So What So What So What’s The Scenario

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The Nasdaq Composite closed just ever so slightly back above its 200 day moving average on Friday. While some of the index’s perceived “untouchables,” such as $AAPL and $AMZN, may be vulnerable here, there have indeed been many stocks in the Nasdaq that have held up remarkably well in this downturn, such as $CSTR, $FFIV and $RBCN. The updated and annotated daily chart of the index, seen below, illustrates the crucial levels of overhead resistance suddenly at the forefront.

Looking forward, I see a few possible scenarios, seen below. I have denoted my scenarios with the light blue lines. Note that some of them may seem to overlap in certain aspects. Feel free to chime in with your own scenarios as well.

The bottom line is that the bulls have a lot of hard work ahead of them, if they are going to put together anything more than a dead cat bounce. However, keeping an open mind is crucial, so as to not let your bias prevent you from taking advantage of opportunities.

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After yesterday’s melt up, today we are well on our way to putting in a low volume, summer Friday doji day of indecision. As I noted last night, we are just below the 20 day moving average on the S&P 500, which is sloping down through 1087. We have not closed above the 20 day moving average since May 3rd of this year. Moreover, we have not so much as tagged it since around that time as well. So far today, we have slightly gone over it at 1088. A close and subsequent hold above the 20 day would encourage me to go long.

For the rest of today, I will likely stay in my 100% cash position.  Many of my readers are in heavy cash as well, judging from the comments I receive. However, that is not an excuse for us to turn off our screens. There are, indeed, stocks setting up in both directions.

Some stocks that are above all major moving averages, and have held up very well on the long side are:

$RBCN, $CROX, $AKAM, $VMW, $CRM, $NTAP, $LULU, $SAPE, $MDAS, $PTV, $HAIN, $HNT and $SWKS.

Keep in mind that if the broad indices roll over early next week, then these long setups will have been for naught, as at least seven out of ten stocks move in concert with the broad market. So long as we remain below a declining 20 day moving average, it remains difficult for me to see the proper risk/reward in putting on longs.

As far as the short side is concerned, I will be looking for inverse ETFs if the opportunity presents itself.  A rejection of the 20 day moving average on the S&P on strong volume next week will likely take us to new lows. Thus, now is the time to be exceptionally prepared for whichever direction Mr. Market chooses to go next week.

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MARKET WRAP UP 06/10/10

The bulls earned a resounding victory today, as they bid stocks up across the board to close the S&P 500 up 2.95% to 1086. While breadth was strong, volume was particularly anemic in several key indices and sectors, such as in the $SPY, $QQQQ, and $IWM. One of the stronger areas of the market has been the transportation sector, and the volume there was slightly above average today on the $IYT‘s 4% rise.  So, the bulls can point to that as a sign that validates the rally.

As I have been discussing for several days now, rallies within a downtrend are characterized by the strong emotions of market players. Many aggressive bears who have been successfully pressing their shorts the whole way down suddenly find themselves falling victim to a heinous squeeze. On the flip side of the coin, the bulls who have been buying the whole way down start to feel redeemed, and become giddy.

There are also those traders sitting in very high levels of cash. Many of them, on days like today, quickly become fearful that they will miss out on a big move higher, and start to chase stocks up. What is amazing to me is how abruptly traders can change the object of their fears within the span of a day.  One trading session they are fearful that the market will have an epic crash, and the next they are scrambling to accumulate long inventory on the fear that the market will never pull back and give them an entry point to buy.

A better approach, in my estimation, is to block out all of the noise and emotion. Instead, the idea is to focus on the health of the market via seeing the big picture in terms of price and volume.  Without sound technical bases, combined with a strong underlying bid from institutional buying, it is unlikely that stocks will be able to hold a sustained uptrend

As the updated and annotated daily chart of the S&P 500 illustrates, today’s rally was impressive, but does little to change the bigger picture (see below).

Look for  the 20 day moving average, currently at 1091 and sloping down, to be a key battleground area should we see follow through in the coming days.  Also, note that we are now back up to the choppy zone where we spent the last half of May. Many market players who tried to pick the bottom were badly hurt on our most recent selloff in early June. So, there is the concept of overhead supply to contend with. As they are close to breaking even after a wild ride down, the bottom pickers are likely to take some money off of the table.

Frankly, a few days of quiet consolidation with an upside bias would be ideal here, so long as that kind of action entices institutions to reenter the market as serious buyers to support stocks. However, what I would like to see happen is irrelevant. The market does what it does, and feeling one way or other about it is futile. The key point is to look for follow through: Continued buying, on volume, across the board which helps firm up daily charts. As a swing trader looking for next big move, that is what I am looking for in order to get back involved in this market on the long side.

