Acknowledging Some Basic Truths

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Should the market continue to melt higher in a V-shaped manner, I acknowledge that I will not reap the full benefits by not being aggressively long. I have yet to see a plethora of the types of high probability swing trading setups on the long side from which I typically make my biggest profits. I also acknowledge that there are many ways different styles and systems in the market that can be profitable if executed properly. So, you are going to have to decide what style works best for you and to which principles you are most likely to adhere. That said, commingling styles is the easiest way to lose money, such as the infamous gambit of “turning a (losing) trade into a long-term investment.”

Currently, I have a few select longs on, such as NILE inside 12631, with a continued heavy cash position. Because I was in very heavy cash for much of the market’s ride down this summer and early-autumn, I am in no rush to chase stocks anywhere. I am content to wait for proper entry points to present themselves, so long as the market holds above (on a weekly closing basis) that key 1120 zone on the S&P 500.

In the cloud-computing space, looking at much of those technology stocks with exposure to this niche it is obvious that they have endured some serious carnage in 2011. Even compared to other areas of the tech sector, the cloud bloodbath is breathtaking. However, now the daily charts of EMC FFIV NTAP RAX VMW all indicate potentially massive, two-month bases/bottoming formations. Again, I am in no rush to be a hero down here, but they do merit close attention.

In addition, the four charts below of stocks with cloud exposure impress me even more than the aforementioned stocks. I suggest keeping them high up on your watchlist. What you are looking to see, in order to buy these, is a benign broad market pullback or sideways period of consolidation, so that the promising patterns in the charts below remain intact.
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It is worth noting that Mattel is clearly the best performing toymaker, and it is not even close. While Hasbro and Jakks Pacific lag, Mattel’s weekly chart is ready to make fresh highs as it clears a tight, multi-month consolidation. Note how quickly it snapped back from the broad market summer swoon, and then subsequently consolidated in an orderly manner. This is the type of action that I am looking for to become ubiquitous if the market is truly going to give long swing traders an excellent chance as big-time profits in the fourth quarter.

Also note that earnings are this Friday, so I would look for an opportunity to enter the stock on weakness as long as the breakout holds above the $27 area.

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The market is still hanging in very well considering how much ground has been covered during the most recent rally. There are plenty of traders having creepy thoughts about a swift roll over. Frankly, that is a reasonable expectation given the wild price action over the past few months. However, it can become dangerous to bet heavily on a scenario that many believe to be a foregone conclusion. As I write this, we have seen some intraday reversals lower in the financials, and the real estate sector is the clear laggard of the day. Again, though, those facts have not caused the broad market to start slipping lower in any noticeable way.

I know that is can become tiresome to preach and practice patience, but monotony is preferable to sloppy trading without an edge. I am still keeping cash levels very high until I see the types of setups that offer favorable risk/reward profiles. Hopefully, a few more trading sessions like we are seeing today will go a long way to setting up more and more charts that are in need of firming up before swing traders like myself are willing to step up to the plate and swing hard.

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We know that the coal stocks have gotten absolutely obliterated in recent months for a whole host of reasons, namely China weakness, hedge fund liquidations, not to mention overall deflationary pressures as well as risk aversion. Looking at charts of individual coal stocks such as ANR PCX WLT, it is fairly obvious that, barring armageddon, they are due for a breathtaking rally from deeply oversold conditions. After all, ANR went from a multi-year breakout last spring back down to its 2009 lows in just  a few short months.

As always, though, your entry point matters. Looking at the daily chart at KOL, ETF for coals, we have witnessed a sharp, “V” shaped move off of the lows. Currently, the ETF is running directly into its declining 20 day moving average, and does not present a high probability entry for swing traders. Instead, a pullback and subsequent hold of the $31 level would offer a better risk/reward profile to long swings. Incidentally, this would form a solid inverse head and shoulders bottoming formation, with an upside price objection of roughly $42. To state the obvious, it is a scenario that may or may not happen. But this is what I am looking for in order to aggressively play coal, with a game plan in place.

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