Wednesday, January 31, 2007
We are entering the end of the month window and stocks have been holding up well, which is bullish. The IWM continues to trade near highs, but we wouldn't bet on a breakout there just yet.
Meanwhile, money continues to flow into the industrials indicating that we may be on the verge of a reacceleration of capital spending. Growing economies mean growing markets, so the outlook continues to improve here.
Tuesday, January 30, 2007
Scans today turned up a rather innocuous picture where most stocks show that they will continue to drift as the market consolidates. A few stocks popped up on earnings, but most of these moves are not tradable.
In the market there are days where it pays to get aggressive and there are days were it pays to just not do anything. Today is one of those days where it pays to just not do anything. Gamblers need to keep on rolling the dice, but good traders know when it's time to wait for higher probabilities.
Monday, January 29, 2007
Just keep the big picture in mind. The longer term bull trend is in tact and a breakout to the upside is almost a given in coming weeks. Those putting on shorts in hope that the market will break down here are probably due for some serious pain.
We did have a couple of interesting developments last week. While the blue chips and even big cap tech were under pressure late last week, the semiconductor sector, SMH, was actually trading in positive territory. The SMH is of course still range bound, but the fact that sellers are no where to be found, even on weak days, and that buyers continue to buy at support are both positives here.
The other interesting development is the fact that while the broad market indices such as the Dow, S&P 500 and NASDAQ, all have another week or two before they will run into their longer term up trends, the Russell 2000 small caps, represented below by the IWM, has been finding support at its long term uptrend and is projecting an upside breakout this week.
Friday, January 26, 2007
Let's put things into perspective.
The QQQQ, as seen above, has been ranging between $43.50 and $44.75 since November 15. It took one dip to its 50-day average in late December and tried to break out in early January, but the trading range held both moves in check and the market returned to its mean.
In other words, this has been a non trending market; a market trading sideways. Understanding this fact, we don't see any reason to interpret Thursday's move as either bullish or bearish as it was more just a reflection of the choppy nature of the current market.
If you look over at the bottom right of the chart, however, you will note that there is an upward sloping trend line. This line represents the up trend which started way back in July. The fact that the QQQQ has been trading in a tight trading range over the past nine weeks is a reasonably bullish development.
Look for the QQQQ to remain in this trading range for a few more weeks. There is some potential for prices to drop slightly below the range here, but that would take the QQQQ back to trend support where it should bounce. A drop to the trend here would be less bullish than a continued sideways move though. A drop to support here would cause some ugly divergences to develop on technical indicators and would call into question the ability to hold the trend. If the market can maintain this range, we should see significantly higher prices in coming months.
Thursday, January 25, 2007
Meanwhile, money that was flowing strongly into tech over the last month now appears to be making its way into the manufacturing and metals sectors. Steel broke out with volume over the past two days and golds are moving up nicely as well.
Wednesday, January 24, 2007
Even so, tech continues to lag so we will be looking at its bounce for an opportunity to short some of its weaker components. The QQQQ could be carving out a head and shoulders top here, so this is something to think about as prices rally.
Tuesday, January 23, 2007
We had hoped that bulls would have remained optimistic enough to try and rally the market back up again this week. That would have created a nice short set up. The fact that selling has remained relentless so far makes for tough going.
Very aggressive traders have a trade if the short some of the weaker tech stocks here, but in doing so they take on an additional risk of shorting against an already oversold market.
We strongly advise focusing on preserving your trading account by tightening trailing stops and not opening any new trades until better set ups emerge. Long side set ups are in jeopardy of failure here, so it's not a good idea to buy weakness in this market. And, as we already stated, oversold bounces put new shorts in jeopardy as well.
On Tuesday we find ourselves in that middle ground market where risk is very high on both the long and the short sides. When the going gets this tough, the tough may get going, but the smart ones move to the sidelines and wait for better times.
Monday, January 22, 2007
Many tech stocks saw serious damage though, so we will carefully consider shorting any strength this week instead of getting aggressive on the long side again.
Friday, January 19, 2007
Tech took a heavy hit yesterday as the QQQQ sold off on heavy volume causing a failure to occur on its recent much ballyhooed (by us anyway) breakout. We had been complaining over the past two days that good set ups were just not to be found. This should have been enough warning considering the fact that in the past when scans didn't turn up good trades it has been a precursor to poor market performance.
Dip buyers may step in and offer support here and the larger trend remains up. Even so, it pays to be careful here and any further rallies are definitely opportunities to sell and not signals to buy.
Thursday, January 18, 2007
What this "market noise" has done, however, is make it very difficult to find a good stock set up. Oil prices look like they may attempt a bounce this week, but that too may just be options expiration activity, which is not going to have a lasting impact into next week. Due to the sharp fall in oil, there has been a fairly heavy short position taken in the sector. Options writers would love nothing more than to see a sharp one or two day climb in the oils that would erode profits on open put contracts.
