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MARKET WRAP UP 07/20/10

Early last evening, several anchors on the financial news networks were trying to ascertain how many points the Dow Jones Industrial Average would fall today, given the poor earnings out of $IBM, as well as a few other large firms. Unfortunately, the market is not quite that easy to game. After a sharp gap down this morning to 1056 within the first ten minutes of trading, the bulls lifted stocks up with their horns for the rest of the day, and never looked back.

With the S&P 500 closing up 1.14% to 1083, the possibility that today marked an elusive higher low remains of the utmost importance. As the updated and annotated daily chart of the S&P 500 illustrates, despite the bulls’ progress today, the declining 50 day moving average that looms above continues to be an obstacle for a sustained move higher (see below).

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All kidding aside, the issue of whether or not today marked a higher low will need to be resolved in the coming days. To automatically presume that we started a new trend higher based on today’s action is likely premature. Similarly, the bears are going to have to think twice about aggressively shorting another meeting with the 50 day moving average, after the myriad of false breakdowns that we saw today.

Turning to other indices and sectors, the Nasdaq, Russell 2000 (small caps), and Dow Jones Transportation Average all had impressive days as well, but remain within their falling channels (see charts below).

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As for the portfolio, my top performer today was $NR. The updated daily chart illustrates below that the stock began to resolve the friction associated with an ascending triangle with a powerful move higher on strong volume today. Follow through is now key, as the presumption is that this pattern will resolve up and out.

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I sold out of the rest of my $THOR position for a small loss, after selling the first 1/2 a few weeks ago for a gain. The stock simply did not rise to the occasion today, despite the broad market reversal, so I am content with my decision to cut my ties as the stock has done nothing of late.

Finally, I added a full position of $ARUN. The stock has been an outperformer throughout this whole correction, and has formed an ascending triangle as a well as a cup and handle bullish pattern. The chart below should illustrate both.

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TOTAL PORTFOLIO:

EQUITIES: 36%

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

CASH: 64%

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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%

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MARKET WRAP UP 07/15/10

After a morning gap lower, followed by choppy trading for most of the day, the market rallied into the closing bell in the final half hour based on a flurry of news events. Congress had passed the financial regulation bill, $GS had reached a settlement with the SEC, and $BP said that they stopped the flow of oil into the Gulf of Mexico. With the S&P 500 finishing up 0.12% to close at 1096, there was clearly more at play under the surface of today’s price action than that which met the eye.

As the updated and annotated daily chart of the S&P 500 indicates below, we are still chopping around the 50 day moving average, as well as the 1090-1100 zone. In my view, to presume that this is either a wildly bullish or bearish consolidation is premature.

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In addition to the S&P, the Nasdaq, Russell 2000 (small caps), and transportation stocks all indicate that we are still chopping around at resistance (see charts below).

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Trading based on news events can often be a tricky proposition. In fact, I generally abstain from trading based on earnings, big news events, etc.. The reason why I believe in doing so is because of the number of variables at play. As a trader who primarily uses charts, I want to mitigate as many external factors as I can before making a trade. Further, I am individual trader, and it is likely that some of the bigger institutional money has some idea about the news and is trying to price it in before I even see the flash come across my screen. Finally, I am a swing trader and not a day trader. Many of the news driven events in the market are usually good for just a quick scalp, before the action is faded as the smart money quickly takes profits.

In this case, the news events announced today would seem to erase much of the uncertainty that has plagued the markets for several months now. As the  daily chart of the $XLF shows below, it was no coincidence that the broad market began the early phases of its correction with the April 16th announcement by the SEC of the fraud investigation into $GS.

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Of course, my interpretation of that chart is that the market was ready for a correction, and the SEC investigation offered a convenient excuse to selloff. Either way, however, the issues with $GS, $BP, and the financial regulation bill have loomed over this market for the past several months. Whether the market rallies higher based on the closure of these events remains to be seen.

Turning to my portfolio, I decided to deploy part of my 80% cash position back on the long side today. Two setups intrigued me to the point where I bought full positions in $SAPE and $SWSI into the closing bell. With my current cash position sitting at 64%, I felt that it was correct to buy two good looking charts on the back of the possibility that the broad market uncertainty has been lifted. Their respective charts can be seen below.

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In sum, trading based on news is never a sure thing, and is often a trap for the retail investor. Today, we had several major events seemingly resolve. As always, the market is the final arbiter, and the reaction from the market in the coming days will illustrate just how significant today really was (or was not).

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TOTAL PORTFOLIO:

EQUITIES: 36%

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

CASH: 64%

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MARKET WRAP UP 07/14/10

Despite the impressive earnings out of $INTC last evening and the accompanying spike in the futures, the market had already curbed its enthusiasm by the time the opening bell rang this morning. After a powerful move higher since hitting 1010 nearly two weeks ago, the S&P 500 put in an indecisive doji today, to close off 0.02% at 1095. Clearly, after six consecutive closes higher, the market took a much needed pause as it comes to terms with the 50 day moving average, as well as the psychologically important 1100 level. Both breadth and volume were consistent with a flatliner of a trading session.

Although bulls and bears alike will claim victory with the market pausing today, and possibly for a few more days, I am not so sure this price action is necessarily bullish or bearish quite yet. Bulls will claim that today’s rest and even a slight pullback in the coming days will be indicative of a bullish consolidation period, where the market digests the recents gains in a healthy manner before we make our next big move higher. On the other hand, bears will argue that we are merely stalling out at tough resistance levels, before we inevitably roll over and resume the steep downtrend that began in late April of this year.

As the updated and annotated daily chart of the S&P 500 illustrates below, the competing forces of the short term advantage that the bulls have is butting heads with the longer term resistance in favor of the bears.

