The Nasdaq’s Hips Don’t Lie

I made this observation for 12631 members inside our chat room this morning:

chessNwine

The Nasdaq is lagging the major indices again today. Usually that is not a good sign for bulls, especially with the Euro soft. Mixed bag today.

10:36:44am EST on Tue, Nov 29, 2011

Since then, the Nazzy has turned red, and many stocks underneath the surface are lethargic. Keep in mind that many high growth stocks are housed in the Nasdaq, which makes it an important index to monitor for risk appetite, even more than the Dow Jones Industrial Average with its stodgy, old firms.

While we may still be in end-of-month bounce mode, when I see the consumer staples (XLP) clearly outperforming the Nasdaq today, I am in no rush to throw money into the pot.

Compare the two intraday charts below of the XLP versus the Nazzy. Not exactly a full “risk on” trade, just yet.

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I am still holding a 1/2 position left of my Apple short, after locking in gains early last week on the first part of it. To update my ongoing, against-the-grain trade for this beloved firm and stock, Apple is currently bouncing off of its 200 day moving average. The 200 day is obviously a widely-watched reference point, and I am not surprised in the least to see some buyers make an attempt down here.

However, the two prongs of my original thesis for the short remain intact. They are:

1. The “Island Top” rare bearish pattern on the daily chart which remains confirmed.

2. The two bearish MACD warnings signs on the weekly, including the MACD cross and divergence.

Also note the potential for the recent bounce off the 200 day moving average to become a bear flag, while most seem to be expecting another V-shaped bounce off that reference point. I may very well add back to the short upon breakdown from a bear flag. However, I will respect a buy-cover stop-loss should the stock rip higher.

Regardless of the short-term outcome of this particular trade, I am at my best as a trader when I make the best strategic decision each and every single time. In this case, as objectively as I can, I believe my analysis is correct and therefore an AAPL short is appropriate. Let’s see if the market continues to agree with me over the steadfast Apple longs.

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We have some decent follow-through this morning to yesterdays huge gap higher. The end of the month in the stock market after a choppy or down month often involves a situation where bears back off the accelerator a bit, and give the bulls some room to bounce. There almost seems to be a certain mystique to this “window dressing” phenomenon, where fund managers try to make their portfolios as aesthetically pleasing as possible for clients. We still have plenty of sloppy charts out there, and a two-day bounce is insufficient to fix those issues.

Underneath the surface, we have a mixed bag. While the financials and Nasdaq are relatively weak, the transportation and energy stocks are strong. Bonds are coming in a bit, while the Euro is weaker than I would expect for a rally in equities. As I have noted previously, whenever the Nasdaq is lagging the major indices I grow skeptical of any rally. However, the end of month here can easily see this market drift higher for another day or two. My PPT screens are flashing more potential ideas than yesterday, which is a good sign.

Overall, I am still playing a highly selective, defensive style of hit-and-run trading. I need more than a day or two of end of month window dressing in order to upgrade to a more aggressive posture.

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When the broad market is trending higher, you often see example after example of a rising tide lifting all boats. Even the stock prices of poorly-run firms with seemingly no catalysts in sight laugh in the faces of rigorous bears, who can win an argument about the trade with everyone except Mr. Market. Almost by definition, life is much easier for bulls who do not put in as much work as they should in discerning the very best and highest probability trading setups.

In the current market, and for much of 2011, life is most certainly not easy for bulls. I frequently discuss the concept of relative strength in this tab, and I have been mentioning it now more than ever due to how selective the market has been with respect to declaring clear winners. Even the clear, high growth leaders in the Nasdaq since 2009 have been flashing ominous signs, forcing me to look elsewhere for a potential changing of the guard. Of course, all of this is predicated on the idea that we do not continue lower into an established bear market, in which case virtually all longs will feel the sharp claws come out.

Should the October lows hold, I am intrigued by the notable outperformance in a few specialty retailers. CRI and PLCE are geared towards children, and both are sporting impressive weekly charts, despite all of the turmoil in markets recently. Contrast these charts to the multitude of broken, sloppy charts out there, and you can see their absolute and relative strength. I also included a weekly chart of Macy’s as an example of another retailer with strong technicals.

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A common issue that traders have is the notion that taking light positions or moving to heavy cash is fine if you trade for extra income or as a hobby, but if you trade for a living then you simply cannot afford to do that. “How do you pay the bills while in heavy cash?” is a question I often see on the Twitter stream from traders who believe they must trade every single day. First and foremost, if you are a day trader then you are going to, naturally, be more active than I am. Beyond that, though, there is a hidden issue of bankroll management, which I will try and expound upon in another post. The bottom line is that you should never feel compelled to trade every single day, as no bet is often the best bet. The idea is not to trade for the sake of trading, but rather because you have a positive expectation.

As much as I would prefer to see a trending market with low volatility, rewarding stock picking and punishing one-to-one correlation macro traders, I can only assess the market that is actually in front of me. My sense throughout this autumn has been that we were not going to break out in the type of low volatility manner that we did back in the fall of 2010. Indeed, the violent price swings have persisted in the face of negative headlines, uncertainty, and fear out of Europe.

Today’s rally looks like it will finish largely intact, despite a modest afternoon giveback. However, I am not finding too many high quality swing trading setups via my screens and homework inside The PPT. My sense here is that we could easily bounce a day or two more, but there is more heavy lifting to be done in order to me to get aggressive. Patience has been the name of the game for swing traders in 2011, and, fittingly, that looks to be the way in which the year will conclude.