Friday, March 06, 2015

Price Action Impressive Volume Not So Much

Market price action has been impressive by any respect. Despite persistent bad news from around the world, and numerous internal red flags, the NYSE advance decline line continues to trade near new highs, and the market marches higher almost unabated. Unfortunately, that's where the good news ends, as it has for the past few short lived rally attempts.

The Nasdaq advance decline line didn't confirm the rally, fell short of its November high, and hasn't confirmed any rally since March 2014. If the NYSE advance decline acted similarly, along with the fact that the Dow Jones Transportation Index has not confirmed any new Dow highs since the end of November, the probabilities of a bear market over a major market correction would increase dramatically.

Volume has not confirmed the rally. Over the last eight days, including today, Friday, the NASDAQ has registered four distribution type days, and the SP 500 and Dow Jones Industrial Averages, three apiece. And over the last four months, the majority of the highest volume days have been stalling or full blow distribution type days. Most of the up days have come on below average volume, and when the volume is higher, it is generally during stalling periods.

A narrow group of leading growth stocks have acted especially well. Breakouts were in above average volume, they followed through almost immediately in strong volume, and have held tight during recent market distribution. But many broke out of late stage bases and have exhibited climactic action. Many others are speculative stocks in biotech and semi conductors, running on take over speculation. It's never a good sign when the market has run out of quality stocks to buy and needs to rummage through the dustbin for "good" ideas.

Short trading ideas have started breaking down, especially in oil related names. Many more short trading ideas are tightening and others continue to quiet down. A market squeeze attempt over the next few days, in low volume, and little back tracking by recent breakdowns, would setup the ideal shorting scenario. In the meantime, a few short positions in stocks that have already tightened and are breaking down, should be taken.

There are two events on Monday that could trigger a sell the news reaction over the next few days. Apple (AAPL) is unveiling its smart watch. Expectations are high. And the ECB starts their QE bond buying program. Unlike when the FED announced US QE and the market initially reacted positively, only to sell off into the start of the bond buying program, the market has actually rallied into the bond buying program, instead of selling off.

This market has been difficult to navigate as an intermediate trend trader. Intermediate trends have been too short, lasting only two to four weeks on average, and unraveling within days, sometimes hours. The majority of trading setups fail to follow through, and sometimes round trip down to the stop, same day. The little, the winners that follow through move, barely covers, if lucky, the losses attempting to get into winning positions. 

Rough trading environments come and market years it feels like a decade. Traders that preserve their capital the most, will survive to enjoy the next big trend. Just don't be scared when the time comes.

Thursday, February 05, 2015

Rally Attempt In Trouble As Countless Major Red Flags Litter The Market

On the surface it could be said that the market appears bullish. Considering all the bad geopolitical news that keeps worsening with every news report, the market has barely budged to the downside and is sitting in a fairly tight range. But that is where all the good news ends.

Over almost the last two months, volume has been running well above average almost daily. The majority of those above average days have been distribution days. The few accumulation days that the market has mustered, volume never traded higher then the major distribution days, and over that time, the Nasdaq and SP 500 have registered 12 and 10 distribution days, respectively, verses four accumulation days, that were immediately undercut over the next few days.

The VIX, a measure of day to day volatility, has not fallen back as much as it did during the last few rally attempts, showing nervousness continues growing even as the market seems to hold up. Intra day volatility is completely out of control with the market ranging over 1 - 2% on many days. Not the type of action typically witnessed during strong rallies, and more indicative of growing uncertainty that generally precedes major corrections or bear markets.

Leading growth stocks are behaving poorly. Major market leaders, Chipotle Mexican Grill (CMG) and Gilead Sciences (GILD), are breaking down or falling apart, and Apple (AAPL), Biogen Idec (BIIB), and Facebook (FB), reported strong earnings but have struggled to make further progress while the market has pushed relentlessly higher for the past four days. Even shorter term trade setups are failing to make any progress, or at least enough to offset losses in losers. This is a strong indication that leading growth stocks should be avoided for the time being. They need quite some time to reset and tighten their consolidations before being considered for a longer term trade.

Short trading ideas are squeezing along with the market, but the majority have not fallen apart and continue to try and tighten up around low risk entry points. Short trading ideas need to be reviewed daily and considered for entry as they start to roll over, since the early movers tend to be the easiest to handle. And with the recent history this market has with rolling over suddenly and not looking back, the early birds really do get the worm.

Casino stocks, Wynn Resorts (WYNN) and Las Vegas Sand (LVS) have pulled back to their fifty day moving averages and getting closer to breaking down. Baidu (BIDU) and Autohome (ATHM) have ignored the market rally attempt and held tight in sideway consolidation within a downtrend. Ready to continue lower as the market rolls over or begins to stall.

Stay prepared and don't wait for too much confirmation. There's plenty of it already. Short trading ideas rolling over and following through will be the death of this latest rally attempt and potentially the start of the next leg of this correction.

Right now these are the facts on the ground. The few pieces of good news or big movers are over shadowed by the bad news and failing leading growth stocks. The market is clearly trying to paint the surface in gold to fool the most amount of traders and investors, but underneath the foundation is shaky looking for a reason to buckle. Keep stops tight if your long or risk major losses in positions with small losses or gains.

Wednesday, February 04, 2015

Gold and Miners Readying To Breakout Into ECB QE

Gold has been trading inversely to the US stock market for several weeks now, intra-day and daily. A weakening US dollar and anticipation of the ECB quantitative easing program starting, could prove bullish for gold over at least the next month or two. This would most likely coincide with a correction in the US stock market.

In, Gold Silver Ready To Follow Oil and Gas Collapse, I wrote that gold, silver, and related miners were ready to rollover. At the time, December 23, 2014, the commodity and related miners were consolidating in traditional short setups, but those fell up apart as quickly as I wrote the article. 

Instead of breaking down, they broke out over their respective fifty day moving averages and rallied nearer to their fifty two week highs over the last five to six weeks. 

The good news, the majority of the short setups would not have trapped traders into a trade, as the majority did not attempt to breakdown. Those that did attempt to breakdown, would have had tight stops and traders would have lost very little.

