Setups For Week of 04/12-04/16

Starting with $AA tomorrow after the close, earnings season should offer more volatility than what we have been seeing in the market.  I strongly believe that you should have 5-10% more cash on hand than you are normally comfortable having, so that you can better take advantage of the swings, rather than them taking advantage of you.  Unless you have illegal insider information (in which case, be prepared to have some fun at a Federal pound-me-in-the-ass prison), playing earnings offers you no edge as a trader.  Therefore, you simply should not engage in that kind of roulette.  I also believe that you should be cognizant of the schedule for earnings releases for every single stock in your portfolio, to avoid unpleasant surprises.

With that said, the overall market still looks healthy.  Like I have said in previous posts, I do not expect to see some serious supply hit the market until around the 1220 level on the $SPX. (See Chart Below)

Because we remain in a bull market with healthy technicals, I like the following setups for this week.  As usual, feel free to pick and choose which ones best suit your style. Keep in mind that despite the favorable risk/reward of high bull flags, there is always a possibility of failure. So, please use stop losses to minimize your downside risk.

Looks like a real happening place.

Take Home Lesson: Many of the egomaniac heros of the previous bear market–suffocated by hubris– become the goats of the current one after the inflection point, when they magically transform from having strong convictions into being laughably stubborn demagogues.

The $SPX closed up 0.67% to finish at 1194, as we continue to drift higher towards our seemingly inevitable rendezvous with 1220.  Because it is a Friday, and I have the rest of the weekend to post individual setups for you, I thought I would spend the rest of this post looking at the market on multiple time frames. Let’s first take a look at the updated daily chart.

To keep it simple, that is a very healthy daily chart. We are in a clearly defined uptrend and testing the lower end of the trend line. We are keeping a relatively close relationship to the 20 day moving average as well.  As coincidence would have it, the upper end of the trend line intersects with the July 2008 resistance, which is an area that I have mentioned is significant.

Let’s look at the weekly chart now, for reference.

I did not choose that 1220 area arbitrarily.  Unlike other chart guys in the “twitterverse,” I do not start with a thesis first and then cherry pick whatever facts I need to prove it.  Rather, I look at the charts and objectively analyze them.  The reason why I believe the 1220 area is so important is because it is the place where the most amount of longs got trapped before the final crash in the fall of 2008.  Recall, the rally in the summer of 2008 suckered in many bulls who believed that the Fannie/Freddie bailout was THE bottom. Obviously, they were disastrously wrong.  It was not just a few Larry Kudlow-like perma bulls who were bullish either.  Respectable money managers like Ken Heebner were horribly wrong and had billions trapped in there.  So, I do expect some serious supply to come back on to the market around the 1220 zone, when those bulls are finally made whole again.

Now, let’s take a look at the monthly chart.  This chart reinforces the view that the 1220 zone should be an area that we will see soon, but will also be a place that will represent some tough resistance. Note how significant that level was in 2005 and 2006.

So, I hope you see the importance of letting the charts lead you to a thesis, rather than the other way around.  I spent a considerable amount of time studying each of these time frames before arriving at the notion that the 1220 area ought to be a place to seriously reduce longs, and to even start looking at the bearish case.

As I noted last night, earnings season is a great time to have some extra cash on hand to survey the landscape. Although it does officially kick off until Monday evening, we are seeing some bets being placed in certain sectors. The transportation sector has an excellent chart and has earned my respect and deserves your attention.

This is the kind of chart for an entire sector that you love to see. It shows great breadth.  However, I am seeing a big reason for the trannies breaking out is due to strength in particular with the shippers. As far as individual issues, you want to go for best in breed. Many shipping stocks have been building towards a multi quarter resolution within a massive pennant.  I am told by some of the more brilliant gentlemen inside The PPT that the shipping company with the best management is $GNK.

Even if it does not BTFO, the stock still looks good for a long swing trade in its trading range.  However, with the trannies at large breaking out, and seasonality at play, this could be the big move up.  I like the risk/reward profile here.

If you want to some more gamboool, $DRYS has a Greek riverboat feta cheese gambler as a CEO, but it trades with an extremely high beta and is also rumored to be a takeover play.

Many other shipping stocks also have the same multi month pennant chart pattern as the two stocks above, such as $PRGN, $EGLE, $SB and $DSX.  I will be stalking these names for the rest of today to look for follow through by way of volume coming in and of course strong price action until the close. If I pull the trigger on any of these names I will update my post.

Again, nothing has changed since last night. I still think you should have some more cash than usual on hand going into earnings season next week.  However, that is not a reason to become lazy and miss great opportunities.

One of my top picks last night, Westport Innovations Inc ($WPRT), finished the day up 8.48% on three times normal volume.  The reason why I liked the setup so much was because a few days ago the stock had its initial breakout, only to pullback yesterday on benign volume.  My reasoning was that the stock was still breaking out, but merely shaking out some weak hands before continuing higher.

Let’s suppose that you missed that one. Well, your good buddy Chess still has some other “Westport Specials,” as I will refer to that chart pattern from now on.

Notice the similarity of the patterns: bullish setup over the course of weeks or months, a breakout, a gap fill to retest a good part of the move, and then a huge move higher.  Note that both $AIG and $NEP are extremely volatile stocks that attract a large amount of day traders and shorts, so they can get some serious momentum going. However, you only want to be involved with these names when their charts are as close to ideal as possible.  So long as you are disciplined enough to use a stop loss,  I like both of these names here.

Beyond that specific setup, I will refer you to the posts that I wrote earlier today.  We have the beginning of another earnings season coming up on Monday evening with $AA, and I do not think it makes much sense to initiate many new longs tomorrow.   The most probable scenario is that volatility creeps back in to the market during earnings, and I would rather survey the landscape first before making some new big bets.

The $SPX gained 0.34% to finish the day at 1186, as we continue to consolidate right around the highs from the most recent leg up that started in the middle of February.  The chart above supports my still short term broad market view that we have some more backing and filling to do, as the Full Stochastics are pointing down.  To be sure, the overarching trend is up, as we remain in a cyclical bull market.  Thus, even during periods of consolidation there are pockets of strength and very strongly performing issues, as I illustrate with charts in my “top setups” posts each night. However, this is certainly not a market where you can indiscriminately buy equities across the board and expect to see appreciation. As I noted yesterday, selectively aggressive traders will profit the most in this market.

Another thing to keep in mind is that earnings begin next week.  $AA reports on Monday after the closing bell, and for those of you who have been complaining about the lack of volatility, your turn to shine could present itself then. Understand that we could test 1150 or even 1120 and STILL do no major technical damage, assuming those level held, because we would be comfortably above both the 100 and 200 day moving averages. (See Chart BELOW).

To sum up my short term strategy, you can, and should, still be playing the strongest looking charts. However, going into earnings next week I believe you should have a decent amount of cash on hand to take advantage of the volatility that I expect to reemerge starting on Monday night.  Cut your laggards and keep stop losses relatively tight.