Chillin’ Like a Villain on Penicillin

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We have an interesting situation in front of the Fed announcement today. Is this a sell the rumor, buy the news type of day? Alternatively, is this simply the big money assuming we will inevitably go down anyway, so they are out selling ahead everyone else? Either way, we are soundly down 1% across all major indices and sectors. Volume is unimpressive, while breadth is weak.

I am not going to make any moves before the announcement. Actually, right after the announcement I will probably wait at least several minutes before doing anything as well, given the historical whipsaws on Fed days. As you can see on an up to the minute daily chart of the $SPY, the two main scenarios I see are either a bearish rising wedge, which would presumably resolve sharply lower. This scenario would break the pattern of higher highs and higher lows since July 1st. The other scenario would be a bullish resolution out of the apex of the multi month triangle we have been forming.

Keep in mind that seven of the last ten trading sessions have closed in the red. Despite that fact, the bears have made no technical damage thus far to the bullish uptrend of the last six weeks. If the bears cannot successfully take us down here, then I believe we will finally see a major breakout to the upside.

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MARKET WRAP UP 08/09/10

Despite the impressive performance by some individual issues, as well as the positive tone of the broad market, stocks generally remained in a holding pattern ahead of tomorrow’s meeting at the Federal Reserve. With the S&P 500 closing up 0.55% to 1127, we are still operating below the key 1131 level, which marked the precise print where we touched and sharply reversed down to 1010 back on June 21st. While breadth was strong, volume once again was notably weak, even for the summer.

Nonetheless, as the updated and annotated daily chart of the S&P 500 illustrates below, we closed above all of the major moving averages heading into the big Fed announcement tomorrow.

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Turning to other key indices and sectors, the emerging markets and transportation stocks remain highly impressive areas of the market. However, the daily charts of the Nasdaq Composite, the small caps, and the financials are slightly lagging the progress of the daily S&P 500 chart (see charts below).

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Given the individual strength and breakouts that I saw today, it was tempting to significantly raise my long exposure. However, the whipsaws surrounding days when the Fed meets and announces have historically been nasty. Rather than use all of my ammunition before the market confirms a breakout, I will wait for a convincing break and hold above 1131, preferably on more impressive volume than we saw today.

Unlike Ben Bernanke, I am not going to use up all of my bullets before I have to.

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TOTAL PORTFOLIO:

EQUITIES: 52%

• LONG: 52% ($BZ $OVTI $ISLN $GNK $LSCC $RDWR $BX $CMI)

CASH: 48%

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To update the $LSCC (Lattice Semiconductor) situation from last Friday, it now appears that the former CEO is going over to $KLIC. More importantly, I am pleased to see that the selling volume today is not heavy. Further, the stock had a precise bounce off of the 50 day moving average.

Thus, I am holding my 1/2 long position in the name. What would make me sell? A close and subsequent hold below the 50 day moving average on accelerating selling volume. I have yet to see that, though. Another option would be to add to my position. In order for me to do that, I need to see aggressive buyers stabilize the stock and bid it up in the coming days. Stay tuned…

[youtube:http://www.youtube.com/watch?v=aSEY0q1POE0 450 300] ________

I also sold 1/2 of my $GNK position in front of their earnings report tonight. It is not my style to make big earnings gambles. Technicals are useful for studying everything that is currently known and knowable. However, news driven events can easily trump the charts. Therefore when I can control it, I like to limit my risk in front of said events.
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TOTAL PORTFOLIO:

EQUITIES: 52%

• LONG: 52% ($BZ $OVTI $ISLN $GNK $LSCC $RDWR $BX $CMI)

CASH: 48%

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Of all the Japanese candlesticks and combinations thereof, arguably the most bullish pattern is what is known as the “Three White (or Green) Soldiers.” In particular, after a downtrend or a prolonged period of consolidation, this is a bullish reversal pattern consisting of three strong closes in a row. You are looking for the open to be within the confines of the previous day, yet you want to see the stock close near the highs of that individual session. Needless to say, the white soldiers indicate a sharp change in investor sentiment and conviction, as bulls present themselves in a meaningful way to capture and hold the initiative.

One of my featured setups last evening, $BZ, is well on its way to completing this pattern. Since April, the stock had a sharp correction along with the broad market, and then tightened up as it consolidated. Today, it is on the cusp of its third consecutive close higher in a convincing manner. White the candle today is not quite the long bodied one you would look for, the first two days of the pattern were so strong that I decided to buy a full position. Note also the uptick in buying volume during the past few days, further confirming the breakout.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 56%

• LONG: 56% ($BZ $OVTI $ISLN $GNK $LSCC $RDWR $BX $CMI)

CASH: 44%

The tension continues to build in the major indices between the recent pattern of higher highs and higher lows, versus the resistance from late June. This tension could easily be resolved as early as this week. While the $HPQ news may weigh down the broad market tomorrow, I believe that the major stocks which are in unique technical predicaments, such as $IBM, will eventually be of more import.

Below, you will find my best trading ideas for the upcoming week. They are all long setups. However, if you must short something, for a quick scalp you could probably do well shorting the ags, as well as the precious metals, due to their recent moves higher in a straight line. However, keep in mind if you choose to short equities that you are fighting the five week trend of higher highs and higher lows.

Feel free to pick and choose whichever setups best fit your style. Please keep in mind that these are trading ideas only. I also urge you to use stop losses in order to mitigate your downside risk–I prefer a trailing 7-8% stop loss.

I hope you find these ideas helpful.

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