Tuesday, July 15, 2014

Bearish Price Volume Action Dominates Stock Market

Price volume action from the start of the rally was worrisome, but over the last two weeks, price volume has clearly turned bearish, indicating the path of least resistance is down. The market has attempted to rally on a few days and reverse higher on others, but volume has failed to materialize. When volume does run higher, the market has either been distributed or stalled (another form of distribution). The NYSE advance decline, the main positive during the rally, has maintained its down trend. The good news is that it marked new highs before the pullback began, indicating that a bear market is not in the cards, yet. But a major correction that feels like a bear market is completely possible.

Leading growth stocks have stopped breaking out and started breaking down. Stocks have bounced with the market the last few days, but volume has been lower. Most will need at least a few weeks to consolidate, while a few could be ready over the next two weeks assuming their consolidation do not fall apart. Of course not all stocks are acting poorly: Whiting Petroleum (WLL) gapped off the twenty day moving average, in well above average volume, on news it was buying Kodiak Oil and Gas (KOG), which itself gapped out of a four week tight pattern on the news. 

Short trading idea stocks have started to roll over in heavier volume and tighten for further downside. Recent breakdowns have been able to hold or follow through to the downside. Middleby (MIDD), Las Vegas Sands (LVS), Bofi Holdings (BOFI) are rolling over at the fifty day moving average in heavier volume.

With the market clearly in a correction, traders should use strength to sell any remaining long positions with little to no profit cushion, and initiate short positions, if their not in cash or short already. Stocks should rollover and keep following through to the downside or consider tightening stops to minimize losses and protect small profits.

Full Disclosure: Position in LVS.

Short Trading Idea: Yahoo (YHOO) Reminiscent of 3COM (COMS)

Yahoo (YHOO), once the search engine leader and internet king, has fallen behind the likes of Google (GOOG), Facebook (FB), Twitter (TWTR), and many more in the new era of Internet 2.0. A new CEO and rumors of an eventual Ali Baba (BABA) IPO, of which Yahoo owns 24%, helped the stock advance just over 250% after breaking out of a cup and handle base the week of October 26, 2012 to its high on January 8, 2014.

The hype surrounding Marissa Mayer's ability to turn the company around has not come to fruition as of yet, if it ever does. Earnings have grown approximately 17% and sales have been negative during the advance. Analyst don't expect much out of the company over the next three years either. Earnings are expected to slow down to 8% and sales will show no growth at all. Not exactly growth type performance that warrants a stock trading at almost thirty times earnings, crediting most of the move more to Ali Baba's IPO then anything the company has actually done.

3COM (COMS) was in a similar situation when it announced the spin off of Palm (PALM), the hottest handheld device before Apple's (AAPL) Ipod and Iphone, in 2000. The company, once the king of modems, ran up over 2,300% from 1992 to 1996, but languished for the remainder of the bull market until announcing the Palm spin off. The stock then ran up up just over 350% in under five months until it topped on the Palm IPO, eventually being taken over by Hewlett Packard (HP) in 2009 well off its all time highs.

Yahoo is now in the process of forming a head and shoulder top with earning expected today after the closing bell. If the company does not start to show signs of turning sales and earning's growth around soon, the Ali Baba boost will not last long past the IPO. Based on current projections, the stock could fall back to near pre-breakout levels around $15 over the next 12 - 18 months and even lower if the market enters a sever bear market over the next few years.

Tuesday, July 08, 2014

Stock Market Exhibits Danger in Ignoring Warnings

The market suffered a major distribution day today. All the major indices were down close to one percent or more in heavy, above average volume. The SP 500, the lead index, registered its eighth stalling or distribution day in the last four weeks and the Nasdaq registered its sixth. The market has shown little in the way of accumulation since the follow through, except for a day or two here and there in areas where shorts would be forced to cover, squeezed, and longs panicked into buying...near new highs. As expected (Shortage of Sellers Explains Rally), the market began stalling and distributing as the Nasdaq finally joined the Dow and SP 500 at new highs for the year. And nothing like a little fluff over the old highs to squeeze the most bears and trap the bulls.

Leading growth stocks lagged for most of this rally, sold off significantly in higher volume. The few stocks that managed to make progress are now too extended, and most breakouts that failed to make any progress are failing or on the verge of failing. Wide and loose, late stage bases, low volume breakouts, lack of follow through after breakouts, and lagging relative strength lines, plagued leading growth stocks from the beginning. Oil and gas stocks were the highlight of the day, closing higher or at the highs of the day: Pioneer Natural Resourced (PXD), Kodiak Oil and Gas (KOG), Concho Resources (CXO).

Short trading idea stocks have started to breakdown in heavy, above average volume. Costar Group (CSGP) and Alpha Natural Resourced (ANR) rolled off their fifty day moving averages, Amazon (AMZN) and Jinko Solar (JKS) sliced through their ten and twenty day moving averages, and Yahoo (YHOO), Wynn Resorts (WYNN), and Sohu.com (SOHU) sliced through their fifty day moving averages.

This has been a difficult few months to make money on the long side and warning signs (Market Distribution Joins Growing List of Sell Signals) added up by the day. Investors/traders had to take profits, or at a minimum, tightened stops to protect profits in over extended positions, and/or to protect small profits and prevent losses in lagging positions. As seen by today's market action, eventually the market acts on its warnings, and weeks of profits can vanish in a matter of hours. Cash or close to cash with a short or two is the best position. Weak rally attempts over the next few days should provide more short entry opportunities and some day trading long trades.