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In addition to the S&P, many other indices and sectors are churning at the upper end of their respective trend lines, as I noted in an earlier post today. Looking ahead, it would not surprise me to see a few more days like today. Despite the fact that the bulls have made significant progress in the past two weeks, to presume a major change in trend from bear to bull would be too risky, at this point in time. Similarly, it is too risky to assume that we will automatically roll over and go to new lows in a resumption of the bear trend, by way of aggressively short selling here.

Hence, I took some more profits today, selling out of my $CRM position, increasing my cash position to 80%. While I am a big fan of $CRM and its stock, the fact remains that it was up ten consecutive days. For me not to take profits on a stock up ten days in a row–especially in this type of oscillating market–would have been foolish. While I certainly see some other charts setting up, which is bullish, I am still going to wait for the market to reveal more evidence about whether we are truly starting a new healthy uptrend before I make aggressive bets.

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TOTAL PORTFOLIO:

EQUITIES: 20%

• LONG: 20% ($NR $NTAP $LULU $THOR)

CASH: 80%

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MARKET WRAP UP 07/13/10

On the sixth day of their winning streak, the bulls showed no signs of letting up, as a big morning gap higher held for the duration of the trading session. With the S&P 500 closing up 1.54% to finish at 1095, the bulls negotiated the 20 day moving average quite handily. In fact, we blew past the 20 day and closed right on the nose of the downsloping 50 day moving average. Breadth was also solid as all of the major sectors closed convincingly in the green. Volume was higher than the past few days, but overall was still quite weak and not indicative of institutions buying with conviction.

Interestingly, the sharp rally that we have seen since we hit 1010 on July 1st conjures up memories of last summer. As you may recall, last June and early July, many traders were calling for a head and shoulders top that would take us back to the March 2009 S&P lows of 666. With the memories of the vicious bear market fresh in their minds, many traders got caught leaning heavily short in early to mid July. However, as we know by now, the head and shoulders top failed miserably, and we saw a parabolic multi week rally higher instead.

This time around, many traders were also looking for a head and shoulders top. When we broke through 1040 a few weeks ago, even the financial news media got in on the act, declaring that the neckline had been broken and thus we were going much, much lower on the indices. Instead, after briefly breaking below 1040 and hitting 1010, we sharply reversed back up into the broader multi month trading channel in which we have been operating.

Going forward, the issue is whether we continue another aggressive multi week move from the possibly failed head and shoulders topping formation. As the updated and annotated daily chart of the S&P 500 illustrates below, the past six days have been impressive, but have so far only brought us back up to a level where we chopped around in late May.

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In the charts below, the Nasdaq, Russell 2000 (small caps) and Dow Jones Transportation Average all show that we are nearing what should be some tough near term resistance levels.

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Thus, I believe it is premature to conclude that we have seen a change in the overarching trend from bear to bull. To be presumptuous here could be very costly, should we roll over again. My strategy in a situation like this is, first and foremost, to hold off on any shorts until we see some definitive evidence that the market has failed at resistance and wants to turn down again. Beyond that, I will slowly peel off my remaining longs into further strength, as I did today. I am still looking for a higher low before I get more heavily involved on the long side.

The weakness in my strategy is if we see a repeat of last summer, and we continue to go straight up, despite being short term overbought. If that happens, then so be it. I have no problem climbing the wall of worry, as I did in lockstep with the market until this past April. However, I believe in at least regaining my balance and assuming an athletic position before climbing that wall.

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TOTAL PORTFOLIO:

EQUITIES: 24%

• LONG: 24% ($NR $NTAP $LULU $CRM $THOR)

CASH: 76%

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[youtube:http://www.youtube.com/watch?v=hiPb50D9G1w 450 300]

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MARKET WRAP UP 07/12/10

In front of the initial earnings of the season being reported this evening, the market put in a rather tedious, uneventful trading session. With the S&P 500 closing up 0.07% to finish at 1078, we have now seen five consecutive closes in the green. While the advance has been on declining volume, low volume is not an excuse–in and of itself–to sit out the rallies, as evidenced by the low volume during most of the run up since March of 2009.

What is of more concern to the bulls is the overhead resistance stemming from the breakdown during the past few weeks. Many longs trapped themselves at these levels, thinking we had bottomed in late June, when the reality is that we had another vicious leg down to 1010. Given the chance to cash out their chips close to even, they will gladly do so. Further, the 20 day moving average, now sloping down slightly, is acting as resistance even though we did close slightly above it today. In sum, as the updated and annotated daily chart of the S&P 500 indicates below, the overall technical picture is still clearly in favor of the bears.

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After hours, I see that $AA beat earnings and is up in post market action. It is crucial to not be presumptuous in situations like this. Remember, it is not the earnings report that matters so much as it is the reaction to it by the market. Moreover, the after hours action can easily fade by the time tomorrow morning rolls around. I believe it is important to resist the urge to extrapolate that the broad market will automatically rally based on $AA‘s beat, although that could easily happen.

My overall market thesis has not wavered. I will play with some longs here, and respect the rally. Should we fail to make a higher low, and instead roll over hard at resistance levels, I will have no problem going back to all cash or even putting on some shorts. Should we have a rip roaring rally tomorrow and Wednesday, I will further reduce my long exposure.

I recognize that my style of trading can often seem boring in these kinds of markets. All I can say is that my style has served me well over the years. To think of trading as being a glamorous profession can be a very dangerous thing. Above all else, I want to be heavily involved during trending markets, where price is gliding parallel and fairly smoothly either above or below all of the major moving averages. When the market is oscillating like this, however, my cash position will remain high until the we fly out of turbulence, and the captain takes off the fasten seatbelt sign.

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TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $CRM $THOR $APKT)

CASH: 64%

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