Archive for the ‘The Week That Was’ Category

The INDU is headed for 9700, which is a 10% pullback from the top at 10700.  This is a healthy correction and has been needed for awhile.  The volume accompanying the current bearish movement confirms the investment community is definitely participating.  This retracement has not surprised us as we have adjusted our positions to take advantage of the move.  We are longer term bullish, so in our opinion, this move is no need to panic. The analysts who are predicting a double dip recession are still alive and well however, we are not in that camp.

The SPX is the same story as the INDU.  Look for 1030 and then 975 on the pullback and then hop back on board the “Bull Train”.  There will be some buying opportunities as the index begins to bottom.  As mentioned in last week’s post, do not underestimate the power of momentum.  There were some that felt that the consolidation on Monday through Wednesday was a bottoming sign which was misguided.  You have to expect periods of consolidation on the way down so don’t be fooled.

The COMPQ fell hard out of the Bear Flag on Thursday and Friday on increasing volume.  We are targeting 2114 and then 2024.  The COMPQ has posted impressive gains since the March 2009 bottom and it is not a surprise to see the index leading the major averages lower.

 The broad market finished lower in January, which does not bode well for those that believe that ’how January goes so does the year’.  We happen to believe that this move is a short-term bump in the road and will provide us with some outstanding buying opportunities going forward.  The key to success in trading is to follow the market.  Don’t fight it with your preconceived beliefs.  Although, we have definite ideas about where we feel the market is going, we will submit to the market and follow it because in the end, the market is always right.  We would rather make money than stubbornly trying to be right.  We wish you a fantastic week ahead!

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Well, it appears we are getting our pullback as we had expected would happen.  We are certainly grateful that we were generously hedged as indicated in last week’s blog.  This may have taken others as a surprise but we were ready for it.  Our positions are now bearishly delta.  The task is now to determine likely targets for the move.  It is difficult to accurately determine the magnitude and duration of a move such as this.  The place to start is to find levels of confluence of indicators.  These are areas where several data points line up to tell us a similar story.  That does not mean that the market is going to co-operate.  However, many times it does. 

It is healthy that we have a pullback.  We are longer term bullish, but this retracement is needed.  We will simply follow it and make money.  I am reminded of the analogy that the market goes up like an escalator and down like an elevator.  The last three trading days certainly support that truism. 

As the market approaches target levels, we will begin to take close note of how it reacts at those key levels.  Typically, you will see the indexes put in narrower range trading days with less volume at support.  Don’t be fooled.  The market can do this several times on the way down.  Look for the market to begin to stall and trade sideways.  It is at times like this when you may be tempted to remove your hedge only to be whipsawed.  The safest approach is to wait for upside confirmation before determining that the market has found a bottom.  You may miss the exact turn, but who cares.  Do not underestimate the market’s ability to follow through.  Momentum can be a freight train and you don’t want to step in front of it.  Just hop on board and ride it to the end of the line.

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We continue to be cautiously bullish but generously hedged in our positions.  We are trend followers, yet the trend is not convincingly robust.  That is ok because there are strategies that we employ for every market condition.  We are currently selling premium which allows us to reduce the cost basis of our stock positions in addition to trading premium collection strategies that creates short term income.  It may appear that when the market is not decisively trending, then the markets are futile.  There is nothing further from the truth.  The fact of the matter is that markets will generally channel 70-75 percent of the time.  We love it when it trends because we can make money very quickly.  A trader that only recognizes and trades the trends will end up being dormant for large periods of time.

The INDU broke out of its sideways channel in mid to late December and smartly traded up from the 10,500 level to 10,700.  It appears that the index may want to go sideways again for awhile.  The slope of the bullish move has flattened.  If you investigate a one year chart of the INDU, you will see that the index has had a varied trajectory on this amazing move.  From the low on March 6th until the close on March 26^th there were only six bearish sessions and they were slight.  The move was parabolic.  The slope changed from that point until early May when we experienced the first of two small corrections.  The index then burst upward from July 13^th mimicking the move from March.  The INDU spent the month of July on a tear until early August when it began a series of stair step moves up until the recent consolidation in November and December.  The slope of the INDU since Mid November has been relatively flat.  Volume has been unremarkable and we are currently at an inflection point as pointed out in previous market analysis. 

