As I discussed last week, I have no problem watching a few pitches float by when the market is in a correction and the temptation is to play for the big bottom. There are many ways to consistently profit in the stock market as a trader, but mixing and matching styles (e.g., turning a momentum trade into a mean-reversion play when it goes against you, waiting for it to come back) out of convenience is usually one of the easiest ways to blow out your account. I know what I look for, and it has by and large served me well over the years. Just as being a stubborn bull was the goal in the obnoxiously overbought market during the first quarter of this year, erring on the side of caution via an outsized cash position has kept me out of trouble since April, all the while getting a few huge wins in AEO DFS and MNST along the way inside the 12631 Trading Service.

I am focused right now on keeping a pristine watchlist, with stocks that may be firming up here and ready to lead us on the next sustained leg higher, whenever it may come. As an example, while the chart for the XRT, ETF for the retail sector, is quite sloppy on many accounts, there are a few highly impressive individual retail stocks to observe. Quite a bit of attention has been given to athletic apparel and footwear firm Under Armour. Indeed, UA has been impressive during this correction, holding up very well and pushing up towards the highs over the past week.

In addition, note two stocks in the same broad industry–Foot Locker and Finish Line. Just as with Under Armour, Foot Locker is actually too extended for me in the short-term for a proper swing trading entry point. As a pin action play, though, I am looking at Finish Line if it can squeeze past $23 tomorrow in a strong overall market.

In sum, I am prepared but will not force the action. The overall technical picture has considerable room for improvement, which means I am going to patiently leg back in if the bulls can build on Tuesday’s rally.

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I am  pressed for time tonight, so I will just suggest you watch In Bruges (2008), a great film with quality acting.

First and foremost, the way in which the bulls were able to bounce us sharply off Tuesday’s lows surprised me. It may very well prove to be some type of tradable bottom, though as I mentioned in my video recap, we need to see some upside confirmation or at least some calm, sideways activity to firm up charts before I am willing to significantly add to my long exposure. Either way, you can see the importance of being prepared and nimble over the past few months of price action that we have seen. It is important to have both long and short ideas in your arsenal when the market is in a corrective phase.

Beyond that, consider this an educational post for future corrections, regardless of whether or not this one has run its course.

For active traders, quickly turning on a dime and scrambling to find names to short is not only stressful because you may have been caught off-guard by the market, but it also illuminates just how prepared we have to be for anything. As legendary basketball coach John Wooden once said, “Failure to prepare is preparing to fail.” Rather than panicking and sloppily searching out various hedges when the market quickly weakens, a better approach is to already know which stocks are under heavy distribution and exhibiting poor relative strength. To be sure, The PPT algorithm will detect this weakness in both price and volume via a rapidly deteriorating daily Hybrid score.

Other traders furiously search through random “tweets” to find short ideas. This essentially amounts to being third class steerage on The RMS Titanic. However, members of The PPT are in quite a different social and economic class, indeed. As part of your PPT membership, all you have to do now is click on my custom “Titanic” screen in The PPT, which encompasses all of the parameters mentioned above, limited to stocks trading at least 500K shares of average volume per day, so that you are not stuck shorting an illiquid name.
In other words, as the stock market ship sinks, The PPT & 12631 members enjoy First Class privileges of sailing away in custom lifeboats, too busy to so much as glance back at the poor trapped souls stuck in steerage.

In addition to the Titanic screen, I created another screen called, “Third Class Steerage,” which further isolates stocks under heavy distribution. As a variation on the “Titanic,” this screen also shows PPT readings for heavy selling by institutions. I added the parameter of stocks showing high volatility scores, which supports the idea of distribution (increased volatility is often associated with tops and bottoms).
Moreover, and this is the key point, I have filtered out stocks that are UP over 50% on a 1-year timeframe, but are also DOWN more than 10% in the past month. What this does is allow me to proffer concrete evidence supporting the distribution thesis that funds are dumping shares to retail investors, after presumably banking some impressive coin for several quarters. No, it does not by any stretch mean that a major bear market is upon us–That would be too much of an extrapolation. What it does mean is that you are better prepared for corrective markets.
CLICK HERE TO BE A FIRST CLASS MEMBER ON THE TITANIC
CLICK HERE TO FROWN UPON THIRD CLASS (STEERAGE) PASSENGERS ON THE TITANIC

As The Fly pointed out earlier in iBankCoin’s Financial News slot with a screen snippet of The PPT algorithm, mattress stocks are taking it on the chin today. Over the past few years, SCSS and TPX have been momentum winners to the upside. It may sound like a bizarre bull market for hot money players, but mattresses have apparently been selling like, well, people need somewhere to sleep with a modicum of comfort.

Turning to the weekly charts of these two mattress standouts, you can see that heavy selling is accompanying the recent price weakness. After a prior steep uptrend especially, this type of action should scream, “distribution” to you, as the larger market players look to unload their shares to smaller traders. Now, the market does not always make things so easy, which means that distribution does not always equal a top. Besides, forming a top can be a painful and tedious process that frustrates everyone before the eventual roll over. What it does mean is that when you see this type of heavy selling for prior momentum favorites you would be remiss to press your luck as a long for anything more than a quick oversold bounce, if that.

Even with this type of distribution, the mattress stocks (and quite a few other momentum winners) can still go higher in the coming weeks, they just need wings to do so on their own. Are you willing to bet on that?

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We are headed into the infamous choppy summer months of trading, so there seems to be more than enough caution out there amongst the entire trading community. The month of April proved to be largely a consolidation for the market, with some sectors and stocks getting hit more than others. With that backdrop, my focus is even more on sticking to the price action and my general trading discipline. I do not consider it a foregone conclusion, by any means, that we have neither topped out here nor are off to the races higher.

The recent pullback in the semiconductors had them finding support right where they were supposed to, not only at the rising 20 period weekly moving average, but also at the major support trendline dating back to the October 2011 lows. The presumption is that these lows will hold, and that we have just witnessed nothing more than a bull correction. That opinion would change, however, if the SMH, ETF for the semis, lost $33.

In the meantime, the market has responded in a way that is pleasing to the bull case. As an example, I wrote about SWKS impending correction back in March as likely a sound buying opportunity in this post. Since then, the stock pulled back from roughly $29 to $23, and then printed a massive weekly bullish engulfing candle to close out last week’s market reversal higher. In addition, members of 12631 can check out a great seasonality play from The PPT for the month of May in our chat room tonight.

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I put my toes in the water last week during the market’s reversal higher, via taking a series of “starter” positions in several longs. Inside the 12631 Trading Service, one of those longs was Monster Beverage. Today, the stock just now shot up over 25% (where we locked in some gains before they halted the stock) on rumors of a buyout from KO. I still have 2% of my portfolio in the stock, pending the halt.

While I would have loved, in hindsight, to be in the stock all-in on margin, in real-time we got in the stock in 12631. Not bad for an overall down day in the market. Come check us out inside the room. There is honestly nothing more rewarding for @RaginCajun or myself about running the trading service than seeing our members succeed.

I am curious to see what happens after the halt, but I have a hard time seeing how it could be really bad news at this point.

Here is the timestamped buy (please ignore the coding).

chessNwine

New Long: $MNST 1/2 position (4% of portfolio) @ $65.04. Stop-loss: Below $63. With market breaking above 1392 on S&P I am putting out some “tester” longs. Will add on more strength. Good chart of a strong stock.

01:33:57pm EST on Thu, Apr 26, 2012