The Bittersweet Honey of Shorting a Rally

 

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The major indices are gapping up massively this morning, with the S&P 500 running directly into its slightly declining 200-day moving average. Shorts are on the run, big-time, and have not been given any real type of reprieve since the market turned on a dime back on October 4th down at 1074 and sprinted higher. If anything, the recent run illustrates that there is a huge difference between patiently sitting out a market in cash, waiting for better entry points, versus outright shorting a rally all the way up. While I have not been fully invested, I have been respecting the increasingly bullish action by methodically adding long exposure.

It is still very early in the trading session, so I am going to wait another twenty minutes or so before gauging whether the move has a good chance of sticking. I see plenty of traders on the Twitter stream eagerly stepping in to aggressively fade the move, which may mean psychologically that it will probably stick. Either way, I am still eyeing many of those financials that I charted last night.

Buying a gap higher is always a tough proposition, but as always I put it within the context of the chart. If it is a gap on a sloppy chart, I usually wait for a better spot. If the chart was tightening up an raring to go, I am more inclined to get involved. One chart hat I am watching here is Jabil Circuit, with potential to hold and continue this breakout from an ascending triangle pattern.

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After being the laughingstock of the market since February of this year (not to mention rolling over first and cratering in 2007 through 2009), the financials are acting more constructively by the day. They have taken their time forming multi-month bases, and now look to be moving up and out of them. The big banks, along with plenty of regionals, look ripe for high probability long swing entry points. Goldman Sachs saw a strong breakout on Wednesday, and I am watching closely to see if it leads the others higher. Now, I fully recognize the argument that the financials are largely zombies facing vast headwinds, which is why it is understandable that most approach them with a “hover hand.” Frankly, that is my inclination as well.

However, I am at my best as a trader when I stick to my discipline of respecting price action, managing risk, and tuning out the noise. Looking at the charts of the following financials, I intend to do just that. If the breakouts trigger, then I will look to be a buyer. If they don’t, then I will take a pass. Either way, I will resist the “hover hand” of allowing a quality setup to pass me by because of being intimidated of the now-obvious fundamental and macroeconomic arguments against them.

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Despite the lingering uncertainty out of Europe, the charts of copper giant Freeport McMoRan and the ETF for China are forcing many a bear into an increasingly difficult position. As you can see below, those potential inverted head and shoulders bottoms look to be coming to fruition by the day. We have seen similar potentially bullish setups in recent months, only to see them fizzle out. This time, though, we are seeing more aggression on the part of the bulls when they need to step up. Both of these charts have plenty of room to run above.

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While governments in the countries across the Atlantic reach impasse after impasse in their meetings, the market here in the U.S. is not doing too much this afternoon. We opened sharply higher this morning, but saw that faded in short order. The S&P 500 dipped slightly back into the top end of that multi-month trading range, from roughly 1120 up through 1220/1230. The Nasdaq is also putting in plenty of sideways work at the top end of its range, as you might expect. Energy and financials are two of the more impressive areas of the market today, showing good relative strength. I am still on watch for continued breakouts in the precious metals and miners, although they are a bit sluggish right now. All in all, it is turning out to be a rather dull session. The good news for bulls is that boring is more likely to be constructive than slipping down from the top end of the range in a wild manner.

The uncertainty out of Europe is being argued as a main reason why the market cannot sustain any type of move higher, but I am seeing improved price action and technicals on many charts. The key, as it has been for all of 2011, has been to remain nimble and not get married to any one thesis. For now, though, I am going to respect the fact that the bulls still hold the advantage after the run we have seen for most of this month.

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My post from October 13th entitled, “Listen Up, Gang,” alerted you to the BIIB setup in the biotechnology space, and I have been holding that position for over two weeks now. I sold half into this morning’s huge pop, since it is always a good idea to take advantage of a positive news item and reaction that comes across the wires in your favor. However, I would argue that the stock was technically set up well regardless of the news. As you can see below on the long-term quarterly chart, we are looking at a decade-long breakout to all-time highs. In other words, the news was an excuse to take the stock where it was going anyway, just more quickly.

Either way, I am proud of the 12631 members who took this trade and are profiting handsomely even in an erratic tape. Then again, I did not just keep the idea reserved for subscribers, as I presented it to you many times in this tab. Any way you slice it, we all have trades that work well for us, and those that do not. What is more unflappable than that is the fact that inside 12631 we have the best community and chat room for traders, anywhere in the world.

And you take that to the bank along with your profits in BIIB.

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