CHESS MOVES

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I made three trades today:

• I sold 1/2 of $ROVI, due to its inability to hold any sustained strength.
• I bought a 1/2 starter in $CREE, see my earlier post.
• I bought a 1/2 starter in $VMW, based on the chart below.

All trades are timestamped in The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 34%

• LONG: 34% ($CREE $VMW$ROVI $TQNT $CTXS $CMG)

CASH: 66%

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Back in late May, I wrote a piece analyzing the monthly charts of several of the top performers since the March of 2009 bottom. Seeing as the title of my post was, “Month Charts from Hell,” my conclusion was that many of them were in the midst of much needed multi-month corrections. One of the top names, $CREE, has been a favorite of iBC precious metals aficionado Jake Gint. Undoubtedly, $CREE was one of the top names to be in off of the 2009 bottom, and deservedly so given the secular growth of the LED industry. To give you an idea of how much Jake nailed the upside rip in this stock frm March, 2009 until April, 2010, check out this timestamped message in The PPT, months before it was correct to even consider selling the stock:

JakeGint wrote:2/3/2010 11:25 AM @ $60.45

“Picked up a little bit more of this at the close yesterday. Take a look at the long term (weekly) charts on this sucker if you get the chance. I think they must be putting those teeny tiny little lights in Keurigs or something.”

So, a sincere hat tip to Mr. Gint on that one, as well as his other precious metals calls. Since May, however, $CREE has been sentenced to stock market Hell. The shooting star from last April on the monthly chart has seen follow-through to the downside.

However, the issue now is whether $CREE still belongs in Hell. Based on the updated monthly chart, seen below, I believe $CREE should now be allowed to journey up through Purgatory. Unless you are betting on a total collapse, this chart has filled out nicely (albeit painfully for longs) over the past few months, and now looks ready to proceed higher off of its first test with the 20 period monthly moving average.

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[youtube:http://www.youtube.com/watch?v=kkl3eXAHTRM 450 300]r

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MARKET WRAP UP 09/13/10

Stocks turned in another steady move higher today, while the pullback that everyone wants to see is missing in action. With the S&P 500 closing up 1.11% to 1121, the midday selloff turned out to be a terrific intraday buying opportunity. Volume was nothing to speak of, while breadth was strong. Two of the weaker areas of late, the small caps and technology sector (namely the semiconductors) turned in impressive days, as they played catch up to the broad market. Moreover, the emerging markets ETF broke out above a multi-month symmetrical triangle today. If that breakout holds in the coming days, it will be tough to argue against the idea that global risk appetite is now back in vogue.

While many charts could use a healthy consolidation period, there appear to be too many traders either bearish, or desperately hoping for a pullback so they can load up longs, for it to imminently materialize. As he is prone to do, Mr. Market will do that which frustrates the greatest amount of traders. Ironically, the same traders who are aggressively shorting this move because it is an unconvincing low volume drift higher, are likely the same ones providing the jet fuel to propel it even further as they get squeezed like the fruit in a Jack LaLanne infomercial. One thing for sure in this market is that if you insist on aggressively shorting the move up to the top end of the multi-month trading range, you are going to need a bigger stop.

Looking at the updated daily charts of the leading indices and sectors, seen below, there is still more room for the bulls to take us higher before we break the upper limits of the multi-month trading range. Beyond that, even a marginal break above the range would not be out of the question. In situations like this, you can either choose to aggressively chase prices higher, you can fight the tape and boldly go short, or you can buttress your exposure to the market with an outsized cash position. I believe that the latter strategy is the correct way to go here. In essence, I am willing to play along with the melt-up, but will do so with an Exit Row seat, and one eye on the emergency brakes.

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I sold out of my $SRS hedge. The market is acting well and closing near the highs of the day. Despite some charts being extended, there is room to run up to 1131 and still be within the trading range. For now, I will simply rely on a huge cash position as a cushion to my longs.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 30%

• LONG: 30% ($ROVI $TQNT $CTXS $CMG)

CASH: 70%

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The more I think about it, the more I realize that my “Lesson of $LULU” should rank right up there with anything else you may consider to be the most important stock market rules of trading. Last month, my tab alone received roughly 100,000 page views. So, in an egregious display of hubris, I could have easily dug my heels in and become as stubborn in my short thesis as Hank Paulson denying Lehman Brothers a bailout. After presenting an overwhelming case for $LULU breaking down on heavy volume on BOTH the daily and weekly charts, I patiently waited several days for the stock to retrace back to the breakout point. When I shorted the stock, it still went higher into earnings. I elected not to play the earnings gamble, and took my 5% loss like a man. Even after the earnings beat and massive squeeze higher, the Yoga clothes maker is continuing its move higher today.

To drive a point home, you simply must have a line in the sand where you are wiling to admit you were wrong about a trade, or else suffer these consequences…

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In other news, my $TQNT long is looking better by the minute. The stock has a strong fundamental thesis as well, seeing as it is not particularly expensive and is a key iPad and smartphone supplier. I am impressed with both the tight base over the past several weeks, as well as the big green candle today.

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I must say, I wish I could be having more fun given the run the market has had over the past eight trading sessions. Right now, trading this market is like going out to party with girls who were the AP Physics types in high school. You feel like you are ready to have fun, you’re out on the town, but there is something off about the whole predicament as you are partying with a bunch of pompous dorks. To be aggressively long right now in this market is akin to partying with those nerds.

Rather than aggressively riding the rally, or stubbornly averaging into short positions the whole way up, I am playing defense. Mind you, I am not playing Buddy Ryan type of defense, where I push the offense BACK three yards every play. No, I am playing the bend-but-don’t-break defense, with a heavy cash position and some select longs, along with $SRS as a hedge.

We are now at the very top of the multi-month trading range. Although many are anxious to call for a top here, and are cherry picking certain aspects of the price action to support their desire for an imminent reversal, I am seeing no such evidence yet. If this, indeed, is going to be a a major inflection point where we rip out of the range up to 1150 or 1160, then I will first and foremost not get caught in the tide. Beyond that, I am admitting my willingness to miss out on some of the profits on the long side, until I see better entry points into less extended charts.