Broad Street Bullying Back

Let’s do some analysis on $GS, as they reported earnings this morning. On April 16th of this year, the stock spiked down hard on heavy volume when the SEC announced their fraud charges. That high volume news driven selloff more or less began the broad market correction as well.

Ever since that huge spike down, however, the stock has pulled back in an orderly way, with tight price candles and on benign volume. In essence, it was a slow drip down over the past few months. As the updated daily chart illustrates below, the falling wedge started to base out, and the 20 day moving average followed suit as it flattened out as well.

After the stock had a nice run higher on news of the settlement with the SEC last week, it has pulled back in a gentlemanly manner. In my view, the 50 day moving average is crucial here. You would like to see a benign retest of that reference point, and then see both price and the 50 day turn back up as well.

$GS may, indeed, have bottomed here. I do not think that you should go buy this in size right here, right now. However, I believe you should keep this near the top of your watch list. I currently have no position in the name.

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MARKET WRAP UP 07/19/10

Nearly two months ago, on May 20th, the S&P 500 closed at 1071. Today, after chopping around this morning, the S&P rallied in the afternoon to close up 0.60% to 1071 as well. Since late May, although we have gone as a high as 1131, and as low as 1010, the overall market has been a complete waste of time for the vast majority of traders. This type of price action seems to be reflected in sentiment, as many traders are not so much bearish as they are apathetic and, perhaps more so, frustrated. As I noted last evening, several key sectors have been “dead money” for nearly a year now, and the broad market can be viewed as dead money as well, over the past two months.

The origin of the broad channel that I denoted on the updated and annotated daily chart of the S&P 500, seen below, should illustrate my point about the previous two months.

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The operative phrase is that we are still in no man’s land, with the bears getting the longer term edge. Despite the fact that the bulls closed us just above the 20 day moving average, we remain firmly below all of the other major moving averages–notably the declining 50 day. Taking some small positions within the broad channel is fine, so long as you are willing to accept the lack of a discernible trend since late May. For most traders, trending markets offer easier opportunities to make profits than do oscillating ones.

Turning to other indices and sectors, the Nasdaq, Russell 2000 (small caps), and Dow Jones Transportation Average all remain within their falling channels. As their respective daily charts illustrate below, only the most agile short term traders have an edge in this type of choppy market.

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As for my personal portfolio, I sold out of my remaining 1/2 position in $LULU today. As I noted earlier, I sold off my first 1/2 a few days ago, to lock in a nice profit. However, I sold the final 1/2 today at break even, because I did not like the way the chart was starting to look, and I wanted to avoid turning a winner into a loser.

I also currently have 1/2 position in $NR. I sold the first 1/2 off earlier this month for a nice profit, when the stock launched higher above $7.00. As I noted back then, I wanted to wait for the stock to retest the $6.50 area, on low volume. However, no such pullback has occurred. Instead, the stock has formed a nice, tight base above all major moving averages. So long as the broad market does not fall apart here, I am strongly considering going back to a full position in this name.

When a stock comes to terms with a price level in an orderly way after a sharp run up, I consider that a very bullish setup. The reason being is because the aggressive buyers who initially pushed the stock higher seem to have conviction in holding their positions, despite the move higher. This tells me that higher prices could still be in the cards.

Even if $NR is not for you, as a practice in pattern recognition, as well as combining strong volume to confirm price action, take a look at the daily and weekly charts, seen below.

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TOTAL PORTFOLIO:

EQUITIES: 32%

• LONG: 32% ($NR $NTAP $THOR $SAPE $SWSI)

CASH: 68%

Keep an eye on this 1072-1073 level on the S&P 500 going into the bell today. On a short term time frame, this is tough resistance. Should we break above it, we could easily sprint to 1080 in a flash. Above 1080, we could quickly fill the gap from Friday’s swoon up to 1098. Without recapturing 1072-1073 first, however, all of those gap fills are a moot point.

Otherwise, we will continue to chop around below 1072, and likely breakdown to 1050 or lower.

Check out the 15 minute chart of the S&P, seen below.

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I sold out of my final 1/2 position of $LULU. The first 1/2 I sold a while back was for a nice profit, whereas this 1/2 is for literally break even. The daily chart of the stock, seen below, is a pretty good reason why I sold. Notice how the stock has been wedging up on light volume, only to breakdown again. Even if the stock doesn’t continue to breakdown, I want to avoid turning a winner into a loser.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 32%

• LONG: 32% ($NR $NTAP $THOR $SAPE $SWSI)

CASH: 68%

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At a very early age, I quickly learned that my father had no intention of raising me with kid gloves. I remember being six years old and sitting in front of the television with him, watching the weekend boxing matches. I suppose, according to modern day psychology, I should have been traumatized for life, being exposed to that much real-time violence, blood and guts. Interestingly, I never had nightmares or anything of the like. In fact, I barely remember the actual fighting between the boxers. I do not remember much in the way of blood or anything gory either.