Currently, gold and related miners have been consolidating in cup and handle bases. Ideally, they will sell off/shake out, four to five percent more, over the next week or two, and setup a lower risk, higher probability trade. 

Since the market doesn't typically do what I like, the current entry would be a breakout above handle highs. Gold (GLD), Hecla Mining (HL), Rangold Resources (GOLD), Royal Gold (RGLD), Barrick Gold (ABX), and Newmont Minding (NEM), are forming cup and handle bases, with solid accumulation patterns and shook out under cut multi-year lows last year and early this year. Without the shakeout in the handle, the trade might be difficult to handle.

Tuesday, January 27, 2015

While Traders Play Investors Should Stay Away

The current rally in the indices is no different then any other rally we have seen over the past few months. Just as a correction starts to take hold and spooks everyone, the market manages to grip onto several pieces of good news and suddenly rally without much warning. But with every rally attempt, while the indices seem fine, the internals continue to deteriorate.

The ECB quantitative easing program was clearly the catalyst for the current rally as the market started to anticipate its announcement about a week before. Unfortunately, we have to ask ourselves how bad are things really that the ECB has to step in?

The hope from the ECB announcement on Wall and Main Street seems to be that the FED will possibly delay raising interest rates and even potentially reactivate QE. Of course this is not the case as the FED is intent, despite potentially deflationary reading in CPI and PPI over the next few months because of the plunge in oil and gas prices, to try and get ahead of any inflationary pressure or asset bubbles that could arise from such a prolonged period of low interest rates and enormous money printing. The FED will stay the course and start raising rates by the middle of the year, if not as early as March or April, to try and get ahead of the US election in 2016. The FED normally tries to avoid changes in monetary policy ahead of elections to try and appear neutral, and has only a limited window to do so before election season goes into full swing.

The VIX drops quickly with every rally attempt, but continues to make higher lows over the last few months. A strong indication that nervousness is building in the market, while complacency seems to set in real quick with every rally attempt. The buy the dip mentality is firmly in place and the perfect bull trap.

Leading growth stocks look awful. With every rally attempt, the number of stocks able to make any progress diminishes, with this one being particularly very narrow...under a dozen stocks, if that much. The majority of the good, trade able moves occurred in stocks that were reporting over the last two weeks and bouncing off bottoms, not breaking out to new highs, and most needed to be sold before the actual report. Otherwise there was almost no participation to the upside by the strongest stocks that managed to buck the previous pullback in the market. Any stocks that did manage to breakout did so in anemic volume, with little follow through, and diminishing volume as they climbed. The remainder of the consolidations are late stage, wide and loose bases with lagging relative strength.

Medical stocks have led the market for quite sometime but most seem to be asleep while handful are still making progress but are too over extended to chase. Actavis (ACT), Incyte (INCY), and Pharmacyclics (PCYC) broke out to new highs, but ACT and INCY breakouts were in anemic volume. Apple (AAPL) and Microsoft (MSFT) bounced nicely off their bottoms, but stalled around their fifty day moving averages. Apple reports tonight and could be a catalyst to lift the market for a day or two, but MSFT was down over 10% on its earning's report.

Short trading ideas worked very well at the beginning of January, but forced traders to cover them last week as the market turned. Most of the profits could have been booked quite easily by alert traders. The short trading ideas list is still littered with stocks that are pulling back to moving averages to digest previous sell offs and new setups are getting ready to rollover. Not the type of action that would be present if the market were truly getting ready to lift off on a big move.

3D systems (DDD), Gerdau S.A. (GGB), Ford Motor (F), and Juniper Networks (JNPR) are all rolling over near or at their fifty day moving averages, with plenty of others waiting in the wings.

I started to alert traders on Twitter and StockTwits Tuesday, January 20th, that short positions needed to be tightened up to protect profits and minimize losses in new positions, and that several large capitalization technology and medical stocks could run into their earning's reports. Which is exactly what has occurred. At this point, many of these stocks should have been sold before their actual earning's reports, and many others are now starting to trigger tighter stops reducing long exposure to the market.

Traders can continue to hold the few stocks that are acting well still moving into their earning's reports, but should continue to trail a tight stop to protect profits and minimize losses on new positions. Traders should not initiate any new positions on the long side as recent setups have gotten wilder, failing to follow through, triggering tight stops very quickly, and are now lagging a strong move by the indices. A recipe that has been deadly over the past few months for anyone over staying their welcome. Continue to monitor the short trading ideas list for entries too.

We've entered the period where late traders are at risk of being chopped to death while the market, once again, begins to setup another pullback that should turn into a major correction. This has been the theme for the last few months and many hecklers point out how wrong it has been. But, even the buy and hold crowd has not made any progress over the last few months, and would be better served on a long vacation until the market manages a major correction. The easy money has been made, and now the market is in the hands of the traders. So while the traders play, investors should stay away.

Wednesday, January 07, 2015

Why Today's Rally Is Nothing More Then A Short Squeeze

After suffering four to six straight distribution days, slicing through their fifty day moving averages in above average volume, and getting a bit over extended, the Nasdaq, SP 500, and DOW, naturally needed to consolidate their losses. Heading into the close, all three indices were trading up over one percent, but volume has been drying up as the day has progressed.

The VIX spiked over fifty percent during the sell off and continued its pattern of higher lows even as the market made new highs. A clear sign that while the markets were luring traders into complacency, anxiety has been slowly rising, and spiking with every pulback, despite the markets ability to make new highs, quickly, after every pullback.

The short trading ideas list is littered with strong downside follow through and new setups tightening as the market squeezes. Nimble traders who started shorting as short setups started to rollover last Friday and over the last two days, are sitting on comfortable profits even after today's short squeeze. It is hard to find a single short setups from Friday or Monday that has fallen apart or is currently threatening to fall apart. The majority are tightening to resume their downtrends once market selling pressure resumes.

Activision Blizzard (ATVI), Terex (TEX), and Priceline (PCLN) continue to follow through to the downisde, while stocks like Advance Micro Devices (AMD), Waddell & Reed (WDR), and Mattel (MAT), are holding tight near their respective fifty day moving averages ready to rollover.

