I pulled the following three trading ideas loaded with shorts from a custom screen in The PPT. PPT and 12631 members can click here to view the screen, which is not even my most comprehensive short squeeze screen. However, it is a good starting off point for ideas in an apparently improving market.
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Just as with Japanese candlesticks, the placement of a “gap” in the price action on a chart is important to your analysis. Generally speaking, there are three main types of gaps: 1) Common gaps, which get filled rather quickly and punish short-term traders chasing the initial move, 2) Breakaway gaps, seen in a jump in price and volume out of an area of consolidation (I am merging “runaway gaps” in with breakaway gaps here), and 3) Exhaustion gaps, seen at the end of extended move, or a blow-off signaling an imminent reversal in trend. In trying to identify the nature of a gap, the key is avoiding confirmation bias when looking at the chart, and being as objective as you can about when and where the gap occurs.
Looking at the healthcare stocks, my main long position inside 12631 is BIIB, which I have held for roughly one week. Friday’s big move higher was accompanied by very strong buying volume, which has me looking at other large biotechnology and major drug firms. In particular, AZN and GSK, two major drug firms, are sporting gaps out of their respective areas of congestion. Note the price action in AZN and GSK on Friday was well above not only Thursday’s range, but above the ranges of the prior several months. Again, given the placement of these gaps, I think there is a good chance for them to be breakaway gaps out of consolidation.
To be sure, there has been much ballyhoo about why these dominant drug firms are “must-buys,” namely because of the aging baby boomer generation and their need for healthcare’s latest and tastiest treats. In the end, though, these stocks are only going to get going when they are good and ready, regardless of how many times a socially inept Wall Street analyst or portfolio manager goes on CNBC pumping the thesis.
I have also included the charts of AMGN CELG and GILD as long ideas in the sector, should you not feel up to chasing those potential breakaway gaps.
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The central theme of my video market recap on Friday was that the rally we saw to close last week differed in nature from what we saw last year when breaking out of a multi-month trading range. The traditional marquee names, leaders if you will, simply did not participate anywhere close to what you would expect when the Dow is up 267 points and the S&P 500 is threatening a major weekly breakout from the now-ubiquitous range. Contrast that with the idea that in the early-stages of a fresh uptrend, you expect there to be widespread energy in numerous charts.
From that analysis, many would deduce that the rally is entirely bogus and it is now correct to position aggressively short. However, the main issue with that argument is that the market may very well be telling us, instead, that just because it is ready to breakout from our 1120-1220 S&P 500 trading range, we are not off the races. In other words, we could still be within the confines of a more massive trading range, such as 1120 up to 52-week highs at 1370. In that scenario, you are looking at much more of a selective, stock/sector-picker’s market.
To support this notion, look no further than the increasingly constructive action in many of the transportation stocks. For much of 2011, they have been duds, often lagging the market. Historically, the trannies are market-leading indicators, and even when they have seen mini-rallies during the year, they were almost always short-lived. Recently, though, many of the key transportation stocks have seen strong buying volume come in to support sharp rallies.
Earlier last week, I created this PPT screen for members of the 12631 Trading Service, which isolates railroad firms under strong accumulation. The working thesis here is that the trannies should be one of those areas of the market that sees inflows, even if the hotshot names in the Nasdaq Composite take a back seat.
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We had another huge morning gap, which has been so prevalent in either direction over the past few months that there does not seem to be much excitement about them any more. Since this morning’s gap, though, the action has tapered off significantly. Breakouts have drifted lower, and the energy level is just not there. I recognize that this is an options expiration Friday, and there remains to be seen a ton of news out of Europe over the weekend. All of those factors may be preventing a bonafide, rock ’em, sock ’em type of move from happening. Either way, the lack of energy after this morning’s gap is preventing me from becoming more aggressive.
On a more pleasant note, though, inside the 12631 Trading Service in our famous “Pelican Room” state of the art chat, we are crushing the BIIB long trade, and have been long for several day, with a high volume breakout today. If you have been considering joining 12631, take a look at how much value you get for your money, as it costs as little as $25 per month. Who knows? Perhaps we will not always keep the price that low. For now, though, it is too much value for you to pass up. Come check us out inside The PPT. Click on this 12631 hyperlink for more details.
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Earlier on Sunday, iBankCoin Financial News reported that Kinder Morgan Energy Partners paid a sizable premium to buy El Paso Corporation in a massive $38 Billion deal. Over the past several months, I noted here and here of the strong relative technical performance of the oil and gas pipeline plays. When you combine the persistent underlying bid to the group as a whole, on top of the now legitimate consolidation taking place in a major way, it is hard not to look at other viable pipeline plays. You are talking about huge dividend yields and a lower beta way to play energy than watching ATPG swing 50% every few days.
Below, note how orderly the weekly charts are, as the pipelines plays have worked through a multi-month consolidation, particularly in comparison to the huge volatility taking place in the broad market since the summer. If you are looking for pin action off the El Paso news as the sharks circle the pipeline plays, then I am most impressed with BPL MMP SXL (the latter after a consolidation).
Members of The PPT and 12631 click here to view the entire group sorted by PPT Hybrid Score.
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To be able to marry impressive growth with strong buy volume and price action in stocks is a nice, convenient bonus for swing traders. Inside The PPT, I created a screen called, “Bull Market Beasts,” where I monitor stocks with extraordinary fundamentals of “growth firms,” with respect to profit margin, return on equity, as well as quarterly earnings and revenue growth. Member of The PPT and 12631 can click here to view and save that screen.
Looking over the screen after this past week, I see several of the most impressive growing firms that happened to have seen strong buying volume during the recent rally. What that tells me is that buyers of size see real value at these levels. Also note that a common gripe with the rally over rough the past two weeks has been the overall lack of broad market volume. To my eye, this reinforces the idea that the big money is selective in where it is going, but you had better pay attention to which names are getting the action. If this is, in fact, a major market bottom, then you can be sure traders will soon be scrambling to find the best of the best for the next leg higher, and I guarantee you will see many new faces that are leading the charge from last year’s rally off the bottom.
A few that jump off the current list: BSFT CPE KLAC. By now, you probably know my stance on the market is that I will not become aggressively long until we consolidate and/or make a higher low as charts across the board firm up. That logic also applies to these names, in that I am looking for a respite before getting involved. The market might cooperate with that scenario or it might keep going vertical. I have no control over that. What I do have control over is where I pick quality entry points to deploy capital.
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