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Unlike previous instances in 2012, a morning gap down was not immediately bought by eager dip-buyers. Instead, the market has gotten down roughly 1% and stayed down, thus far this morning. It is still early in the session, but we are seeing a slight change of character. The more important issue for traders going forward is whether this morning’s price action represents some kind of sea change, in which we are witnessing a major reversal. One thing to keep in mind is that the S&P 500 Index looks to be simply coming in to test its rising 20-day moving averages, which is just a few points below price now. Moreover, sentiment seems to be awfully quick to turn to cautious with each of these pullbacks, which could be construed as helping the market climb a bullish “wall of worry.”

As the session progresses, I will be watching to see if more individual stocks start to shun the broad market action and move higher from technical setups. The broad market may indeed be taking a rest for a few days, but the sign of a healthy market will be individual issues continuing to press forward. Two ideas that I have been flagging here and inside 12631 are seen below. Both look to be acting well this morning.

On the downside, I am looking to see how the S&P 500 reacts to that 20 day moving average test, which is currently at 1297 and rising.

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Legendary American firearm manufacturer Smith & Wesson has been more of a trading vehicle than anything else since crashing during the vicious late-2007-2009 bear market. Gold bugs may have been touting the gun plays as a good bet on anarchy and doom & gloom, but thus far SWHC has yet to even take out its post-crash rally highs from the spring of 2009 at about $7.50. Relative to the broad market and many sectors and issues, Smith & Wesson has amounted to a jammed handgun for longs, failing to fire when ready.

Recently, though, SWHC broke out on very strong buy volume from its more than 30-month downtrend (off those post-crash May 2009 rally highs). When you have a stock that has seen countless fits and starts as a trading vehicle over a sustained period of time, volume takes on even more significance in terms of gauging whether a breakout is legitimate. Here, Smith & Wesson has found buyers of size that have presented themselves in a meaningful way.

In addition to SWHC, Sturm, Ruger & Co. is the other great American firearm manufacture in the space. Since 2009, RGR has actually soundly outperformed SWHC in terms of share price action. While SWHC has only recently taken the lead, you can see below that RGR is on the cusp of a major breakout above $40, Also note the recent clearing of prior resistance on increased buy volume.

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When the broad market is a snoozer, like it is today, it can be tricky to decipher what is actually happening. The Nasdaq Composite is slightly green, while the S&P 500 is down roughly 0.25%. Underneath the surface, I am seeing a decent mix of red and green issues. Overall, the market has been consolidating its march higher over the past few weeks in a rather orderly manner. Bears who have been foaming at the mouth to pounce on the short side have been pretty soundly disappointed by the lack of follow-through to any move lower. Objectively speaking, that appears to be a plus for the bulls. We also continue to see volatility abate, while upside breakouts appear to have worked much better than major breakdowns of late.

Inside 12631, we are tossing dogmatic approaches to the side and instead are focused on what is actually working, such as Endologix, which we have been long for a few days.

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Even if the major indices pull in a bit here, which would be entirely reasonable in the short-term, one of the hallmarks of a bullish market is that some individual setups can continue to work as capital rotates out of extended issues into properly set up ones. With that in mind, we know that many energy stocks noticeably outperformed the tape on Monday. When that happens, I have little interest in pursuing those issues with sloppy charts, even if they are up 7% on heavy volume and all of social media is buzzing about them. In other words, I will not stray from my style simply because of a potential bottom in a technically poor chart.

Instead, I am focused on ferreting out the best of the best, in terms of securities with price action indicative of basing above all simple moving averages, already set up for a possible breakout. Noble Energy, the first chart below, is a textbook example of exactly what I am talking about. I have included other potential long swing trading ideas as well, that could follow Noble higher out of their already sound and steady-as-she-goes setups.

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mxc

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Simply put, periods of extreme indecision and compression in a security tend to lead a sharp resolution, one way or the other. Orbitz Worldwide, the global online travel firm, has seen volume and price volatility noticeably diminish over the past five weeks. You can see the tight Bollinger Bands on the daily chart, below. In a situation like this, you want to look at that compression within the context of the overall chart, rather than just in a vacuum.

Here, the stock had recently broken out from a multi-year downtrend on impressive volume. If Orbitz is going to sustain its bearish to bullish major reversal, the looming resolution is going to be a powerful move to the upside out of this extraordinarily tight compression, proving to be a significant higher low. Rather than a particular price trigger in this example, I would be looking for an increase in volume to signal the explosion. And, of course, if the resolution comes to the downside, protective stop-losses are your saving grace.

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