Leading growth stocks continue to behave poorly. There are almost no long term setups, and the few short term setups that were available can't follow through and are stalling even as the market pushes higher during the day. Outside of a few stocks that could run into earnings, the long side needs to be avoided until there is at least some evidence that leading growth stocks are resisting downside market pressure and nearing breakouts on reversal days. None of this is happening in today's short squeeze.

Apple (AAPL), Baidu (BIDU), and Ali Baba (BABA), held up strongly yesterday and attempted to follow through at the open along with the market. But as the day has progressed, all three stocks have started to stall, even as the market continues to push into new intra-day highs.

Without any solid longer term setups, poor follow through by shorter term setups, weak volume on today's rally attempt, and short positions holding recent gains, the probability of a sustained rally is almost zero. The indices may continue to squeeze to their short term, ten and twenty day moving averages, but be on alert for stalling action as they do.

Traders should use any rally attempt to initiate new short positions or add on to existing short positions. Any long positions that might remain in a traders portfolio that is not reacting to today's rally attempt, should be sold.

Monday, January 05, 2015

Fifth Straight Distribution Day Kills Rally Attempt

Going into Christmas, Santa delivered a rally, but not anything you wanted under the Christmas tree. Outside of the huge rally day on December 17th, the first day of the rally attempt, volume dried up, and the market began to stall as it approached new highs. 

Over the past five days the Nasdaq has suffered five straight distribution days, including today, the SP 500 is working on its third straight distribution day, and the Dow Jones Industrial Average, the first to signal trouble ahead, has suffered five distribution days in the last six trading sessions.

Four to five distribution days in a two to three week time frame is enough to kill any rally attempt. But a cluster of distribution in a weeks time is a clear signal for investors and traders to clear out of the long side and consider shorting the weakest stocks in the market.

Leading growth stocks initially bounced and moved past their moving averages, but in anemic volume, and price performance lagged on a daily basis going into the end of the year, even as the market tried to push higher. Stocks like Apple (AAPL), Baidu (BIDU), and Ali Baba (BABA), appeared ready to run into their earning's reports after clearing or bouncing off their fifty day moving averages, but stalled almost immediately and started to drag the market lower daily, finally slicing back through their fifty day moving averages. The majority of other leading growth stocks barely reacted and lagged during the entire rally attempt. 
Not the type of action traders are looking for during a strong rally. 
Short trading ideas did a nice job tightening up into year end and began rolling over from their moving averages on Friday. Alert traders could have started initiating positions, and adding additional positions this morning on new setups. Foregin banks, UBS AG (OUBS), Credit Suisse Group (CS), and Deutsche Bank (DB), by far the weakest group, were the first to roll over. Continue to keep an eye on the gold (GLD) and silver (SLV) miners (DUST), as that trade is not completely dead yet. High end retailers Michael Kors (KORS) and Coach (COH) have also rolled over at key moving averages. Review the short trading ideas list for additional setups over the next few days.

Writing in my daily journal the same two statements on a daily basis, leading growth stocks lagging again and new setups trapping bulls in and triggering tight stop losses daily, most of the time in the same day, forced me to cash on December 31st, once several of my tighter stops to protect profits and control losses began to trigger. This is similar action we have experienced over the last few rally attempts where the market starts to kill traders by a death of a thousand cuts before rolling over into a new correction attempt.

Those who follow me on Twitter, StockTwits, SeekingAlpha, or LinkedIn, were alerted with the following post on December 31st: "Cash is the best position going into the New Year. Leading growth stocks behaving poorly."

Traders should be clearly out of any long positions, and investors can probably pack up their bags for a little while. In fact, long term investors could have spent the past few months on vacation.

The market may still attempt to rally into earning's season, but any attempt will most likely be lead by a narrow group of growth stocks that are expected to deliver strong earnings. The remainder of leading growth stocks are going to need several weeks, if not months, to consolidate and digest the two year, almost unabated, bull run.

Sunday, December 28, 2014

After A Choppy Year What To Expect Next

All year long, every time the market threatened to enter its first prolonged, deep correction, the market would stop on a dime, reverse, and run relentlessly back into new highs. Barely pausing to allow traders back into the market. And each time the market would make it back to new highs, leading growth stocks would start to stall and warn of another looming correction weeks before the market would actually rollover. Chopping hesitant traders to death. 

Smart traders protected their portfolios rather then try and hold on in hopes of more upside after a prolonged bull run, and more and more bull market leadership climaxing, topping out, and failing to follow through to new highs with each successive high by the market.

So here we are at the end of the year, in the same place we have found ourselves so many times this year. The market rolled over at the beginning of December after several more bull market leading growth stocks climaxed and rolled over to slice their fifty day moving averages, only to reverse on December 17th, in massive volume, and run back to new highs within six days.

Once again, leading growth stocks that climaxed in the previous market move to new highs, have failed to follow the market higher, while a much narrower group of stocks, that have not crashed through their fifty day moving averages, stand ready to climax with this move back to new highs. The majority of these stocks are rising out of late stage, wide and loose consolidations, with lagging relative strength. And the the longer these stocks sit around in consolidations without breaking out to new highs, the more likely any breakout attempt will be a bull trap and fail, rather then follow through aggressively to new highs. A major red flag for the prolonged health of this leg of the bull market.

Shorting has not been any easier, except for in the commodities sectors. Oil, gas, gold, and silver related stocks have had several sustained down trends that nimble traders could have taken advantage of. The short trading ideas list, updated almost every week, has included dozens of these stocks throughout the year.

At this point, traders that reacted quickly with the last blog entry, Is a Christmas Rally Around The Corner, covered their short positions and avoided painful squeezes in the majority of these stocks, and are positioned long. 

If not, as stated earlier, there are still some interesting trading setups in the leading growth stocks analysis list that have the potential to make big moves going into earnings or while the market is able to hold up. But keep in mind, the list is extremely narrow, and the few that have moved with the market have barely kept pace with rapid advance by the market since the December 17th bottom.

With all the major indices at or near all time highs, it would not be surprising if the bull market pushed ahead for another few weeks into earning's season. But with all the red flags that have existed for the past few months ever present, the market is clearly in a topping process that is taking longer then most traders and investors are used to. Traders should be on the lookout for further lagging action to aggressively tighten stops to protect profits and minimize losses on lagging positions.