Finally, to continue with an ongoing theme, here is an updated and annotated daily chart of $FCX, which has been my tell for the broad market. The stock is rallying back to its major breakdown point on meek volume. Should the stock continue to rally on weak volume up to its breakdown zone, and then roll back over on strong volume, I will look to add short exposure to the market at large. Watch this one closely.

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Just a quick reminder to keep an open mind in the face of this kind of market.  It is not just these violent day to day swings, but rather the hour to hour and minute to minute ones that illicit raw emotions out of traders.  If you are sitting on a very high level of cash, as I am, one of the tendencies is to want the market to go down a lot more in order to pick up cheap bargains.

Resist the urge to become overly bearish. At any point, the big money can come in to this market and stabilize it. If you are blinded by your pessimism, you will miss out on some great opportunities.  Judging from today’s sharp gap up, though, we are not quite there yet. While breadth is good, volume is light.  The past few rally attempts have completely fallen apart into the closing bell, and have frustrated a great many of bulls in doing so.

It would be a real positive to see volume pick up into the closing bell, and to see us go out near the highs of the day.  However, as a swing trader, I would not be betting money on that happening, just yet.

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Back in 2007, the four horsemen leading the tech charge higher as we formed a multi year top were: $AAPL, $GOOG, $RIMM and $AMZN. In recent months, $GOOG and $RIMM have fallen behind in certain areas, and their stocks have been weak for quite some time now. $AAPL and $AMZN, on the other hand, have been dominant.

One of the interesting things about the mass psychology in the market happens when we see a broad market bullish to bearish reversal.  Fund managers and traders look for whatever long plays that are holding up relatively well, and they pile in while the walls around them cave in.  Interestingly, when the relative outperformers/last bastions of safety finally start to roll over, that is a sign that we are– at the very least–at the beginning of the end of the correction.  Recall in late 2008/early 2009 when plays like $WMT and $XOM rolled over, after having been very good outperformers. Corrective/bear markets eventually get to everything. There are no sacred cows, especially in those places where a large amount of market players think they can safely hide as the market slides.

In the current market, both $AAPL and $AMZN have been hanging tough since the broad market started to fall apart in late April.  Both of their respective daily charts, seen below, tell the story of them starting to break down.  While there is a sort of taboo about shorting these two stellar businesses, if you are looking to be aggressive, then now would be the time to short them on further market weakness.

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MARKET WRAP UP 06/09/10

After hitting a late morning high of 1077, the S&P 500 fell apart into the close to finish off 0.59%, at 1055. As I have noted in my previous posts, the raw emotions of many traders come to the forefront when we see price action like this.  The punishing downtrend that we have seen for weeks on end causes many traders to hope that they can buy stocks at the exact bottom, and make a huge score. When we finally see a relief rally, it is usually fast and furious, as shorts are squeezed, and bulls pound their chests in victory. However, when the rally falls apart quickly, the tables turn yet again, and the bulls find themselves quickly underwater on their new long inventory, and the bears scramble to reinitiate shorts.

Of course, all of these emotions are not constructive.  While it is tempting to think of trading as a test of one’s intestinal fortitude, it is important to remember that we are engaging in a complex mental exercise here. Any aggression that you show as a trader should be in a very well thought out and controlled manner. Leave the street fighting to others.

As the updated and annotated daily chart of the S&P 500 illustrates below, we continue to chop and flop around our key 1040-1050 zone. As I have noted before regarding key reference points, the longer that the market spends at these levels, the more likely it is that the support will fail.  What you are looking for are buyers stepping up with conviction, and greedy shorts paying the price for pushing their bets too far. From the action that we saw today, that kind of bullish scenario has yet to materialize. In order for me to get involved again on the long side, I am going to need to see that happen.

Thus, keeping a heavy cash position and an open mind are still the best ideas that I have.  Note that taking a pass on trading in this type of environment has the added bonus of viewing the action in an objective way. Having a healthy frame of mind and a healthy confidence level are essential in all forms of gambling.  Make no mistake, trading IS gambling, as we are betting on outcomes that have yet to be determined. Instead of denying that fact, a better strategy would be to embrace sound gambling concepts. A market like this will punish you for overtrading, fighting the trend, and any lack of discipline whatsoever. Novice traders will likely learn those lessons the hard way. Many other traders, however, have enough experience to the point where they think they are untouchable as far as bearing the brunt of the market’s force. They think they can manage their way out of any corner, no matter what they did to put themselves there.  In short, they allow their emotions, hubris, and machismo to overtake them, and they are essentially outthinking themselves.

You don’t make that same mistake.

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