What I do vividly remember, however, is how my father would remind me before each and every fight of how to tell if the referee was any good. He told me that, just before the match commenced, if the referee advised the boxers to “protect yourself at all times,” then he was a good referee. If he did not, then he was a subpar official. Perhaps it may seem like a trivial way to judge a referee, but the point I took away from that is sometimes it is necessary to be reminded of the obvious. Although the boxers had a team of trainers, physicians and managers in their respective corners, they were ultimately all alone inside the ring, with nowhere to hide. If the opposing boxer decided to take a cheap shot at you even after the bell for the end of the round had rung, you still had to look out and protect yourself.

Similarly, in the stock market individual traders can often forget that, at the end of the day, they are singularly responsible for their profits and losses. Too often, the temptation for many retail traders is to latch on to a high profile trader and mimic their every move without much regard for risk tolerance and position sizing. This is an easy trap to fall into, as it serves as a way for retail traders to mentally absolve themselves of guilt, should they blow up their trading accounts. However, make no mistake that expecting some type of miracle bailout for your losses will not happen, at least not for us little people.

As this concept pertains to the current market, the overarching theme that I see over the past year has been the way in which Mr. Market has chopped up traders failing to adequately protect themselves. Those traders who enjoyed riding the trend down in 2008, and the subsequent trend back up for a few quarters in 2009, have since found a noticeable lack of a new trend ever since. To illustrate this point, let us take a look at some of the key areas that experienced huge run ups and subsequent crashes earlier this decade: the financials, emerging markets, and homebuilders. I think it is fair to say that all three of these areas were at the heart of the bubbles in credit, real estate and globalization/commodities. Naturally, they experienced a sharp rally off of the 2008 lows. However, they have since become “dead money.”

In each of the following weekly charts, notice how, for roughly the past year, traders who went long in anticipation of a breakout, or shorted a potential breakdown, have been repeatedly punished. Traders who properly hedged themselves likely made out well reasonably well, all things considered. Only the traders who combined experience, agility, clearheaded thinking, not to mention a healthy dose of luck were able to crush this market.

There is no way of knowing how long this period of overall dead money will last. Many market players believe that we will soon see a major breakdown. Other traders think that we are on the cusp of a significant breakout to new highs. Until the market definitively breaks one way or the other–and holds that break–remember now more than ever to protect yourself at all times.

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MARKET WRAP UP 07/16/10

Despite the exuberance associated with the influx of breaking headlines in yesterday’s final hour of trading, today set up to be a classic case of selling the news. Add to the mix that today was also an options expirations Friday, plus the fact that we had some major earnings after the bell yesterday, and it is no wonder that traders’ emotions are oscillating from bullish to bearish as violently as the indices are from overbought to oversold. With the S&P 500 closing down 2.88% to 1064, the bulls are still counting on a higher low to end this correction. Alternatively, the bears are seeking to push us below the crucial 1040-1050 zone, yet again, to confirm the next leg in this downtrend.

As the updated and annotated daily chart of the S&P 500 indicates, the bulls were turned away from some crucial resistance levels today. Whether or not they can quickly regroup remains to be seen. If they do not, the bears will regain the initiative once again (see below).

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The charts of the emerging market and financial ETFs have made some real progress in the past few weeks. The financials have broken out of a steep declining channel, and retraced the breakout today. I cannot stress how important it is for the bulls to rise to the occassion next week, or else this breakout will have been a fake out (see below).

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The emerging markets have made a series of higher lows, and appear to be leading us out of this correction. Note the formation of an apex that should resolve soon. Just as with the financials, the bulls need to defend this constructive chart, or else all of their progress these past few weeks will have been for naught.

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On a more bearish note, the Nasdaq, Russell 2000, and Dow Jones Transportation Average all remain within their declining channels, and were firmly turned away from resistance today (see charts below).

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In sum, we are not guaranteed to make new lows just because we experienced a nasty selloff today. However, the closer we get to breaching the 1040 zone again, the more likely that scenario is going to play out. Erring on the side of caution is still advised.

As you might imagine, my portfolio took some lumps across the board, save $NTAP. Fortunately, my 64% cash position cushioned the pain–but pain nonetheless. I noted earlier today that weakness at the 1050 zone is where I would look to get more serious about swing trading some short positions. I will reserve the right to judge the action as I see fit, but if the bulls cannot step up next week, then I want to have a piece of the action when the lower lows appear to be inevitable.

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TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $THOR $SAPE $SWSI)

CASH: 64%