Apple (AAPL) and Baidu (BIDU) are bouncing off their fifty day moving averages, Ali Baba (BABA) and Actavis (ACT) are attempting to bounce off their fifty day moving averages, Avago Techonologies (AVGO) has pulled back to the twenty day moving average and is three weeks tight,  and Illumina (ILMN) is setup in a flat base on top of cup and double bottom handle.

The short side, except for a few stocks, needs time to tighten up after the major squeezes many of these stocks experienced recently. Until there is more distribution in the market, traders would be prudent to thread lightly on the short side.

Going into 2015 it is hard to predict a bear market is around the corner. The market rarely ever falls into a bear market without at least another major rally attempt to new highs. 

With the third year of the presidential cycle historically bullish, it would not be surprising if the market fell into a multi-month, major correction, as we approach the Yellen "couple of meeting's" tightening schedule she alluded to at the last FED press conference (February or March). But the markets have historically only reacted negatively short term term as the FED begins its tightening cycle and continued to advance higher until the FED has raised rates at least several times.

In conclusion, based on historical precedents of the presidential cycle and FED tightening, I'm expecting the market to finish this rally at some point early next year and fall into a minimum of a 12 - 15% corrrection, to as much as 20% on forced liquidations. Resume the bull market for the remainder of 2015 and possibly 2016, at which point FED tightening and the Presidential race will take their toll on the market. With the Nasdaq so close to all time highs at 5,132.52, I would not be surprised if the market achieved this level before a bear market begins.

Of course the facts can change over that period and we will adjust our expectation accordingly. For now, we can only trade based on the facts that are currently present in front of us. 

Good luck and happy new year if this turns out to be the last market update of the year.

Tuesday, December 23, 2014

Gold Silver Ready To Follow Oil and Gas Collapse

There are many reasons gold, silver, and other commodities should be rallying. Two main ones are, geopolitical turmoil (flight to safety) and worldwide quantitative easing (fear of inflation) which seems to have no end. Yet, oil collapsed over 40%, natural gas 30%, gasoline 35% in the last three months, and now precious metals such as gold, silver, copper, platinum, and related miners, are setup in bearish patterns ready to rollover.

So why is this happening? Inflation, which should have reared its ugly head by now after a massive amount of quantitative easing by the FED, additional quantitative easing by the Bank of Japan and China, and hints that the European Central Bank is about to embark on their own version of quantitative easing, has not shown up in official government data. In fact, central banks around the world are nervous about deflation. Though if you ask the average consumer, they will tell you they have felt the affects of inflation over the last few years in their day to day purchases.

The strong rally in the dollar has had the effect of lowering import prices and falling oil prices have been able to offset price increases in day to day purchases, and the FED has indicated barring a sudden collapse of the economy, interest rates will start heading higher early in 2015. Putting additional upside pressure on the dollar and downside pressure on commodities.

Central banks around the world have been selling their commodities to finance their accumulated debts and war machines, to shore up their militarys in an uncertain geopolitical climate.

Oil and oil related stocks were perfect shorts over the last three months. Many rolled over 30% or more in a very short period of time, and could fall further after a period of consolidation. 

Gold, silver, and their related miners, have spent the past few weeks consolidating into their respective fifty day moving averages, and are now starting to rollover.

One way to play the potential sell off in commodities is to short the miners. Newmont Mining (NEM), Silver Wheaton (SLW), and Anglogold Ashanti (AU), are threatening all time lows and major support areas. 

Another way is to short ETFs like the Spider's Gold (GLD) and Silver Trusts (SLV). Or for the most aggressive traders, buy the 3x short ETFs and ETNs, Direxion Daily Gold Miners Bear 3x (DUST), VelocityShares Inverse 3x Silver ETN (DSLV), or VelocityShares 3x Inverse Gold ETN (DGLD). These are highly volatile instruments and traders be fully away of the risks before trading them.

For more short trading ideas, review the short trading ideas list (click).

Wednesday, December 17, 2014

Is a Christmas Market Rally Around The Corner?

The market has taken quite a beating over the last two weeks. The Nasdaq and SP 500 sold off over five percent, in heavy, above average volume, and sliced through their respective fifty day moving averages, but have all become historically over extended to the downside. While markets can stay extended for quite sometime, in the near term, they will attempt to at least bounce to work off the over extended position.

Leading growth stocks sold off, but not as hard as would be expected. While stocks like Tesla Motors (TSLA), Priceline Group (PCLN), and Qihoo 360 (QIHU) have potentially broken down for good, others like Alibaba  (BABA), Facebook (FB), and Apple (AAPL), have pulled back to moving averages in an orderly fashion. Very few leading growth stocks exhibit the type of patterns associated with major market moves, but several are in position to benefit from a market dead cat bounce.

Short trading ideas rolled over in spectacular fashion, especially stocks in the Casino and Oil/Gas and related sectors. Wynn Resorts (WYNN), Las Vegas Sands (LVS), First Solar (FSLR), Gulfport Energy (GPOR), Fluor (FLR), Peabody Energy (BTU), and Yandex (YNDX), dropped twenty percent or more. Any new short setups are lagging and should be avoided until the market is able to squeeze higher for at least a few days.

All the elements are in place for a Christmas rally. The market and short trading ideas are over extended, and there are few leading stocks that have held up well over the last week despite heavy market selling.

Traders should consider profit taking on extended short positions or at a minimum tighten their stops to protect their profits, and definitely cover any stocks that have not followed through or showing a loss. Aggressive traders could take a position or two on the long side for a potential dead cat bounce over the next few days into the end of the year. Otherwise cash is not a bad position until the market shows some more strength.

Wednesday, December 03, 2014

Stalling Heavy Distribution Low Volume Confirming Other Major Red Flags

While the indices seem to be on a relentless march higher, the underlying technical picture has been deteriorating over the last three weeks. The SP 600, which has led the market lower on several occasions this year, failed to make new highs along with the other major indices and has suffered five distribution type days over the last thirteen days. The DOW and SP 500 have suffered three distribution type days over the last five days. The Nasdaq, the leading index, has suffered four distribution type days over the last four weeks.While these counts may not sound high, volume has been drying up significantly on recovery days, and picking up strongly on stalling and heavy selling days.

