Maximum Boom-Boom

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MARKET WRAP UP 07/16/10

Despite the exuberance associated with the influx of breaking headlines in yesterday’s final hour of trading, today set up to be a classic case of selling the news. Add to the mix that today was also an options expirations Friday, plus the fact that we had some major earnings after the bell yesterday, and it is no wonder that traders’ emotions are oscillating from bullish to bearish as violently as the indices are from overbought to oversold. With the S&P 500 closing down 2.88% to 1064, the bulls are still counting on a higher low to end this correction. Alternatively, the bears are seeking to push us below the crucial 1040-1050 zone, yet again, to confirm the next leg in this downtrend.

As the updated and annotated daily chart of the S&P 500 indicates, the bulls were turned away from some crucial resistance levels today. Whether or not they can quickly regroup remains to be seen. If they do not, the bears will regain the initiative once again (see below).

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The charts of the emerging market and financial ETFs have made some real progress in the past few weeks. The financials have broken out of a steep declining channel, and retraced the breakout today. I cannot stress how important it is for the bulls to rise to the occassion next week, or else this breakout will have been a fake out (see below).

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The emerging markets have made a series of higher lows, and appear to be leading us out of this correction. Note the formation of an apex that should resolve soon. Just as with the financials, the bulls need to defend this constructive chart, or else all of their progress these past few weeks will have been for naught.

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On a more bearish note, the Nasdaq, Russell 2000, and Dow Jones Transportation Average all remain within their declining channels, and were firmly turned away from resistance today (see charts below).

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In sum, we are not guaranteed to make new lows just because we experienced a nasty selloff today. However, the closer we get to breaching the 1040 zone again, the more likely that scenario is going to play out. Erring on the side of caution is still advised.

As you might imagine, my portfolio took some lumps across the board, save $NTAP. Fortunately, my 64% cash position cushioned the pain–but pain nonetheless. I noted earlier today that weakness at the 1050 zone is where I would look to get more serious about swing trading some short positions. I will reserve the right to judge the action as I see fit, but if the bulls cannot step up next week, then I want to have a piece of the action when the lower lows appear to be inevitable.

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TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $THOR $SAPE $SWSI)

CASH: 64%

Pardon me for my lack of posting today, as I have been away from my desk most of the day taking care of errands that I have been putting off for quite some time.

As for the market, today’s selloff just goes to show that the market will usually do that which frustrates the majority of traders. The news yesterday would seem to have erased the uncertainty in the market, but clearly that is not the case today. Either way, we are still in an oscillating market, and not a trending one. To me, that means you should be in heavy cash.

As demoralizing as today may seem for the bulls, keep in mind we still have the potential to make a higher low. I have been looking for a pullback from the sharp move from 1010-1100 over the past few weeks. Now that we have it, will the bulls step up to the plate? It sure does make for fine summer entertainment. However, just like the other summer entertainment, Shakespeare in the Park in New York City, you should not be spending any money on it just yet.

For me, my line in the sand is the 1050 area. Should be blow through there, I will go back to 100% cash and look at the short side more seriously for swing trades.

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MARKET WRAP UP 07/15/10

After a morning gap lower, followed by choppy trading for most of the day, the market rallied into the closing bell in the final half hour based on a flurry of news events. Congress had passed the financial regulation bill, $GS had reached a settlement with the SEC, and $BP said that they stopped the flow of oil into the Gulf of Mexico. With the S&P 500 finishing up 0.12% to close at 1096, there was clearly more at play under the surface of today’s price action than that which met the eye.

As the updated and annotated daily chart of the S&P 500 indicates below, we are still chopping around the 50 day moving average, as well as the 1090-1100 zone. In my view, to presume that this is either a wildly bullish or bearish consolidation is premature.

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In addition to the S&P, the Nasdaq, Russell 2000 (small caps), and transportation stocks all indicate that we are still chopping around at resistance (see charts below).

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Trading based on news events can often be a tricky proposition. In fact, I generally abstain from trading based on earnings, big news events, etc.. The reason why I believe in doing so is because of the number of variables at play. As a trader who primarily uses charts, I want to mitigate as many external factors as I can before making a trade. Further, I am individual trader, and it is likely that some of the bigger institutional money has some idea about the news and is trying to price it in before I even see the flash come across my screen. Finally, I am a swing trader and not a day trader. Many of the news driven events in the market are usually good for just a quick scalp, before the action is faded as the smart money quickly takes profits.

