breakout was stellar and the early afternoon volume on the RUT Futures (/TFU0) was the key indicator of the coming run – we saw this on the 5m chart earlier in the week as well, and I think if it was for Helicopter Ben on Wednesday, we would have seen this action yesterday and what may come Monday (a gap up, followed by an afternoon fade) today.
All in all, I think the RUT has the potential to make it to the 100d SMA before pulling back. The strength in small caps is overbought, yes, but we’ve seen overbought rallies continue until they’re even too extreme for buyers in the past. It all comes down to how Monday will set the tone for next week.
Good luck, and have a phenomenal weekend Chess!
ZM
See, that’s what I’m fully expecting on Monday. A gap up and a fade. Which is why it probably won’t happen 🙂
Not trying to be insulting or disrespecting…JUST AN OBSERVATION
I do enjoy your ‘take’ on market moves etc.
The chart trend lines: DJ-20,RUT,S&P etc.
Ok..
I notice you start drawing at the very top and angle down 2 find 2 more reference points to establish the top of the channel.
Myself ..I would draw from first high after that massive plunge as the new channel started at that high, not the previous.
Maybe I’m doing it wrong
Maybe it doesn’t mean anything
I see you start the bottom line at the low of the drop, but start the top line before drop…it puts a little change in the angle is all and it connects 3 points closer together instead of bypassing 2 or 3 to get to the end.
AGAIN..Maybe it doesn’t mean anything
Maybe I’ve been doing it wrong
No offense taken. You make good point. I am simply trying to best capture the essence of the price action patterns—admittedly very subjective as objective as one tries to be.
those charts,with the exception of eem, look to have the same movement from june all the way up to now,like they are trading in lockstep to each other.
Chess,
Help me we TA here.
I noticed that sometimes your trend lines hit the candles and at other times the wicks. Is there a way of deciding exactly where to put those lines?
Thanks!
It is subjectively trying to capture the essence of the trend. Whatever I feel is the most objective trend line that corresponds to the price action.
Chess, if the broad market pulls back at next resistance, how would BX and POWR respond to that? Will they be able to move up regardless? Thanks. Another question: would PPT helps if I only have one day a week to watch the market?
hubbs:
If the broad market pulls back, I would expect BX and POWR to move lower, given that at least 7 out of 10 stocks move in concert with the broad market. I could get lucky like I did with NR, and see it move much higher on down days. However, I am not relying on lucky. I will respect my stop losses, but I still like both charts.
The PPT would actually be perfect to streamline your limited available time. You could immediately determine just how oversold or overbought the broad market is–or not–and make your trading decisions based on that. Also, there are countless programmed screens that are designed to make much more efficient use of your time. It sounds like a great fit for you.
Thanks Chess. For my level (now experience doing puts and calls) and trading with a Fidelity account, which level do I sing up with PPT (is power drip system something totally different?)? And I have only about $60K in Roth IRA and another $40K non-retirement fund to trade. I am on summer break and have had some time watching your excellent analysis (with my limited understanding) and stock trading actions. What I am concerned with my getting on with PPT is that I see sometime you made quick sell and buy and I wouldn’t be so quick if I can only trade on Fridays. Also even most successful traders will have a bad pick once in a while and not everything on PPT screens winners. With limited fund I won’t be buying all and I could end up with just the losers with in my portfolio?
I meant no puts and calls experience and knowledge.