Better off Studying

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Looking at a zoomed out 3-minute chart of the SPY of today’s action, you can see that the bulls have been extremely weak in mounting any bounce attempt. As I noted earlier, the huge gaps we are seeing on major daily charts, such as the Nasdaq, is menacing enough to the point where you should take them very seriously. Breakaway gaps, if true, are no joke and punish bottom-pickers like there’s no tomorrow. I know the temptation is to look at the intraday price action and declare that we are basing before a late-day rally, but the bears deserve more respect for that given the trend day lower through noon. Rather than forcing the issue, you are better off studying up on strategy and techniques, looking through the archives here at iBC.

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The U.S. Dollar seems to be the butt of many jokes these days, and has been for quite some time. While I can understand why, it is important to not let that adversely affect your market analysis. We know there has been an inverse relationship between the Dollar and most risk assets, as a weak Dollar has been seen as a windfall for commodities, multi-nationals, etc.. Generally speaking, a stronger Dollar often denotes risk aversion as investors flee too “safety” When you think about how long this trade has persisted in the face of the constant bashing of the currency, it is on the level of black comedy in the sense that investors are suffering from battered spouse syndrome, or Stockholm syndrome, depending how you view it.

Either way, there remain plenty of folks rooting for an unending decline of the Dollar. However, looking objectively here, we can see that over the past six months the Dollar has made an effort to scallop out a major bottom. Whether it holds or not remains to be seem, along with that inverse correlation to risk assets. Frankly, I see very few, if any, market watchers looking for a sustained uptrend in the Dollar. When you factor in the improving technicals, that is a scenario I do not want to rule out.

If the UUP can move higher off of this $22 level, I suspect the number of investors/businesses/traders caught off-guard will be surprising. In other words, don’t fall asleep on the Dixie.

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We have a nasty gap down this morning on the Nasdaq Composite Index daily chart, among others, that appears to be in no rush to get filled. Across the board, the markets are sending a loud and clear “risk off” signal. My only current position is that short AAPL trade that I have discussed in several other posts, which may or may not see me locking in some nice gains today (I am plus 22 points on the trade). At first, I thought there might be a chance that the selling could be contained to the high momentum leaders since 2009, such as AAPL AMZN CRM GMCR NFLX PCLN. However, we are even seeing old tech names like IBM INTC MSFT get hit today too. So, there are no sacred cows.

At this point I am focused on not trying to catch a falling knife, which is what this market appears to have become. I know this is a holiday week with Thanksgiving on Thursday, but my sense is that too many traders are looking for the market to give them an easy way out. An ECB intervention is rumored to come every five minutes or so, and I refuse to play the game of trying to front run such widely-monitored news.

Besides, from my perspective the biggest “news” of today is the gap lower on the Nasdaq which could easily be a breakaway gap, meaning it will not get filled. That may or may not materialize, but I am seeing plenty of eagerness to buy the dip which has me looking to do anything but.

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Over at least the past two decades, the 20 period monthly moving average on the S&P 500 has been an excellent reference point for bull and bear cycles. When it is rising, you should generally be a bull for the foreseeable future, while you should be bearish when it is declining. When it smooths out, you should grow cautious and wait for resolution. As with all moving averages, it is important to note the slope of the reference point and not just whether price is above or below at any given time. Too often, traders completely ignore the former aspect, while getting caught up in the latter to their detriment.

Another important point is to keep the timeframe in mind for perspective, as multi-day or even multi-week trades can be made counter to the trend above. The 20 period monthly moving average analysis is extremely beneficial to your market posture during largely volatile periods of confusion. As an example, in the summer of 2010 we had a nasty 16% broad market correction. At the time, I posted a monthly chart like the one above over on Stocktwits, noting that even though the market was quite scary and sentiment horribly negative, all that was happening was a pullback to the still-rising 20 period monthly moving average. Note above that we found support right near that rising 20 period monthly.

Unlike the summer of 2010, when we never breached the 20 period monthly, this time around we did. That said, the moving average is still inclining (albeit at a lesser rate), which tends to bode overall quite well for bulls. Moreover, the buyers did an excellent job of quickly taking price back above it.

Based on prior market action, a longer-term bullish to bearish reversal should see the 20 period monthly moving average flatten out while price consolidates below it, before we eventually break lower. I am not impressed with the price action in the current market of late, but the bears still have plenty of work to do before I would say that we are back in a cyclical bear market.

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While many issues formed their respective bear market lows back in either late-November 2008 or March 2009, Priceline.com bottomed several months in front of the S&P 500 in October of 2008. Without question, the global online travel company, with a clever business model that conveniently allows you to negotiate favorable deals, has been one of the marquee stocks in the entire market over the past three years. You are talking about an appreciation from $45 per share to just over $560, pocketing famous spokesman William Shatner hundreds of millions of dollars along the way.

As the holiday season rapidly approaches, conventional wisdom dictates not only that fund managers will scramble to own “the winners” through Christmas, but also that bears are going to step aside given the likely lower trading volumes and traditional bullish seasonality. So, going long PCLN here must be a no-brainer then, right? Well, technically there are several major reasons to factor additional risks into any potential upside rewards.

First and foremost, the more mature a primary uptrend becomes, the more vulnerable it is to late-stage base failure. In a similar vein to my post on Salesforce.com last Friday, that does not necessarily mean that the stock has topped out forever. Instead, it simply means that the chart needs to, at a minimum, form the basis for another sustained move higher, which is a lengthy and tedious process at best. Beyond that, Priceline has formed multiple tops at the $550 area over the past several months. While it is tough to be a bear if price can get above that level, the risk of a multiple major top being formed is high and in no way should be cavalierly dismissed, as some of the most vicious and ferocious declines are seen when price is finally turned away from a multiple top serving as impossible resistance.

There is also the possibility that this is simply a bullish consolidation pattern before eventually going much higher and continuing the uptrend.  Generally speaking, my analysis almost always revolves around looking at potential rewards in a trade and in the market through the prism of risk. Given the increased price swings that you can see on the below weekly chart since last April’s first touch of the $550, I would argue that we are seeing an increasingly violent confrontation between bulls and bears. As you know, loud arguments are reflected on charts via loose and sloppy patterns which tend to favor bears over bulls, especially after a prior steep uptrend. So, again, extreme caution is urged for longs.

After becoming part of the elusive ten-bagger (and more) category, Priceline.com might very well be a microcosm for many of the marquee, high momentum growth stocks over the past three years. The stock has earned a band of loyal longs who have been rewarded for buying and holding since 2008. This time around, they might be out of line and pushing their luck a little too much, regardless of how skilled their negotiating tactics may be.

Disclosure: I have no position in PCLN at the time of this writing. 

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Yeah, you might want to get on seeing Viggo Mortensen play a monster Russian mafioso in Eastern Promises (2007), directed by the legendary David Cronenberg.

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