Leading growth stocks have acted awful over the last three to four weeks. The majority of the early leaders off the October 15th bottom have stalled and are starting to fail. Most broke out of late stage, wide and loose bases, which are more prone to failure, and staged what appear to be climactic runs. Recent breakout attempts are out of late stage, v-shaped bases with no volume confirmation and fail to follow through for more then a few days before rolling back into their bases.

Semiconductor stocks, NXP Seminconductors (NXPI) and Avago Technologies (AVGO), broke out of late stage, v-shaped bases, in volume well below average. Chinese stocks, and bull market leaders, Vipshop Holdings (VIPS) and Bitauto (BITA), are failing out of late stage, wide and loose bases. Facebook (FB) and Gilead Sciences (GILD) have failed out of last stage bases. Even Apple (AAPL), the clear leader off the October 15th bottom, has seen volume diminish into new highs with heavy selling creeping in.

Short trading ideas on the other hand have been able to follow through to the downside but not without significant shakeouts first. The majority have been difficult to handle and most likely stopped traders out before following through to the downside. Many are now using the indecisive market action to once again tighten up into moving averages for another breakdown attempt over the next few days and weeks. Almost none have fallen apart. A strong sign of a looming correction.

Commodity related stocks, Diamondback Energy (FANG), Gulfport Energy (GPOR), Chicago Bridge and Iron (CBI), Newmont Mining (NEM), and SolarCity (SCTY), have been the weakest with many commodities approaching and breaking multi year lows. Even tech related stocks Priceline (PCLN) and 3D Systems (DDD) are forming or following through on bearish head and shoulder patterns.

With almost no solid, low risk, long or short setups, the last few weeks have been a good time for traders to be minimally invested or even in cash. Aggressive traders should only be holding long stocks marching straight up with very tight stops or a few short positions that have slowly rolled over without a shakeout. 

The topping practice can take a few weeks as we've seen in past rollovers this year, rewarding patient traders and chopping to death overly active traders. Avoid the long side at all costs and continue to monitor short trading ideas for new setups.

Tuesday, November 11, 2014

Frothy Market Action Masks Major Warning Signs

The Nasdaq and the SP 500 have staged another impressive rally, just as they seemed to be on the verge of an overdue, prolonged, major correction. They are up over 10% in the last four weeks, distribution is low, bad news is ignored, good news is cheered, and volume, in general, has been above average. But, the underlying technicals have been deteriorating. 

The Nasdaq Advance Decline line is still in a major downtrend downtrend even as the Nasdaq continue to make new fifty two week highs, and volume has been drying up over the last few days as the market makes new and all time highs, a major sign of declining participation.

The NYSE, small/mid cap, European, and all of the Asian indices, except for China, have not been able to rally near new highs, and the Russian Stock Market is teetering on the verge of collapse. Stalling in an area where distribution would be expected to set up the next major leg down.

The VIX contracted quickly, but still maintains its uptrend since July, showing complacency sets in too quickly and nervousness is increasing with each additional rally attempt.

Value is outperforming growth, which initially led the market off the bottom, and long term interest rates are stalling at their respective fifty day moving averages and appear ready to roll over again, indicating a flight to safety. Interestingly, Gold (GLD) and Silver (SLV) are in free fall.

Leading growth stocks(click to review) have behaved extremely well since the market bottomed on October 15th. Breakouts have occurred almost daily, in heavy volume, and follow through strongly, in above average volume. But once again, just focusing on the surface is deceiving. 

While a strong follow through after a breakout is exciting, a strong follow through out of a late stage base could be a sign of climactic action, and nearly all of the early breakouts that followed through strongly, are out of late stage, wide and loose bases. 

More recently, a strong majority of the early breakouts have failed to follow through any further along with the market and volume has been deteriorating as just a handful of stocks continue to make further progress. Intraday volatility is extremely high, making handling positions much more difficult. An indication of potential exhaustion and waning participation.

Recent breakouts have failed quickly or failed to follow through, and have continued to come out of late stage, wide and loose, v-shaped bases, with lagging relative strength. To make matter's worse, a few bull market leaders imploded on earning's reports, Netflix (NFLX) and Salix Pharmaceuticals (SLXP). Biotech stocks, Gilead Sciences (GILD), Pacira Pharmaceuticals (PCRX), and Biogen (BIIB), one of the strongest groups in the market, have been stalling or breaking down. Even Apple (AAPL) has run out steam.

Short trading ideas(click to review) are almost completed with their setups. A majority could use the rest of this week and maybe next to tighten up before breaking down. Few sets up have fallen apart despite an impressive 10% run by the market, as institutions take advantage of market strength to distribute the weakest and strongest stocks in the market. Aggressive traders could consider a short or two, but patience may pay off in most other short setups.

Oil and gas stocks continue to act sloppy and drag down all related groups including the Solars. First Solar (FSLR) is breaking down and Sun Power (SPWR) is on the verge of joining. Gilead Sciences (GILD), Biogen (BIIB), and Facebook (FB), on the leading growth stocks analysis(click to review) list, appear to be setting up late stage base failure entries. Review the updated short trading ideas (click to review) list for more potential entries over the next few weeks. 

If most of this sounds familiar, it is. Almost every rally since 2013 has played out this way. Indices act strong while leading growth stocks drift lower, not appearing to suffer any damage with a few acting strongly, the "distractor" stocks, creating a mirage that everything is okay, when it is not. Within a few weeks the market rolls over into another pullback or correction, wiping out recent gains in a matter of days, if not hours, but before that, traders get ground up as the market tops.

It is a bad sign when leading growth stocks are consolidating, even tightly, while the market is essentially screaming higher. It is a sign of distribution, weakness, not accumulation, strength. This type of action leads to a market that rolls over and punishes traders that over stayed their welcome  and/or increased leverage, in fear of missing a big move.

Traders should clearly be out of any losing or lagging position, and extremely tight on stocks exhibiting climactic action. There are few breakouts in this rally that are out of first or second stage bases. 

There is little reason to give back hard earned profits in over extended positions, give back gains in lagging positions, and/or suffer greater losses in losing positions.

