Market Wrap Up 04/30

As many of you know, today marks the end of my month as King of the Peanut Gallery.  I would like to sincerely thank each and every single one of you for being loyal readers and giving great feedback.  Even if some of you have not agreed with me all of the time, you have been great to interact with here.

At the risk of repeating myself from last night, I would really appreciate your support in my candidacy to become a tabbed blogger on iBC, whenever The Fly chooses to hold an election.  I have worked extremely hard these past few months to add value to your trading strategies and market outlook.  I think iBC is a terrific website with great prospects, and I think I have earned the opportunity to help contribute to that.  Of course, without you guys, none of that would be possible.  So, again, THANKS!

The $SPX closed down 1.67% to finish at 1186 today, as the bulls lost the initiative from yesterday’s rally.  Not only did the bulls give up the psychologically important 1200 level, but we are now below the 20 day moving average yet again.  Moreover, the bearish volume on the down days has been consistently overpowering the bullish volume on the up days for quite some time now. We closed today not only on the session lows, but also near a key support level at 1185. If we lose that price next week, I expect that to inspire even more selling.

As I discussed last evening, one indicator worth looking at is the RSI, at the very top of the chart above.  Bull markets typically stay above 50 on the RSI, with 70 being an overbought reading.  If the RSI drops below 50, as it did in late January and early February of this year, it is usually in the context of a fairly sharp correction–more than a mere 2-3% pullback.  In our current market, we bounced off of the RSI 50 level the past two days, only to close slightly below it today.  Keep an eye on that 50 level next week, to see if we continue to weaken below it. As far as the other indicators are concerned, the MACD is sloping downward and giving a clear sell signal, and the stochastichs are signaling a bearish bias as well. Please keep in mind that these indicators are far from conclusive, but they are useful instruments to get an idea of how robust the market internals are.

My daily updated chart shows that we are still working our way through a broadening channel, which is basically the reverse of a symmetrical triangle.  This pattern, especially after a strong rally, is often referred to as a “megaphone” because of the higher highs, but lower lows.  The pattern reflects the increased volatility and struggle in the marketplace between the bulls and bears. Usually, the megaphone is a bearish topping formation and is ultimately resolved sharply to the downside.  After a strong move up, bulls want to see a quiet period of consolidation.  However, what we are seeing now is anything but quiet and orderly.

Thus, my short to intermediate term bets have become more bearish.  I added more short exposure today in the form of $QID and $SKF, shorting the technology and financial sectors.  I still have a very large cash position, and my top long is the stellar $SWHC. Keep in mind that my short exposure is less than 17% of my overall portfolio right now, so I am not advocating an all-in short strategy.  I am merely placing some money where my analysis is, given the charts above.  Anecdotally, I am seeing many traders who have become so accustomed to buying the dip that it seems as though they have ruled out the possibility of a steep correction. Given the evidence that I see thus far, more caution than that is warranted.

I may post something else later this evening, but I would like to leave you for now with something that I have been thinking about lately. Never call yourself a bull or a bear. Being a trader is the only label that you need.  Sure, you can place bearish or bullish bets at any given time, but you should allow yourself the mental freedom to change your mind at a moments notice, if your analysis tells you to. There are no awards for Bull of the Year, nor for bears, so just focus on making money based on the market that you SEE, not the one that you want to see.

I made a video just now for you, which should put the broad market into context on a relatively short time frame.  CLICK HERE

Alright, guys. Let’s get down to business.  The bulls had a very good day today, recapturing the 20 day moving average and the psychologically important 1200 level.  Above all else, I continue to stay open minded and nimble, with high levels of cash. I am not an ideologue and hopefully never will be.  I do not care about labeling myself a bull or a bear. I simply trade to make money. If the market follows through to the upside, I will quickly look to the long side for a swing trade.  If, on the other hand, today proved to be mere end of month window dressing and we fall down hard, then I will increase my short exposure.

I am going to show you two charts of the $SPX. The first chart, immediately below, includes several indicators such as the RSI, MACD and Full Stochastics.

First of all, note the significance of the 50 level on the RSI at the very top of the chart.  Generally speaking, bull markets stay above 50.  If we break below, it usually signals a deeper correction than a mere 2-3%, as was the case in late January/early February.  70 is overbought territory, whereas 30 is a very oversold zone.  Keep an eye on that 50 level to see if it holds.  The bulls were pleased to see it hold today.

Both the MACD and Stochastics, however, are bearish and sloping down with no imminent crossover apparent. Thus, we have some conflicting signals. Frankly, that makes sense after today’s move up which put us back into a short term neutral range. Keep in mind that price and volume are still your bookends for technical analysis, but it does help to use other indicators when there is indecision in the market as to where the next intermediate term move is going to be.

