Going With the Flow

While I eventually need to see some consolidation before becoming aggressive on the long side, there is no sense in fighting this tape as it squeezes higher. A name like AAPL had come down quite hard in the past few weeks, and bears got caught trying to push the envelope too much, too soon. A vicious short squeeze, though, does not automatically equal an excellent entry point for high probability trades. So, timeframes should still be kept rather tight here. With the way this market has either gapped up or down at the open over the past few months, one thing is for certain: If you try to catch every single move you will find your account chopped to pieces.

One short idea that I like because of its broad base that has potential to move much higher is MED. No position yet for me here, but I am stalking it. Note the potential inverse head and shoulders bottom with a neckline at $17.85.

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In addition to the post about Ford I wrote earlier this weekend here, I am going to present two charts below to drive home my thoughts about the current market. The first chart is the XLE daily (ETF for energy stocks), in which we see that a key multi-year reference point at $62/$63 has been lost. Last week, a rejection of a major continued breakdown led to a retracement up to that important level before Friday’s reversal. Now, just because the breakdown was rejected does not automatically mean that this is an easy money trade for longs. Note how sloppy the chart remains, meaning that the price action is expected to be far more random and volatile than usual. To be sure, energy can continue to drift higher to the 50 day moving average early this upcoming week, but that would not be such a high probability scenario as to compel you to trade it.

You can see how difficult the market is making it for both bulls and bears here, unless you are able to pinpoint every short-term fluctuation. For swing traders, though, there is not much to work with here, just yet. That can change in just a few short days of base building, which is why it pays to constantly monitor charts and stay on top of your market homework. In other words, the big institutions are going to need to come in and continue to stabilize the market this week, if these potential bottoming patterns are indeed going to prove true.

Even in the medical equipment space, where a fair amount of stocks are decently set up, a large cap name like Zimmer Holdings, Inc. is going to need more “heavy lifting” done by institutions, in order to solidify the potential double-bottom shown below. Plenty of traders would look at that move off the bottom last week as a simple knee-jerk bounce at major support, and until the big boys come in and place a strong bid under the stock discretion is indeed the better part of valor.

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While I am being a bit facetious with my title, the serious issue presented here is whether a “screaming buy” is found in Wal-Mart’s current stock price. If you look at Wal-Mart over the past decade or so, you can see that the stock has gone literally nowhere. Value players like Karen Finerman have had their patience tested with the non-performance of the stock to the point where we do not hear much from them about WMT anymore. Old Man Buffett still owns Wal-Mart, but even he does not discuss the global retail mega-store famous for low prices. We also know that there is considerable competition with Wal-Mart’s prices from other online retailers nowadays.

As will always be the case with fundamental arguments, you are going to have to ask yourself at what point the market has baked it into the cake. The aggravating factors against owning Wal-Mart have highly likely contributed to the fact that the stock has been the epitome of dead money since 2000. With the monthly Bollinger Bands pressed tightly together, along with most of those monthly moving averages converging to a point, Sam Walton’s pride and joy is ready for a big move. Of course, we all want to know in which direction that big move will be. To be sure, the tight price action tends to favor the bulls, as opposed to loose and sloppy patterns and heavy selling volume which favor a bearish outcome.

If you believe that Wal-Mart will be a continued American icon and thriving global business as the 21st century progresses, then we are probably near or at an excellent long-term buy point.

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When you take into account that most films today try to pass their chase sequences and cat-and-mouse games off as original, you will understand that the overwhelming majority of them fail miserably when compared to The French Connection (1971).  I would argue that this is Gene Hackman’s seminal role, portraying the gruff, acerbic, yet highly astute New York City Police Detective Jimmy “Popeye” Doyle. Along with Roy Scheider, the narcotics investigators stumble onto an entangled drug smuggling ring with major French connections. Director Bill Friedkin’s classic has served as the prototype for many, many watered-down films since it released. With that in mind, why not go directly to the original and enjoy the real deal?

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[youtube:http://www.youtube.com/watch?v=IUdr1LdCsq0&feature=related 550 412]

 

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…wait for your pitch and don’t go down swinging out of desperation.

I mentioned Ford in one of my market recaps earlier this week as being emblematic of the current predicament that the market is presenting. On the one hand, we can see below that Ford has shown signs of breaking out of a very steep downtrend over the past several month. Within that downtrend, note the falling wedge that formed. Falling wedges can often signal looming bullish reversals in the late-stages of an establish downtrend. Clearly, the bulls can hang their hats on this nice breakout.

However, the issue now is whether you should deploy capital to Ford on the long side. In other words, most Ford longs are currently underwater in a big way, so of course they are going to be cheering and exhaling a big sigh of relief given the first move back above the 50 day moving average since May (!). Unless you nailed the exact bottoming tick, you are probably not sitting pretty here.

So, traders with capital on the sidelines have the advantage of not being emotionally attached to that nasty ride down. When looking at Ford currently, the issue is whether the market will offer a high probability entry point for swing traders next week. In order for that to happen, we would need to see some digestion of the recent move. Why isn’t Ford a high probability entry right here, right now, given the move higher last week? Because the initial move has likely been made already, or at least the lion’s share of it, and the chart is not tight. If it is legitimate, we should see a brief sideways period before more buyers come in. To my eye, the attractive entry point would be a few days of sideways-to-down action, followed by a buyable secondary break higher. We might get it, or we might not. Either way, that is what it would take for me to become more aggressive here.

Incidentally, I believe the same analysis applies to the broad market as well.

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