Dead Ahead of The Fed

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MARKET WRAP UP 08/09/10

Despite the impressive performance by some individual issues, as well as the positive tone of the broad market, stocks generally remained in a holding pattern ahead of tomorrow’s meeting at the Federal Reserve. With the S&P 500 closing up 0.55% to 1127, we are still operating below the key 1131 level, which marked the precise print where we touched and sharply reversed down to 1010 back on June 21st. While breadth was strong, volume once again was notably weak, even for the summer.

Nonetheless, as the updated and annotated daily chart of the S&P 500 illustrates below, we closed above all of the major moving averages heading into the big Fed announcement tomorrow.

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Turning to other key indices and sectors, the emerging markets and transportation stocks remain highly impressive areas of the market. However, the daily charts of the Nasdaq Composite, the small caps, and the financials are slightly lagging the progress of the daily S&P 500 chart (see charts below).

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Given the individual strength and breakouts that I saw today, it was tempting to significantly raise my long exposure. However, the whipsaws surrounding days when the Fed meets and announces have historically been nasty. Rather than use all of my ammunition before the market confirms a breakout, I will wait for a convincing break and hold above 1131, preferably on more impressive volume than we saw today.

Unlike Ben Bernanke, I am not going to use up all of my bullets before I have to.

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TOTAL PORTFOLIO:

EQUITIES: 52%

• LONG: 52% ($BZ $OVTI $ISLN $GNK $LSCC $RDWR $BX $CMI)

CASH: 48%

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To update the $LSCC (Lattice Semiconductor) situation from last Friday, it now appears that the former CEO is going over to $KLIC. More importantly, I am pleased to see that the selling volume today is not heavy. Further, the stock had a precise bounce off of the 50 day moving average.

Thus, I am holding my 1/2 long position in the name. What would make me sell? A close and subsequent hold below the 50 day moving average on accelerating selling volume. I have yet to see that, though. Another option would be to add to my position. In order for me to do that, I need to see aggressive buyers stabilize the stock and bid it up in the coming days. Stay tuned…

[youtube:http://www.youtube.com/watch?v=aSEY0q1POE0 450 300] ________

I also sold 1/2 of my $GNK position in front of their earnings report tonight. It is not my style to make big earnings gambles. Technicals are useful for studying everything that is currently known and knowable. However, news driven events can easily trump the charts. Therefore when I can control it, I like to limit my risk in front of said events.
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TOTAL PORTFOLIO:

EQUITIES: 52%

• LONG: 52% ($BZ $OVTI $ISLN $GNK $LSCC $RDWR $BX $CMI)

CASH: 48%

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Of all the Japanese candlesticks and combinations thereof, arguably the most bullish pattern is what is known as the “Three White (or Green) Soldiers.” In particular, after a downtrend or a prolonged period of consolidation, this is a bullish reversal pattern consisting of three strong closes in a row. You are looking for the open to be within the confines of the previous day, yet you want to see the stock close near the highs of that individual session. Needless to say, the white soldiers indicate a sharp change in investor sentiment and conviction, as bulls present themselves in a meaningful way to capture and hold the initiative.

One of my featured setups last evening, $BZ, is well on its way to completing this pattern. Since April, the stock had a sharp correction along with the broad market, and then tightened up as it consolidated. Today, it is on the cusp of its third consecutive close higher in a convincing manner. White the candle today is not quite the long bodied one you would look for, the first two days of the pattern were so strong that I decided to buy a full position. Note also the uptick in buying volume during the past few days, further confirming the breakout.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 56%

• LONG: 56% ($BZ $OVTI $ISLN $GNK $LSCC $RDWR $BX $CMI)

CASH: 44%

The tension continues to build in the major indices between the recent pattern of higher highs and higher lows, versus the resistance from late June. This tension could easily be resolved as early as this week. While the $HPQ news may weigh down the broad market tomorrow, I believe that the major stocks which are in unique technical predicaments, such as $IBM, will eventually be of more import.

Below, you will find my best trading ideas for the upcoming week. They are all long setups. However, if you must short something, for a quick scalp you could probably do well shorting the ags, as well as the precious metals, due to their recent moves higher in a straight line. However, keep in mind if you choose to short equities that you are fighting the five week trend of higher highs and higher lows.

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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IBM 5100: Considered to be the world’s first commercial portable computer.

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Although $HPQ is the talk of the town over the weekend as well as likely into next week, I am more intrigued by $IBM. “Big Blue” has been consolidating at its all time high price for the past several quarters. While $IBM is not the end all and be all of the American economy, it is still a resilient firm that has survived and subsequently thrived after previous bear markets. Moreover, do not forget that we are talking about a firm with a market capitalization of nearly $167 billion.

Looking at the stock in multiple time frames, it is becoming increasingly clear that $IBM is on the cusp of making a huge move. The daily chart, seen below, supports this argument, as we see how compressed all of the major moving averages have become.

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The weekly chart, seen below, illustrates how tight of a trading range the stock has been in for nearly ten months. Again, this supports my thesis that the stock is about to make its next big move, as ten months of sideways action is an extraordinarily long time, and it sets the stage for the stock’s next big move.

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The monthly chart, seen below, puts the puzzle together, as we see just how sensitive the stock is to its prior highs over the past decade. Indeed, as the saying goes, price has memory. Compared to the previous times when the stock has been up above $130, this time the stock is consolidating in a much more orderly way. Again, this supports the idea of big move coming. The evidence suggests that move will be up and out, rather than a total collapse.

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The thesis that $IBM is on the verge of a major breakout begs the question of how this applies to the broad market. While it is possible that $IBM could breakout, yet the broad market sells off or continues to chop sideways, I do not believe it to be a probable scenario. Although it does not seem likely, given the fundamental backdrop that the U.S. and global economies continue to face, a decisive $IBM breakout above the low to mid $130’s would presage a fresh leg higher in the senior indices.

Perma bears are certain to look at the same charts that I am and infer that $IBM is topping, an will lead us down below 1,000 on the Dow Jones Industrial Average over the next few years. There really is not much that I have to say to someone like that. First, I have no position whatsoever in $IBM. Second, I conduct my analysis as objectively as I can, and looking at Big Blue in multiple time frames has led to me to my thesis. At the very least, $IBM ought to be on your list of scans as yet another broad market “tell,” along with $FCX, $XLF and $FXY.

NOTE: Hat tip to @zortrades on the stream, as he did some good work on $IBM a few days ago.