Take Off Those Beer Goggles

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After rising to an angle of ascent that was simply unsustainable, Apple Computer, Inc. all of a sudden has an ugly chart. The catalyst du jour is that one of their important executives (they have executives besides iSkinandBones?) is rumored to be going to $HPQ. To repeat one of my core trading tenets, I believe that the aforementioned rumor was much more of an excuse than a catalyst for today’s ugly candle. The stock was simply too extended in the short term to buy up here.

Looking at an updated $AAPL daily chart, you can see that it seems as though Apple had its own flash crash today. The stock may very well recover and rise in a straight line above $300, but there is no way I will go along for the ride with a chart like this. Regardless, the lights have just been turned on, and the hot girl you saw at the bar all night does not look quite the same anymore.

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[youtube:http://www.youtube.com/watch?v=SzoXxDUZock&feature=related 450 300]r

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MARKET WRAP UP 09/27/10

The bulls continue to need more than one shot to knock out the bears with a break above the important 1150 price level on the S&P 500. After Friday’s compelling rally, the market gave back some of the gains in a rather dull session today, as the S&P closed down 0.57% to 1142. Continuing with the broken record theme on volume, it was light once again. Breadth was slightly negative, but we saw plenty of individual strength.

As boring as today was, and as negative as the selling we saw in the final hour felt, the daily charts of the leading indices and sectors, seen below, indicate that no technical damage was done. In fact, the red candles printed today did not even pierce below the midpoint of the big green marubozu candles printed on Friday. Technically speaking, that fact indicates a lack of potency on the part of the bears, despite how extended some individual charts are.

Going forward, my strategy is to resist the urge to call a top to this market. If, indeed, we are in the early stages of a sustained uptrend, then days like today will prove to have been healthy consolidation days where swing traders should have been accumulating longs. Another aspect of uptrends is that the pullbacks are often characterized by much more sizzle than steak. The selling into today’s closing bell seemed an awful lot like we saw on Thursday. The tendency was to quickly call for a reversal in the market and press shorts. However, we know from Friday’s action that the bears were aggressively squeezed when they thought they had recaptured the initiative, and thus the uptrend continues.

An alternative scenario is that 1150 is too tough of a level to breach to the upside right now. If Robert Prechter’s Dow 1,000 forecast comes to fruition over the next several years, then I would imagine that 2010 is the year that we are ultimately rejected from the 1150 level on the S&P. Of course, a hedge fund manager like David Tepper thinks that The Fed will never let that collapse happen. With all of these forecasts and prognostications, it is easy to get lost in the noise.

Instead of making broad, blanket statements, a better approach is to focus on the price action, drown out the noise, and ride the momentum that the market has seen this month without automatically assuming that a fresh bull leg has commenced. To do this requires a day in, day out work ethic, analyzing a constantly changing, dynamic market. I recognize that the latter method requires more time, effort and daily homework.

Then again, that is what I am here for.
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TOTAL PORTFOLIO:

EQUITIES: 66%

• LONG: 58% ($ATPG $CSTR $GNK $HMIN $NANO $PAY $TIE $VMW)
• SHORT: 8% ($QID)

CASH: 34%

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With my $ATPG position up roughly 8% today, the temptation is to run to the nearest bar and “start drinking at 11 a.m.,” like some washed-up mook frat boy who refers to blowing lines of cocaine as “going skiing.” Well, I have news for you: A country is defined by its culture, so quit acting like a scumbag and show some respect to society at large.

Instead of chest pounding, I want to run you through my thinking on this holding, namely why I am not taking profits just yet. As you can see in the updated 5 minute chart below, the stock has smoothly held its gains throughout today’s trading session. I see no sign of sellers loudly arguing that the move higher is unjustified. Instead, note how the issue is calmly coming to terms with the higher price, by way of orderly consolidation.

Even on a 5 minute time frame, all major moving averages are holding, and therefore, so am I.

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It behooves you to at least acknowledge that today’s pullback is harmless and healthy, with bonafide areas of underlying strength. There are plenty of names that continue to scream higher, such as $BIDU and $CMG, while we are also seeing some money rotate over to names that have been setting up behind the leaders, such as $ATPG, $RIG and $HMIN.

To be sure, there are plenty of names in the red. However, today is far from a bloodbath. If the selling starts to pick up this afternoon, then that would be a reason to reconsider. For now, though, today is a healthy pause, and I am treating it as such.

Finally, keep $BP on your list of scans. It looks a lot like $ATPG did before today’s breakout. With the oil spill out of the news headlines, and with elections coming up, this one should resolve to the upside out of the tight apex of the multi-month symmetrical triangle.

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In both my market wrap up on Friday, as well as in the videos I made last evening, I discussed the idea that the S&P 500 needs to negotiate the 1150 level. We know that 1150 has been a psychologically important price for the past twelve years, but that fact alone is probably not going to give us much of an edge in terms of trading this week. Therefore, we need to be even more precise with our strategy. With many of the leading stocks extended here, I believe the key to this week will be to focus on the names setting up behind the leaders that have not yet exploded to the upside.

Indeed, if we see profits taken out of names like $AAPL and $FCX, and properly rotated over to stocks setting up behind them, such as $ANR and $RIG, then we can have more conviction that there is some substance to this rally. The broader the participation we see, the less likely this rally will be remembered as a short-lived flash in the pan with traders and fund managers simply chasing diminishing pockets of strength.

Below, you will find my best trading ideas for the upcoming week. Feel free to pick and choose whichever setups best fit your style. Please keep in mind that these are trading ideas only. I also urge you to use stop losses in order to mitigate your downside risk. In general, I prefer a trailing 7-8% stop loss, unless otherwise indicated on my annotated charts.

I hope you find these ideas helpful.

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[youtube:http://www.youtube.com/watch?v=2bbs7jPsSRE 450 300]r

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[youtube:http://www.youtube.com/watch?v=h-y4pp1Mgjc 450 300]r

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