Wednesday, October 29, 2014

Will FED Extinguish Rally It Ignited

The market bottomed and has not looked back since October 16th, when St. Louis Fed President James Bullard, a non voting member, said the Fed should consider delaying the end of it Quantitative Easing Program. With the mid term elections so close and the economy not nearing a recession, this is wishful thinking. The Fed will end QE today as expected. The question is how will the market react over the next few days, not hours.

Price volume has been almost perfect with no distribution and several add on follow through days. Unfortunately, that is where the good news ends. 

The market has been extremely extended over the last few days, the VIX, a measure of day to day volatility, has contracted quickly, but is still making higher lows, and neither the NASDAQ or NYSE advance decline lines are nearing new highs, indicating a major contraction in the number of stocks participating in such a powerful price move by the indices, and increasing the odds of this rally being nothing more then another bull trap.

Leading growth stocks, that got out of the gate early as the market reversed two weeks ago, have behaved well and followed through in strong volume. Unfortunately, many of the breakouts are out of later stage bases and appear to be in the midst of their climax runs. Lannett (LCI), Apple (AAPL), Regeneron Pharmaceuticals (REGN), and Ilumina (ILMN), gapped out of later stage cup and handle bases, in heavy volume.

New setups are now lagging the market, as recent breakout attempts out of these new setups have been failing more often and are becoming extremely volatile, making them difficult to handle. Baidu (BIDU),  Phillips 66 Partners (PSXP), and Cousins Properties (CUZ) are setup ahead of tonight's earning's reports.

Stocks should not be consolidating while the market is charging higher in heavier volume. It is a sign of short term weakness and are prone to heavy selling during even a minor pullback. These setups must first prove they can withstand a minor market shakeout before being considered on a breakout attempt.

Short trading ideas should have been long covered. I warned traders on Tuesday, October 14th in, Now That The Correction Is In Full Swing What To Expect Next:

"With the market and most short trading ideas over extended, short traders cannot get too complacent. Traders need to start reducing recent positions that have failed to follow through and tightening stops on positions with significant profits. While it may be tempting to ride through the first market test of the fifty day moving average, it could be extremely painful, especially if the market doesn't stop and attempts to test new highs."

And tweeted the morning of October 15th: 

"Consider taking profits in short positions or at a minimum tightening stop significantly. Consider a long or two."

With so few short setups, they are probably best avoided for the next few days while the market digests recent gains. Continue to track them as most are digesting the recent selling in a very orderly fashion and could be setting up for another round of breakdowns in the next few weeks. Avon Products (AVP) and Peabody Energy (BTU) appear ready to roll over at their respective twenty day moving averages.

All signs point to the rally being another short lived rally within this latter part of the the bull market, in which a handful of leading growth stocks make progress and climax, while the rest stall and roll back over. Rewarding early longs and frustrating everyone else jumping on the bandwagon.

There is no reason to be 100% in cash. Traders should be holding a few strong long positions, and tightening stops on the rest. Only very aggressive traders should consider being heavily margined at this juncture. 

Tuesday, October 14, 2014

Now That The Correction Is In Full Swing What To Expect Next

After warning for weeks, and several attempts over the last year, the market is finally in its first real correction since 2012. Any attempt to rally or reverse intra-day losses, has been quickly met with more selling the very next day or closes near the lows of the day. 

Volume has clearly favored the downside and the NYSE and NASDAQ advance declines lines are leading their respective markets to new lows. But, the market is now getting over extended, and based on historical studies, closer to a multi-week rally attempt to test the their respective fifty day moving averages before resuming the downtrend. Ideally, the NASDAQ will test the 3,900 - 4,000 range to shakeout enough investors and setup the last major leg of the bull market.

The majority of leading growth stocks have suffered significant damage over the last couple of weeks, but not to the extent they couldn't repair themselves over the next few weeks or months. Biotech's, Celgene (CELG), Gilead Sciences (GILD), and Biogen Idec (BIIB), and semiconductor stocks, Avago (AVGO) and Skyworks Solutions (SWKS), which appeared to be weathering the correction so well, succumbed to heavy selling over the last few days.

As the correction progresses, not all leading growth stocks will follow the market lower. Some will tighten, finish up consolidations, and be ready to breakout before the market bottoms. Apple (AAPL) has been forming a flat base ahead of its Ipad Event Thursday, October 16th, and earning's report Monday, October 20th. Medivation (MDVN) has been pulling pack to the fifty day moving average in low volume, digesting a 30% gain since breaking out of a first stage cup and handle base on August 7th, in volume 350% above average. The stock was a featured trading idea on July 28th, Biotech Company Ready To Explode on Earnings. EPAM Systems (EPAM) has formed a second stage cup and handle base.

Short trading ideas have performed exceptionally well, breaking down and following through, but are now over extended from proper entry points. While the original group of stocks have followed through, recent setups have not been as profitable, trading wildly. While new setups appear tempting, most are now considered to be lagging the market and much more prone to failure. Gulfport Energy (GPOR), Pentair  (PNR), Covance (CVD), and UBS AG (UBS) continue lower.

With the market and most short trading ideas over extended, short traders cannot get too complacent. Traders need to start reducing recent positions that have failed to follow through and tightening stops on positions with significant profits. While it may be tempting to ride through the first market test of the fifty day moving average, it could be extremely painful, especially if the market doesn't stop and attempts to test new highs. If the market correction is going to deepen after the test of the fifty day moving average, most current positions will offer better short entry opportunities.

Friday, October 10, 2014

Apple Flat Base Ready To Breakout Ahead of Earnings

Apple (AAPL) has spent the last six weeks forming a tight, second stage flat base along its fifty day moving average, despite the market's correction and ahead of its October 20th earning's report, with its relative strength line leading into new high ground. The stock advanced 38% since gapping out of a deep, first stage cup and handle base April 24th, in volume 190% heavier then its fifty day average, on a strong earning's report.

The stock can be bought anywhere between the upper trend line of the consolidation around $102, all the way up to the flat base high of around $105. Protective stops should be place at the consolidation low of around $97.50, and tightened up if the stock fails to make progress.

