Playing By Their Own Rules

Gold and silver continue to take their sweet old time working through periods of consolidation. Despite the fact that they have been on watch for big moves recently, they have kept on churning sideways, playing by their own rules. The dramatic moves both metals have seen in recent years have abated for now, but seasonality suggests that could change soon. Particularly with silver, there is only so long that prices can stay compressed before one side wins out. I continue to watch them closely for big-time moves. SLV is still meandering through the tight $30/$32 range.

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Plenty of charts, especially in the industrial material/energy complex, are sporting patterns like the two below. They are far from what you would see in the middle-to-advanced stages of an established uptrend, which means the bulls have more heavy lifting to do in the interim. However, make no mistake that shorting charts that are firming up and forming tight bases after a steep downtrend is extremely risky business. After all, take a look at what has happened over the past several weeks, as shorts have been quickly transformed from heroes into goats after Thursday’s sell-off.

Hence, my strategy has been to look for the big short squeeze plays for a bigger bang for my buck in the shortest amount of time. If, and when, we see more evidence of sustained uptrend materializing, then I am going to branch out to longer-term swings, with projected holding periods of weeks and months.

Currently, the market is overbought by many–but not all (RSI)–indicators. An overbought market can stay overbought in a bullish tape. While that point is obvious, a more subtle one is that simply going sideways for a day or two can alleviate the overbought condition as well, without giving shorts anything to cheer about. I am still focusing on individual charts in aggregate more than indicators or sentiment data.

Headed into Tuesday, I am prepared for the idea that some of the super high beta, small-cap names may start to put the hurt on shorts who have thus far been mainly punished by the large or mega cap stocks. In other words, we could see the proverbial “dash for trash.”

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It looks as though the bulls will hang on for another strong session. A pullback is now becoming increasingly expected, and I can see why. The market has a knack for not being cooperative in situations like these, but I am still focused on looking at many individual charts to get a feel for the action above all else. I am not seeing too many fades, although I would like to see more upside follow-through this week.

In particular, the cement industry is looking increasingly better by the day, namely CRH CX EXP. It is a good sign to see notable 2011 laggards like Cemex start to come to life here, as broader participation is a positive for the bulls. I will probably delve into them more on my recap after the bell today. Stay tuned…

In my opening post this morning, I laid out my strategy of seeking technically set up stocks with heavy short positions, so as to maximize the pain inflicted on bears leaning the wrong way. Inside the 12631 Trading Service in The PPT, I went long Brown Shoe Company this morning. In addition to posting the trades in our state of the art chat room, we send out email alerts for the trades that RaginCajun and I make, and here was the timestamp of this trade with entry:

Frankly, I will place more emphasis on that type of price behavior than anecdotal evidence about how “everyone is now a bull,” or something akin to that. One thing I am convinced of right now is that focusing on many individual charts is probably the best way to block out the noise and not get caught up in over thinking things. If the market really is going to violently reverse lower, I promise you will see it quickly reflected insofar as breakouts failing, and Brown Shoe types of trades getting stuffed back in my face.

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