Monday, April 05, 2010

A Bull Trap Setting Up or Setup

If you've been following my tweets, you know that I've been quite cautious with this rally most of the time. But, 2 weeks ago it seemed the market could sit around and consolidate into a new strong move, but that doesn't seem to be the case as of this weekend. I do expect the current tightness to resolve to the upside first, but would not be surprised to see sellers come in within the next week or two, if not few days. So there could be big trading gains to be had, but they need to be protected. So why the change of stance?

  1. Low volume - leading stock have been drifting higher in low volume for the past few weeks. Some will argue that it was due to the upcoming holiday weekend, but I've found historically that that excuse tends to be more of a trap then a valid reason.
  2. New bases are either too wild, have extremely low relative strength, or very late stage. The argument here could be that new leadership is setting up, but you generally want new leadership to setup during corrections and pullbacks not while the market has already made a significant move from the lows, and the late nature of the other bases tends to be failure prone.
  3. Many leaders have exhibited mini climactic action. Keep in mind, climactic action is not always obvious on the charts. But pay attention if you're stock has had any type of unusually large spike on heavy volume that would be out of the norm for the stock.
  4. There have been a bunch of attempted breakouts that have come on low volume and others are failing or have failed pretty quickly.
  5. Markets and stocks have been acting extremely erratic intra-day. In many cases stocks are round tripping there moves 2 to 3 times a day. This type of action tends to be more indicative of distribution.
  6. Market is heading into overhead from the 2006 - 2008 rally. Again one can argue that it doesn't matter anymore because of the time that has passed. But, the market fell and then rose so fast, there might not have been enough time to shake out the weak hands. Usually such severe bear markets are followed by mild bear markets, and we did not get that this time. So there could still be a large overhang of supply (but this is just opinion).
  7. The rally off the recent lows has had very little participation from your traditional fundamentally strong stocks. Now sometimes it does take up to a month plus for stocks to get going, but the above points kind of invalidate that theory.

Right now my game plan is pretty simple. I won't defy the market. But I have tightened up my stocks and will take only the trades that do not risk my other profits. Any large out of the ordinary moves by my stocks will be a sign to sell not cheer.

I've been through these types of situation before. They generally do not end well when they stop. Especially with recent purchases. So take it one day at a time and be careful.

Gennady Kupershteyn

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