The next chart is my usual annotated one, updated daily for you:

As you can see, we are back to being in a short term neutral range. The channel of the rally since February has been breached for several days now, which is why I did not include those trend lines today.  Instead, I thought I would focus on one possible–repeat, a mere possible–outcome that we may be forming a bearish megaphone top, with higher highs, but lower lows.  This is a function of the kind of volatility that you see at market tops, with a heated argument between the bears and bulls that is eventually resolved to the downside.  Keep an eye out for that.  Volatility is a friend of the bear.  The bulls, instead, want to see quiet consolidation after a nice move up.

Of course, after a day like today, there is always the possibility that we get a “V” shaped bounce back up to new highs.  The bulls have pulled off that kind of quick recovery whenever it looked like we were going to fall over the cliff each time since March, 2009.   Hence, due to this conflicting evidence, I remain content holding a very high (50% +) cash position here.  As I have said before, I do not look at reward alone, but rather I always look at it through the prism of risk.

I really wish I could give you guys an easy answer about whether the next big move is up or down, but the reality is that if I did that, it would be pure gambling at this point in time.  We have seen a spectacular move up both from March 2009, as well as from February 2010 to where we are now.  I believe we are in a cyclical bull market, but you still have to respect the fact that, even during those great bull runs, the market corrects in a take-no-prisoners manner from time to time.

Until the market reveals more about where it wants to go….

My Top Pick: Cash

UPDATE: My King of the Peanut Gallery reign will come to an end tomorrow, the end of the month.  I see that The Fly will be holding elections for a full time tabbed blogger on iBankCoin.  If you think that I have earned my own tab, from my posts here and in the regular Peanut Gallery, I would really appreciate your support. I think iBC is a great site and I think I can add value to it, so I will be announcing my candidacy.  Thanks for reading, as always.

For those of you so inclined, click here for my video market wrap up of today’s action.  Now is most certainly not a time to panic, but you do want to mentally prepare yourself, indeed do a duck and cover drill, for a scenario where we gap lower in the coming days. Consider what adjustments you would immediately make.  It may not materialize, but when we have a short term breakdown, it is a wise precaution to take.

Recapturing he $SPX 1196 (20 day moving average) and 1200 (psychological) levels are crucial for any sort of short term reversal back up for the bulls.  If we continue to chop around this zone, we will likely be setting up a bear flag prior to another move lower.  As I noted earlier today, it is CRUCIAL that you remain open-minded and nimble here.  If you get caught heavily leaning the wrong way–at this point in time especially–your trading account will pay a dear price.

I still am of the opinion that a larger than usual cash position is correct.  I also believe some short hedges are sound here. Finally, my top long ideas are $SWHC and $YSI. Corning ($GLW) may still break out of its cup and handle pattern, but I sold off a bunch today because I did not like its fallow reaction to solid earnings.  Remember, the best trades usually work right away. Although I am basically even on the trade thus far, my style is to play for the breakout either immediately prior to it happening, or in the early stages of it.  If it takes too much time to develop, if at all, I will cut it and wait for a better opportunity somewhere else.

Losers average losers and winners add winners, to paraphrase Paul Tudor Jones.

We are currently bouncing off of the lows from yesterday’s massive selloff.  However, the $SPX remains below both the 20 day moving average (1195) and the psychological 1200 level. not to mention the supporting trend line of the rally since February. Because of those facts, I initiated some short exposure to my portfolio yesterday in the form of aggressive instruments–albeit only a 10% total allotment so far in $TZA and $SMN combined.  If we rally but fail at the 20 day and/or 1200 in the next few days, I will look to add more short exposure.

I also bought a position in $SWHC this morning. I have had my eye on the stock for a while as a swing trade, since it has been getting crushed the past few months.  Today, it is up on strong volume as a pin action play off of positive $RGR news.

Also, $GLW came out with solid earnings this morning, but the stock is not doing much so far.  Cup and handle patterns can take time to develop, but I will be watching it closely to see if it weakens.  The best trades usually work right away, and my patience with Corning is wearing as thin as their glass panels.

Overall, I favor a long and slightly short strategy at this point, with still high levels of cash given the uncertain terrain in we currently reside.  The most important thing is that you need to be flexible right now, as no one knows for sure whether we will recover quickly or continue into a deeper correction.  Until the market gives us some better directions, we will have to keep our hazard lights on.

Given the previous churning and subsequent selling pressure we are seeing today at both the 20 day moving average and the lower trend line of the rally since February in the $SPX, I have decided to initiate a 10% short position in my portfolio, via purchases of $TZA (triple short small caps) and $SMN (double short materials).

I chose the small cap triple short because of the high beta nature of the small caps, and how much of a run they have been on. Certainly, in a correction they will fall fast and furiously.  Also, I chose materials because of how weak the sector chart looks…

Please keep in mind that these are merely hedges for now, only comprising 1/10 of my portfolio.  However, if we continue to weaken, that could change.