Bad to the Last Drop of Summer

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MARKET WRAP UP 08/23/10

With the beginning of the end of summer trading commencing this week, the market stayed to its script of chopping up both bulls and bears. After several uninspiring attempts at a rally today, the S&P 500 sold off into the closing bell to finish down 0.40% to 1067. As has been the norm, volume was tepid and breadth was weak. The good news for the bulls is that we did not take out Friday’s lows of 1063. However, the bad news is that we closed on the lows of the day, and we are still dangerously probing multi-month support levels.

The updated and annotated daily chart of the S&P 500, seen below, should illustrate these points.

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The daily charts of the other key indices and sectors also continue to tell the story of the bulls tempting fate, in the form of dancing on significant support levels.

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With the market acting weak at key support zones, I have one eye on the exit doors with respect to the longs in my portfolio. The nature of this market has been to punish bulls who anticipated big upside breakouts, as well as bears who shorted at support, looking for a breakdown. The essence of a trading range is to reward traders who resist the urge to extrapolate that weak price action will beget more selling, and vice versa for rallies. In other words, fade the prevailing sentiment. Right now, sentiment is poor, and traders are frustrated and just about ready to give up on this market. It will be interesting to see if we find support here and stay within this tight trading range.

If we do not, the stampede towards the exits will be deafening.

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Since late May, Mr. Market has truly been a royal pain in the ass to both bulls and bears.

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[youtube:http://www.youtube.com/watch?v=TwBa3XA3Sl4 450 300]r

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You better check yo self.

I am down on my $CMI position since its purchase. So, how am I supposed to react to it? Do I say, “Oh wow, man. I’m losing money here, man. I’m a total loser, maaaaaaan. Let me smoke some nugs and munch out on Funions and Bugles.”

Answer: No. I do not say that.

$CMI is still a top tier company that makes great, hi-tech engines. Rather than getting all frustrated and emotional about being down on the position, an analysis of the daily chart tells me how I can best define my risk from here. As you can see below, I am willing to admit I am wrong and sell out of the name if the stock falls and holds below $75. If that happens, then the prior breakout earlier this summer can be deemed premature, at a minimum.

Of course, if the prior resistance turns into support now, the stock could easily be setting up for a run to new highs. Thus, having a clear line in the sand is important for not only mitigating your downside risk, but also helps to keep open the possibility of capitalizing on a reversal back to the upside.

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[youtube:http://www.youtube.com/watch?v=AJR62vsAg-0 450 300]r

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After taking some profits into the 10% spike higher in $ISLN this morning, I made a few more trades:

• I initiated a 3/4 short position in $ANV
• I sold out of $LCAPA
• I sold out of $BZ

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 64%

• LONG: 58% ($APKT $RICK $KOG $LVS $MELI $HMIN $ISLN $RDWR $CMI)
• SHORT: 6% ($ANV)

CASH: 36%

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[youtube:http://www.youtube.com/watch?v=6o5NweFWjAw&feature=related 450 300]r

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TOTAL PORTFOLIO:

EQUITIES: 58%

• LONG: 58% ($APKT $RICK $KOG $LVS $MELI $LCAPA $BZ $HMIN $ISLN $RDWR $CMI)

CASH: 42%

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When I introduced my setups last Sunday evening, I noted that the major indices were at key support levels. Accordingly, I was finding many of the best setups to be that of the “buy the dip” variety, as opposed to stocks on the verge of significant breakouts to new highs. Fast forward to the end of this past week, and we have more or less come roundtrip to find ourselves in the same predicament, as a rally early last week quickly disintegrated into a bear victory.

As I noted in my market recap on Friday, the senior indices continue to probe multi-month support zones. The more we probe these key support levels, the more like it is that they will fail. Thus, the bulls have yet again painted themselves into a corner. Either they will rise to the occasion this week and defend these support levels once and for all, or we are on the cusp of a major breakdown to retest the early July lows. Just as the case was last week, I am finding the best setups on the long side to be those of stocks that have nicely consolidated their moves higher throughout the summer.

With that said, my top individual idea is to go short $ANV. The chart can be seen below, and I give my reasons as to why I think it makes for a nice swing short.

Also below, you will find my best trading ideas on the long side 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–I prefer a trailing 7-8% stop loss.

I hope you find these ideas helpful.

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