Full Disclosure: No Position

Wednesday, October 08, 2014

Largest Price Swings Occur During Corrections

The market gapped down Wednesday but found support at last week's correction lows and started to rally around 11:15 am. Volume was running heavy to the downside in the morning and accelerated as the market exploded higher after the FED minutes were released at 2:00 pm. By the close, all three major indices were up over 1.5% in the second heaviest trade since the end of June. If all three indices had not taken out last week's correction  lows earlier in the day, today would've have been considered a fifth day follow through.

The FED knows that any hint of an accelerated time table for raising rates would spook the markets and would lead to an irrational downside reaction. So they will try, for as long as possible, to keep the bears at bay, even though their time tables have not changed.

China has continued its strong uptrend, but the rest of the world, especially Europe, have continued their corrections, and need time to digest recent losses before firming up for a rally, which could take weeks with further downside.

The VIX marked new correction highs but reversed significantly as the market rallied. The NYSE and NASDAQ advance decline lines and the fifty two week high low ratio marked new lows for the correction and barely bounced with the strong afternoon rally.

Keep an eye on interest rates, they are near recent support levels. If these levels hold, there could be a significant spike in interest rates over the next few weeks despite the FED's apparent dovish stance, which could put further pressure on the stock market. 

Leading growth stocks still need time to setup. There are very few stocks that are ready to breakout, and most are from late stage consolidations, but in strong industry groups. Biotech stocks Gilead Sciences (GILD) and Celgene (CELG) are ready to breakout of flat bases, and Medivation (MDVN) and United Therapeutics (UTHR) are bouncing off their respective twenty day moving averages.

Short trading ideas squeezed along with the market, but most did not experience any unusual trading activities associated with a bottom. Recent breakdowns 3D Systems (DDD), UBS AG (UBS), and Avon Products (AVP) held up well and digested their recent gains.

The market was over-extended at the lows of the day and bulls took solace in its ability to hold support, a continued dovish stance by the FED, and a lack of bad news. As impressive as the day appeared, traders have to keep in mind that the biggest percent moves tend to occur during corrections and are nothing to get excited about initially.

There's little reason to cover most short positions or rush into long positions, but traders need to keep an eye on the action over the next few days to decide how tight to tighten stops to protect profits. The market may follow through today's gains as earning's season gets underway, but it will be important to see if volume continues to confirm the move or the market begins to stall around moving averages. Stay patient and do not panic.

Monday, October 06, 2014

Market Rally Attempt Nothing More Then A Mirage

The indices have swung wildly from day to day over the last two weeks. Each time the market sells off, it seems to get bought back up just as strongly. This is unusual action for a rally, but not for a correction. Most of the biggest up and down days in market history have been during corrections. But the one constant, volume, has never confirmed the strong up days. As we've experience over the last three months, volume continues to trade higher on down days, and lower on strong up days.

Outside of a handful of speculative names, GoPro (GPRO), Palo Alto Networks (PANW), Vimicro International (VIMC), and Mobileye (MBLY), the bulk of leading growth stocks remain in consolidations and need at least a few more weeks to complete. The few stocks that are ready to breakout, tend to be sloppier, later stage consolidations, with lagging relative strength.

Short trading ideas have continued to follow through and have been quietly digesting their recent gains during the last three days. Most are extended from low risk entry points, but could provide some quick trading opportunities over the next day or two as the market squeeze runs its course.

The market is indicating further downside, even though another rally attempt is to be expected as we approach the official start of earning's season. Markets rarely sell off straight down without a one to two week, or more, rally attempt after the initial sell off from the top. Short traders need to be patient with their positions and prepared to start tightening stops to protect profits with the next wave of selling.

Monday, September 29, 2014

Bulls Hold On To Hope When They Should Fear

Bulls continue to hope this market will not correct and continue to rally. They point to the few positives in the market as a sign of strength and ignore the growing list of red flags that are signalling a deepening correction. Sure the market has ignored the growing number of geopolitical conflicts, but have they really?

Since the beginning of July when the market ended its last strong rally, distribution, stalling, and churning, have increased dramatically. Rally days and weeks have come on anemic, below average trading, and when volume has spiked to above average levels, rarely was it ever higher then the preceding down days.

The NYSE advance decline line lagged the most recent rally into new highs, and the NASDAQ advance decline line never even came close to new highs. Both advance decline lines have been on a steady decline into new lows despite several strong price days in the market.

Volatility has increased significantly over the last few days with no end in sight. Despite several rally attempts, the VIX has been on a steady uptrend for several months. While some consider this a sign of capitulation, price has not confirmed. Capitulation occurs after several weeks of selling and a steady decline in volatility as a new rally is attempted.

Leading growth stocks have completely ignored any strength in the market. The majority have sliced through their fifty day moving averages in heavy volume, recent breakouts have failed, and the one's that can be characterized as holding up, are wide and loose. Few are in bearish formations indicating a major bear market is around the corner, but that takes months to take shape. There are a few stocks that continue to defy the heavy market distribution, but I call those distractor stocks that give bulls hope to hold on. GoPro (GPRO), a recent hot IPO, continues to make new highs in heavy volume.

Short trading ideas have started to break down, but have been tough to hold during the recent increase in volatility. Traders need to stay patient with these positions as few have given any reason to panic or triggered protective stops. Many new setups continue to tighten within consolidations and secondary entry points. 3D Systems (DDD), Pentair (PNR), Gulfport Energy (GPOR), Covance (CVD), Avon Products (AVP), and Arch Coal (ACI), are following through on recent breakdowns off their respective fifty day moving averages.

There is no indication of impending bear market, but a major correction is clearly in the cards. Long only traders should be in cash and looking for a place to vacation, but not forget to keep up with their research, just in case. Aggressive traders should be holding several short positions looking to add or initiate additional positions.

Full Disclosure: Positions in DDD, PNR, GPOR, CVD, AVP

Friday, September 26, 2014

Industrial Manufacturing Company on Verge of Another Breakdown - Pentair $PNR

Pentair (PNR) broke down from a bearish head and shoulder pattern, July 31, 2014, on a poor earning's report. The company missed both sales and earning's estimate and guided lower. Since then, the stock has attempted to rally back to the fifty day moving average and head and shoulder neckline two times, but both attempts were in low volume.

