Market Wrap Up 04/29

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.

On days like today, you see many traders whining about how politicians and external events lost them a lot of money in the market. They were holding such beautiful stocks with amazing potential until…IT happened.  Sure seems like an easy thing to do. Why come to terms with your face-buried-in-the-sand-all-in-triple-long strategy, when some four-eyed schmuck of a screaming Senator on television has his glasses dangling from his nose like he is about to flunk your doctoral dissertation? Well, the fact is that we have been losing momentum as of late in the markets, and I strongly suggested that you have a large cash position throughout earnings season to boot.

Stocks are getting crushed today, and the underlying action is even worse.  We have taken out the 20 day moving average on the $SPX and, barring an impressive close, we have also clearly broken down below the trend line of the rally since February.  The best thing I can tell you right now is to IMMEDIATELY come to terms with your current portfolio.  Cut any laggards you have had on the long side, as they will get crushed twice as much in a correction.   Beyond that, being at least 30% cash is the ideal position.  We have many layers of support below us, so if you choose to aggressively short here then you need to be extremely nimble doing so.

Finally, if we manage a rally attempt this afternoon, watch the 1195 and 1200 levels as resistance to see how well we negotiate them as a gauge of strength.

The $SPX fell 0.43% to close at 1212, as we made another marginally higher yearly high today. To be sure, momentum is waning, and the new highs we are making are not particularly breathtaking given the underlying action that we are seeing. Many intraday moves higher were faded into the bell today.  Let’s be clear, the real issue is whether we are simply in a period of tight trading before our next move up, or whether we are slowly sliding down the rope before the bears really seize control and we go crashing down.  The reason why I say we are still in somewhat of a neutral, consolidating range despite making fresh highs is because of what I am seeing in the chart below.

As you can see, we are churning at the lower trend line of the rally since February.  It is a real plus for the bulls that we remain above the 20 day moving average after having tested it twice last week.  However, as I said last evening, the longer we churn here the more likely it is that we will eventually break below it.  Lower trend lines are supposed to serve as a supporting reference point, where bulls aggressively buy a dip there.  Here, we are seeing a mentality that the market is merely “hanging out” at the lower trend line, rather than sharply bouncing off of it.  This is something to keep a close eye on tomorrow and beyond, but it is probably not something worth acting on to the short side quite yet.

I raised my cash position to back over 50% today, as I sold out of $AES and $COCO.  Perhaps I am being too cautious, but frankly I am at peace with the idea that if we catapult higher tomorrow I will not reap the full reward.  For me, the stock market is not just about potential reward, but rather the reward relative to the risk involved.