Inconceivable!

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MARKET WRAP UP 10/25/10

Stocks continued their inconceivable march higher today, as the S&P 500 chopped around after a morning gap up to gain 0.21% to 1185. The 200 period weekly moving average, which I discussed in this earlier post, provided resistance during the morning thrust higher. I expect that reference point to continue to be a key level, given that the 200 period weekly was the scene of the top that we formed back in April of this year.

As far as the internals are concerned, breadth was fairly strong today, with the energy and materials complex leading, while financials continued to underperform. Across the daily charts of the leading indices and sectors, we printed what could be argued as a series of bearish shooting star candles. However, to presume a top remains a perilous task, given how potent the uptrend has been over the past several weeks. In order for those shooting star candles to prove true, the bears need to firmly take control of the initiative over the next few days.

Despite how overdue some may think the markets are for a correction, as I noted on Sunday evening, it is best to err on the side of the prevailing trend until further evidence of a change in market character is upon us.

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The PPT is much, much more than a mere broad market oscillator. In this video, The Fly has allowed me to give an exclusive, behind-the-scenes look into some of the key features of his proprietary algorithm, which have never before been made available to non-members.

Please keep in mind that there are plenty of other features inside The PPT that I did not even have a chance to get to in this video, so be sure to take the time to decide if a membership to The PPT is right for you. I can tell you from my own personal experience, long before I started writing for iBC, that being a PPT member improved my trading enormously due to the features that went well beyond just the broad market hybrid scores.

If the video below is too small to watch, you can simply double-click the screen and watch it on YouTube.

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[youtube:http://www.youtube.com/watch?v=H1PEL3PrxW0 450 300]r

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The Dow Jones Transportation Index made a 52 week high today. As I have been discussing for months now, the trannies never made a lower low even during the depths of the summer sell-off. In other words, even though the S&P 500 took out the February lows, the transportation stocks never confirmed the downtrend by breaching their respective February lows. Therefore, the historically leading sector appears to be intact, in terms of its reliability as a leading indicator.

With the trannies making a fresh high today, the presumption is that the S&P will take out the 1219 level as well this year. Does it absolutely HAVE to happen? No, nothing is inevitable except death and taxes. However, I believe it is a high probability that the broad indices make new highs this year based on this development. Also, the timing of when the S&P will make those new highs is also a question mark. Nonetheless, the idea is the new highs are, indeed, likely to come.

The bears who cherry-picked facts and data down at 1040 on the S&P conveniently ignored the relative strength in the trannies. Will they continue to do so now, and thus help squeeze the market higher?

(Yes, the Eddie Murphy joke will be thoroughly used and worn out until there is literally not tread left on the tire)

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I sold out of my 1/2 $BAC long for a 2.5% loss. As you may recall, when I bought the stock a few days ago it was with the idea of playing it for confirmation of the hammer it had printed. I set a very tight stop below the hammer with the idea of not letting myself get trapped, should the stock make another leg lower. While I hate to lose, I am as content as I can be with a loser in this spot, seeing as I believe the strategy behind the trade was sound.

I also bought a 3/4 position in $IMAX, a name I featured in my top setups last evening.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES/ETF’s: 58%

• LONG: 58% ($ATPG $CTSH $DDS $HMIN $IMAX $MSTR $RGS $SHLD $WEN)

CASH: 42%

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One of my current holdings, $DDS, is a pretty good example of how I seek to find and push an edge in the market. The retailer has a huge short position, and a relatively low float to boot. As an example, $SKS, which is also a retailer, has a slightly lower market cap than $DDS, yet has nearly 100 million more shares outstanding. Regarding the short position, $DDS has a sizable one, with 26%.

These facts, in and of themselves, are not enough to go long $DDS just for the helluva it. In fact, during downtrends, a heavily shorted low floater would actually be a great place to get smashed up if you were long, as the snowball would be taking you along for the ride downhill. Instead, what you are looking for is a situation where the odds have tilted away from the numerous shorts in the name, and the stock is healthy from a technical perspective.

It is only when that latter scenario presents itself that you will want to become aggressive. Remember, aggression is great, but it is selective aggression that gets the money over the long run. In the case of $DDS, we now have a situation where the stock is technically sound. Based on the improved price action and volume pattern in the name, I can now point to the low float and high short position as aggravating factors to charge the shorts of being guilty in their complacency.

Regardless of the outcome, my thesis for this trade is that I have an edge over the shorts who are stubbornly denying the improvements in the stock.  After spiking up on heavy volume over two weeks ago, the stock has flagged out. Today, the stock is showing signs of commencing a secondary breakout. The orderly price action tells me that the shorts in this name have yet to reach their maximum pain threshold.

Therefore, I will continue to push my edge via a full-sized long position.

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Moving averages are best used as reference points, as opposed to places where you automatically buy or sell. As an example, let us look at the 200 period weekly moving average for the S&P 500, which more or less marked the place where the market topped out back in April. Presently, the 200 period weekly is at 1194, just about where we are trading at the time of this writing.

Does that mean it is correct to start shorting like the wind blows? In my view, absolutely not. Instead, this is an excellent opportunity to gauge just how strong-willed the bulls (and bears) are after running from 1039 to 1194 over the past two months. Also note the possibility we simply blow up through this level, as the “obvious” resistance may need to be breached first before we dip.

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