Accelerating margins over the last four quarters are about the only thing good going for the coming, but revenue misses have led to decelerating earnings growth. Ruining the potential of accelerating margins. The company has missed analysts estimates for two straight quarters and estimates have been coming down significantly ever since. Three year sales growth is expected to decelerate from 35% to 1% and earnings growth is expected to stay steady at around 16%, but decelerate over at least another quarter to 9% from 83% three quarters ago.

The stock can be shorted as it breaks below the recent range between $66.00 and $66.25 with a tight stop just above recent highs around $67.30.

Full Disclosure: Hold Position

Tuesday, September 23, 2014

Chinese Discount Retailer Could Defy Market Downtrend - Vipshop Holdings $VIPS

Vipshop Holdings (VIPS) has been one of the market's biggest winners, advancing almost 3,500%, since breaking out of it first stage, cup shaped based the week of September 21, 2012. Since topping the week of August 15, 2014, the stock has pulled back to the fifty day moving average, closing tight over the last three weeks along the fifty day moving average with a high volume positive reversal last week. The current consolidation is a later stage base and carries a higher risk of failure. But, despite the market's three day sell off, the stock has held up quite well, rallying over four percent in higher volume today.

From a fundamental perspective there is very little to dislike. Margins have improved from -1.4% to 3.5% over the last seven quarters and return on equity is a solid 40% and rising. The company has beaten analyst's estimates over the last four quarters by 23.8%, 19.5%, 31.3%, and 12.5%, respectively, and analyst continue to raise quarterly and annual estimates. Sales and earnings are expected to grow by 65% and 105% over the next three years, respectively, after growing well over 200% over the previous three years.

Based on current valuations and expected growth rates, the stock could trade up to $300 by the end of the year, and more then double to $500 over the next twelve to eighteen months. Traders should consider entering the stock as it breaks out above the current downtrend line around $211. Protective stops should be placed at $195 initially, and tightened as the stock follows through. Keep in mind, the late stage nature of the base and current market correction could throw cold water on any breakout attempt.

Full Disclosure: No Current Position

The Greatest Trick The "Bear" Ever Pulled Was Convincing The "Markets" It Didn't Exist

The market sold off for a second straight day yesterday after marking new highs last Thursday, but volume was lower. This was little consolation as comparisons to Friday's quadruple witching volume were difficult and volume was still higher then almost every other up day during the rally except for one, continuing the trend of higher volume down days and lower volume rally days. Even though the day wouldn't officially be considered a distribution day, over the last twenty trading days the Nasdaq, SP 500, and Dow, have registered six, eight, and seven distribution or stalling/churning days, respectively.

The NYSE and NASDAQ advance decline lines failed to confirm the indices new highs and have been leading them lower. While the NYSE advance decline line did manage to make new highs during the rally, the NASDAQ advance decline line did not, and is on the verge of confirming a second leg down. 

The small cap indices which led the market lower during the last correction, failed to follow the larger cap indices into new high ground during the recent rally, and are now rolling over near their fifty and two hundred day moving averages for a second leg lower.

The majority of leading growth stocks lagged during the rally and are now breaking down below their fifty day moving averages in above average volume. It is very important to keep in mind that leading growth stocks should not be holding tight or bouncing off their longer term moving averages while the market rallies higher. Even though it seems constructive, it is not and a sign of underlying distribution. Baidu (BIDU), Netflix (NFLX), Tesla Motors (TSLA), and Under Armour (UA) are all starting to break their fifty day moving averages and falling below recent pivot points in above average volume.

Recent short trading ideas 3D Systems (DDD) and Gulfport Energy (GPOR) rolled over at their fifty day moving averages, while Altisource Portfolio Solutions (ASPS) continues to consolidate around its fifty day moving average. Even Yahoo (YHOO), as expected, sold off hard after the Ali Baba (BABA) IPO opened for trading. Review the updated list of short trading ideas to prepare for further downside.

The Capitalist Bull has warned over the last few weeks that traders need to protect their profits and cut out all lagging, especially losing, positions. The market's move into new high ground was the final bull trap frustrating the bears and keeping the bulls complacent. By now, most traders should be in cash with a short position or two as the trend turns lower and a correction takes hold. Few stocks are worth holding through a correction. The only stocks a trader should consider holding through a correction are those that were bought out of first or second stage consolidations and have signifcant gains that can withstand a correction. 

Expect the indices to gyrate wildly as they approach and undercut their respective fifty day moving average and recent consolidation lows. Long only traders can go on vacation for at least the next week or two to avoid being trapped into the market on false rally attempts.

Thursday, September 18, 2014

High Yielding Fertilizer Stock Readies New Uptrend - Potash Corporation of Saskatchewan $POT

Potash Corporation of Saskatchewan (POT) advanced over 2,200% from its first stage breakout the week of July 25, 2003 to its peak the week of June 20, 2008 and crashed along with the market during the financial crisis. The stock ran up 400% from its financial crisis low, only to sell off over 50%, but in a more orderly fashion, forming a multi-year bullish descending wedge. Potash has managed to breakout above the descending wedge and is currently forming a tight cup shaped base with plenty of accumulation just above the descending wedge.

Industrial companies like Potash tend to see their stock prices advance ahead of good fundamentals, but there are usually clues. The company has significantly beaten analysts estimates the last two quarters by 14.3% and 21.7%, respectively, and analyst have been raising estimates. Margins have shrunk for two straight years, but return on equity is a respectable 19%. Sales and earnings growth have been negative, but are expected to turn positive over the next few quarters and years. The dividend has increased for the last five years and now yields approximately 4.1%.

If Potash can improve pricing power, which will lead to higher margins, it can continue to delivering earning's surprises that will carry the stock higher. Investors and traders have to be patient over the next few days and allow the stock to digest the recent multi-day spurt, and consider entering the stock as it breaks above the recent high of $36.67, with a initial protective stop at recent lows around $33.42. Depending on the pullback, the stock could produce a tighter entry on the pullback. There is a lot of overhead supply for the stock to work through, but the stock should be able to run to the high of the cup shaped base of around $38 over the near term, and into the $45 - 60 range over the long term. Tighter stops can be used once the stock breaks out.

Full Disclosure: No Current Position