We are doubtful that oil can mount a meaningful longer term comeback from here, so the probable dips in the breakout transport sector may be buying opportunities.
We await to see if the pullback in tech finds buyers. We suspect it will.
Wednesday, January 17, 2007
Monday, January 15, 2007
As we said, there are some good reasons to think that this time might be different. The bearish case is obvious (resistance and overbought market conditions), so we will focus primarily on the bullish case here.
1. The QQQQ is trading in a "bump-and-run" pattern after it fooled traders on a false breakdown last July. This dip below support is a classic shake out pattern that often occurs before major bull markets begin.
2. The QQQQ seems to be carving out a cup and handle pattern. This is also a technically bullish development.
3. Major QQQQ components are very strong: MSFT broke out above a similar channel a couple of months ago and is now on a tear as institutional money floods in. Likewise, unless you have been on vacation in Siberia, you know that Apple (AAPL) has been breaking out as the market excitedly embraces the iPhone.
Money has been moving out of energy and into tech for over a week now and the movement has been quite dramatic. This is setting up to be the year of the tech. Could it be a fake out? Yes, definitely. We need to be wary of that and until the QQQQ breaks through resistance we need to be extra careful. So far it looks really good for the techies though.
Friday, January 12, 2007
At least that is the healthy expectation.
Tech could continue to rally higher, but then stocks would be on much shakier ground and a larger correction may loom. But let's worry about that when and if it becomes an issue. Right now there is still profit to be made from this rally and focusing on a potential future correction will keep you from profiting now when the market is hot.
Thursday, January 11, 2007
Last week we outlined our reasons why the small cap sector was gearing up to lead the market higher after underperforming the blue chips during the entire fall rally. The IWM (Russell 2000 ETF) then proceeded to break down instead of higher seemingly nullifying our prediction.
That was last week. This week the IWM has caused eager shorts a great deal of pain as it has refused to follow through lower. Instead, the breakdown has reversed and can now be considered a failure as can be seen below.
But what happens when a stock or an index rallies back up after a breakdown fails? We need look no further than the current market leader QQQQ to see. Note the failed breakdown in late December in the QQQQ chart below. Now the QQQQ is powering higher and is threatening to break out to multi year highs. Look for a similar development in the IWM to ensue.
What happens if the IWM starts to move? We should start to see some nice fast moves in some of the lower priced stocks. This is something we have yet to see in this rally, but it looks promising.
Wednesday, January 10, 2007
Sentiment readings swung into the extraordinarily bullish direction yesterday as an extreme 14-1 QQQQ calls were purchased against puts. As long time readers know, an extreme reading of 2-1 calls to puts is considered overly bullish and tends to proceed a market correction. Readers may also recall, however, that we witnessed similar extraordinary extremes in October right before the market powered higher.
The lesson here is that while overly bullish sentiment is not healthy for continued price highs, an extreme number like yesterday's seems to represent a level of confidence from a group that knows something. So, while we are need to remain cautious here and keep our fingers on the trigger ready to exit if something goes wrong, it looks as if a group of institutional traders is making a similar bullish bet as the one made in October, which paid off handsomely.
Tuesday, January 09, 2007
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Monday, January 08, 2007
The QQQQ rallied last week and money flow on the index broke out confirming a rotation into this sector. In the past, the broad market has always followed higher a few days after the QQQQ has led the way. This time may be different, but it probably won't be.
Likewise, let's put Friday's S&P pullback into perspective. As you can see below, the SPY is merely pulling down to its rising 50-day average. If it touches down on this average this week, it will be the first time it has done so since it broke above on August 15. This has been a strong trend and strong trends find defense at their 50-day average as the pullback crowd eagerly awaits a high probability buy. Also note that the SPY broke out above its weekly resistance line in November. This line now provides a high degree of support.
Friday, January 05, 2007
Thursday, January 04, 2007
Wednesday, January 03, 2007
Because of these uncertainties we have neutral charts pretty much across the board. It is important to stay open-minded about the immediate outlook this week. The fact is, we just don't know if the pros are going to come back today in a selling mood or if they are ready to buy. Friday's options reading was overly bearish. Moreover, the first week or two in January is generally positive. As such, we may see buying today, but evidence for either the bullish or bearish case here is pretty subjective.
If you are itchy to dive into the market after the long weekend, try to restrain that itch and take a sideline seat today. Uncertainty is not a good environment to open new trades into. The year is just beginning and there will be plenty of chances to put money to work. For today, wait and see what sets up after the long weekend. If you do, you will have a better chance of putting the probabilities in your favor.