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Healthy Action Today

Keep your eyes on the downtrend line highlighted in this previous post: The Nasdaq Composite.

Today’s action looks to place the price above or right at the downtrend line. This is healthy and will signal that in the near term, the selling has slowed.

While I’m sure many would have liked to have seen a +2.5% rise today, frankly, that kind of movement will not be sustained. It is better to let things slowly stabilize. If that can happen, leaders will begin to emerge, and some long setups may begin to work again.

***Update*** Obviously, the market moved from healthy to sickly as the afternoon progressed.

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Examining Market Tops

Market “crashes” are a popular subject for consideration during any period of general market weakness. History has shown, however, that markets in a correction do not typically experience an extreme downside “crash” similar to what was witnessed in 1987. Rather, the correction unfolds as a series of downside moves which increase in volume and reverse after a capitulation or flush-out. Between this series of downside moves are bounces which decrease in volume and reverse as the market hits a key resistance level.

At this point in the current correction, it seems apparent that the very best traders have probably stayed long and calm (with hedges and strategic, calculated sells) while others were building short positions early enough to be deep in the money.

My sense is that the rest of the unwashed have sold indiscriminately and bought randomly and have probably timed(poorly) their dip-buying and shorting in a way that ensures maximum psychological pain. Inevitably, the market will move in the opposite direction.

The differences between the great traders and the rookies is their understanding of what is probable and likely from a historical perspective, and their ability to position themselves, unequivocally, based on their determination that the market is going to behave as it typically has, or whether it is going to do something brand new.

Even during the average pullback of the last 5 years the market has bottomed, bounced, and then made another leg down before a capitulation event occurred. The indexes in the above charts which show the 1998 correction also exhibit the same behavior, except on a larger scale. A trader who believes that “things are different this time” is either looking for a V bottom or a non-stop drop. Neither is likely, although both are possible.

What is likely is that there will be a sustained bounce, followed by more downside. This pattern continues until the market eventually reverses on a high-volume capitulation day.

If future market events unfold similarly to past events, then longs will see higher prices, soon. Shorts who have established positions over the last several days will get squeezed. As prices rise, some longs will believe that the rise will be sustainable and will not sell; they might even add positions. Some shorts will believe that a V bottom is occurring and will cover. Both will likely lose money as their psychology eats away at their convictions, and the market reverses for a second leg down.

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The Daily Breakdown: The Nasdaq Composite Index

I’m sure many readers will be thrilled when the Nasdaq no longer qualifies for The Daily Breakdown. With Wednesday’s close below the 200 day moving average, unfortunately this breakdown cannot be ignored.

Do not mistake this post as a predictor of what is to come. Instead, use it to mark exactly where things stand so that it will be clear when something different starts to happen.

The blue down trend line is lying almost directly over top of the 9 day simple moving average. Until the index closes and holds above this line, nothing changes. As I’m sure the bulls are beginning to get wary of failed bounces, a conservative strategy could be to not even consider bounce plays until the Nasdaq gets above this most recent downtrend line.

When a bounce occurs, I expect that resistance will be at whole numbers, namely at 2600 and 2700.

 One final note. I do not know if in reality things are as bad as the market is perceiving them to be. I do know that as Fly has said, the most abundant opportunities present themselves at the bleakest of times.

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The Daily Breakout: CEG

With the utility sector holding firm through the latest correction, CEG has weathered the downturn superbly. Today the stock broke out to a new 52-week high.

As the stock is a bit extended, and the RSI(2) is 99, it might be prudent to wait for a pullback. Or, consider jumping right in to the momentum bandwagon.

A previous Daily Breakout, MCK, is consolidating its move very smoothly. It is stocks like these two that are steady making new highs and in sectors which are maintaining good relative strength that will likely lead when the market firms up.

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The Daily Breakdown: TUP & JOYG

Due to the consistent selling of the last 2 weeks, it is getting harder to find breakdowns that offer significant promise of further price depreciation. In other words, there are many issues that are oversold. While the temptation to wait for a bounce before selling is logical, I’m sure many traders have had no problem over the last few months buying new highs. In this market, one might just be rewarded for selling new lows.

Ideally, our breakdown setups will have failed at both the 50 day and 200 day moving averages. TUP is an exception (it is still trading above the 200 day), and has been included because there are simply not many other setups that are not oversold. TUP did fail at the 50 day, and in this market it seems natural that the next stop may be the 200 day, which coincides with an area of previous support. Setting a stop above $34 and covering at $29 would provide a 3:2 reward/risk ratio.

 Note: since the consumer has been declared dead, how many house honeys are left to buy Tupperware?

JOYG is just an ugly chart. Normally one should avoid such issues. However, ugliness may work in our favor. In this case, JOYG has failed at both the 50 and 200 day averages. All recent gaps have been filled, and support is 8 points lower than Monday’s close. Remember, what we are looking for in our short setups are charts that show exhausted bulls. JOYG’s trading over the last several months has definitely raked the bulls over some “coals.”

A stop above $54 and a target of $42 gives a reward/risk of 2:1.

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Reader Request: CELG


A reader commented on CELG’s ability to bounce uniformly from the 200 day average. After glancing at the chart, it looked worthy of some study.

Bullish Jim has done some great work with filters that select stocks that are approaching the 200 day simple moving average. My own tweaking and testing of his filter has returned results with a 75% win rate and a return on investment of roughly 80%. While I didn’t run any screens with the filter last week, CELG looks like it might have made the screen. Regardless, CELG has behaved exactly as we would have hoped after a near touchdown on the 200 day.

CELG has established a clear pattern of bumping and running from the 200 day. Whether this pattern continues is anyone’s guess. I believe that if the market firms up and doesn’t make any new lows, that CELG may continue with this established pattern.

 A gap-fill is a distinct possibility in the area of $67-$68. However, I would also expect resistance in this area from the overhead supply and the falling 50 day average.

While the MACD is almost crossing over and the Stochastics just gave a buy signal, the prime time for purchasing this stock would have been the morning after the hammer was formed just above the 200 day average. Backtesting of Jim’s filter has also shown that in order to achieve the most consistent profits from this strategy, CELG would have been sold on the open, Friday.

I am happy to consider reader requests for technical analysis. However, if the chart is ugly, or I am short on time, I will not be able to publish it.

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The Daily Breakout: MCK

McKesson Corp. beat and raised on October 31st. Volume on the gap up was spectacular. For the last two weeks it has consolidated, and has been strong enough to never pierce the gap. This is a very bullish chart, and makes for an easy “set it and forget it” type trade.

Although the stochastics are overbought, the strength of the intial move suggests it may stay overbought for some time, similar to March, April, and May.

RSI(2) is also close to overbought, but it too may stay overbought for some time.

Healthcare has been strong on a relative basis. MCK is setting up for a possible leadership position within the wholesale drug and services sector.

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