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This post was originally published earlier today for member inside 12631, a trading service in The PPT. Click on the 12631 hyperlink for more details.

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Objectively speaking, trend lines drawn on charts are most valid when the chart actually has several “reactions” or touches of them. Otherwise, anyone can draw any squiggly line they want out of a given bullish or bearish bias, with it not helping your analysis and in fact hurting it.

The S&P 500 marginally broke out from the symmetrical triangle I had been discussing on my recaps last week. With weakness in stocks and the Euro today, there is a distinct possibility for a “throwback,” or a retest of the resistance trend line from which price broke out. That equates to a retest of roughly 1250. There is nothing inherently bearish about a throwback. However, taking for granted that the retest will automatically hold amounts to complacency. Hence, I am watching this area closely to see if it survives the throwback.
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12631 member “Earl” observes in our chat room that many areas of the insurance industry are acting well. Indeed, looking at the weekly chart of KIE, ETF for the insurers, you can see how much tighter the pattern is compared to the sloppy charts of many other sectors. This is a good area in which to do some homework, trying to ferret out individual plays that may be ready to turn the corner.

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We are starting to see more typical holiday trading now, with low volume and a general bias towards the upside. Even with that taking hold, the tendency is usually that we see small caps attract a lot of hot money in the festive holiday season. This year, that is not really the case just yet, likely because of how punishing the market has been in 2011 to momentum players. In fact, I would not be surprised if BOTH the bears and dedicated momo guys closed up shop and called for 2011–That is just the kind of year it has been.

In sum, we are drifting higher and the S&P 500 has recaptured
the key 1220-1230 area. Short-term constructive looks to be the easiest path to go until next week.

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There is a real danger in this type of market environment for confirmation bias to overrun your trading discipline. As an example, we saw the transportation stocks outperform on Thursday, which many bulls would point to as a clear positive. At the same time, bears would argue that technology stocks lagged, and consumer discretionary was noticeably weak when compared to defensive sectors like healthcare and utilities. Seeing as the market has essentially flopped around sideways since crashing last summer, there really is “something for everyone” to interpret in their favor or bias, and yet there has been no major breakout nor breakdown that has held true.

Hence, I am focused on keeping things simple with this market and not being too convoluted in my approach. Over the past week or two, I have noted the potentially massive inverse head and shoulders bottoming formation in the IYR, ETF for the real estate sector. As you can see below, now looks to be as good an opportunity as the bulls will have to run this thing up to at least the neckline at $58. If it triggers through $55/$56, then great. If not, then it would not surprise me to just see more of the same type of trend less action indefinitely.

Also note plenty of REIT’s have similar attractive setups as well, basing just above their respective moving averages. To go with the analogy that I have been making on my video recaps recently, I view the stocks on my watchlist as ornaments on a Christmas tree, not to be taken down and played with unless I have two compelling reasons: 1) The individual setups actually trigger a breakout higher, and 2) The broad market cooperates with the idea of breakout plays working well for more than just a few hours or one trading session.

Members of The PPT and 12631 can click here for more potential long trading ideas in the real estate sector.

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