Stock #Market Recap 10/12/11 {Video}

Vimeo/Wordpress is having issues today with embedding the vimeo, so here is the link:

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I will have more on the recap today, but the basic idea here is to resist the urge to assume that the market must come crashing down just because we have seen a vertical move higher. If this is, indeed, a major market bottom, then what almost always happens is that we become overbought and then proceed to stay overbought for much longer than traders think is possible. Beyond that, overbought conditions are more likely to be worked off by the market going sideways for a while in lieu of rolling over.

That said, I am sticking to my discipline of focusing on high probability setups and not drifting from my style. Should the market scream higher by 3% tomorrow, then so be it. I still have a few longs on but plenty of cash to boot. By definition, a sustained uptrend will offer tons of high probability setups for swing traders as it develops. I am not fully certain that we are in a new uptrend, as exemplified by the fact that we remain in that 100 point range on the s&P 500. As I said earlier today, no range lasts forever.

However, no V-shaped move higher is perpetual, either.

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Green Mountain Coffee Roasters is down over 4.50% today in the face of patent litigation news. Apart from the headlines, the daily had already been concerning, as you can see on the first chart below. Now, even if that does not amount to a classic head and shoulders topping pattern, the stock is clearly facing plenty of technical headwinds as it breaks down from a bear flag on heavy volume today. You can see how quickly the stock could flash down to its 200 day moving average, which actually has not been tested since November of 2010.

Moreover, you can see that such a steep uptrend for an extended period of time conjures up comparisons to Netflix. Note the two monthly charts below. At a minimum, that kind of a move higher brings the “Rubber Band Effect” into play, and leaves GMCR extremely vulnerable to further downside here, regardless of the broad market action.

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You can see on the daily chart above how quickly we gone from the bottom of the 1120-1220 range on the S&P 500 to the top. That kind of a straight line move does not happen very often, even off of major bottoms. We are where we are, though, and the pressing issue remains whether to chase this market higher, right here right now, or instead exude some patience for things to settle down. To be sure, the mass psychology of the market has shifted dramatically, not in terms of anecdotal evidence but rather what is being reflected in the price action. The fear of a crash has suddenly morphed into a fear of missing out on an epic rally.

In spite of all the changes we have seen over the past week, we remain in that 100 point S&P range. At some point, that is going to break. However, as this “melt up” gains more attention, I suspect we will have a battle on our hands before that happens. I do give the bulls the edge, though, given the constructive action in the financials and many other beaten-down areas of the market that still have plenty of room to rally.

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The market is continuing to melt up since the failed breakdown we saw two Tuesday’s ago. If nothing else, these types of conditions illustrate that there is a huge difference between staying in heavy cash, versus trying to short a market that seemingly defies gravity, at least in the short-term. Bears are feeling the pain here, but only because they insisted on declaring the top to this rally. The fact remains, though, that there are most certainly times in the market where it is correct to adopt a neutral stance and deploy (or withhold) capital as such.

Despite the impressive move higher in the indices, I am only playing a few select longs inside the 12631 Trading Service, with a continued heavy cash position. Reason being, I am simply not finding a multitude of the types of setups that I strive to pounce on and make my biggest profits from when the market is constructive. To be sure, price action like this could easily be the first leg in a fresh new uptrend, and if that is the case then we will be seeing quality setups emerge in the coming days. For now, I am still playing hit-and-run trading on the long side with plenty of dry powder.

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