Market Distribution Joins Growing List of Sell Signals - Read More

Shortage of Sellers Explains Rally - Read More

Deceitful Market Difficult to Navigate - Read More

Market Rally Resumes Poor Price Volume Action Dominates - Read More

Trend less Market Atrocious For Traders - Read More

Monday, July 07, 2014

Short Trading Idea: Pharmacyclics Inc. (PCYC) - Late Stage Base Failure

Pharmacyclics (PCYC) has been one of the bull markets biggest winners. Rising over 6,000% after breaking out of a flat base, inside of a cup and handle base, the week of September 11, 2009 above a $2.41 pivot point. At the breakout, the fundamentals were non existent. It was just a story. There was no sales or earnings growth, company was losing money, and estimates showed no signs of strong expectations and more losses.

Today, the fundamentals are fantastic. Sales and earnings are expected to grow 67% and 34% respectively, over the next three years. The problem is, even at lofty valuations, three times growth, the stock is fairly valued at these levels 12 - 18 months out. But a single hiccup, especially after poor recent guidance and estimates for this year and next few quarters extremely poor, could panic institutions into heavy selling.

The stock topped out the week of February 21, 2014 after gapping and breaking out of a late stage, double bottom with a high handle base on a strong earning's report, at just over $154. The relative strength line never confirmed the new high. The breakout failed over the next two weeks, eventually falling 46.7% and slicing through the fifty and two hundred day moving averages in heavier volume.

The stock has spent the last three month trying to breakout above the fifty day moving with little success while the market has rallied, and is currently in the process of stalling at the fifty day moving average for the third time. A breakdown below the fifty day moving average, in heavier volume, could cut the stock in half down into the $50 - 60 range. This would be within range of how far, on average, big winners fall after topping. Protective stops should be placed above $105 or the recent high just before the stock breaks down.

Click To Read Past Trading Ideas

Full Disclosure: No Current Position

Wednesday, July 02, 2014

Short Trading Idea: CME Group (CME)

CME Group (CME) has been forming a head and shoulder top for the last year while the market has been rallying higher. The stock sliced through the neckline in heavy volume back in April and has been digesting that sell off ever since. It has  attempted to rally back above the fifty day moving average three times with no success. The first two attempts were in below average volume and recently the stock has been stalling in heavier volume...no price progress. A decisive break, in heavier volume, below the fifty day moving average, could see the stock fall to new fifty two week lows and next support levels in the low to mid $60's. Protective stops should be placed around $72 to protect from major losses.

Full Disclosure: Hold Position

Thursday, June 26, 2014

Market Distribution Joins Growing List of Sell Signals

The market has rallied despite uncertainty surrounding Ukraine, Iraq, the economy, and upcoming earnings. Price action has been impressive, shaking out early in the day and closing higher or at the high's of the day on most days, but below average volume has been a major concern. Over the last two weeks, volume has expanded, still below average, but the market has failed to make much progress. Most of the higher volume days have either stalled or turned into a distribution day, higher volume selling. The lead index, the SP 500, has experienced four to five distribution days over the last three weeks, a major warning signal.

The NYSE advance/decline line continues to make new highs, but the fifty two week high low ratio has fallen despite the market trading at fifty two week highs...less stocks are participating in the upside. The VIX and bull bear ratios indicate extreme investor complacency, trading near bull market extremes. Interest rates have been falling and gold has been rising. A stealth attempt to rush to safety? 

Leading growth stocks have lagged the entire rally. They have shown signs of life on several occasions, but have failed to sustain any momentum. Value stocks have been the clear leaders and the market has behaved accordingly, choppy and difficult to make progress in. Early breakouts have either become over extended, exhibiting climactic action, or lack volume, with many failing to make much progress. Relative strength has failed to confirm many recent breakouts, and most are late stage, wild and loose consolidations.

Netflix's (NFLX) handle has been wedging along the lows. Pacira Pharmaceuticals (PCRX) is a wild and loose, late stage breakout in weak volume. Celgene (CELG) broke out of a v-shaped cup and handle but the relative strength line has not confirmed. Hi-Crush Partners (HCLP) is extended historically and in the midst of a potential climax run, up over 25% in a few weeks after a long advance. Bidu (BIDU) and FaceBook (FB) have attempted to breakout from wild and loose cup and handle bases, but failed to make much progress and the relative strength lines are lagging. Home builders, Toll Brothers (TOL), Lennar (LEN), and Standard Pacific (SPF), have attempted to build cup and handle bases, but the relative strength lines have lagged and the consolidation are wild and loose. Oil and Gas stocks have been the clear leaders, Sanchez Energy (SN) and Pioneer Natural Resources (PXD).

The divergence between market direction and sell signals has become "normal" stock market behavior over the last year and a half, during rallies for short periods of time. But when the convergence begins, traders and investors had little time to react. Hard earned profits vanished and quickly turned into losses if traders hesitated to protect profits and minimize losses. 

The market is in a perfect position to frustrate longs and shorts at the same time, slowly killing them from over trading, a death by a thousand cuts. Traders should be extremely selective with new positions and hold only well behaving positions. Without hesitation, protect profits in over extended positions, and book minor profits or minimize losses in lagging stocks. Better safe then sorry with all the sell signals.