Setups for Week of 09/13-09/17

My video last evening revolved around the idea that we are at the upper end of our multi-month trading range. Since late May, it has been a huge mistake to turn aggressively bullish at the top of this range. As you might imagine, sentiment has now turned bullish, and the prospect of chasing extended charts suddenly seems in vogue. While I would welcome a breakout of the range, I will not aggressively position for it. To my eye, 1130 on the S&P 500 represents the last stand for the bear thesis. We closed at 1109 on Friday, and the futures are currently shooting higher. A continued drift higher is likely, but I do not see enough momentum behind the move for me to see a clear edge.

Despite my cautious stance, I am keeping an open mind. More importantly, I am going to be prepared in the event we see a March or July of 2009 type of melt-up. The market does what it does, without regard for any of our wishes and desires. To be sure, it would be healthy and constructive to see a 3% pullback from these levels. However, a nice, orderly, predictable market is usually not in touch with reality. We simply must accept the market that we actually see, not the one that we would hope to see transpire.

Below, you will find my best trading ideas for the upcoming week. I have noted on some of the charts where you should wait for a slight pullback before adding. 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–I prefer a trailing 7-8% stop loss.

I hope you find these ideas helpful.

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…but first, we have to actually be in a trend. Mr. Market has not been very kind, and in fact has been downright nasty, to both bullish and bearish traders who have presumed a sustained trend in their favor over the past three or four months. As I note in the video below, I have no interest in being a hero going into next week. I would most certainly welcome a fresh bull leg higher, as they tend to be relatively easier markets. If we are, indeed, poised to break above this multi-month trading range and begin a true sustained uptrend, then by definition there will be time to get on the momentum train.

Until that happens, however, I will respect the range. In addition to the price action, other indicators have been flagging overbought conditions, namely The PPT.

NOTE: If the video is too small for you to see the charts, you can double-click on the screen and watch it on YouTube.

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[youtube:http://www.youtube.com/watch?v=j1QvCQtUV5g 450 300]r

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I have a 62% cash position, four longs acting well ($CMG, $CTXS, $ROVI, $TQNT), as well as some hedge to the downside (long $SRS). The way this market is acting, we could be setting up for a “don’t short a boring market” type of rally, or we could be topping out before a sharp leg down next week. I do not claim to be smart enough to determine which of those scenarios will play out. If anyone does, step forward and ye shall be judged.

I believe that the most profitable traders are selectively aggressive. Many traders are very selective, while others are extremely aggressive. However, combining the two is often difficult. There are times when acting boldly is correct. I think this is one of those times where it is correct to take some weight off of the accelerator. Should the market explode higher next week, well, I still have some skin in the game. Obviously, I will not reap the full reward in either direction.

Given that we are consolidating near the top of a multi-month trading range, I am willing to accept less of a potential reward in the face of increased risk.

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[youtube:http://www.youtube.com/watch?v=kn481KcjvMo 450 300]r

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As an individual trader, the discipline it takes to be nimble is by far your most powerful weapon. Take my previous $LULU short position, for example. I wrote several blog posts over the past few weeks detailing how bearish I believed the chart to be. There had been a significant breakdown from multi-month support on heavy volume, and I entered my short just as the stock was retracting on light volume up to the primary breakdown point.

Despite the enticing setup, the stock had no interest in selling off further in front of its earnings this morning. Therefore, the Yoga apparel maker drifted up slowly the past few days. I made the decision to cover my position yesterday, as I did not want to gamble on earnings. Today, $LULU is up nearly 13% on heavy volume after a terrific earnings report. Not only has the breakdown point been recaptured, but so have all major moving averages! Would I short $LULU now? I suppose for a very short term scalp it could work, but I was looking for more a swing setup.

The lesson is this: Technical analysis works very well for everything that is presently known and knowable to the market. However, no chartist is omniscient. Do not fall into that trap. As an individual trader, you are trying to minimize as many external variables as you can. Earnings reports are classic examples of information that is not yet known or (legally) knowable to the market in advance. Thus, with respect to trading, as often as possible you should be looking to reduce your trade size on a given issue in front of earnings and/or big announcements. Unlike big mutual funds, you have the ability to be nimble in situations like that. Use it to your advantage.

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MARKET WRAP UP 09/09/10

After opening up to 1110 within the first several minutes of trading, the S&P 500 saw several whipsaws on the way down to close the day up 0.48% to 1104. Volume remained light in the face of the Jewish holidays this week, and breadth was decent, but far from inspiring. Continuing with an ongoing theme, the broad market has been correcting in time much more than in price. The attempt at a breakout this morning was rather quickly rejected, and we continue to chop and churn along the 1100 level.

The present situation is as neutral as it gets. We are in a broad, multi-month trading range, and we are consolidating near the top of that channel. To presume that this consolidation is automatically bullish or bearish is pure guesswork. Thus, my portfolio has returned to a defensive posture. I have a heavy cash position, yet again, and I am hedged with longs ($CMG, $CTXS, $ROVI, $TQNT) as well as some short exposure (long $SRS).

I am still of the belief that many individual issues, as impressive a run as they have had over the past few weeks, need some time to come in and digest their recent gains. That event would also have the added bonus of providing higher probability entry points for swing traders than the opportunities we are seeing now. Of course, the market has no obligation to make our task easier. We cannot control that. Instead, what can we can control is our risk profile.

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Why, yes. As a matter of fact, I am.

I bought a full position in $SRS, which is an ultrashort real estate ETF. Rather than chart the ultra (which I basically never do), I will show you a chart of the $IYR, which is the long real estate ETF. As you can see below, the real estate ETF is at a prior resistance level and is printing an ugly red reversal candle today. A retest of the moving averages lined up below could easily happen, and it would not mean the end of the world for this chart. Thus, I am in for a quick trade.

All trades are timestamped in The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 38%

• LONG: 30% ($ROVI $TQNT $CTXS $CMG)
• SHORT: 8% (long $SRS)

CASH: 62%

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