It Might Be Fun to Go Shopping Again

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You can see below on the daily chart of the XRT, ETF for the retail sector, that price is consolidating in a comparatively tight manner this time around, as opposed to the prior several months with those loose and sloppy patterns. If the XRT can negotiate $51 well, I like the following three individual retail stocks as long trading ideas. See my notes on their respective chart below.

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I pointed out that the financials did not suffer nearly as much damage as you thought they would have in yesterday’s 250 Dow point swoon. Instead, we saw a “throwback” to the breakout point from the prior falling channel. Today, the bulls pounced on this opportunity to defend the breakout, as financials are impressively moving higher today along with the market. Looking at the charts of BAC GS JPM MS, etc., it is obvious that the bulls still have their work cut out for them in reversing major, multi-quarter downtrends. However, the action today needs to be respected. Not only did the falling channel breakout remain intact despite a monstrous sell-off yesterday, but the bulls responded with an old-fasionhed gangster counter-punch today.

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Consider how on the current 5-minute SPY chart below (the first one), we have made a series of higher highs and higher lows since this morning’s upside reversal. At the same time, the 30-minute chart then indicates we have a potential head and shoulder top on that timeframe. Now, the sexy thing to do is extrapolate out the head and shoulders top as being inevitable. Keep in mind, though, that the shorter-term timeframes compound to amount to the longer-term look. Also, during periods of consolidation the head and shoulders pattern is often a red herring.

The bulls have recovered well from yesterday’s sell-off and this morning’s move lower, and the charts are not indicating that they have relinquished the short-term initiative yet.

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To be clear, it is often not necessarily what the market is doing, but how it is doing. Going sideways, or “chop,” can just as easily have bearish undertones if there are wild price swings and high volatility as it can be bullish if the action is muted. So, I am not just looking for the market and individual stocks to merely chop around in order for me to get bullish, but rather for them to tighten up and quiet down considerably.

A good example of the type of action I am looking for is in home healthcare equipment maker LNCR. Note the long base on the daily chart below, which could just as easily be a consolidation before another leg lower as it could be a bottom. So, what to look for? Well, loose and sloppy patterns denote loud, violent disagreement amongst market players, which often resolves in a bearish manner. On the other hand, if price compresses to the point where it is a stalemate, you should be on watch for a bullish breakout as bears have lost their mojo.

On the chart below, note that the “right side” of the base has tightened up as volume tapered off as well. The base has a symmetrical look to it now, and I am more inclined to stalk a bullish upside move than to be prepared for another major leg lower. If the market can somewhat replicate a plethora of charts like the one below, then the bulls would be in a good position for a major upside breakout.

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[youtube:http://www.youtube.com/watch?v=tvOrQOQkTC0 550 412]

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The market recovered nicely from a soft open this morning, but the action is still highly challenging for traders trying to profit from riding any sort of trend. The good news is that a few more days of this type of flattish acton should go a long ways to setting up charts. I have mentioned that type of scenario previously, when I thought we were going to get that base building period at various points over the past few weeks. However, each time the market then proceeded to kick in another round of volatility. When price swings and volatility increase, looser and sloppier patterns on charts emerge, making high probability, low-risk entry points essentially non-existent for swing traders looking to hold more than a few minutes or hours.

Hopefully, we see a more benign period of action starting today. I cannot control if that happens or not, but I can certainly control how I choose to deploy or withhold my capital. I still have a few select longs that were barely down during yesterday’s broad market sell-off, which is encouraging. As Sinatra sang, nice and easy is the way to go with trading this market for now. I look forward to a period coming up where aggression is both strategically correct and rewarded.

I will be using today’s session largely to monitor which stocks, if any, are shaping up to be the best of the best.

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