In this case, the news events announced today would seem to erase much of the uncertainty that has plagued the markets for several months now. As the  daily chart of the $XLF shows below, it was no coincidence that the broad market began the early phases of its correction with the April 16th announcement by the SEC of the fraud investigation into $GS.

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Of course, my interpretation of that chart is that the market was ready for a correction, and the SEC investigation offered a convenient excuse to selloff. Either way, however, the issues with $GS, $BP, and the financial regulation bill have loomed over this market for the past several months. Whether the market rallies higher based on the closure of these events remains to be seen.

Turning to my portfolio, I decided to deploy part of my 80% cash position back on the long side today. Two setups intrigued me to the point where I bought full positions in $SAPE and $SWSI into the closing bell. With my current cash position sitting at 64%, I felt that it was correct to buy two good looking charts on the back of the possibility that the broad market uncertainty has been lifted. Their respective charts can be seen below.

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In sum, trading based on news is never a sure thing, and is often a trap for the retail investor. Today, we had several major events seemingly resolve. As always, the market is the final arbiter, and the reaction from the market in the coming days will illustrate just how significant today really was (or was not).

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TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $THOR $SAPE $SWSI)

CASH: 64%

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I will go into more depth in my market wrap up this evening, but into the closing bell, I bought full positions in:

• $SAPE
• $SWSI

All trades are timestamped in The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $THOR $SAPE $SWSI)

CASH: 64%

Ok guys, here it is. We could be in the process of making that higher low, and then subsequently sprint higher, changing the trend from bear to bull. Alternatively, we may have just retraced to the “scene of the crime” for both the death cross and head and shoulders top, before we head back down and break to new lows, solidifying both of those technical phenomena.

Either way, my best advice is to hold off on getting caught one way or the other. Both bulls and bears have strong arguments here, and we are just going to have to wait for things to unfold before getting aggressive again. Further, even if we do make a higher low, we could easily chop around for a while being moving higher, seeing as we are still in earnings season.

Finally, here are some names on my list of scans that I am looking at for potential longs:

• $NR (already own 1/2 position)
• $SAPE
• $NXTM
• $VRX
• $LSCC
• $PACR
• $VLTR

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MARKET WRAP UP 07/14/10

Despite the impressive earnings out of $INTC last evening and the accompanying spike in the futures, the market had already curbed its enthusiasm by the time the opening bell rang this morning. After a powerful move higher since hitting 1010 nearly two weeks ago, the S&P 500 put in an indecisive doji today, to close off 0.02% at 1095. Clearly, after six consecutive closes higher, the market took a much needed pause as it comes to terms with the 50 day moving average, as well as the psychologically important 1100 level. Both breadth and volume were consistent with a flatliner of a trading session.

Although bulls and bears alike will claim victory with the market pausing today, and possibly for a few more days, I am not so sure this price action is necessarily bullish or bearish quite yet. Bulls will claim that today’s rest and even a slight pullback in the coming days will be indicative of a bullish consolidation period, where the market digests the recents gains in a healthy manner before we make our next big move higher. On the other hand, bears will argue that we are merely stalling out at tough resistance levels, before we inevitably roll over and resume the steep downtrend that began in late April of this year.

As the updated and annotated daily chart of the S&P 500 illustrates below, the competing forces of the short term advantage that the bulls have is butting heads with the longer term resistance in favor of the bears.

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In addition to the S&P, many other indices and sectors are churning at the upper end of their respective trend lines, as I noted in an earlier post today. Looking ahead, it would not surprise me to see a few more days like today. Despite the fact that the bulls have made significant progress in the past two weeks, to presume a major change in trend from bear to bull would be too risky, at this point in time. Similarly, it is too risky to assume that we will automatically roll over and go to new lows in a resumption of the bear trend, by way of aggressively short selling here.

Hence, I took some more profits today, selling out of my $CRM position, increasing my cash position to 80%. While I am a big fan of $CRM and its stock, the fact remains that it was up ten consecutive days. For me not to take profits on a stock up ten days in a row–especially in this type of oscillating market–would have been foolish. While I certainly see some other charts setting up, which is bullish, I am still going to wait for the market to reveal more evidence about whether we are truly starting a new healthy uptrend before I make aggressive bets.

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TOTAL PORTFOLIO:

EQUITIES: 20%

• LONG: 20% ($NR $NTAP $LULU $THOR)

CASH: 80%