We know that the market is going to do what it wants to do.  Prosperous traders realize and embrace that knowledge.  We apply strategies that optimize current market conditions, but we can develop a market bias in anticipation of what is likely to happen in the near term.  We pointed out in a recent post that institutional money appears to be pulling out of the market and into money market funds while retail investors are removing money from those funds and one could suspect that it is finding its way into the stock market.  Our feel is that the more sophisticated investor is anticipating a pullback in the markets.  It is anyone’s guess as to the magnitude and duration of such a move.  I can tell you that we are prepared to take advantage of that move when it occurs.  Best, Robin

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The Dow Jones Industrial Average, SPX and the COMPQ all experienced increased volume on the move to the upside this week.  Our sense is that the move is not quality.  However, with that said, the market is always right and we are bullish until we’re bearish.  That means that the amount of hedge we employ is commensurate with our degree of bullish/bearish bias.  After the large upside candle on Monday, the INDU put in four very indecisive trading days with a Hanging Man, Doji, Hanging Man, and Hanging Man Tuesday through Friday respectively.  The index is currently at the upper Bollinger Band and at a long term resistance level.  We continue to be Trend Followers and are “Long the Market” but ever so slightly.  We are looking for a breakdown to occur soon.  When that happens, we will adjust our positions to take advantage of the move.  All of the indexes have room to move in the recent channel and we will not be definitively bearish until the broad based indexes break down out of the trading range with increased volume.

There is indication that as recently as late December, institutional money had been flowing into money market funds to the tune of almost $4.5 billion.  At the same time, retail investors have pulled out of money markets by nearly $2 billion.  One could speculate that this shift in allocation in the face of a rising stock market is driven by retail investors who may not be as savvy as the institutional money.  This may be a classic handoff from the smart money institutional investors to the less informed retail investors at the top of the market.  Please realize that we recognize that there are numerous very smart retail investors, but we also acknowledge that there are many who are not.  Those less sophisticated retail investors are many times the ones left holding the bag at the top of a move and “shaken out of positions” at the bottom only to see the market turn bullish.  So, buyers beware!

We continue to expect a retracement in the markets.  Even with the recent injection of volume this past week, the market is overbought and exhibiting signs of weakness.  The key is to follow the market and stay nimble enough to adjust when the trend changes.  Robin

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The DOW bounced off of the top of the sideways channel and is now poised to move down and retest the bottom of the channel at 10,200.  We are expecting a definitive breakdown out of the channel and to begin testing a series of swing highs and lows that have been put in since August.  However, until the index shows its’ hand, we will sit patiently and just trade the stock where it want to go in the channel.

The SPX made an attempt to break out to the upside last week only to be rejected by several DOJIs and then a Bearish Engulfing pattern on Thursday.  We suspect that the move back inside of the channel will result in a retest of the lower end of the channel at 1084.  If the index breaks down out of the channel, which is what we feel that it will do, the next stop should be 1020-1030.

The COMPQ has been the leader all year and its move the last two weeks in breaking out of the rising wedge to the upside was very impressive.  The index has also encountered several DOJI days and then a very convincing Bearish Engulfing pattern to end the trading for the week, month and year.  Our sense is that the index will move down to test the top trend line of the rising wedge at 2240.

Stay nimble and follow the market.  Trade what you see and define your levels of support and resistance.  Let’s make 2010 a very profitable year!! Robin

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The DOW continues in its sideways channel and moved up to the top of that channel this past week on weak volume.  The trend is tired and ready to retrace.  The stochastics has moved back into the overbought area and the index is at the top bollinger band.  I feel that this move is merely end of the year window dressing and we are overdue for a pullback.  If we break down out of the channel, look for 10,100 as the first level of support followed by 9700 – 9800.  The upside resistance appears to be very stout and in my opinion, not likely to be challenged soon.

The SPX closed above the recent channel top but on very unremarkable volume.  We shall see if the index will continue higher, but I feel that any upside move will be short lived as we are due to pullback soon.  The “January Effect”  may allow the small caps and value stocks to shine, but that should not carry beyond the end of January.  I don’t feel that the pullback will be massive, maybe 5 to 10 percent.

The COMPQ convincingly broke to the upside with apparently no signs of indecision.  However, it was not a quality move based upon the lack of participation as measured by volume.  It will be interesting to see if we get follow through into 2010.   My next comments will be coming to in the New Year.  Stay in tune with the market and follow it.  If you go where the market goes, you will prosper in 2010.  Best, Robin

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The DOW is still channeling.  The ADX shows the trend to be without further impetus.  Overhead resistance is strong and even with extaordinary volume on Friday, the best that we could do was a “Spinning Top” at the lower end of the range.  I think that the index is getting ready to pullback.  The first clue would be if it broke 10,170.  There are several swing highs and lows that could act as targets if the DOW began to retrace.  The primary downside target is 9100.  I really feel that the next 1000 points to the upside are going to be tough to achieve. 

The SPX tells a similar story as the DOW.  The downside target is 850-950 if the index breaks down.  We are stalled out to the upside from the consolidation trading from 2004 at the 1125-1175 level.  Should the index break through that area, the next target would be 1325.

The COMPQ could retrace to 2025-2050 if it breaks down out of the current channel.  The upside target is 2375 – 2550.  Stay nimble and follow the market.  When the indexes break out of their sideways trading (and they will)  be ready to take advantage because it should be a good move.  I am inclined to think that the move will be down in a correction.  Keep in mind that healthly markets correct so let it do what it is going to do and be there to profit.  Robin

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